-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T7QdhVWhz2XGU9jnXMyXfrLM26/Bp7deJQ7tb3HAkimRtQQWmWrt6E7d//8uC2a2 GSWT1WTZuPwwzWz+Bv3dAg== 0000912057-96-020101.txt : 19960913 0000912057-96-020101.hdr.sgml : 19960913 ACCESSION NUMBER: 0000912057-96-020101 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960911 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVERGREEN RESOURCES INC CENTRAL INDEX KEY: 0000353943 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 840834147 STATE OF INCORPORATION: CO FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-11805 FILM NUMBER: 96628909 BUSINESS ADDRESS: STREET 1: 1000 WRITER SQ STREET 2: 1512 LARIMER ST CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3035340400 S-2 1 FORM S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ EVERGREEN RESOURCES, INC. (Exact name of registrant as specified in charter) COLORADO 84-0834147 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
1000 WRITER SQUARE, 1512 LARIMER STREET DENVER, COLORADO 80202 (303) 534-0400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) JAMES S. WILLIAMS, CHAIRMAN 1000 WRITER SQUARE, 1512 LARIMER STREET DENVER, COLORADO 80202 (303) 534-0400 (Name and address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES OF ALL COMMUNICATIONS TO: JOHN B. WILLS, ESQ. JOHN J. HALLE, ESQ. 410 SEVENTEENTH STREET KURT E. SCHEUERMAN, ESQ. SUITE 1940 STOEL RIVES LLP DENVER, COLORADO 80202 900 SW FIFTH AVENUE (303) 628-0747 PORTLAND, OREGON 97204-1268 (303) 592-1846 (FAX) (503) 224-3380 (503) 220-2480 (FAX) ------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE AFTER EFFECTIVE DATE OF THIS REGISTRATION STATEMENT ------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: / / If the Registrant elects to deliver its latest Annual Report to security holders or a complete and legible facsimile thereof pursuant to Item 11(a)(1) of this Form, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / / If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE 2,300,000 Common Stock, No Par Value........................ Shares (2) $6.4375 $14,806,250 $5,105.60
(1) Estimated solely for calculation of the amount of the registration fee calculated pursuant to Rule 457(c) as of September 9, 1996. (2) Includes 300,000 shares to cover over-allotments, if any. ------------------------------ The Exhibit Index appears on Page II-9 of the sequentially numbered pages of this Registration Statement. This Registration Statement, including exhibits contains 168 pages. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EVERGREEN RESOURCES, INC. CROSS REFERENCE SHEET
ITEM NO. LOCATION IN PROSPECTUS - --------- ----------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........................ Cover Page; Inside Cover Page 2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Back Prospectus............................................ Cover Page 3. Summary Information, Risk Factors and Ratio of Prospectus Summary, Risk Earnings to Fixed Charges............................. Factors 4. Use of Proceeds....................................... Use of Proceeds 5. Determination of Offering Price....................... * 6. Dilution.............................................. Dilution 7. Selling Security Holders.............................. * 8. Plan of Distribution.................................. Cover Page, Underwriting 9. Description of Securities to be Registered............ Description of Capital Stock 10. Interests of Named Experts and Counsel................ * 11. Information with respect to the Registrant (a) Business.......................................... Business and Properties (b) Financial Statements.............................. Consolidated Financial Statements (c) Industry Segments................................. * (d) Market price and Dividends of Registrant's Common Equity and Related Stockholder Matters............ Price Range of Common Stock, Dividend Policy, Principal Stockholders, Description of Capital Stock (e) Selected Financial Data........................... Selected Financial Data (f) Supplementary Financial Information............... * (g) Management's Discussion and Analysis.............. Management's Discussion and Analysis of Financial Condition and Results of Operations (h) Changes In and Disagreements with Accountants..... * 12. Incorporation of Certain Information by Reference..... Inside Cover Page 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities........................ *
- ------------------------ *Omitted because item is inapplicable or answer is in the negative. SUBJECT TO COMPLETION DATED SEPTEMBER 11, 1996 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 2,000,000 SHARES [LOGO] COMMON STOCK The 2,000,000 shares of Common Stock offered hereby are being sold by Evergreen Resources, Inc. ("Evergreen" or the "Company"). The Company's Common Stock is listed on the Nasdaq National Market under the symbol "EVER." On September 9, 1996, the last sale price of the Common Stock as reported by the NASDAQ National Market System was $6.25. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT (1) COMPANY (2) Per Share................................ $ $ $ Total (3)................................ $ $ $
(1) The Company has agreed to reimburse Paulson Investment Company, Inc., for accountable expenses incurred by it in connection with this offering in an amount not to exceed $75,000. The Company has also agreed to issue to Paulson Investment Company, Inc. and Capital West Securities, Inc., the representatives of the several Underwriters (the "Representatives") warrants to purchase up to 200,000 shares of Common Stock for $ per share (120% of the initial public offering price of the Common Stock offered hereby) (the "Representatives' Warrants") and to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $275,000 (including the accountable expenses referenced in Note 1, above). (3) Assumes no exercise of the Underwriters' option to purchase up to 300,000 additional shares of Common Stock to cover over-allotments. See "Underwriting." If all such shares are purchased, the total Price to Public will be $ , the total Underwriting Commissions will be $ and the total Proceeds to the Company will be $ . The shares of Common Stock are offered by the several Underwriters named herein when, as and if delivered to and accepted by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that delivery of certificates representing such shares of the Common Stock will be made against payment therefor on or about , 1996. Paulson Investment Company, Inc. Capital West Securities, Inc. The date of this Prospectus is , 1996 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. AS USED HEREIN, THE "COMPANY" OR "EVERGREEN" MEANS EVERGREEN RESOURCES, INC. AND ITS SUBSIDIARIES UNLESS THE CONTEXT REQUIRES OTHERWISE. UNLESS OTHERWISE INDICATED, (I) INFORMATION INCLUDED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION OR OF ANY OTHER OPTIONS OR WARRANTS DESCRIBED HEREIN AS OUTSTANDING AND NO CONVERSION OF PREFERRED STOCK; AND (II) ALL HISTORICAL INFORMATION RELATING TO NET ACREAGE, NET WELLS AND RESERVES GIVES RETROACTIVE PRO-FORMA EFFECT TO THE ACQUISITION BY THE COMPANY ON AUGUST 14, 1996, EFFECTIVE AUGUST 1, 1996, OF THE LP INTERESTS OF ENERGY INVESTORS FUND, LP AND ENERGY INVESTORS FUND II, LP IN PBI FUELS, LP AND THE MERGER WITH POWERBRIDGE, INC., (ALL COLLECTIVELY REFERRED TO AS "PBI") WHOSE ASSETS CONSISTED OF PERCENTAGE INTERESTS IN CERTAIN OF THE COMPANY'S RATON BASIN GAS WELLS, ACREAGE AND RELATED GAS GATHERING AND MARKETING FACILITIES. CERTAIN TERMS USED HEREIN RELATING TO THE OIL AND GAS INDUSTRY ARE DEFINED IN "CERTAIN DEFINITIONS" INCLUDED ON PAGE 44 OF THIS PROSPECTUS. THE COMPANY Evergreen Resources, Inc. explores for and acquires, develops, produces and sells oil and gas. Evergreen is currently developing coalbed methane properties located on over 120,000 acres in the Raton Basin of southern Colorado. As of the date of this prospectus, Evergreen has completed 31 gas wells in its Raton Basin property. An additional 11 wells have been drilled, 10 of which are awaiting completion. These ten additional wells are expected to be completed and placed into production in October 1996. The eleventh well is located at some distance from the other drilled wells and will be produced when the area in which it is located is developed. Evergreen believes that its Raton Basin properties will ultimately support over 500 wells which Evergreen expects to develop over the next 10 years. Evergreen also retains an interest in and operates properties in the San Juan Basin of northwest New Mexico. Evergreen operates all of its own producing properties and also acts as operator on a contract basis for properties owned by others. Effective August 1, 1996, Evergreen purchased the interests of PBI and its affiliates in the Raton Basin. The Company issued to PBI and its affiliates 1,162,266 restricted shares of Evergreen common stock and assumed $3.6 million of long term debt owed by the PBI affiliates to Hibernia National Bank. In return Evergreen received approximately 37.5 BCF of proved gas reserves (PBI's interest in existing proved reserves in the Raton Basin), PBI's 25% working interest in all Raton Basin leases, and PBI's 50% interest in the Primero Gas Marketing Company. With the completion of this acquisition Evergreen owns a 100% working interest in its Raton Basin properties. See "Business Properties -- PBI Agreements." During the last ten years, new drilling, completion and production techniques have led to the establishment of substantial new reserves of coalbed methane gas in the United States. Coal is formed from plant remains accumulated in a swampy environment and subsequently buried deeply between sands and other sediments. Coals typically contain significant quantities of methane, the primary constituent of natural gas, which is generated in the coal-forming process. This gas is adsorbed onto the coal surfaces and can be liberated by reducing the pressure in the coal. Drilling wells into the coal and removing gas and water from the coal reduces the pressure and liberates the gas. All of Evergreen's producing Raton Basin wells have been drilled to exploit the Vermejo coal beds located at a depth of between 500 and 1,800 feet. With the exception of the ten wells being completed and the one well awaiting a pipeline hook-up as described above, all of the wells drilled to the Vermejo coal beds have been completed and are producing. Evergreen believes that the shallower Raton coal beds, located at a depth of between 250 and 1,500 feet, can also be exploited. As a preliminary, exploratory project, Evergreen has drilled three Raton coal wells, two of which are currently pump testing and selling gas and the third of which is awaiting further evaluation. Both the Vermejo and Raton coal beds were formed approximately 65 million years ago in the Late Cretaceous - -- Early Tertiary Period, in coastal and deltaic swamp environments. 3 Since the formation of the coal beds, the entire area has been deformed and fractured by mountain-building forces and has been intruded by hot liquid rock (magma). The Company believes this history of heating and deformation makes the Raton Basin coals superior producers of coalbed methane. Coalbed methane wells tend to produce gas at moderate rates but over a substantial period of time (typically 30 to 40 years). Well productivity depends primarily on the permeability of the coal seam and the effective use of drilling, completion, production, and maintenance techniques designed to maximize gas flow into the wellbore. Frequently, water within the coal seams must be produced for several months or years before the trapped natural gas will flow at maximum rates. Evergreen believes that, in the 6 years that it has been developing coalbed methane gas wells, it has developed various techniques that will enhance its ability to generate economic production from such wells. The coals are somewhat variable, with individual coal seams ranging from 1 to 12 feet in thickness, separated by layers of sandstone, shale and siltstone. Typically, the Company's wells are completed to produce gas from intervals containing five to fifteen individual coal seams. See "Business and Properties - -- Coalbed Methane Geology." Evergreen management believes that the Company's Raton Basin Project is worthy of full scale development for these reasons: - DRILLING RESULTS ON TARGET -- The first 31 producing wells now exceed 8.8 million cubic feet of combined gross daily gas production -- in line with Evergreen's forecasts. - LOW FINDING AND DEVELOPMENT COSTS -- Wells drilled, completed and hooked-up for gas sales to date in the Raton Basin have average reserves estimated at 1.8 BCF of gas at a cost per well of approximately $300,000, implying a finding and development cost of $0.17 per MCF. - LOW LIFTING COSTS -- Lifting costs were approximately $0.33 per MCF in the quarter ended June 30, 1996. Although some additional economies of scale may be achievable, lifting costs should decline modestly in the future as more wells are developed. - LARGE ACREAGE POSITION -- Evergreen has over 120,000 gross acres under lease in the Raton Basin. This acreage will support a multi-year development project of over 500 wells. - IMPROVED GAS PRICES -- Recent higher gas volumes have permitted access to new gas markets resulting in significantly improved gas prices than were obtained in the Summer of 1995. (See discussion of the CIG Agreement below and "Business and Properties -- Material Agreements.") Evergreen has recently entered into an agreement with Colorado Interstate Gas Pipeline ("CIG") which entitles it to firm transportation of its Raton Basin gas between the field and the interconnection between CIG's pipelines and other interstate pipelines in Texas. The Company has committed to transport at least ten million cubic feet per day through CIG's pipelines commencing October 1, 1996 and may increase its volumes to as much as 25 million cubic feet per day from the Raton Basin. The Company has recently drilled ten new wells which it expects will increase production to over ten million cubic feet per day by the contract date. Evergreen believes that the CIG agreement will expand the range of customers to which it can market its gas and will result in Evergreen realizing higher gas sales prices. See "Business and Properties -- Gas Marketing." Historically, Evergreen had been a producer of oil and gas from a variety of different areas of the United States. In 1994, Evergreen decided to concentrate on gas production in the Raton Basin and began divesting most of its other producing assets. All of Evergreen's producing properties are now located in the Raton and San Juan Basins and consist exclusively of gas wells. Primarily as a result of this decision, production and service revenues declined from a high of $3,310,000 in fiscal 1994 to $2,172,000 in fiscal 1996 but have been increasing since the 3rd quarter of fiscal 1996 as additional Raton Basin wells have been completed. Production and service revenues were $717,200 in the quarter ended June 30, 1996, as compared to $469,700 in the comparable quarter of the prior year, reflecting the completion of 22 additional Raton Basin wells during the last twelve months. 4 While Evergreen has been developing coalbed methane resources in the Raton Basin, it has sold its producing coalbed methane wells in the San Juan Basin. Higher royalties and operating costs as well as lower production rates per well made Evergreen's San Juan Basin wells much less economical than the Raton Basin wells. Though Evergreen's producing San Juan Basin wells have been sold, Evergreen retains a stream of payments in respect of future production. In connection with the San Juan Basin wells, Evergreen remains subject to a 1992 agreement for connection of the wells to the El Paso Field Services ("El Paso") pipeline in the area. The agreement requires Evergreen to transport an average of 11,000 MMBtu of gas per day through the El Paso pipeline for a period of 5 years. Evergreen has not been able to meet the volume obligation with production from the San Juan Basin and expects to incur additional shortfall payment obligations through 1997. Through June 30, 1996, the amount of the shortfall liability is $1,831,000 and Evergreen expects the total liability to reach approximately $3.0 million. Evergreen is currently in discussions concerning alternative resolutions of the shortfall, including a possible purchase of a portion of the pipeline system. See "Business and Properties -- El Paso Agreement." Changes to proved reserves reflect the divestiture of Evergreen's properties outside the Raton and San Juan basins and their replacement with Raton Basin wells. Proved gas reserves increased from 51.6 billion cubic feet at the end of fiscal 1994 to 128 BCF as of August 1, 1996. Proved oil reserves declined from 1,643,073 Bbls to 0 on August 1, 1996. Evergreen expects that proved gas reserves will continue to increase as additional Raton Basin wells are drilled and completed. Evergreen is the licensee under seven onshore United Kingdom hydrocarbon exploration licenses for the development of coalbed methane gas and conventional hydrocarbons. The licenses cover substantially all of six coal-bearing basins located in England. The U.K. has recently passed legislation revising the licensing scheme for mineral properties. Evergreen is negotiating to convert its licenses to the new form of licenses, which will allow exploration, development and production. The term of the new licenses will be 30 years, though there will likely be requirements to release portions of the licensed lands periodically as they are explored and determined not to be sufficiently attractive for further development. Over 400,000 acres of the properties covered by the licenses ("U.K. Properties") are currently considered prospective specifically for coalbed methane. Evergreen has preliminarily evaluated the U.K. Properties by reviewing existing geological and geophysical data by conducting limited seismic testing and by drilling three test wells, none of which has produced gas in economic quantities. Approximately $7.5 million has been expended over 5 years in acquiring and evaluating the U.K. Properties. Evergreen is unable to assess the ultimate value, if any, of the U.K. Properties. Successful exploitation of the U.K. Properties will depend on various factors, including the physical characteristics of coal on the properties, drilling, completion and production costs in the local area (which are considerably higher than comparable production costs in the Raton Basin) and local gas prices, none of which can be accurately predicted. Successful exploitation of the U.K. Properties may require techniques different from those that Evergreen is successfully employing in the Raton Basin. Accordingly, the successful exploitation of the U.K. Properties must be viewed as speculative. Evergreen does not expect to use any of the proceeds from this offering to develop the U.K. Properties and will require additional capital to fund any such development. See "Use of Proceeds" and "Business and Properties -- Other Activities." Evergreen also continues to investigate potential opportunities to develop or participate in the development of other oil and gas properties throughout the world and may expand the scope of its activities to accommodate one or more such opportunities. It is likely that any significant expenditure required of Evergreen in connection with any such opportunity would require additional capital. Evergreen Resources, Inc. is incorporated in Colorado and its corporate offices are located at 1000 Writer Square, 1512 Larimer Street, Denver, Colorado 80202. Its telephone number at that address is (303) 534-0400. 5 THE OFFERING Common Stock offered 2,000,000 shares Common Stock to be outstanding 9,102,002 shares after the offering (1)(2) Use of proceeds Development of the Company's acreage in the Raton Basin; reduction of borrowings and general working capital. See "Use of Proceeds." NASDAQ National Market Symbol "EVER"
- ------------------------ (1) Does not include 497,800 shares of Common Stock issuable upon exercise of options and warrants outstanding as of September 1, 1996, and 1,132,075 shares of Common Stock issuable upon conversion of outstanding preferred stock. See "Management -- Executive Compensation" and "Description of Securities." (2) Includes 1,162,266 shares issued in the PBI transaction and 40,000 shares issued subsequent to June 30, 1996. SUMMARY GAS AND OIL RESERVE INFORMATION The following table sets forth summary information with respect to the Company's estimated net proved gas and oil reserves and the discounted present value of the estimated future net revenues therefrom as of August 1, 1996. For additional information relating to the Company's gas and oil reserves, see "Business and Properties", "-- Production", "-- Reserves", the Supplemental Gas and Oil Information included after the Consolidated Financial Statements and "Risk Factors -- Engineers' Estimates of Reserves and Future Net Revenues" included elsewhere in this Prospectus. The Company's reserve report as of August 1, 1996 was prepared by Resource Services International, Inc., an independent reservoir engineering firm and reflects the PBI acquisition.
AS OF AUGUST 1, 1996 ----------------------------------------- DEVELOPED UNDEVELOPED TOTAL ESTIMATED PROVED RESERVES Gas (BCF) 75.3 52.7 128.0 Total (BCFE) Present Value of Estimated Future Net Revenues before income taxes discounted at 10% (millions) $ 35.2 $ 16.0 $ 51.2
The Present Value of Estimated Future Net Revenues is based on a weighted average price of $1.52 per MCF of gas realized by the Company at August 1, 1996. 6 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The following table sets forth the summary historical consolidated financial data of Evergreen for each period indicated. The historical financial data of Evergreen for the three-year period ended March 31, 1996, have been derived from Evergreen's audited consolidated financial statements. The historical financial data for the three months ended June 30, 1996 and 1995 are derived from unaudited financial statements of the Company. Production data for all periods are unaudited. The summary consolidated financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements, notes thereto and other information included elsewhere in this Prospectus and the documents incorporated herein by reference. The pro forma financial data set forth below reflect the acquisition by the Company of Powerbridge, Inc. and certain affiliated interests and has been derived from the unaudited pro forma consolidated financial statements included elsewhere herein. See "Evergreen Resources, Inc. and Subsidiaries Pro Forma Consolidated Financial Statements (unaudited)."
THREE MONTHS ENDED JUNE 30, FISCAL YEARS ENDED MARCH 31, --------------------------------- ---------------------------------------------- PRO FORMA PRO FORMA 1996 1996 1995 1996 1996 1995 1994 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND PRODUCTION AND SALES PRICE DATA) STATEMENT OF OPERATIONS DATA Revenues $ 1,073 $ 779 $ 508 $ 3,210 $ 2,935 $ 3,351 $ 4,342 Depreciation, depletion and amortization 281 202 167 685 590 709 660 Interest expense 105 9 9 214 37 30 -- Net income (loss) attributable to common stock (61) (90) (439) (895) (607) (705) 44 Net income (loss) per common share (1) (0.01) (0.02) (0.08) (0.13) (0.10) (0.13) 0.01 BALANCE SHEET DATA Working capital 1,030 1,017 694 2,479 1,857 3,206 Total assets 57,069 44,555 39,244 44,172 39,140 32,880 Preferred stock 7,500 7,500 3,750 7,500 3,750 -- Long-term debt 4,413 409 -- -- -- -- Stockholders' equity 39,223 31,523 31,635 31,589 32,202 30,413 PRODUCTION DATA Production Gas (MMCF) 600 394 208 1,267 941 782 638 Oil and condensate (Mbbls) -- -- 2 10 10 37 58 Average sales price Gas ($/MCF) $ 1.39 $ 1.33 $ 1.18 $ 1.23 $ 1.28 $ 1.70 $ 2.15 Oil and condensate ($/Bbl) -- -- 19.62 18.40 18.40 15.96 14.50 Average production cost per equivalent MCF 0.35 0.33 0.93 0.77 0.77 1.10 1.21 CASH FLOW STATEMENT DATA Cash flow from operations (542) (160) 1,130 408 485 Cash flow from investments (1,520) (863) (2,764) (2,958) (307) Cash flow from financing (196) 424 3,329 3,635 242
- ------------------------ (1) Net income (loss) per common share has been computed by dividing net income (loss), after reduction for preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding during each of the periods presented. Options and warrants to purchase stock are included as common stock equivalents when dilutive. In 1994, common stock equivalents of 221,029 shares are included in the weighted average number of common shares outstanding. Common stock equivalents are not included in 1996 and 1995 as their effect is antidilutive. 7 RISK FACTORS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933. SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THIS SECTION AND UNDER "PROSPECTUS SUMMARY," "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS AND PROPERTIES." ACTUAL EVENTS OR RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, WITHOUT LIMITATION, THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED WHEN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. VOLATILITY OF OIL AND GAS PRICES. The Company's revenues, profitability and future rate of growth are substantially dependent upon prevailing market prices for natural gas and oil, which can be extremely volatile and in recent years have been depressed by excess domestic and imported supplies. In addition to market factors, actions of state and local agencies, the United States and foreign governments, and international cartels affect oil and gas prices. All of these factors are beyond the control of the Company. These external factors and the volatile nature of the energy markets make it difficult to estimate future prices of natural gas and oil. There is no assurance that current price levels can be sustained or that the Company will be able to produce oil or gas on an economic basis in light of prevailing market prices. Any substantial or extended decline in the price of natural gas would have a material adverse effect on the Company's financial condition and results of operations, including reduced cash flow and borrowing capacity and could reduce both the value and the amount of the Company's oil and gas reserves. RECENT LOSSES. The Company was unprofitable in fiscal 1995 and 1996 and experienced a net loss attributable to the common stock in the first quarter of its current fiscal year. Although the Company expects profitability to improve as additional Raton Basin wells are completed, there is no assurance that this will occur or that the Company will achieve, or be able to sustain, profitable operations. FUTURE CAPITAL REQUIREMENTS. The Company will require additional equity or debt capital, as well as the anticipated cash flow from operation of its developed properties, to fund the full development of the Raton Basin. Any development of other properties, including the Company's United Kingdom properties, is expected to require substantial additional capital. There is no assurance that any required capital will be available or that it will be available on terms acceptable to the Company. The inability of the Company to fund development of its properties could cause the Company to lose all or portions of such properties through failure to comply with minimum lease or license requirements or could require the Company to farm out or otherwise dispose of or abandon such properties. There is no assurance that the Company could successfully farm out or dispose of any such properties. EL PASO AGREEMENT. In August 1992, Evergreen entered into a series of agreements with El Paso concerning the connection of Evergreen's San Juan Basin wells to El Paso's non-jurisdictional gathering system. Under the agreements, El Paso paid for construction of a gathering pipeline to a central point in Evergreen's producing area. Evergreen paid for construction of its own gathering system to the wells beyond that point, which was sold to Associated Natural Gas, Inc. in 1993. Evergreen dedicated 90% of its San Juan Basin production to El Paso's gathering line for a period of 10 years following completion of the line and agreed to deliver a minimum of 11,000 MMBtu per day for five years to El Paso's gathering line or pay a shortfall payment of $0.25 per MMBtu. Production from the wells has been substantially less than 11,000 MMBtu per day and Evergreen has accrued a shortfall obligation of $1,831,000 as of June 30, 1996 that may grow to in excess of $3.0 million by the end of the five year period. El Paso is discussing alternate resolutions with Evergreen, including the sale of El Paso's gathering line to Evergreen. However, there is no assurance that an alternative agreement will be reached. SPECULATIVE NATURE OF OIL AND GAS EXPLORATION. The business of exploring for and, to a lesser extent, of developing oil and gas properties is an inherently speculative activity that involves a high degree of business and financial risk. Property acquisition decisions generally are based on various assumptions 8 and subjective judgments that are speculative. Although available geological and geophysical information can provide information with respect to a potential oil or gas property, it is impossible to determine 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 the Company's investment therein. While the portion of the Company's Raton Basin property in which the Company is currently operating appears to present only moderate risk in this regard, the remainder of the Raton Basin property, the Company's United Kingdom properties and any properties in which the Company may invest in the future are or may be largely untested and therefore subject to more substantial risk that they will be uneconomic or marginally economic. OPERATING HAZARDS. Oil and gas operations involve a high degree of risk. Natural hazards, such as excessive underground pressures, may cause a costly or dangerous blowout or make further operations on a well financially or physically impractical. Equipment failures, human errors and other factors can result in the substantial impairment or destruction of property, environmental damage and/or human injury. The Company is subject to all the risks inherent in the exploration for, and development of, oil and gas, including blowouts, fires and other casualties. Any such event can result in the exposure of the Company to claims of individuals or governmental agencies or to the loss or impairment of the value of its properties, or both. The Company maintains insurance coverage as is customary for entities of a similar size engaged in similar operations but losses can occur from uninsurable risks or in amounts in excess of existing insurance coverage. UNCERTAINTY OF ESTIMATED RESERVES. This Prospectus contains estimates of reserves and future net revenues which have been prepared by independent petroleum engineers. However, petroleum engineering is not an exact science and involves estimates based on many variable and uncertain factors. Estimates of reserves and future net revenues prepared by different petroleum engineers may vary substantially depending, in part, on the assumptions made and may be subject to adjustment either up or down in the future. The actual amounts of production, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and gas reserves to be encountered may vary substantially from the engineers' estimates. The Company's reserve values remain sensitive to gas prices in the current environment of fluctuating commodities prices. REGULATION. The oil and gas industry is extensively regulated by federal, state and local authorities. Legislation and regulation affecting the industry are under constant review for amendment or expansion, raising the possibility of changes that may affect, among other things, the pricing or marketing of oil and gas production. Substantial penalties may be assessed for noncompliance with various applicable statutes and regulations, and the overall regulatory burden on the industry increases its cost of doing business and, in turn, decreases its 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. ENVIRONMENTAL CONSIDERATIONS. Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the operations and costs of the Company. For example, the Company operates under permits issued by the State of Colorado to discharge water provided from its coalbed methane wells. Inasmuch as such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance. LIMITED PROTECTION FOR TECHNOLOGY; DEPENDENCE ON TECHNOLOGY OWNED BY OTHERS. The Company employs operating methods that it believes to be proprietary and of significant value in exploiting coal bed methane resources. In most cases, patent or other intellectual property protection is unavailable for such technology and the Company relies on non-disclosure agreements and similar processes to protect its technology. The Company's use of independent contractors in most aspects of its drilling and 9 completion operations makes the protection of such technology more difficult. Moreover, the Company relies on the technological know how of the independent contractors that it retains in connection with its oil and gas operations. The Company has no long-term agreements with such contractors and there is no assurance that the Company will continue to have access to such know how. DEPENDANCE ON GATHERING AND TRANSPORTATION FACILITIES. Substantially all of the Company's current production consists of natural gas. The marketability of the Company's gas production depends in part upon the availability, proximity and capacity of gas gathering systems, pipelines and processing facilities. Federal and state regulation of gas and oil production and transportation, general economic conditions, changes in supply and changes in demand all could adversely affect the Company's ability to produce, gather and transport its natural gas and oil. If market factors were to change materially, the financial impact on the Company could be substantial. The Company is a party to two gas transportation contracts that require the Company to transport minimum volumes. If the Company ships smaller volumes, it may be liable for damages proportional to the shortfall. See "Business and Properties -- Agreements." Under the San Juan Basin contract, the Company is subject to claims for $1.831 million in shortfall payments through June 30, 1996, which may grow to $3 million by 1998. The Company expects to meet its volume obligations with respect to the Raton Basin transportation agreement. The Company is exploring ways to resolve the San Juan Basin claims, including the possibility of purchasing the subject pipeline. There is no assurance that the San Juan Basin claims can be resolved without a loss to the Company. While the Company believes that its production in the Raton Basin will be more than adequate to meet volume requirements, unforeseen events, including production problems or substantial decreases in the price for natural gas, could cause the Company to ship less than the required volumes, resulting in losses on the transportation contracts. COMPETITION. Major oil companies, independent producers, institutional and individual investors and various oil and gas income funds are actively seeking to acquire oil and gas properties throughout the world, as well as the equipment, labor, and materials required to operate such properties. Many of the Company's competitors have financial and technological resources vastly exceeding those available to the Company. Many oil and gas properties are sold in a competitive bidding process in which the Company, if it is making an independent bid, may lack technological information or expertise available to other bidders. There is no assurance that the Company will be successful in acquiring and developing profitable properties in the face of such competition. OIL AND GAS LEASES. The Company's right to explore and produce oil and gas from its properties derives from its oil and gas leases with the owners of the properties. There are many versions of oil and gas leases in use. The Company has acquired most of its current leases from other companies who first acquired the leases from the landowners. Oil and gas leases generally call for annual rental payments and the payment of a percentage royalty on the oil and gas produced. Courts in many states have interpreted oil and gas leases to include various implied covenants, including the lessee's implied obligation to develop the lease diligently, to prevent drainage of oil and gas by wells on adjacent land, to seek diligently a market for production, and to operate prudently according to industry standards. Oil and gas leases with similar language may be interpreted quite differently depending on the state in which the property is located. Issues decided differently in two states may not yet have been decided by the courts of a third state, leading to uncertainty as to the proper interpretation. For instance, royalty calculations can be substantially different from state to state, depending on each state's interpretation of typical lease language concerning the costs of production. The Company believes it has followed industry standards in interpreting its oil and gas leases in the states where it operates. However, there can be no assurance that the leases will be free from litigation concerning the proper interpretation of the lease terms. Adverse decisions could result in material costs to the Company or the loss of one or more leases. TITLE TO PROPERTIES. As is customary in the oil and gas industry, the Company conducts only a preliminary title examination at the time properties believed to be suitable for drilling operations are acquired. Prior to the commencement of drilling operations, a title examination of the drill site tract is 10 conducted. The Company believes that titles to its leasehold properties are good and defensible in accordance with standards generally acceptable in the oil and gas industry, but there is no assurance that the Company could defend title to its undeveloped properties. ACCOUNTING RISKS. The Company reports its operations using the full cost method of accounting for gas and oil properties. Under full cost accounting rules, all productive and non-productive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized. See "Notes to Financial Statements." Under full cost accounting rules, the net capitalized costs of gas and oil properties may not exceed a "ceiling" limit of the present value of estimated future net revenues from proved reserves, discounted at 10%, plus the lower of cost or fair market value of unproved 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, 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. Natural gas prices are often volatile, varying substantially from quarter to quarter depending on weather conditions, quantities of gas in storage, and supply variations. Since the "ceiling test" must be applied quarterly, the company may be forced to write down the value of its oil and gas properties during a quarter when gas prices are substantially below present levels. Full cost accounting rules would not allow the Company to increase the value of its oil and gas properties in a subsequent quarter when gas prices improved. PREFERRED STOCK. The Board of Directors of Evergreen is authorized, without action by the Shareholders, to issue up to 25,000,000 shares of Preferred Stock from time to time in one or more series. The Board may also fix for each series the number of shares, designation, liquidation and dividend rights, preferences, voting rights, redemption rights and other rights, restrictions and qualifications or sinking fund provisions. As of September 9, 1996, the Company has issued 7,500,000 shares of ten year term 8% Convertible Preferred Stock, $1.00 par value ("the Preferred"). The Company is obligated to pay cumulative annual cash dividends of 8% quarterly on the Preferred. The Preferred is convertible at any time, or from time to time, in whole or in part, at the option of the holders into 1,132,075 shares of Common Stock, at $6.625 per share. All outstanding shares of the Preferred must be redeemed by Evergreen on the tenth anniversary of original issuance at par value, plus accrued dividends. Commencing in December 1999, through December 2003, the Company is required to make annual mandatory redemption payments of $1,250,000 to redeem the Preferred at a rate of 1,250,000 shares per year. No dividends may be paid on the Common Stock unless all accrued dividends and redemption obligations on the Preferred have been paid in full. Liquidation preference for the Preferred Stock is par value plus accrued and unpaid dividends prior to distributions on the Common Stock upon any voluntary or involuntary liquidation, dissolution or winding up of Evergreen. The payment of dividends on the Preferred or mandatory redemption payments could have a material adverse effect on the Company's financial condition. See "Business and Properties -- Agreements." The conversion of the outstanding Preferred into Common Stock and any future issuances of Preferred Stock could, under certain circumstances, be dilutive to holders of Common Stock and would result in a reduction in percentage ownership interest in the Company by holders of Common Stock. In the event of a proposed merger, tender offer, proxy contest or other attempt to gain control of the Company not approved by the Board of Directors, it would be possible, subject to any limitations imposed by applicable law, the Company's Articles of Incorporation, the terms and conditions of any outstanding class or series of Preferred Stock and the applicable rules of any securities exchanges upon which securities of the Company are at any time listed or of other markets in which securities of the Company are at any time listed, for the Board of Directors to authorize the issuance of one or more series of Preferred Stock with voting rights or other rights and preferences which would impede the success of the proposed merger, tender offer, proxy contest or other attempt to gain control of the Company. The issuance of Preferred Stock may have an adverse effect on the rights (including voting rights) of holders of Common Stock. See "Description of Capital Stock." 11 POTENTIAL FUTURE SALES PURSUANT TO RULE 144. Of the 7,102,002 shares of Common Stock of the Company outstanding as of the date of this Prospectus, 3,004,500 shares, including 392,400 shares issuable on exercise of immediately exercisable stock purchase warrants, are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended. Of these shares, 1,845,630 are currently eligible for sale subject to the volume restrictions set forth under Rule 144. The holders of these shares have agreed not to sell or otherwise dispose publicly of any of their shares of Common Stock for a period of three months from the date of this Prospectus without the written consent of Paulson Investment Company, Inc. However, no prediction can be made as to the effect, if any, the future sale of these or other shares of Common Stock or the availability of such shares for sale pursuant to the provisions of Rule 144 will have on the market price of the Common Stock of the Company prevailing from time to time. 12 CAPITALIZATION The following table sets forth as of June 30, 1996 (i) the actual capitalization of the Company, (ii) the capitalization on a pro forma basis, giving effect to the acquisition of PBI, and (iii) on a pro forma as adjusted basis giving effect to the receipt of the estimated net proceeds to be received by the Company from the sale of the 2,000,000 shares of Common Stock being offered hereby at an assumed offering price of $6.25 per share. The table should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1996 ----------------------------------------- (in thousands) PRO FORMA AS ACTUAL PRO FORMA ADJUSTED (Unaudited) Long-term debt $ 409 $ 4,413 $ 4,413 ------------- ----------- ------------- Redeemable preferred stock, $1.00 par value: 25,000,000 shares authorized, 7,500,000 issued and outstanding 7,500 7,500 7,500 ------------- ----------- ------------- Shareholders' equity: Common Stock, no par value, 50,000,000 shares authorized; 5,899,736 issued and outstanding, and 7,102,002 issued and outstanding pro forma and 9,102,002 issued and outstanding pro forma as adjusted 59 71 91 Additional paid-in capital 41,822 49,510 60,715 Foreign currency adjustment (394) (394) (394) Retained earnings (deficit) (9,964) (9,964) (9,964) ------------- ----------- ------------- Total shareholders' equity 31,523 39,223 50,448 ------------- ----------- ------------- Total capitalization $ 39,432 $ 51,136 $ 62,361 ------------- ----------- ------------- ------------- ----------- -------------
13 DILUTION The net tangible book value of Evergreen as of June 30, 1996 was $31,177,000 or $5.28 per share of Common Stock. After giving effect to the PBI acquisition as of August 1, 1996, the pro forma net tangible book value of Evergreen as of June 30, 1996 is $38,824,000 or $5.47 per share. Net tangible book value per share represents the amount of total tangible assets of the Company less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed initial public offering price of $6.25 (after deducting the underwriting discount and estimated other offering expenses payable by the Company in connection therewith), the pro forma net tangible book value as adjusted of the Company at June 30, 1996, would have been approximately $50,048,000 or $5.50 per share. This represents an immediate increase in net pro forma tangible book value of $.03 per share to existing shareholders and a $.75 per share (12%) dilution to new investors. Dilution is determined by subtracting (i) pro forma net tangible book value per share after the offering from (ii) the amount of cash paid by a new investor for a share of Common Stock. The following table illustrates this per share dilution: Assumed initial public offering price per share $ 6.25 Net tangible book value at June 30, 1996 $ 5.28 Increase in net tangible book value from the acquisition of PBI .19 --------- Pro forma net tangible book value after acquisition of PBI 5.47 Increase in net tangible book value per share attributable to new investors .03 --------- Pro forma net tangible book value after this offering (1) 5.50 --------- Dilution of net tangible book value per share of Common Stock to new investors $ .75(1) --------- ---------
- ------------------------ (1) The above table assumes no conversion of Preferred Stock or exercise of outstanding options or warrants. Assuming the Underwriters' over-allotment option is exercised in full, the pro forma net tangible book value per share after the offering would be $5.51 which would result in a dilution to new investors of $.74 per share. 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered hereby are estimated to be approximately $11,225,000 ($12,950,000 if the Underwriters' over-allotment option is exercised in full) assuming that the shares of Common Stock offered hereby are sold at an assumed initial public offering price of $6.25 per share. The Company expects to use substantially all of the net proceeds for development of the Raton Basin Project. Such development includes the drilling and completion of 30-40 new wells and upgrading and expansion of existing gathering and compression facilities. For cash management purposes the Company may initially apply a portion of the proceeds to reduce the outstanding balance on its revolving credit line. Based on current and forecast drilling and operating costs in the Raton Basin and current gas prices, the Company believes that, if an additional 30-40 wells are successfully drilled and completed in the Raton Basin, cash flow from Raton Basin operations and available bank borrowing facilities will be sufficient to support the Company's planned further development plans for the Raton Basin. However, a variety of factors, over many of which the Company has no control, could cause the Company's costs to be higher or its revenues to be lower than currently estimated. See "Risk Factors -- Other Industry and Business Risks." The Company does not expect that the proceeds from this offering will be sufficient to fund significant development costs related to other projects, including but not limited to the Company's United Kingdom properties. See "Risk Factors -- Need for Additional Capital" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company may elect to use the proceeds from this offering for purposes other than those described above if it determines that such alternative use (not presently contemplated) would be more beneficial to the Company. Until funds are needed for the uses referred to above, the net proceeds of this offering will be invested in deposits with banks, investment-grade securities and short-term income-producing investments, including governmental obligations and money market instruments. 15 PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market under the symbol "EVER." The range of high and low prices for the periods indicated, as reported by Nasdaq, is as follows:
HIGH LOW Fiscal 1995 First Quarter $ 8.75 $ 6.50 Second Quarter 8.25 6.50 Third Quarter 8.25 5.25 Fourth Quarter 6.00 4.00 Fiscal 1996 First Quarter $ 5.75 $ 4.25 Second Quarter 5.50 4.00 Third Quarter 5.37 3.50 Fourth Quarter 6.16 5.00 Fiscal 1997 First Quarter $ 7.25 $ 5.75 Second Quarter (through September 9, 1996) 7.22 5.75
On September 9, 1996, the closing sale price for the common stock as reported by Nasdaq was $6.25 per share. At September 9, 1996, there were approximately 4,000 holders of record of the Company's Common Stock. DIVIDEND POLICY Subject to the preferential rights of the Preferred Stock, holders of Common Stock are entitled to receive such dividends as may be declared by the Company's Board of Directors. The Company has not paid any cash dividends since its inception. The Company anticipates that future earnings will be retained for the development of its business and that no cash dividends will be declared in the foreseeable future. 16 SELECTED CONSOLIDATED FINANCIAL DATA The selected data presented below for each of the years in the three-year period ended March 31, 1996 are derived from the consolidated financial statements of the Company, which financial statements have been audited by BDO Seidman, LLP, Certified Public Accountants. The selected data presented below for the three month periods ended June 30, 1996 and 1995 are derived from the Company's unaudited consolidated financial statements and include, 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 Notes thereto and "Management's Discussion And Analysis Of Financial Condition And Results Of Operations" included elsewhere in this Prospectus. The selected consolidated financial data provided below are not necessarily indicative of the future results of operations or financial performance of the Company. The pro forma financial data set forth below reflect the acquisition by the Company of Powerbridge, Inc. and certain affiliated interests and has been derived from the Company's unaudited pro forma consolidated financial statements included elsewhere herein. See "Evergreen Resources, Inc. and Subsidiaries Pro Forma Consolidated Financial Statements (unaudited)."
THREE MONTHS ENDED JUNE 30, YEARS ENDED MARCH 31, --------------------------------- ---------------------------------------------- PRO FORMA PRO FORMA 1996 1996 1995 1996 1996 1995 1994 (in thousands except per share amounts) INCOME STATEMENT DATA Revenues: Oil and gas production $ 835 $ 526 $ 284 $ 1,740 $ 1,393 $ 1,916 $ 2,207 Oil and gas services 172 191 186 701 779 858 1,102 Other 66 62 38 769 763 577 1,033 ----------- --------- --------- ------------- --------- --------- --------- TOTAL $ 1,073 $ 779 $ 508 $ 3,210 $ 2,935 $ 3,351 $ 4,342 Cost of production 209 132 248 908 656 993 1,041 Depreciation, depletion and amortization 280 202 167 685 590 709 660 Gas gathering 44 44 58 219 219 238 219 Cost of oil and gas services 197 185 195 767 727 790 929 General and administrative 149 149 202 819 819 850 1,350 Interest 105 9 9 214 37 30 -- Preferred Dividends 150 150 75 505 505 94 -- Net Income (Loss) attributable to common stock (61) (90) (439) (895) (607) (705) 44 Net Income (Loss) per common share (1) (0.01) (0.02) (0.08) (0.13) (0.10) (0.13) 0.01 BALANCE SHEET DATA Working capital 1,030 1,017 694 2,479 1,857 3,206 Total assets 57,069 44,555 39,244 44,172 39,140 32,880 Preferred Stock 7,500 7,500 3,750 7,500 3,750 -- Long-term debt 4,413 409 -- -- -- -- Common Stockholders equity 39,223 31,523 31,635 31,589 32,202 30,413 CASH FLOW STATEMENT DATA Cash flow from operations 542 (160) 1,130 408 485 Cash flow from investments (1,520) (863) (2,764) (2,958) (307) Cash flow from financing 196 424 3,329 3,635 242
- ------------------------ (1) Net income (loss) per common share has been computed by dividing net income (loss), after reduction for preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding during each of the periods presented. Options and warrants to purchase stock are included as common stock equivalents when dilutive. In 1994, common stock equivalents of 221,029 shares are included in the weighted average number of common shares outstanding. Common stock equivalents are not utilized in 1996 and 1995 as their effect is antidilutive. 17 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 THERETO PRESENTED ELSEWHERE IN THIS PROSPECTUS. THE COMPANY FOLLOWS THE FULL-COST METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES. SEE "SUMMARY OF ACCOUNTING POLICIES," INCLUDED WITH THE CONSOLIDATED FINANCIAL STATEMENTS BEGINNING AT PAGE F-12 OF THIS PROSPECTUS. RECENT DEVELOPMENTS On August 14, 1996, Evergreen acquired, effective as of August 1, 1996, approximately 37 BCF of proved natural gas reserves, approximately 24 BCF of which are developed, together with 25% working interest in 120,000 gross acres and 50% interest in an associated gas gathering and marketing system. All of these assets are located on Evergreen's present acreage position in the Raton Basin. Evergreen issued 1,162,266 restricted shares of Evergreen Common Stock and assumed $3.6 million of long term bank debt owed to Hibernia National Bank. The acquisition of these assets increased Evergreen's interest to 100% in all leases, reserves, production, and associated gathering facilities on the Company's 120,000 gross acres in the Raton Basin. At March 31, 1996, Evergreen reported 80 BCF of proved reserves, based on an independent engineering study, which has now been updated. As of August 1, 1996, Evergreen's proved reserves increased to 128 BCF, through the above reported acquisition and other development activity in the Raton Basin. Approximately 59% of these proved reserves are developed. Present value of future net revenues before income taxes discounted at 10% increased from $30 million at March 31, 1996, to $51 million as of August 1, 1996. LIQUIDITY AND CAPITAL RESOURCES Evergreen currently has a $15.0 million revolving line of credit with Hibernia National Bank of New Orleans with interest at the Bank's prime rate. Advances pursuant to this line of credit are limited to the borrowing base, which is presently $15.0 million. There are no restrictions associated with advances under the line. An annual fee of one half of one percent is paid quarterly for any unused portion of the credit line. The borrowing base is redetermined semi-annually by the bank based upon reserve evaluations of the Company's oil and gas properties. As of September 1, 1996 the amount outstanding under the line of credit was $1,000,000. The Company intends to consolidate the $3.6 million of long term debt assumed in the PBI acquisition into the $15.0 million revolving credit line with Hibernia National Bank. The Company anticipates drilling 30 to 40 wells and expanding and upgrading gas gathering facilities during fiscal 1997. Capital requirements for the remainder of fiscal 1997 are estimated to be approximately $10 million, which includes an increase as a result of the PBI acquisition. The Company believes that cash flow from operations, the availability of funds under its line of credit, and the funds from this offering will be sufficient to fulfill the 1997 development objectives. Leases expiring in fiscal 1997 are not material and do not require significant drilling expenditures. Cash flows used by operating activities were $542,000 for the three months ended June 30, 1996 as compared to $160,600 in the prior year. The increase in cash used by operating activities is due primarily to the significant increase in drilling activities in the first quarter of fiscal 1997 compared to the same period in fiscal 1996. Cash flows used by investing activities were $1,520,400 during the three months ended June 30, 1996 versus $863,200 during the same period in 1995. The increase was primarily due to the continued development of the Raton Basin. During the three month period ended June 30, 1996 the Company completed and placed into production an additional ten wells. 18 Cash flows used by financing activities were $195,900 in the first quarter of 1996 as compared to cash flows provided by financing activities of $423,700 in the prior period. The decrease was primarily due to the net change in cash held for future distribution to third party interest owners of $565,000. The Company's production from its San Juan basin properties has not met the minimum volume requirements under its transporation agreements with El Paso. See "Risk Factors -- El Paso Agreement" and "Business and Properties -- El Paso Agreement." As of June 30, 1996, the cumulative obligation of the Company to El Paso resulting from this shortfall was $1,831,000. At current rates of production, this liability would increase to over $3 million by the end of the contract term in July 1998. The Company has had discussions with El Paso with respect to various potential arrangements, including the purchase by the Company of El Paso's gathering facilities. El Paso has not attempted to collect the shortfall payments, pending further negotiations with the Company. Accordingly, this obligation has been accounted for as a long term liability. However, there is no assurance that agreement will be reached on any such arrangement. Should El Paso seek to enforce its right to the shortfall payment, which may occur at any time, the amount may be held to be immediately due and payable and may constitute an expense in the quarter in which the payment was requested. If the Company purchases the pipeline, there is no assurance that the Company would be able to recoup its investment through operation of the pipeline. RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1995 During the three months ended June 30, 1996, Evergreen recorded net income of $60,000 on revenues of $779,000 versus a net loss of $364,500 on revenues of $508,000 for the same period in 1995. After preferred stock dividends, the Company reported a net loss of $90,000 or two cents per common share in the current quarter versus a net loss of $440,000 or eight cents per common share in the same quarter in the prior year. The improved performance in the current quarter is a result of increased production and revenue from the Raton Basin, reduced production (lifting) costs due to the sale of marginal and/or non-strategic properties and reduced overhead costs. Production revenues during the three months ended June 30, 1996 were $526,300 versus $283,700 for the same period in 1995, an increase of $242,600 or 86%. Natural gas production increased to 394.3 million cubic feet in the quarter ended June 30, 1996, compared to 207.7 million cubic feet during the same period in the prior year. This increase is attributable to substantial growth in Raton Basin production. During the current quarter, Raton Basin gas production represented over 80% of the Company's total gas production, compared to 30% for the same period in the prior year. At June 30, 1996, there were 31 producing Raton Basin wells compared to 9 producing wells at June 30, 1995. Natural gas prices averaged $1.33 per MCF during the three months ended June 30, 1996 versus $1.18 per MCF in the prior year quarter. The Company currently enters into contracts with various purchasers for periods ranging from one to six months. The Company has no significant oil reserves, production or revenues. Production costs and taxes for the three months ended June 30, 1996 were $131,900 compared to $248,200 for the same period in 1995. This 47% reduction is due to the sale or shutting-in of marginal, non-strategic properties with high lifting costs. Shut-in wells will be returned to production if economically justifiable, or plugged. During the Company's last four fiscal years, production (lifting) costs have declined:
1993 1994 1995 1996 Equivalent MCF lifting cost $ 1.91 $ 1.21 $ 1.10 $ 0.77
19 During the quarter ended June 30, 1996, average lifting cost was $0.33 per equivalent MCF versus $0.93 per equivalent MCF during the same period in 1995. The Company anticipates Raton Basin lifting costs to decline further as additional wells are brought into production.
THREE MONTHS ENDED JUNE 30 -------------------- 1996 1995 GAS Revenues $ 523,300 $ 245,300 Production (MCF) 394,300 207,700 Avg. Price per MCF $ 1.33 $ 1.18 OIL Revenues $ 3,300 $ 38,400 Production (Barrels) 141 2,000 Avg. Price per Barrel $ 23.06 $ 19.62 Production Cost Per Equivalent MCF $ 0.33 $ 0.93
Oil and gas service revenues and cost of oil and gas services are attributable to the Company's wholly owned subsidiary Evergreen Operating Corporation ("EOC"), which is primarily responsible for drilling, evaluation and production activities associated with various properties and for negotiating the sales of oil and gas production from the properties. As of August 2, 1996, EOC was serving as Operator for approximately 150 producing wells owned by the Company, unaffiliated and affiliated parties. During the three months ended June 30, 1996 oil and gas service revenues and expenses were basically unchanged from the prior year's levels. Interest income was $51,600 during the three months ended June 30, 1996 as compared to $23,200 during the three months ended June 30, 1995. The increase in interest is due to an increase in cash from the proceeds of the preferred stock and sales of properties. Depreciation, depletion and amortization was $201,800 during 1996 as compared to $167,200 in 1995. The increase is due to the increase in gas production and added gas gathering equipment in the Raton Basin. General and administrative expenses were $149,300 during the three months ended June 30, 1996 versus $202,300 during the same period in 1995. The decrease of $53,000 was due to a reduction in personnel and the related salary expense, the consolidation of the corporate offices in Denver and general overhead reductions. RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO THE FISCAL YEAR ENDED MARCH 31, 1995 The Company reported a net loss of $606,800 (after preferred stock dividends of $504,600) or $.10 per common share for the year ended March 31, 1996, compared to a net loss of $704,700 (after preferred stock dividends of $94,200) or $.13 per share for the year ended March 31, 1995. Production revenues during 1996 were $1,392,700 as compared to $1,916,300 in 1995, a decrease of $523,600 or 27%. The decrease in production revenues is due primarily to lower gas prices and the sale of oil and gas properties. Gas production increased to 941,174 MCF in 1996 from 782,000 MCF in 1995. However, average gas prices decreased approximately $.41 per MCF to $1.29 per MCF in 1996 as compared to $1.70 during 1995. The decrease in gas prices more than offset the increased production and reduced gas revenues to $1,211,000 in 1996 from $1,331,000 in 1995 for a reduction of $120,000 or 20 9%. Oil revenues decreased to $178,000 in 1996 versus $584,000 in 1995 for a reduction of $406,000 or 70%. This reduction is due to the sale of substantially all oil properties. Cost of production and operations was $875,500 for the year ended March 31, 1996 versus $1,231,700 for the same period in 1995. The decrease in cost of production and operations of $356,200 or 29% is due primarily to the sale or shut-in of uneconomical oil and gas properties with high lifting costs. The average production cost per Mcfe was $.77 in 1996 as compared to $1.10 in 1995. During the year ended March 31, 1996, the lifting costs have continued on a downward trend. As previously noted the Company has focused its efforts on the Raton Basin and as additional wells are drilled, the Company expects the lifting costs for the Raton Basin to continue to decrease. Oil and gas service revenues and cost of oil and gas services are attributable to the Company's wholly owned subsidiary EOC, which is primarily responsible for drilling, evaluation and production activities associated with various properties and for negotiating the sales of oil and gas production from the properties. As of March 31, 1996, EOC was serving as operator for approximately 150 producing wells owned by the Company, unaffiliated third parties and affiliated parties. Oil and gas service revenues during 1996 were $779,100 versus $858,300 in the same period during 1995. The $79,000 decrease was primarily due to non-recurring special service fees of approximately $201,000, which were offset by increased operating fees of approximately $111,000 in 1996. Interest and dividend income was $206,800 during the year ended March 31, 1996 as compared to $116,300 during the year ended March 31, 1995. The increase in interest and dividends of $90,500 is due to an increase in cash from the proceeds of the preferred stock offering. Other income was $556,200 during the year ended March 31, 1996 versus $460,000 for the same period in 1995. In 1996 the Company sold its interest in ANGI Ltd. to an unaffiliated entity for $580,000, which resulted in a gain of $525,000. Costs of oil and gas services were $727,100 during the year ended March 31, 1996 as compared to $789,800 during the year ended March 31, 1995. The decrease of $62,700 or 8% was primarily due to a reduction in personnel and related salary expense. Depreciation, depletion and amortization was $590,000 during the year ended March 31, 1996 as compared to $709,000 in 1995. While there was no significant change in total production from the prior year, the decrease in depreciation, depletion and amortization is due primarily to the increase in estimated reserves of approximately 30%. General and administrative expenses were $819,800 during the year ended March 31, 1996 as compared to $850,100 during the same period in 1995. The decrease of $30,300 was due to general overhead reductions. RESULTS OF OPERATIONS -- FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO THE FISCAL YEAR ENDED MARCH 31, 1994 The Company reported a net loss of $704,700 attributable to Common Stock (which includes $94,200 of Preferred Stock dividends) or $0.13 per share of Common Stock for the year ended March 31, 1995, compared to net income of $43,500 or $0.01 per share of Common Stock in 1994. Principal factors in the year to year earnings decline were lower gas prices, reduced oil production and service revenues, lower interest and other income and Preferred Stock dividends during the year ended March 31, 1995. Oil prices averaged $15.96 per barrel during the year ended March 31, 1995 versus $14.50 per barrel during the same period in 1994. Gas prices averaged $1.70 per MCF in 1995 versus $2.15 per MCF in 1994. Natural gas production increased 23% during the year ended March 31, 1995, to 782,000 million cubic feet. 21 Oil production declined 36% during the year ended March 31, 1995 versus the prior year, principally due to the sale of non-strategic properties. Oil and gas service revenues and cost of oil and gas services are attributable to EOC, which is primarily responsible for drilling, evaluation and production activities associated with various properties and for negotiating the sales of oil and gas production from the properties. As of March 31, 1995, EOC was serving as operator for approximately 150 producing wells owned by the Company and also by other unaffiliated third parties. Oil and gas service revenues were $244,300 lower in 1995 than 1994, due primarily to non-recurring special service fees received in the prior year. Interest and dividend income declined from $238,000 in 1994 to $116,300 in 1995 because of less cash available for investment. Other income totaled $459,900 in the fiscal year ended March 31, 1995, principally from a gain on the sale of oil and gas assets of $330,900. Oil and gas production costs and taxes for the year ended March 31, 1995 were 6% lower than in the prior fiscal year. On a production equivalent unit basis, costs and taxes declined to $1.10 per MCF equivalent in 1995 from $1.21 in 1994. Cost of oil and gas services in 1995 declined by 15% from 1994 primarily because of reduced staffing. General and Administrative expenses for the year ended March 31, 1995 were 37% lower than the prior year primarily because of non-recurring legal fees in the prior year and an ongoing overhead reduction program. Depreciation, depletion and amortization expenses for 1995 were approximately 7% higher than in 1994, due to increased production. Other expenses increased to $351,200 in the fiscal year ended March 31, 1995 from $34,500 in the fiscal year ended March 31, 1994, due primarily to a loss on the sale of marketable securities ($122,100) and a write-down on the valuation of certain non-oil and gas assets ($217,000). PRO FORMA COMBINED RESULTS OF OPERATIONS The Company's pro forma combined operating results reflect the PBI acquisition as if it had occurred at the beginning of each period presented. The pro forma operating results for the 12 months ended March 31, 1996 include the 12 months ended March 31, 1996 for the Company and the 12 months ended December 31, 1995 for PBI. The pro forma operating results for the three months ended June 30, 1996 include the operating results of the Company, and PBI for such period. Adjustments to the pro forma combined operating results include changes to reflect the elimination of overhead charges and management fees billed by the Company to PBI; elimination of non Raton Basin related income, reclassification of gas revenue and production expenses related to PBI to conform to the Company's financial statement presentation and to eliminate PBI expenses eliminated as a result of the merger; changes in depletion, depreciation and amortization to reflect the new cost basis of assets acquired; changes to general and administrative expenses to eliminate expenses of PBI as a result of the merger; changes to interest expense to eliminate interest on debt not assumed and adjust interest on bank debt to the Company's borrowing rate. In addition, the weighted average shares outstanding have been adjusted to reflect the acquisition of PBI and the number of shares issued in the offering as of the beginning of the periods presented. The pro forma combined results of operations for the 12 months ended March 31, 1996 and June 30, 1996 are not indicative of the future results the Company anticipates as a result of the acquisition. The periods presented for PBI reflect the increase in the number of producing wells in which PBI had a working interest ( from 0 to 26) and increased production from 0 to approximately 2,300 MCF's 22 per day at an average sales price of approximately $1.00 per MCF. Also, during the periods presented there were significant start-up costs from PBI's 50% interest in the Primero Gas Marketing Company. The Company anticipates that the acquisition of PBI will have a positive impact on future operating results. This is due to PBI's current net production of 2,600 MCF per day at an average gas price of $1.52 per MCF. The Company does not anticipate incurring any significant general and administrative expenses as a result of the acquisition. INCOME TAXES AND NET OPERATING LOSSES As discussed in Note 4 in the accompanying consolidated financial statements, the Company has net operating loss carry forwards for income tax purposes of approximately $12,000,000, certain of which are limited due to stock issuances in 1988 and 1990. At March 31, 1996, the Company established a 100% valuation allowance on the net deferred tax asset arising from the loss carry forwards in excess of the deferred tax liability resulting from depreciation and amortization differences. The valuation allowance was recorded as it was more likely than not that any part of the deferred tax assets would be realized. With improved operating results for the three months ended March 31, 1996 and June 30, 1996, a re-evaluation of the valuation allowance was made. The probability of future taxable income was evaluated based on current projections of future operating results through 1999. While the Company believes that it will continue to improve its profitability, the use of net operating losses may be dependent upon the successful completion of the proposed underwriting and or other potential funding alternatives, which will provide the Company with financing to continue its drilling program. As a result of the re-evaluation, the Company has decided that no adjustment to the deferred tax valuation allowance should be made at June 30, 1996 since the Company cannot determine that it is more likely than not such tax benefits will be realized. ACCOUNTING STANDARDS The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets" and SFAS No. 123, "Accounting for the Stock Based Compensation." SFAS No. 121 provides standards for accounting for the impairment of various long-lived assets. The Company uses the full cost method which requires an impairment to be recorded when total capitalized costs exceed the present value, discounted at 10%, of estimated future net cash flows from proved oil and gas reserves. Therefore, the adoption of SFAS No. 121 is not expected to have a material effect on the financial position or results of operations of the Company. SFAS No. 123 encourages the accounting for stock-based employee compensation programs to be reported within the financial statements on a fair value based method. If the fair value based method is not adopted, then the statement requires pro-forma disclosure of net income and earnings per share as if the fair value based method had been adopted. The Company has not yet determined how SFAS No. 123 will be adopted nor its impact on the financial statements. Both statements are effective for fiscal years beginning after December 15, 1995. 23 BUSINESS AND PROPERTIES HISTORY OF THE COMPANY Evergreen Resources, Inc. ("Evergreen" or "the Company"), is a Colorado corporation organized on January 14, 1981. Evergreen was formed to engage in exploration for, and acquisition, development, production and sale of, oil and gas. At various times Evergreen has owned interests in oil and gas leases and producing wells in several states. Currently, the majority of Evergreen's reserves and production are derived from leases in the Raton Basin of Colorado. These leases are being explored and developed for the production of coalbed methane (natural gas) produced from gas wells drilled into coal seams. Evergreen has sold the majority of its interests in wells outside the Raton Basin. Evergreen Operating Corporation ("EOC") is a wholly owned subsidiary of the Company that is primarily responsible for drilling, evaluation and production activities associated with Evergreen's properties. To the extent that third parties own undivided interests in Evergreen's properties, EOC operates on behalf of those third party owners. EOC also operates certain wells in Colorado in which Evergreen does not own an interest, though that constitutes a minority of EOC's business. EOC negotiates the sales of oil and gas production from the wells that it operates. As of March 31, 1996, EOC was serving as operator for approximately 150 producing wells owned by the Company and also by other affiliated and unaffiliated third parties. The Company believes that, as operator, it is in a better position to control costs, safety, orderly development and timeliness of work as well as other critical factors affecting the economics of a well or a property. EOC presently operates all of the Company's wells. Primero Gas Marketing Company ("Primero") formerly known as Primero Gas Gathering Company, is a Colorado joint venture formed in August of 1994 between the Company and third parties to construct and operate a gathering system to connect the Company's Raton Basin wells to the pipelines of Colorado Interstate Gas Company ("CIG"). The joint venture financed and constructed the gathering system and has entered into contracts to purchase all gas produced at the wellhead from the Company's wells, including the interests of other working interest owners in the wells. Primero has entered into a contract with CIG for firm transportation on CIG's pipelines of up to 25 million cubic feet of gas per day for a term of 10 years. See "Business and Properties -- Agreements -- CIG Agreement." The Company expects to have access to higher price gas markets as a result of this transportation agreement. See "Business and Properties -- Marketing." As a result of the Company's recent acquisition of the interests of co-owners in its Raton Basin projects, the Company's subsidiaries now own all of Primero Gas Marketing Company. See "Business and Properties -- Agreements -- PBI Agreements." In 1991 and 1992, the Company's wholly owned subsidiary, Evergreen Resources (U.K.) Ltd. ("ERUK"), was awarded seven onshore U.K. hydrocarbon Exploration Licenses for the development of coalbed methane gas and conventional hydrocarbons (the "Licenses"). The Licenses provide ERUK with the largest onshore acreage position in the U.K., and cover substantially all of six distinct onshore U.K. basins. Over 400,000 acres are considered prospective specifically for coalbed methane. In August 1994, Management decided to focus the Company's domestic efforts and resources on development of coalbed methane natural gas in the Raton Basin of Colorado. The Company has divested all of its oil and gas properties outside of the San Juan and Raton Basins. During the last ten years, new technology has led to the development of substantial new reserves of coalbed methane gas in the U.S. Coalbed methane gas is expected to make a significant contribution to future U.S. energy requirements and, if successfully developed, may be of equal importance to many countries. Since 1990, Evergreen has participated in coalbed methane gas projects through various activities including drilling new wells and acquiring substantial leases in the U.S. and U.K. for future development. 24 FOCUS Over the last two years Management has re-positioned Evergreen in order to focus the Company's domestic efforts and resources on development of coalbed methane gas in the Raton Basin of Colorado. The number of states in which Evergreen owns or operates oil and gas properties has now been reduced from twelve to two states, through sales of non-strategic and/or marginal properties. The oil and gas production and reserves lost through these property sales have now been more than replaced by new production and reserves in the Raton Basin. Overhead has been reduced by approximately one-third since 1994 and should remain near present levels for the foreseeable future. Operations are now fully consolidated into Evergreen's Denver offices. The Company currently is experiencing significant growth in its gas production volumes, revenues and cash flow primarily as a result of its development drilling in the Raton Basin. For the quarter ended June 30, 1996, the Company's average net daily gas production increased to 4.4 million cubic feet from 2.2 million cubic feet for the same period in the prior year. As of September 1, 1996, the Raton Basin represented approximately 90% of Evergreen's net daily production of natural gas. All of the Company's proved reserves, oil and gas production and revenues are now attributable to natural gas. COALBED METHANE VERSUS TRADITIONAL NATURAL GAS PRODUCTION Coalbed 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 coalbed methane wells are very different from traditional natural gas production. Coal beds produce nearly pure methane gas while traditional gas wells normally produce gas that contains small portions of ethane, propane, and other, heavier, hydrocarbon gases. Methane normally constitutes more than 90% of the total gases in the production from traditional gas wells. The Raton Basis 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 (Btu), are very close to the average properties of pipeline gas from traditional gas wells. Coal is a black organic mineral formed from buried deposits of plant material from ancient coastal swamps. Methane, or natural gas, is a common component of coal, though coals vary in their methane content per ton. Rather than being limited to open spaces in the coal structure, methane is adsorbed on to the inner coal surfaces. When the coal is fractured and exposed to lower pressures (near a well or in a coal mine) the gas leaves (desorbs from) the coal. Whether a coal bed will produce commercial quantities of natural gas depends on its original content of gas per ton of coal, the thickness of the coal beds, the reservoir pressure and the existence of fractures through which the released gas can flow to the wellhead (permeability). Frequently, coal beds are partly or completely saturated with water. As the water is produced, space is created for gas to leave the coal and flow to the well. Contrary to traditional gas wells, new coalbed methane wells often produce water for several months and then, as the water production decreases because the coal seams are being drained, and the pressure decreases, natural gas production increases. WATER PRODUCTION AND DISPOSAL Fortunately, most of the water produced from the Raton Basin coal seams to date has been low in dissolved solids, allowing the Company, operating under permits issued by the State of Colorado, to discharge the water into streambeds or stockponds. If more brackish water is discovered in subsequent wells, it may be necessary to install and operate evaporators or drill specialized injection wells to re-inject the produced water back into the underground rock formations adjacent to the coal seams or to lower sandstone horizons. While alternate methods of water disposal may increase the Company's operating 25 expenses, the Company does not expect that such costs would have a material impact on its lifting costs in the Raton Basin. RATON BASIN GEOLOGY In the Raton Basin, Evergreen produces methane from the Vermejo coals, consisting of several individual seams ranging in thickness between 1 and 12 feet, and at drilling depths between 550 and 1,800 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 65 and 40 million years before the present. The Raton Basin is an elongated downward fold in the earth's crust formed at this time that is approximately 80 miles long north to south and about 50 miles wide east to west. Plant material accumulated in thick layers in coastal swamps in the Raton Basin and was subsequently buried and subjected to heat and pressure which formed the coals. Since these coals were buried, continued mountain building forces compressed the Basin, creating an extensive series of fractures in the coal 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 structures in the center of the Raton Basin known as the Spanish Peaks. The magma moved up through existing 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 coals beds. The Company believes that the compression of mountain building and the intrusion of magma into the Raton Basin have enhanced the ability of the Vermejo and Raton coals to yield coalbed methane. The Company's geological interpretation has been borne out by its first 31 wells, all of which have economic gas production. Radiating out from the Spanish Peaks is a network of vertical and horizontal cracks in the surrounding sedimentary rocks (including the Vermejo coals) that were filled with magma, called dikes and sills. The dikes and sills of solidified magma are resistant to erosion and now form ridges in the area. The Company believes that the formation of the Spanish Peaks and the dikes and sills has made the nearby Vermejo coals particularly suited to coalbed methane production. The radiating dikes and sills have broken up the coal beds, increasing permeability, and the magma presence has thermally matured the coals so that they have generated more volatile gases, such as methane. The Company's geological interpretation has been borne out by its first 31 wells, all of which have economic gas production. COALBED METHANE TECHNOLOGY Coalbed methane wells are drilled and completed in a manner similar to traditional gas wells, but exploration is easier because coalbeds are relatively continuous underground and because it is not essential to find folded or faulted structures that create natural traps. The coalbed methane is trapped in the molecular structure of the coal itself until released by pressure changes. 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 the beds is variable. Evergreen is currently completing its wells in the Vermejo coal beds. Individual wells are often completed to produce gas from five to fifteen individual coal beds with individual thicknesses between 1 and 12 feet. 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. Coal often provides very little ability for the gas to move through it to the wellbore. Permeability is the measure of the ability of fluids to move through the rock (coal) under the influence of a differential pressure. The Raton Basin coals exhibit very good to excellent permeability. However, in order to establish commercial gas production rates, Evergreen must create a permanent conduit between the individual coal seams and the wellbore. This is accomplished by creating and propping open artificial fractures within the coal seams so the pathway for gas migration to the wellbore is enhanced. After a well is drilled, instruments are lowered to identify the individual rock layers and to measure the location and thickness of individual coal seams. Then, steel casing is cemented into the wellbore, to prevent gas or water from one rock formation from migrating upward or downward into another formation. A special blasting 26 device is lowered to the desired zone of production and detonated, producing a series of perforations in the well casing at that depth. Then fluids containing coarse sand are pumped through the perforations to create and fill fractures in the coal seam radiating outward from the wellbore. These fractures filled (propped) with coarse sand become the conduits for coalbed methane to reach the well. Similar techniques of fracturing (known as "fracing" in the industry) are used on traditional gas and oil wells and are often performed by independent well service contractors. The Company, working in conjunction with its contractors, has developed effective procedures for fracing the Vermejo coals in its Raton Basin wells. Although individual wells vary, the average production from the wells is in excess of 280,000 cubic feet of gas per day, with individual wells producing as much as 800,000 cubic feet per day. In addition to developing well completion and fracing techniques particularly suited to its Raton Basin wells, the Company has used specialized drilling techniques in the Raton Basin. Traditional gas wells are drilled with the use of rotary drill bits cooled and lubricated by drilling fluids or "mud." Coalbed methane production is particularly sensitive to the permeability of the coals. Exposing the Raton Basin coals to drilling mud appears to significantly lower the permeability of the coals by plugging the pores and natural fractures in the coals. The Company has, therefore, used percussion air drilling (similar to a jackhammer) without traditional drilling muds in drilling its wells. RATON BASIN PRODUCTION Since December 1991, Evergreen has acquired oil and gas leases covering over 120,000 gross acres in the Raton Basin, Las Animas County in Southeastern Colorado. The initial 70,000 acres were acquired from Amoco Production Company by direct purchase without overriding royalties. The remainder of the acreage has been purchased from individual owners under various lease terms. Over 67,000 acres of the total have been included in a Federal Unit Agreement which simplifies lease maintenance for the Company. Operation and production within a federal Unit is governed by federal rules based on the inclusion of federal leases within the Unit. Under the Unit Agreement, Evergreen's subsidiary EOC is the operator of all wells drilled in the Unit area. Production from any well in the Unit area will maintain all of the leases beyond their primary terms. By the end of 1996, Evergreen will designate a "participating area" under the Unit agreement. Gas production in the participating area will be pooled and shared by the lessors and lessees in that area in proportion to their acreage ownership of the mineral estate in the area. The participating area is likely to be amended annually, or new participating areas created, as additional wells are completed. The Company may form other federal Units for much of its remaining acreage in the Raton Basin. Evergreen's acreage position in the Raton Basin will support over 500 wells on 160 acre spacing. Since 1994 Evergreen has completed 32 wells capable of commercial production and is currently producing from 31 of those wells. An additional group of 10 wells has been drilled since March 31, 1996, but those wells are not yet completed and connected to the system of gas gathering pipelines. The Company currently expects that the newest 10 wells will be in production during October of 1996. Thirty to forty wells are scheduled to be drilled during 1997. Daily production from the field currently exceeds 8.8 million cubic feet per day, for an average of over 280,000 cubic feet per well per day. The range of production from individual wells is from 50 to 800 thousand cubic feet per day. Because of the importance of removing water from the coal seams to enhance gas production, Evergreen will continue production from more modest wells because of the beneficial 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. Independent engineering estimates attribute proved reserves of approximately 1.5 - 2.0 BCF of gas per well for the approximately 80 locations to which proved reserves were assigned in the most recent evaluation by independent consulting engineers. The productive lives of the wells are expected to be in excess of 30 years. 27 CUSTOMERS AND MARKETS Substantially all of the Company's oil and gas production is sold at the well site as it is produced. Primero Gas Marketing Company ("Primero"), is a Colorado joint venture owned by subsidiaries of the Company that owns the gathering system to and purchases all the Company's production from its Raton Basin wells. For the first years of Raton Basin production, Primero had a series of short term contracts for the sale of Raton Basin gas. Primero could only access markets outside the Rocky Mountains region when pipeline transportation was available from customers or other brokers. Wellhead gas prices in the Rocky Mountain region have been substantially lower in the Midwestern and Eastern regions of the United States for the last several years. Primero recently entered into a contract with CIG for firm transportation on CIG's pipelines of up to 25 million cubic feet of gas per day for a term of 10 years beginning October 1, 1996. See "Business and Properties -- Agreements -- CIG Agreement." This transportation capacity will accommodate the Company's expected gas production from existing and new wells in the Raton Basin for the next 18 months to two years. The CIG contract provides for delivery of the Company's gas into interstate pipelines in Texas. From there, the gas can be transported to Midwest and East Coast markets. The Company expects to have consistent access to higher price gas markets as a result of the CIG transportation agreement. In addition, 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. Currently, the Company's gas is sold at spot market prices or under contracts for terms less than one year. Evergreen's business is not seasonal in nature, except to the extent that weather conditions at certain times of the year may affect Evergreen's access to its oil and gas properties and its ability to drill oil and gas wells. The impact of inflation on the Company's activities is minimal. While gas prices have historically fluctuated between winter and summer seasons, changes in the market during the last few years have made such fluctuations unpredictable. For instance, because local gas utilities around the country need to refill their gas storage facilities in the summer, prices may be higher during spring or summer months than during subsequent winter months when temperatures are warmer than normal. Evergreen had two major customers for the sale of oil and gas as of June 30, 1996, who purchased approximately 68% (NGTS, Inc.) and 19% (Conoco), of the Company's gas production. The loss of these customers would not have a material adverse effect on Evergreen's business. None of the Company's existing marketing agreements obligates the Company to continue sales to any particular gas purchaser for a period longer than 7 months. COMPETITION The Company competes with numerous other companies and individuals, including many that have significantly greater resources, in virtually all facets of its business. Such competitors may be able to pay more for desirable leases and to evaluate, bid for and purchase a greater number of properties than the financial or personnel resources of the Company permit. The ability of the Company to increase reserves in the future will be dependent on its ability to select and acquire suitable producing properties and prospects for future exploration and development. The availability of a market for oil and natural gas production depends upon numerous factors beyond the control of producers, including but not limited to the availability of other domestic or imported production, the locations and capacity of pipelines, and the effect of federal and state regulation on such production. Domestic oil and natural gas must compete with imported oil and natural gas, coal, atomic energy, hydroelectric power and other forms of energy. The Company does not hold a significant competitive position in the oil and gas industry. FUTURE DEVELOPMENT IN THE RATON BASIN Evergreen management believes that the Company's Raton Basin Project is worthy of full scale development for these reasons: 28 DRILLING RESULTS ON TARGET -- The first 31 producing wells now exceed 8.8 million cubic feet of combined gross daily gas production -- in line with Evergreen's original forecasts. LOW FINDING AND DEVELOPMENT COSTS -- Each well drilled to date has established 1.5 - 2.0 BCF of gas at a cost per well of approximately $300,000. The result is a finding cost of approximately $0.15 - $0.20 per MCF, among the lowest finding costs in the industry. LOW LIFTING COSTS -- Management expected that by disposing of the Company's marginal properties and developing new Raton production, overall Company lifting costs would decline sharply. On an equivalent MCF basis (6 MCF = 1 barrel of oil), Evergreen's lifting cost trend is favorable:
1993 1994 1995 1996 $ 1.91 $ 1.21 $ 1.10 $ 0.77
In the quarter ended June 30, 1996, the lifting cost in the Raton Basin was $0.33 per MCF. This cost should decline modestly as more wells are developed. LARGE ACREAGE POSITION -- Evergreen has over 120,000 gross acres under lease in the Raton Basin. This acreage will support a multi-year development project of over 500 wells. IMPROVED GAS PRICES -- Recent higher gas volumes have permitted access to new gas markets resulting in better gas prices than those obtained in the Summer of 1995. (See discussion of the CIG Agreement below in "Business and Properties -- Material Agreements.") The Company plans to develop the Raton Basin project in three broad stages, each comprising 150 - 200 wells. The stages will require separate gathering and compression facilities. For reasons of geologic control, logistics and reasonable levels of capital expenditure, the Company expects to proceed at a pace of 40 - 50 wells per year. AGREEMENTS CIG AGREEMENT On September 5, 1996, Evergreen (through its marketing joint venture with Primero Gas Marketing Company) entered into a letter agreement with Colorado Interstate Gas Company ("CIG") providing for CIG's construction of a gas blending facility in Trinidad, Colorado, 10 miles from Evergreen's wells and a firm transportation agreement for a ten year term. Evergreen's gas production is relatively pure methane and to meet CIG pipeline specifications, CIG desires to have small quantities of nitrogen blended with the methane. CIG will construct a nitrogen blending facility capable of blending 20 million cubic feet of gas per day, to be in service on or about October 1, 1996. Evergreen has entered into a firm transportation agreement at CIG's current tariff rates to transport gas to either Dumas, Texas or to El Paso's Big Blue meter station in Moore County, Texas. Evergreen will be obligated to transport at least 10,000 MMBtu per day (approximately 10 million cubic feet of gas), and will be allowed to transport an additional 15,000 MMBtu per day at a fixed charge. The Company's wells presently produce approximately 8.8 million cubic feet of gas per day. The Company has drilled an additional 10 wells and expects to have those wells producing at approximately the same time that the transportation agreement takes effect. This transportation agreement will provide Evergreen access to Midwest markets and the Company believes that it will receive higher gas prices as a result. SAN JUAN BASIN AGREEMENTS Evergreen recently sold its interest in 6 producing coalbed methane wells in the Rosa Unit of the San Juan Basin, Rio Arriba County, New Mexico. Evergreen began operations in the Rosa Unit in 1990. Due to high royalties payable to landowners, less productive wells, and high operating costs in the San Juan Basin, Evergreen has concluded that the economic conditions for coalbed methane production are much more favorable in the Raton Basin. Accordingly, as of June 1, 1996, Evergreen entered into an 29 agreement transferring six producing San Juan Basin wells to EP San Juan Limited Partnership, affiliated with Banque Paribas. In addition to $53,046 in initial consideration, Evergreen retains a production payment equal to 99% of net profits until 1.1 BCF of gas has been produced from the wells. At present production levels, the production payment will end in 4-5 years. Evergreen will receive additional payments of approximately $0.65 per MMBtu of gas produced through December, 2002, adjusted annually according to a formula considering inflation and changes in gas prices. Evergreen also retains (a) its interest in and the right to develop the remaining portions of its San Juan Basin leases, (b) the right to repurchase a 100% interest in the wells between December 31, 2002 and January 1, 2008, and (c) an automatic reversion to a 75% interest in the wells if they continue production in excess of 1.8 Bcf of gas. In return, Evergreen will operate the wells for the new owner for $400 per month plus reimbursement of third party costs. The entire transaction is subject to rescission up until November 30, 1996 pending the purchaser obtaining favorable rulings from the IRS in connection with the transaction. Evergreen owns an additional 16 wells in the San Juan Basin, of which 12 are shut in due to low production volumes and gas prices. EL PASO AGREEMENT In August 1992, Evergreen entered into a series of agreements with El Paso concerning the connection of Evergreen's San Juan Basin wells to El Paso's pipeline system. Under the agreements, El Paso paid for construction of a gathering pipeline to a central point in Evergreen's producing area. Evergreen paid for construction of its own gathering system to the wells beyond that point, which was sold to Associated Natural Gas, Inc. in 1993. Evergreen dedicated 90% of its San Juan Basin production to El Paso's gathering line for a period of 10 years following completion of the line and agreed to deliver a minimum of 11,000 MMBtu per day for five years to El Paso's gathering line or pay a shortfall payment of $0.25 per MMBtu. Production from the wells has been substantially less than 11,000 MMBtu per day and Evergreen has accrued a shortfall obligation of $1,831,000 as of June 30, 1996 which may grow to in excess of $3.0 million by the end of the five year period. El Paso is discussing alternate resolutions with Evergreen, including the sale of El Paso's gathering line to Evergreen. However, there is no assurance that agreement will be reached. UNITED KINGDOM In 1991 and 1992, the Company's wholly-owned subsidiary, ERUK, was awarded seven onshore U.K. hydrocarbon Exploration Licenses for the development of coalbed methane gas and conventional hydrocarbons (the "Licenses"). The Licenses provide ERUK with the largest onshore acreage position for coalbed methane exploration in the U.K., and cover substantially all of six distinct onshore U.K. basins. Over 400,000 acres are considered prospective specifically for coalbed methane. Selection of the licensed areas was made after evaluating extensive geological, geophysical, petrophysical and measured methane gas content data bases. The majority of the original data base was acquired through technology sharing agreements with British Coal Corporation, who shared all relevant available data on the six basins and granted ownership of this data to ERUK. ERUK has augmented this data with proprietary seismic and coalbed methane well data and also geologic data from the British Geologic Survey, and other sources. During the period 1992 to 1994, Evergreen conducted seismic work and drilled three wells on two of the Licenses. The wells encountered 30' to 80' of gross coal. Two of the wells were hydraulically fracture stimulated and one was tested for permeability. Following extensive production testing, none of the three wells produced gas in economic quantities. The three wells are presently shut-in. Approximately $7.5 million has been invested to date in acquiring, maintaining and evaluating the Licenses. This amount is included in the statement of the Company's assets. Under a new onshore Licensing regime implemented by the U.K. Department of Trade and Industry, Evergreen will convert its existing Licenses to new onshore licenses, called Petroleum Exploration and 30 Development Licenses. These new licenses will provide up to a 30 year term with periodic relinquishment, approximately every 5 years, of up to 50% of the acreage subject to future development plans. Work commitments on the existing Licenses have been fulfilled through 1997 as a result of Evergreen's prior U.K. activity. There are no royalties or burdens encumbering the Licenses. Management believes, based on the data evaluated, that the coal seams in the license areas contain significant quantities of gas. Further evaluation will be required to determine the economic viability of extracting this gas. Each license area must be evaluated separately since success or lack of success on one License may not be translated to similar results on other Licenses or separate geologic basins. Over 500 drilling locations are feasible on the Licenses. The U.K. market for the purchase and sale of natural gas became fully deregulated in April 1996. The impact of deregulation to date has been a sharp decline in short term or "spot" gas prices. Evergreen continues to believe that higher prices justifying onshore coalbed methane development are available by supplying local end users directly under long term contracts. Evergreen is continuing to hold discussions with various funding sources, including potential industry partners, for the purpose of resuming evaluation and development of the Licenses. OPERATIONS The Company's wholly-owned subsidiary, EOC, is primarily responsible for drilling, evaluation and production activities associated with various properties and for negotiating the sales of oil and gas production from the properties. As of September 9, 1996, EOC was serving as operator for approximately 150 producing wells owned by the Company and also by other affiliated and unaffiliated third parties. The Company believes that, as operator, it is in a better position to control costs, safety, and timeliness of work as well as other critical factors affecting the economics of a well or a property. EOC presently operates wells which represent virtually 100% of Evergreen's proved reserves. OIL AND GAS RESERVES The table below sets forth the Company's quantities of proved reserves, as estimated by independent petroleum engineers, all of which were located in the continental U.S., and the present value of estimated future net revenues from these reserves on a non-escalated basis discounted by 10 percent per year as of the last three fiscal years ending March 31, 1996 and as of August 1, 1996.
AUGUST 1, YEARS ENDED MARCH 31, ----------- ------------------------------------- 1996 1996 1995 1994 Estimated Proved Gas Reserves (MCF) 128,029,100 80,926,000 57,882,000 51,588,100 Estimated Proved Oil Reserves (Bbls) -- 4,800 842,900 1,643,100 Present Value of Future Net Revenues (before future income tax expense) $51,214,300 $30,163,400 $23,312,330 $32,443,800
Reference should be made to Supplemental Oil and Gas Information on pages F-21 - F-25 of this Prospectus for additional information pertaining to the Company's proved oil and gas reserves. During fiscal 1996 the Company did not file any reports that include estimates of total proved net oil or gas reserves with any federal agency other than the Securities and Exchange Commission. 31 PRODUCTION The following table sets forth the Company's net oil and gas production for the last three fiscal years and for the first quarter of the last two fiscal years.
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31, -------------------- ------------------------------- 1996 1995 1996 1995 1994 Natural Gas (MCF) 394,300 207,700 941,200 781,700 637,900 Crude Oil & Condensate (Bbls) 141 1,957 9,700 36,600 57,500
AVERAGE SALES PRICES AND PRODUCTION COSTS The following table sets forth the average gross sales price and the average production cost per unit of oil and gas produced, including production taxes, for the last three fiscal years and for the first quarter of the last two fiscal years. For purposes of calculating production cost per equivalent MCF, barrels of oil have been converted at a ratio of six MCF of gas for each barrel of oil:
THREE MONTHS ENDED JUNE 30 YEAR ENDED MARCH 31 -------------------- ------------------------------- 1996 1995 1996 1995 1994 Average Sales Price Gas (per MCF) $ 1.33 $ 1.18 $ 1.28 $ 1.70 $ 2.15 Oil (per Bbl) 23.06 19.62 18.40 15.96 14.50 Average Production Cost Per Equivalent MCF $ 0.33 $ 0.93 $ 0.77 $ 1.10 $ 1.21
PRODUCING WELLS AND DEVELOPED ACREAGE The following table sets forth, as of September 9, 1996, the approximate number of gross and net producing oil and gas wells and their related developed acres owned by the Company. Productive wells are producing wells and wells capable of production, including shut-in wells. Developed acreage consists of acres spaced or assignable to productive wells.
PRODUCING WELLS DEVELOPED ACRES - ------------------------------------------------ -------------------- OIL GAS GROSS NET - ------------------------ ---------------------- --------- --------- GROSS NET GROSS NET -0- -0- 53 42.50 22,917 17,478
UNDEVELOPED ACREAGE At September 9, 1996, Evergreen held undeveloped acreage as set forth below:
UNDEVELOPED ACRES -------------------- LOCATION GROSS NET Colorado 121,925 98,050 New Mexico 640 324 --------- --------- TOTAL U.S. 122,565 98,374 United Kingdom 630,480 630,480
32 The following table sets forth the expiration dates of the gross and net acres subject to Colorado leases summarized in the table of undeveloped acreage.
ACRES EXPIRING -------------------- GROSS NET Twelve Months Ending: March 31, 1997 12,356 7,165 March 31, 1998 18,405 12,584 March 31, 1999 15,124 7,212 March 31, 2000 and later 4,316 2,262
DRILLING ACTIVITIES The Company's drilling activities for the years ended March 31, 1996, 1995, and 1994 are set forth below:
1996 1995 1994 ---------------------- ------------------------ ------------------------ GROSS NET GROSS NET GROSS NET Exploratory: Productive 0 0.00 0 0.00 4 2.00 Dry 0 0.00 0 0.00 0 0.00 -- - - --------- --------- --- 0 0.00 0 0.00 4 2.00 Development: Productive 22 15.75 6 3.00 6 2.25 Dry 0 0.00 0 0.00 0 0.00 -- - - --------- --------- --- 22 15.75 6 3.00 6 2.25
GOVERNMENT REGULATION OF THE OIL AND GAS INDUSTRY GENERAL The Company's exploration, production and marketing operations are regulated extensively at the federal, state and local levels. Gas and oil exploration, development and production activities are subject to various laws and regulations governing a wide variety of matters. For example, hydrocarbon-producing states have statutes or regulations addressing conservation practices and the protection of correlative rights, and such regulations may affect Evergreen's operations and limit the quantity of hydrocarbons Evergreen may produce and sell. Other regulated matters include marketing, pricing, transportation, and valuation of royalty payments. At the U.S. federal level, the Federal Energy Regulatory Commission ("FERC") regulates interstate transportation of natural gas under the Natural Gas Act and regulates the maximum selling prices of certain categories of gas sold in "first sales" in interstate and intrastate commerce under the Natural Gas Policy Act. Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act deregulated natural gas prices for all "first sales" of natural gas, which includes sales by Evergreen of its own production. As a result, all sales of the Company's natural gas produced in the U.S. may be sold at market prices, unless otherwise committed by contract. The Company's gas sales are affected by regulation of intrastate and interstate gas transportation. In an attempt to promote competition, the FERC has issued a series of orders which have altered significantly the marketing and transportation of natural gas. The Company believes that these changes have generally improved the Company's access to transportation and have enhanced the marketability of its natural gas production. To date, Evergreen has not experienced any material adverse effect on gas marketing as a result of these FERC orders; however, the Company cannot predict what new regulations may be adopted by the FERC and other regulatory authorities, or what effect subsequent regulations may have on its future gas marketing. 33 The Company also is subject to laws and regulations concerning occupational safety and health. It is not anticipated that the Company will be required in the near future to expend amounts that are material in the aggregate to the Company's overall operations by reason of occupational safety and health laws and regulations, but inasmuch as such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance. ENVIRONMENTAL REGULATIONS Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the operations and costs of the Company. The Company discharges water produced from coal formations in the Raton Basin pursuant to various permits. It is not anticipated that the Company will be required in the near future to expend amounts that are material in relation to its total capital expenditure program by reason of environmental laws and regulations. However, inasmuch as such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance. STATE REGULATION OF OIL AND GAS PRODUCTION State statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Most states in which the Company owns and operates properties have statutes, rules or regulations governing conservation matters, including the unitization or pooling of oil and gas properties, establishing of maximum rates of production from oil and gas wells and the spacing of such wells. Many states also restrict production to the market demand for oil and gas. Such statutes and regulations may limit the rate at which oil and gas could otherwise be produced from the Company's properties. Some states have enacted statutes prescribing ceiling prices for gas sold within their state. The Company's Raton Basin production is not currently subject to price regulation. However, the Company is unable to predict whether production rate limitations or price regulations may be imposed in the future. TITLE TO PROPERTIES As is customary in the oil and gas industry, only a preliminary title examination is conducted at the time properties believed to be suitable for drilling operations are acquired by the Company. Prior to the commencement of drilling operations, a thorough title examination of the drill site tract is conducted by independent attorneys. Once production from a given well is established, the Company prepares a division order title report indicating the proper parties and percentages for payment of production proceeds, including royalties. The Company believes that titles to its leasehold properties are good and defensible in accordance with standards generally acceptable in the oil and gas industry. OFFICE AND OPERATIONS FACILITIES The Company's corporate offices are in Denver, Colorado. The lease covers approximately 11,800 square feet and is month-to-month. The current monthly rental rate is approximately $12,800. The Company believes its office space is sufficient for the foreseeable future. LEGAL PROCEEDINGS The Company is not engaged in any material pending legal proceedings to which the Company or its subsidiary is a party or to which any of its property is subject. EMPLOYEES At September 9, 1996, the Company and its subsidiaries employed 25 full time and 3 part time persons. 34 MANAGEMENT The Executive Officers and Directors of the Company and their respective positions and ages are set forth below:
NAME AGE POSITION James S. Williams 61 Chairman of the Board and Director Mark S. Sexton 40 President, CEO and Director CEO, Evergreen Operating Corp. Dennis R. Carlton 45 Vice President Exploration and Director President, Evergreen Operating Corp. John J. Ryan III 68 Vice President and Director Chairman, Evergreen Resources (U.K.) Ltd. Alain Blanchard 55 Director Larry D. Estridge 51 Director Scott D. Sheffield 44 Director Kevin R. Collins 39 Vice President Finance, CFO and Treasurer J. Keither Martin 62 Secretary Ian M. Thomson 56 Managing Director Evergreen Resources (U.K.) Ltd.
There is no arrangement, known to the Company, including any pledge by any person of securities of the Company or any of its parents, the operation of which may at a subsequent date result in a change in control of the Company. All Directors hold office until the election and qualification of their successors. Officers serve at the discretion of the Board. JAMES S. WILLIAMS has been the Chairman and a Director of Evergreen since founding the Company in 1981. Mr. Williams graduated in 1956 from Columbia College and has been engaged in U.S. oil and gas activities for over twenty years. Mr. Williams resides in Denver, Colorado and devotes full time to Evergreen. MARK S. SEXTON was named a Director of Evergreen in March 1995 and President and CEO in June 1995. He has managed the daily activities of Evergreen Operating Corporation ("EOC") since 1987 and was named Vice President Operations for Evergreen and President of EOC in 1989. A Registered Professional Engineer in Colorado, Mr. Sexton graduated in 1978 from Stanford University with a B.S. degree in Mechanical Engineering. From 1978 to 1982, he was employed in various engineering and financial positions with Amoco Production Company. From 1982 to 1985, he was employed with Norwest Bank Minneapolis as Manager of Engineering and Evaluations. From January 1986 to June 1987, he was President of Sound Energy Development Co. and Managing Director of the Carbon River Energy Partnership. He resides in Evergreen, Colorado and devotes full time to Evergreen. DENNIS R. CARLTON was named a Director of Evergreen in March 1995. He received a Bachelor of Science degree in Geology in 1972 and a Master of Science degree in Geology in 1975 from Wichita State University. He joined Evergreen in December 1981 as Vice President Geology. He was named a Director in March 1985 and President in December 1986. He served as President and a Director until May 1989 when he was named Executive Vice President of EOC. In May 1991 he was named Vice President Exploration of Evergreen. In June 1995 he was named President of EOC. He resides in Denver, Colorado and devotes full time to Evergreen. 35 JOHN J. RYAN III was named Vice President and a Director of Evergreen in May 1989. Since 1982 he has been engaged in international tax and investment activities. Mr. Ryan, a resident of Geneva, Switzerland, is also Chairman of Evergreen Resources (U.K.) Ltd. ALAIN BLANCHARD was named Director of Evergreen in May 1989. From 1983 until 1988 Mr. Blanchard was an Associate and shareholder of Laidlaw Adams and Peck. A resident of Brussels, Belgium, he has managed discretionary funds for private and institutional clients for over 15 years and continues to do so. LARRY D. ESTRIDGE was named a Director of Evergreen in May 1989. He resides in Greenville, South Carolina, and is a partner in the law firm of Wyche, Burgess, Freeman & Parham, P.A. He has been affiliated with the Wyche law firm since July 1972. He has represented EOC and a number of affiliated companies for the last six years. SCOTT D. SHEFFIELD was named a Director of Evergreen in September 1996. Mr. Sheffield is currently Chairman, President and CEO of Parker & Parsley Petroleum Company (NYSE "PDP") and has been since April of 1985. From 1979 to April 1985 he was employed by Parker & Parsley in various engineering positions, 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 Midland, Texas. KEVIN R. COLLINS joined Evergreen as Vice President Finance, CFO and Treasurer in July 1995. He received a B.S. in Business Administration and Accounting from the University of Arizona in 1980, and became a CPA in 1983. Mr. Collins has been involved in public accounting for over twelve years. From 1986 to 1994 he was employed by BDO Seidman, LLP, Denver where he was Senior Manager. He was with Ehrhardt Keefe Steiner & Hottman, CPA's, Denver from October 1994 to June 1995. He resides in Littleton, Colorado and devotes full time to Evergreen. J. KEITHER MARTIN was named Secretary of Evergreen in June 1995. He has served as Controller for EOC since 1984. During the previous sixteen years, Mr. Martin was employed by Anderson Oil Company as Director of Financial Information. He resides in Golden, Colorado and devotes full time to Evergreen. IAN M. THOMSON graduated in 1961 from Edinburgh University with a BSc (Hons) degree in engineering followed by post-graduate studies at Imperial College, London. He was a Board Director of the Laird Group PLC, a leading U.K. industrial conglomerate, responsible for a mining equipment subsidiary in the U.K., U.S. and other countries. He presently holds various non-executive directorships in U.K. industrial and manufacturing companies. Mr. Thomson resides in Oxford, England. BOARD COMMITTEES The Audit Committee is presently composed of Larry D. Estridge, Alain Blanchard and James S. Williams. The Committee recommends to the Board the firm to be employed as the Company's independent auditors and consults with and reviews the reports of the Company's independent auditors and the Company's internal financial staff. One meeting was held during the fiscal year ended March 31, 1996. The Compensation Committee is presently composed of Mark S. Sexton and Larry D. Estridge. The Compensation Committee assists the Board in establishing compensation for key employees. Two meetings were held during the fiscal year ended March 31, 1996. 36 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE. The information contained in the following Summary Compensation Table for the fiscal years 1996, 1995 and 1994 is furnished with respect to the named executives.
RESTRICTED STOCK NAME AND PRINCIPAL SALARY OTHER ANNUAL AWARD(S) WARRANTS LTIP PAYOUTS POSITION FISCAL YEAR ($) BONUS ($) COMPENSATION ($)(1) ($)(2) (#) ($) James S. Williams 1996 86,742 0 0 39,463 0 0 Chairman and a 1995 68,333 0 0 37,220 0 0 Director 1994 76,250 0 0 35,000 5,000 0 Mark S. Sexton 1996 86,750 0 0 31,875 0 0 President, CEO and 1995 73,334 0 0 32,917 0 0 a Director 1994 78,625 0 0 35,000 5,000 0 Dennis R. Carlton 1996 86,750 0 0 31,875 0 0 Vice President and 1995 73,334 0 0 32,917 0 0 a Director 1994 78,625 0 0 52,500 5,000 0 NAME AND PRINCIPAL ALL OTHER POSITION COMPENSATION ($) James S. Williams 0 Chairman and a 0 Director 0 Mark S. Sexton 0 President, CEO and 0 a Director 0 Dennis R. Carlton 0 Vice President and 0 a Director 0
- ------------------------ (1) For each of the named executives, the aggregate amount of perquisites and other personal benefits did not exceed 10% of the executive's total annual salary and bonus. (2) At March 31, 1996, aggregate restricted stock holding for each of the named executives were 15,000 shares. Market price at March 31, 1996 was $5.75. WARRANT GRANTS. No stock purchase warrants were granted to the named executives during the fiscal year ended March 31, 1996. WARRANT/OPTION EXERCISES AND HOLDINGS. The following table sets forth information with respect to the named executives of the Company concerning the exercise of options/warrants during the last fiscal year and unexercised warrants held as of the end of the fiscal year.
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY WARRANTS/OPTIONS WARRANTS/OPTIONS SHARES VALUE FY END (#) FY END ($) ACQUIRED ON REALIZED EXERCISABLE (E)/ EXERCISABLE (E)/ NAME EXERCISE (#) ($) UNEXERCISABLE (U) UNEXERCISABLE (U) James S. Williams 0 0 45,450 (E) $ 86,481 (E) Mark S. Sexton 23,125 40,468 45,450 (E) $ 86,481 (E) Dennis R. Carlton 10,625 18,594 45,450 (E) $ 86,481 (E)
During the fiscal year ended March 31, 1996, the Company deferred no compensation to the persons named in the preceding tables. COMPENSATION OF DIRECTORS Directors of the Company receive fees of $100 per meeting for their attendance at meetings of the Company's Board of Directors and have currently waived these fees. All Directors are reimbursed for reasonable out-of-pocket expenses incurred in connection with attending Board and Shareholders' meetings. Directors who are not Officers or are not on salary with the Company receive $15,000 per year. 37 CERTAIN TRANSACTIONS No Director or Executive Officer of the Company, nominee for election as a Director, security holder who is known to the Company to own of record or beneficially more than 5% of any class of the Company's voting securities, or any member of the immediate family of any of the foregoing persons, has had any material transaction since the beginning of the Company's last fiscal year, or has any currently proposed material transaction, to which the Company was or is to be a party, in any amount except EOC provides well services to an affiliated entity for which it receives fees pursuant to written operating agreements. For the years ended March 31, 1996 and 1995, such fees totalled approximately $450,000 and $316,000. Additionally, EOC provides non-operating services to affiliates, as requested by them for engineering, evaluation, acquisition and similar services for which EOC was compensated approximately $24,000 and $229,000 during the years ended March 31, 1996 and 1995. 38 PRINCIPAL SHAREHOLDERS The following table summarizes as of September 9, 1996 (i) the number and percentage of shares of Common Stock owned of record and beneficially by each person known by the Company to be the beneficial owner of more than five percent of the Company's Common Stock, (ii) the number and percentage of shares owned beneficially by each Director, (iii) the number and percentage of shares owned beneficially by all Officers and Directors as a group, and (iv) the percentage of shares to be owned by each person listed upon completion of this offering:
PERCENT OF CLASS ----------------------------- NUMBER OF SHARES PRIOR TO AFTER OFFERING NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING (1) Heartland Advisors, Inc. 926,500 13.0% 10.2% Gold Energy Inc. 1,043,000(2) 14.7% 11.5% Energy Investors Fund, LP 364,500 5.1% 4.0% Energy Investors Fund II, LP 1,020,784(3) 13.9% 10.9% Energy Investors Partners, L.P. 364,500(4) 5.1% 4.0% Energy Investors Partners II, L.P. 1,020,784(5) 13.9% 10.9% EIF Investors, Inc. 1,385,284(6) 18.9% 14.9% EIF Acquisition L.L.C. 1,385,284(6) 18.9% 14.9% Indeck Capital, Inc. 1,385,284(6) 18.9% 14.9% Gerald R. Forsythe 1,385,284(6) 18.9% 14.9% John Hancock Mutual Life Insurance Company 2,290,994(7) 27.8% 22.4% John J. Ryan III 255,032(8) 3.6% 3.6% James S. Williams 120,040(9) 1.7% 1.3% Mark S. Sexton 156,672(10) 2.2% 1.7% Dennis R. Carlton 135,796(11) 1.9% 1.5% J. Keither Martin 9,500(12) 0.1% 0.1% Kevin R. Collins 23,000(13) 0.3% 0.3% Alain Blanchard 59,590(14) 0.8% 0.7% Larry D. Estridge 21,000(14) 0.3% 0.2% Ian M. Thomson 35,000(15) 0.5% 0.4% All Officers and Directors as a Group (9 Persons) 815,630 10.3% 8.2%
- ------------------------ (1) Assumes that the Underwriters' over-allotment option will not be exercised, and that the beneficial owners will not purchase any shares in the offering. (2) Gold Energy Inc., a Delaware corporation, is 100% owned by Goldenergy Investments, Inc. ("Goldenergy"), a Panama corporation. The ultimate beneficial owners of the Company's shares held by Goldenergy are unknown to the management of the Company, which has no direct or indirect ownership of Goldenergy. The Company is unaware of any additional shares of Evergreen to which Goldenergy has the right to acquire beneficial ownership. (3) Includes 226,415 shares of common stock issuable upon conversion of presently convertible outstanding Convertible Preferred Stock. (4) Consists of shared voting and dispositive power over 364,500 shares held directly by Energy Investors Fund, L.P. ("Fund I"). (5) Consists of shared voting and dispositive power over (i) 794,369 shares held directly by Energy Investors Fund II, L.P. ("Fund II") and (ii) 226,415 shares issuable to Fund II upon conversion of presently convertible Convertible Preferred Stock. (6) Consists of shared voting and dispositive power over (i) 364,500 shares owned by Fund I, (ii) 794,369 shares held directly by Fund II, and (iii) 226,415 shares issuable to Fund II upon conversion of presently convertible Convertible Preferred Stock. 39 (7) Consists of 905,660 shares issuable upon conversion of presently convertible outstanding Convertible Preferred Stock. Also includes shared voting and dispositive power over (i) 364,500 shares directly owned Fund I, (ii) 794,369 shares held directly by Fund II, and (iii) 226,415 shares issuable to Fund II upon conversion of presently convertible Convertible Preferred Stock. (8) Includes 30,000 shares issuable pursuant to stock purchase warrants presently exercisable. (9) Includes 62,500 shares issuable pursuant to stock purchase warrants presently exercisable. (10) Includes 78,450 shares issuable pursuant to stock purchase warrants presently exercisable. (11) Includes 75,450 shares issuable pursuant to stock purchase warrants presently exercisable. (12) Includes 2,000 shares issuable pursuant to stock purchase warrants presently exercisable. (13) Includes 15,000 shares issuable pursuant to stock purchase warrants presently exercisable. (14) Includes 20,000 shares issuable pursuant to stock purchase warrants presently exercisable. (15) Includes 35,000 shares issuable pursuant to stock purchase warrants presently exercisable. The Company will issue to the Officers and/or Directors listed below new five year warrants to purchase Common Stock exercisable at $7.00 per share following the completion of the next four fiscal years, as follows:
NUMBER OF WARRANTS TO BE ISSUED ------------------------------------------ FISCAL YEAR 1997 1998 1999 2000 - ---------------------------------------------------- --------- --------- --------- --------- Mark S. Sexton 19,250 19,250 19,250 19,250 Dennis R. Carlton 17,500 17,500 17,500 17,500 James S. Williams 13,125 13,125 13,125 13,125 Kevin R. Collins 8,750 8,750 8,750 8,750
The warrants will be issued in 1997, 1998, 1999 and 2000 only if the Company experiences at least twenty percent growth over the previous fiscal year in each of the following three categories: total proved developed reserves, total production, and cash flow. Additionally, in order to qualify for the warrants, the Officers and/or Directors must be employed by the Company as of the last day of each fiscal year. 40 DESCRIPTION OF CAPITAL STOCK Evergreen is authorized to issue 50,000,000 shares of Common Stock, no par value, and 25,000,000 shares of Preferred Stock, $1.00 par value per share, which are issuable in one or more series. A total of 7,102,002 shares of Common Stock are issued and outstanding, and a total of 7,500,000 shares of Preferred Stock are outstanding as of September 9, 1996. COMMON STOCK VOTING RIGHTS--Holders of shares of Common Stock are entitled to one vote per share. Shares of Common Stock do not have cumulative voting rights. No fractional shares are presently outstanding. DIVIDEND RIGHTS--Holders of shares of Common Stock are entitled to receive such dividends as the Board of Directors may from time to time declare out of funds of Evergreen legally available for the payment of dividends. LIQUIDATION RIGHTS--Upon any liquidation, dissolution or winding up of Evergreen, holders of shares of Common Stock are entitled to receive pro rata all of the assets of Evergreen available for distribution to shareholders subject to any prior rights of holders of any outstanding Preferred Stock. PREEMPTIVE RIGHTS--Shareholders of Evergreen do not have any preemptive rights to subscribe for or purchase any stock, obligations, warrants or other securities of Evergreen. SHAREHOLDER ACTION--All Shareholder action must be taken at a meeting and not by written consent. TRANSFER AGENT--The transfer agent and registrar for the Common Stock is Keycorp Shareholder Services, Inc., Denver, Colorado. Evergreen furnishes its shareholders with annual reports containing audited financial statements and with quarterly reports containing unaudited financial information. PREFERRED STOCK The Board of Directors of Evergreen is authorized, without action by the Shareholders, to issue Preferred Stock from time to time in one or more series. The Board may also fix for each series the number of shares, designation, liquidation and dividend rights, preferences, voting rights, redemption rights and other rights, restrictions and qualifications or sinking fund provisions. On December 8, 1994, the Company received $3.75 million through the private placement, with institutional investors, of 3,750,000 shares of ten year term 8% Convertible Preferred Stock, $1.00 par value ("the Preferred"). The Company received an additional $3.75 million on July 26, 1995 by issuing an additional 3,750,000 shares. All proceeds have been used for development of the Company's oil and gas leases in the Raton Basin of Colorado. Cumulative annual cash dividends of 8% are payable quarterly. At Evergreen's option, two quarterly dividends over the ten year life of the issue may be satisfied through the issuance of Common Stock valued at its then current market value. No dividends may be paid on the Common Stock unless all accrued dividends, sinking fund and redemption obligations on the Preferred have been paid in full. Overdue dividends shall bear interest at the rate of 10% until paid in full. The Preferred is convertible at any time, or from time to time, in whole or in part, at the option of the holders into 1,132,075 shares of Common Stock, at $6.625 per share. Evergreen can require the conversion of all, but not less than all, of the Preferred into Common Stock on any date, provided the Common Stock has traded at not less than $16 per share for the 30 consecutive days immediately preceding the date of conversion and on the date of conversion. The shares of the Preferred are callable, in whole or in part (minimum call being 20% of original issue, expressed in shares), at Evergreen's option 41 at a call price equal to par value, plus accrued dividends, payable in cash, plus the warrants as described below. A mandatory preferred redemption payment of $1,250,000 is due annually commencing in December 1999. Overdue payments shall bear interest at the rate of 10% until paid in full. All outstanding shares of the Preferred must be redeemed by Evergreen on the tenth anniversary of original issuance at par value, plus accrued dividends. Liquidation preference is par value plus accrued and unpaid dividends prior to distributions on any junior stock upon any voluntary or involuntary liquidation, dissolution or winding up of Evergreen. Evergreen has issued warrants which will be triggered and will become exercisable for 10 years at $6.625 per share if Evergreen exercises its call option. Holders of the Preferred may exercise stock purchase warrants equal in number to the underlying common shares called, up to a maximum of 1,132,075 shares. Future issuances of Preferred Stock could, under certain circumstances, be dilutive to holders of common stock and would result in a reduction in percentage ownership interest in the Company by holders of common stock. In the event of a proposed merger, tender offer, proxy contest or other attempt to gain control of the Company not approved by the Board of Directors, it would be possible, subject to any limitations imposed by applicable law, the Company's Articles of Incorporation, the terms and conditions of any outstanding class or series of preferred stock and the applicable rules of any securities exchanges upon which securities of the Company are at any time listed or of other markets in which securities of the Company are at any time listed, for the Board of Directors to authorize the issuance of one or more series of preferred stock with voting rights or other rights and preferences which would impede the success of the proposed merger, tender offer, proxy contest or other attempt to gain control of the Company. The issuance of preferred stock may have an adverse effect on the rights (including voting rights) of holders of Common Stock. 42 UNDERWRITING The Underwriters named below (collectively, the "Underwriters"), for whom Paulson Investment Company, Inc. and Capital West Securities, Inc. are acting as the representatives (the "Representatives") have severally agreed subject to the terms and conditions of the Underwriting Agreement with the Company (the "Underwriting Agreement"), to purchase from the Company and the Company has agreed to sell to the Underwriters the number of shares of Common Stock set forth opposite their respective names below:
UNDERWRITER NUMBER OF SHARES Paulson Investment Company, Inc. Capital West Securities, Inc. ---------- TOTAL 2,000,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the several Underwriters are subject to certain conditions precedent and that the Underwriters purchase all of the shares of Common Stock offered hereby, if any such shares are purchased. The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain selected dealers at such price less a concession within the discretion of the Representatives, of which an amount also within the discretion of the Representatives may be reallowed to other dealers. The public offering price and concessions and discounts to dealers may be changed by the Representative after the initial public offering. The Company has granted to the Underwriters an option, exercisable not later than 45 days after the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock at the initial public offering price, less underwriting discounts and commissions. The Underwriters may exercise this option only to cover any over-allotments in the sale of the 2,000,000 shares of Common Stock offered hereby. The Company has agreed to reimburse Paulson Investment Company, Inc., up to a maximum amount of $75,000, for accountable expenses incurred by it in connection with this offering. Certain executive officers, directors and 5% shareholders of the Company have agreed not to sell any Common Stock of the Company owned by such person, pursuant to Rule 144 under the Securities Act or otherwise, without the prior written consent of Paulson Investment Company, Inc., for a period of 90 days after the date of this Prospectus. The Underwriting Agreement contains indemnity provisions among the Underwriters, the Company and the controlling persons thereof against certain liabilities, including liabilities arising under the Securities Act of 1933, as amended. The Company has agreed to issue to the Representatives warrants (the "Representatives' Warrants") to purchase up to 200,000 shares of Common Stock. The Representatives' Warrants are exercisable for a period of four years beginning one year from the date of this Prospectus at a price of $ per share (120% of the initial public offering price of the Common Stock offered hereby) and are 43 nontransferable for a period of one year following the date of this Prospectus, except (a) to any of the Underwriters or to individuals who are either an officer or a partner of an Underwriter of (b) by will or the laws of descent and distribution. The holders of the Representatives' Warrants will have, in that capacity, no voting, dividend or other shareholder rights. Any profits realized by the Representatives on the sale of the securities issuable on exercise of the Representatives' Warrants may be deemed to be additional underwriting compensation. The foregoing is a brief summary of the provisions of the Underwriting Agreement and does not purport to be a complete statement of its terms and conditions. A copy of the Underwriting Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. CERTAIN DEFINITIONS Unless otherwise indicated in this Prospectus, natural gas volumes are stated at the legal pressure base of the state or area in which the reserves are located at 60 DEG. 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 Prospectus, 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, "MBbl" means thousand barrels, "MMBbl" means million barrels, "MCFE" means thousand cubic feet equivalent, "MMCFE" means million cubic feet equivalent, "BCFE" means billion cubic feet equivalent and "MMBtu" means million British thermal units. With respect to information concerning the Company's working interests in wells or drilling locations, "gross" gas and oil wells or "gross" acres is the number of wells or acres in which the Company has an interest, and "net" gas and oil wells or "net" acres are determined by multiplying "gross" wells or acres by the Company's working interest in those wells or acres. A working interest in an oil and gas lease is an interest that gives the owner the right to drill, produce, and conduct operating activities on the property and to receive a share of production of any hydrocarbons covered by the lease. A working interest in an oil and gas lease also entitles its owner to a proportionate interest in any well located on the lands covered by the lease, subject to all royalties, overriding royalties and other burdens, to all costs and expenses of exploration, development and operation of any well located on the lease, and to all risks in connection therewith. "CAPITAL EXPENDITURES" means 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; and other miscellaneous capital expenditures. A "DEVELOPMENT WELL" is a well drilled as an additional well to the same horizon or horizons as other producing wells on a prospect, or a well drilled on a spacing unit adjacent to a spacing unit with an existing well capable of commercial production and which is intended to extend the proven limits of a prospect. An "EXPLORATORY WELL" is a well drilled to find commercially productive hydrocarbons in an unproved area, or to extend significantly a known prospect. "UNDEVELOPED ACREAGE" is considered to be those 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 gas, regardless of whether such acreage contains proved reserves. "COALBED METHANE" is methane gas from coals in the ground, extracted using conventional oil and gas industry drilling and completion methodology. The gas produced is usually over 90% methane, with a small percentage of ethane and impurities such as carbon dioxide and nitrogen. Methane is the principal component of natural gas. Coalbed methane shares the same markets as conventional natural gas, via the natural gas pipeline infrastructure. 44 "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. "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 re-completion. "PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES" means the present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with SEC guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. LEGAL MATTERS John B. Wills, Attorney at Law, Denver, Colorado, has acted as counsel for the Company in connection with this offering. Stoel Rives LLP, Portland, Oregon, have acted as counsel for the Underwriter in connection with certain legal matters relating to the securities offered hereby. EXPERTS The consolidated financial statements of Evergreen Resources, Inc. included in this Prospectus and the Registration Statement have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their report appearing elsewhere herein and in the Registration Statement, and are included herein in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Powerbridge, Inc. as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, incorporated in this Prospectus by reference from Evergreen Resources Inc.'s Form 8-K/A dated September 6, 1996, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference (which report expresses an unqualified opinion and includes an explanatory paragraph relating to substantial doubt about Powerbridge Inc.'s ability to continue as a going concern), and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The estimated reserve evaluations and related calculations of Resource Services International, Inc. set forth in the Prospectus have been included herein in reliance upon the authority of said firm as experts in petroleum engineering. AVAILABLE INFORMATION This Prospectus constitutes a part of a Registration Statement on Form S-2 (herein together with all amendments thereto referred to as the Registration Statement) filed by the Company with the Securities and Exchange Commission (the Commission) under the Securities Act of 1933, as amended. This Prospectus does not contain all of the information set forth in the Registration Statement and exhibits thereto, certain portions of which are omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the shares of Common Stock offered hereby, reference is made to the Registration Statement including the exhibits thereto, which may be inspected at the Commission's offices without charge, or copies of which may be obtained from the Commission upon payment of prescribed fees. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and, in accordance therewith, files reports, proxy statements and other 45 information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024 and at the following Regional Offices of the Commission: Everett McKinley Dirksen Building, 219 South Dearborn Street, Chicago, Illinois 60604, Room 1204, and Jacob K. Javits Building, 75 Park Place, 14th Floor, New York, New York 10007. Copies of such material also can be obtained at prescribed rates by writing to the Commission, Public Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common Stock is quoted on NASDAQ, and financial reports, proxy statements and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc., Washington, D.C. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, all of which were previously filed with the Commission, are hereby incorporated by reference in this Prospectus: The Company's Annual Report on Form 10K for the year ended March 31, 1996. The Company's Quarterly Report on Form 10Q for the three months ended June 30, 1996. The Company's Proxy Statement dated July 15, 1996, concerning the Company's Annual Meeting of Stockholders held August 15, 1996. The Company's Form 8-K dated August 21, 1996 and Form 8-K/A dated September 6, 1996 concerning the acquisition of certain limited partnership interests owned by Energy Investors Fund, LP and Energy Investors Fund, II and the merger of Powerbridge, Inc. with a subsidiary of the Company. All documents filed by the Company prior to the date of this Prospectus pursuant to Sections 13(a),13(c), 14 or 15(d) of the 1934 Act prior to the termination of the offering of the shares of Common Stock shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of those documents. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that such statement is modified or replaced by a statement contained in this Prospectus or in any other subsequently filed document that also is or is deemed to be incorporated by reference into this Prospectus. Any such statement so modified or superseded shall not be deemed, except as so modified or replaced, to constitute a part of this Prospectus. The Company undertakes to provide without charge to each person to whom a copy of this Prospectus has been delivered, upon the written or oral request of any such person, including any beneficial owner, a copy of any or all of the documents referred to above that have been or may be incorporated in this Prospectus by reference, other than exhibits to such documents. Written or oral requests for such copies should be directed to James S. Williams, Chairman, Evergreen Resources, Inc., 1512 Larimer Street, Suite 1000, Denver, Colorado, 80202, (303) 534-0400. 46 INDEX TO FINANCIAL STATEMENTS EVERGREEN RESOURCES, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Financial Statements: Pro Forma Explanatory Headnote F-2 For the Three Months Ended June 30, 1996 (Unaudited) Unaudited Pro Forma Consolidated Balance Sheet F-3 Unaudited Pro Forma Consolidated Statement of Operations F-4 For the Year Ended March 31, 1996 (Unaudited) Unaudited Pro Forma Consolidated Statement of Operations F-5 Notes to Pro Forma Consolidated Financial Statements F-6 EVERGREEN RESOURCES, INC. AND SUBSIDIARIES Report of Independent Certified Public Accountants F-7 Consolidated Balance Sheets, June 30, 1996 (unaudited) and March 31, 1996 and 1995 F-8 Consolidated Statements of Operations for the Three Months Ended June 30, 1996 and 1995 (unaudited) and for the Years Ended March 31, 1996, 1995 and 1994 F-9 Consolidated Statements of Stockholders' Equity for the Three Months Ended June 30, 1996 (unaudited) and for the Years Ended March 31, 1996, 1995 and 1994 F-10 Consolidated Statements of Cash Flows for the Three Months Ended June 30, 1996 and 1995 (unaudited) and for the Years Ended March 31, 1996, 1995 and 1994 F-11 Notes to Consolidated Financial Statements F-15
F-1 EVERGREEN RESOURCES, INC AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The accompanying unaudited pro forma consolidated financial statements give effect to the acquisition by Evergreen Resources, Inc. ("the Company" or "Evergreen") of 100% of the outstanding common stock of Powerbridge, Inc. and the limited partnership interests of Energy Investors Funds I and II (collectively "PBI") pursuant to the Agreement between the parties; to reflect the issuance of 1,162,266 of the Company's common stock and the assumption of $3.6 million in long-term debt, and are based on the estimates and assumptions set forth herein. This unaudited pro forma information has been prepared utilizing the historical financial statements and notes thereto, which are incorporated by reference herein. The unaudited pro forma financial data does not purport to be indicative of the results which actually would have been obtained had the purchase been effected on the dates indicated or of the results which may be obtained in the future. The unaudited pro forma financial statements should be read in conjunction with the historical financial statements set forth herein. The pro forma consolidated balance sheet assumes the acquisition was consummated at June 30, 1996. The accompanying unaudited pro forma statements of operations have been derived from the statements of operations of the Company for the three months ended June 30, 1996 and PBI for the three months ended June 30, 1996 and statements of operations of the Company for the fiscal year ended March 31, 1996 and PBI for the year ended December 31, 1995, and adjust such information to give effect to the acquisition as if the acquisition had occurred as of the beginning of each of the periods presented. F-2 EVERGREEN RESOURCES, INC AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1996
POWERBRIDGE, INC. ------------------------------ PRO FORMA CONSOLIDATED EVERGREEN ACTUAL ADJUSTMENTS PRO FORMA ----------- ---------- ------------------ ------------- ASSETS CURRENT ASSETS Cash $ 1,440,449 $ 176,852 $ $ 1,617,301 Accounts receivable: Oil and gas sales 265,455 439,211 704,666 Other 1,240,464 66,850 1,307,314 Prepaid expenses 303,172 139,817 442,989 ----------- ---------- ------------------ ------------- TOTAL CURRENT ASSETS 3,249,540 822,730 4,072,270 ----------- ---------- ------------------ ------------- PROPERTY AND EQUIPMENT, AT COST Proved oil and gas properties, full cost 37,357,042 3,965,153 3,568,389(a) 44,890,584 Unevaluated properties 7,946,873 600,000(a) 8,546,873 Gas gathering equipment 5,310,184 3,478,563 8,788,747 Support equipment 622,838 51,819 674,657 ----------- ---------- ------------------ ------------- Total cost 51,236,937 7,495,535 4,168,389 62,900,861 Less accumulated dd & a (11,746,864) (208,321) 208,321(a) (11,746,864) ----------- ---------- ------------------ ------------- NET PROPERTY AND EQUIPMENT 39,490,073 7,287,214 4,376,710 51,153,997 DESIGNATED CASH 1,059,233 1,059,233 OTHER ASSETS 756,106 206,187 (178,689)(b) 783,604 ----------- ---------- ------------------ ------------- $44,554,952 $8,316,131 $ 4,198,021 $57,069,104 ----------- ---------- ------------------ ------------- ----------- ---------- ------------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 769,154 $ 530,797 $ 100,000(a) 1,399,951 Accrued expenses and other 287,936 428,555 (250,000)(b) 466,491 Amounts payable to oil and gas property owners 1,176,194 1,176,194 ----------- ---------- ------------------ ------------- TOTAL CURRENT LIABILITIES 2,233,284 959,352 (150,000) 3,042,636 PRODUCTION TAXES PAYABLE 1,059,233 1,059,233 LONG-TERM LIABILITIES 2,239,678 4,589,701 (584,901)(b) 6,244,478 ----------- ---------- ------------------ ------------- TOTAL LIABILITIES 5,532,195 5,549,053 (734,901) 10,346,347 ----------- ---------- ------------------ ------------- REDEEMABLE PREFERRED STOCK 7,500,000 7,500,000 ----------- ---------- ------------------ ------------- MINORITY INTERESTS 3,434,330 (3,434,330)(a) -- ----------- ---------- ------------------ ------------- COMMON STOCKHOLDERS' EQUITY Common stock 58,998 5,470 6,153(a) 70,621 Additional paid-in capital 41,822,026 7,688,377(a) 49,510,403 Foreign exchange gain (loss) (394,582) (394,582) Deficit (9,963,685) (672,722) 672,722 (a),(b (9,963,685) ----------- ---------- ------------------ ------------- TOTAL COMMON STOCKHOLDERS' EQUITY 31,522,757 (667,252) 8,367,252 39,222,757 ----------- ---------- ------------------ ------------- $44,554,952 $8,316,131 $ 4,198,021 $57,069,104 ----------- ---------- ------------------ ------------- ----------- ---------- ------------------ -------------
See accompanying Headnote and Notes to Pro Forma Consolidated Financial Statements. F-3 EVERGREEN RESOURCES, INC AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
POWERBRIDGE, INC. PERIOD ENDED EVERGREEN JUNE 30, 1996 THREE MONTHS ------------------------------- ENDED JUNE 30, PRO FORMA CONSOLIDATED 1996 ACTUAL(I) ADJUSTMENTS PRO FORMA -------------- --------- -------------------- ------------- REVENUE Oil and gas production $ 526,344 $ 499,741 $ (190,427)(i) $ 835,658 Oil and gas services 190,909 (18,945)(c) 171,964 Interest 51,599 7,114 (3,229)(i) 55,484 Other income 10,028 17,069 (17,069)(d),(i) 10,028 -------------- --------- ---------- ------------- TOTAL REVENUE 778,880 523,924 (229,670) 1,073,134 -------------- --------- ---------- ------------- COSTS AND EXPENSES Cost of production 131,953 150,365 (73,097)(c),(e),(i) 209,221 Gas gathering costs 43,898 43,898 Cost of oil and gas services 184,841 12,884(e) 197,725 Depreciation, depletion and amortization 201,840 86,284 (7,301)(f),(i) 280,823 General and administrative 149,270 233,893 (233,893)(g),(i) 149,270 Interest expense 9,385 255,906 (160,022)(h),(i) 105,269 Other (2,337) (2,337) -------------- --------- ---------- ------------- TOTAL EXPENSES 718,850 726,448 (461,429) 983,869 -------------- --------- ---------- ------------- NET INCOME (LOSS) 60,030 $(202,524) $ 231,759 89,265 --------- ---------- --------- ---------- PREFERRED STOCK CASH DIVIDENDS 150,000 150,000 -------------- ------------- NET LOSS ATTRIBUTABLE TO COMMON STOCK $ (89,970) $ (60,735) -------------- ------------- -------------- ------------- LOSS PER SHARE OF COMMON STOCK $ (0.02) $ (0.01) -------------- ------------- -------------- ------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (J) 5,899,736 7,062,002 -------------- ------------- -------------- -------------
See accompanying Headnote and Notes to Pro Forma Consolidated Financial Statements. F-4 EVERGREEN RESOURCES, INC AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
POWERBRIDGE, INC. YEAR ENDED DECEMBER 31, 1995 EVERGREEN YEAR ------------------------------- ENDED MARCH PRO FORMA CONSOLIDATED 31, 1996 ACTUAL ADJUSTMENTS PRO FORMA -------------- ----------- ------------------ ------------- REVENUE Oil and gas production $ 1,392,695 $ 189,829 $ 156,945(e) $ 1,739,469 Oil and gas services 779,146 (77,954)(c) 701,192 Interest 206,769 6,728(e) 213,497 Other income 556,221 122,389 (122,389)(d) 556,221 -------------- ----------- ------------------ ------------- TOTAL REVENUE 2,934,831 312,218 (36,670) 3,210,379 -------------- ----------- ------------------ ------------- COSTS AND EXPENSES Cost of production 875,543 297,058 (45,281)(c),(e) 1,127,320 Cost of oil and gas services 727,121 39,442(e) 766,563 Depreciation, depletion and amortization 589,936 270,285 (175,546)(f) 684,675 General and administrative 818,805 760,311 (760,311)(g),(e) 818,805 Interest expense 36,620 294,756 (117,417)(h) 213,959 Other (10,997) (10,997) -------------- ----------- ------------------ ------------- TOTAL EXPENSES 3,037,028 1,622,410 (1,059,113) 3,600,325 -------------- ----------- ------------------ ------------- NET LOSS (102,197) $(1,310,192) $ 1,022,443 (389,946) ----------- ------------------ ----------- ------------------ PREFERRED STOCK CASH DIVIDENDS 504,620 504,620 -------------- ------------- -------------- ------------- NET LOSS ATTRIBUTABLE TO COMMON STOCK $ (606,817) $ (894,566) -------------- ------------- -------------- ------------- LOSS PER SHARE OF COMMON STOCK $ (0.10) $ (0.13) -------------- ------------- -------------- ------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (J) 5,800,036 6,962,302 -------------- ------------- -------------- -------------
See accompanying Headnote and Notes to Pro Forma Consolidated Financial Statements. F-5 EVERGREEN RESOURCES, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (a) Reflects the allocation of PBI's purchase price, consisting of 1,162,266 shares of the Company's common stock at $7,700,000 ($6.625 per share). The purchase price has been allocated as follows: Proved oil and gas properties 3,776,000 Unevaluated properties 600,000 Amounts attributable to minority interest, PBI deficit and miscellaneous 3,324,000 ---------- Total $7,700,000 ---------- ----------
(b) Reflects the forgiveness of debt and accrued interest (total $835,000) negotiated as part of the acquisition and elimination of intangible assets not related to the business combination. (c) Reflects the elimination of overhead charges and management fees billed by Evergreen to PBI for which billing discontinued with the acquisition. (d) Reflects the elimination of PBI non-operating income amounts which discontinue with the Evergreen acquisition and amounted to $17,000 for the six months ended June 30, 1996 and $122,000 for the year ended December 31, 1995. (e) To reclassify PBI's gas revenue and production expenses to conform to Evergreen's financial statement presentation and to eliminate PBI's production expenses ($30,250 for the three month period and $111,000 for the year) which terminated as a result of the acquisition. (f) To adjust depreciation, depletion and amortization for additional $3,776,000 of purchase price allocation to proved oil and gas properties and converting PBI to full cost method of accounting utilizing combined Evergreen and PBI reserve amounts. (g) Reflects elimination of general and administrative expenses terminated as a result of the acquisition. (h) To eliminate interest expense on $750,000 in debt forgiven as part of the acquisition which bore interest at rates ranging from prime to 20%. (i) Actual results for PBI encompass the six months ended June 30, 1996 and therefore results for the three months ended March 31, 1996 are eliminated to make the PBI period presented correspond with those for Evergreen. (j) Pro forma weighted average shares reflect the issuance of 1,162,266 shares of Evergreen's common stock for the acquisition of PBI for all periods presented. F-6 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 March 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evergreen Resources, Inc. and subsidiaries as of March 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Denver, Colorado May 24, 1996 F-7 EVERGREEN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS ASSETS
MARCH 31, JUNE 30, ------------------------ 1996 1996 1995 ----------- ----------- ----------- (Unaudited) CURRENT: Cash and cash equivalents $ 1,440,449 $ 3,702,511 $ 2,038,157 Accounts receivable: Joint interest billings and other 1,240,464 897,142 945,557 Oil and gas sales 265,455 237,178 297,602 Other current assets 303,172 132,446 76,341 ----------- ----------- ----------- Total current assets 3,249,540 4,969,277 3,357,657 ----------- ----------- ----------- PROPERTY AND EQUIPMENT (NOTE 15): Proved oil and gas properties, based on full-cost accounting 37,357,042 36,378,828 33,442,534 Unevaluated properties not subject to amortization 7,946,873 7,792,739 8,136,519 Gas gathering equipment 5,310,184 4,415,439 3,417,086 Support equipment 622,838 595,656 676,051 ----------- ----------- ----------- 51,236,937 49,182,662 45,672,190 Less accumulated depreciation, depletion and amortization 11,746,864 11,558,516 11,140,276 ----------- ----------- ----------- Net property and equipment 39,490,073 37,624,146 34,531,914 DESIGNATED CASH (NOTE 3) 1,059,233 770,076 593,024 OTHER ASSETS 756,106 808,218 657,573 ----------- ----------- ----------- $44,554,952 $44,171,717 $39,140,168 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 769,154 $ 1,204,378 $ 700,201 Amounts payable to oil and gas property owners 1,176,194 1,123,465 711,307 Accrued expenses and other 287,936 162,127 89,646 ----------- ----------- ----------- Total current liabilities 2,233,284 2,489,970 1,501,154 Production taxes payable 1,059,233 770,076 593,024 Long-term liabilities (Notes 10 and 14) 2,239,678 1,822,834 1,094,128 ----------- ----------- ----------- Total liabilities 5,532,195 5,082,880 3,188,306 ----------- ----------- ----------- REDEEMABLE PREFERRED STOCK (NOTE 5) 7,500,000 7,500,000 3,750,000 ----------- ----------- ----------- COMMITMENTS (NOTES 10 AND 14) STOCKHOLDERS' EQUITY (Notes 6 and 7): Common stock, $.01 stated value; shares authorized, 50,000,000; shares issued and outstanding, 5,899,736, 5,899,736 and 5,672,159 58,998 58,998 56,721 Additional paid-in capital 41,822,026 41,822,026 41,419,179 Accumulated deficit (9,963,685) (9,873,715) (9,266,898) Foreign currency translation adjustment (394,582) (418,472) (7,140) ----------- ----------- ----------- Total stockholders' equity 31,522,757 31,588,837 32,201,862 ----------- ----------- ----------- $44,554,952 $44,171,717 $39,140,168 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-8 EVERGREEN RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31, ---------------------- ---------------------------------- 1996 1995 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (Unaudited) REVENUES: Oil and gas production (Note 7) $ 526,344 $ 283,739 $1,392,695 $1,916,262 $2,207,102 Oil and gas services (Note 11) 190,909 185,890 779,146 858,298 1,102,572 Interest and dividends 51,599 23,190 206,769 116,320 238,135 Other (Note 11) 10,028 15,210 556,221 459,948 794,378 ---------- ---------- ---------- ---------- ---------- Total revenues 778,880 508,029 2,934,831 3,350,828 4,342,187 ---------- ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Cost of production and operations 131,953 248,213 875,543 1,231,669 1,259,478 Gas gathering costs 43,898 58,275 -- -- -- Cost of oil and gas services 184,841 195,095 727,121 789,778 928,890 Depreciation, depletion and amortization 201,840 167,150 589,936 709,008 659,820 General and administrative expenses 149,270 202,260 818,805 850,088 1,349,768 Interest expense 9,385 9,214 36,620 29,688 -- Other (2,337) (7,709) (10,997) 351,158 100,682 ---------- ---------- ---------- ---------- ---------- Total costs and expenses 718,850 872,498 3,037,028 3,961,389 4,298,638 ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) 60,030 (364,469) (102,197) (610,561) 43,549 Preferred stock dividends (Note 5) 150,000 75,000 504,620 94,167 -- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK $ (89,970) $ (439,469) $ (606,817) $ (704,728) $ 43,549 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) PER COMMON SHARE $ (.02) $ (.08) $ (.10) $ (.13) $ .01 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,899,736 5,672,159 5,800,036 5,446,741 5,234,636 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-9 EVERGREEN RESOURCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED MARCH 31, 1996, 1995 AND 1994 AND FOR THE THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
COMMON STOCK ---------------------- FOREIGN $.01 STATED VALUE ADDITIONAL CURRENCY TOTAL ---------------------- PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY --------- ----------- ----------- ------------- ----------- -------------- Balance, April 1, 1993 4,958,120 $ 49,581 $39,086,812 $(8,605,720) $(504,113) $ 30,026,560 Exercise of stock purchase warrants 18,750 188 46,688 -- -- 46,876 Common stock issued to ESOP 30,000 300 125,325 -- -- 125,625 Issuance of common stock as employee bonus 51,500 515 175,798 -- -- 176,313 Other increases 131 1 (575) -- -- (574) Foreign currency translation -- -- -- -- (5,210) (5,210) Net income -- -- -- 43,549 -- 43,549 --------- ----------- ----------- ------------- ----------- -------------- Balance, March 31, 1994 5,058,501 50,585 39,434,048 (8,562,171) (509,323) 30,413,139 Issuance of common stock for well interests (Note 6) 501,040 5,010 1,748,630 -- -- 1,753,640 Issuance of common stock (Note 6) 81,368 813 158,688 -- -- 159,501 Exercise of stock purchase warrants (Note 6) 31,250 313 77,813 -- -- 78,126 Foreign currency translation -- -- -- -- 502,183 502,183 Preferred stock dividends -- -- -- (94,167) -- (94,167) Net loss -- -- -- (610,560) -- (610,560) --------- ----------- ----------- ------------- ----------- -------------- Balance, March 31, 1995 5,672,159 56,721 41,419,179 (9,266,898) (7,140) 32,201,862 Exercise of stock purchase warrants (Note 6) 159,059 1,592 302,315 -- -- 303,907 Common stock issued to ESOP 10,000 100 19,900 -- -- 20,000 Issuance of common stock for services 55,000 550 116,840 -- -- 117,390 Other 3,518 35 (36,208) -- -- (36,173) Preferred stock dividends -- -- -- (504,620) -- (504,620) Foreign currency translation -- -- -- -- (411,332) (411,332) Net loss -- -- -- (102,197) -- (102,197) --------- ----------- ----------- ------------- ----------- -------------- Balance, March 31, 1996 5,899,736 58,998 41,822,026 (9,873,715) (418,472) 31,588,837 Preferred stock dividends (unaudited) -- -- -- (150,000) -- (150,000) Foreign currency translation (unaudited) -- -- -- -- 23,890 23,890 Net income (unaudited) -- -- -- 60,030 -- 60,030 --------- ----------- ----------- ------------- ----------- -------------- Balance, June 30, 1996 (unaudited) 5,899,736 $ 58,998 $41,822,026 $(9,963,685) $(394,582) $ 31,522,757 --------- ----------- ----------- ------------- ----------- -------------- --------- ----------- ----------- ------------- ----------- --------------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-10 EVERGREEN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31, ------------------------ ------------------------------------- 1996 1995 1996 1995 1994 ------------ ---------- ----------- ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES: Net income (loss) $ 60,030 $ (364,469) $ (102,197) $ (610,561) $ 43,549 Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities: Depreciation, depletion and amortization 201,840 167,150 589,936 708,933 659,820 Gain on sale of subsidiaries -- -- (525,287) (330,856) -- Writedown of investments -- -- -- 217,438 -- (Gain) loss on sale of marketable securities -- -- -- 113,074 (24,996) Stock issued for services -- -- 31,555 50,837 131,871 Other 13,792 10,280 -- -- -- Changes in operating assets and liabilities: Accounts receivable (374,671) (126,204) 106,209 770,058 (1,153,551) Other current assets (169,264) (16,762) (56,520) 82,881 (140,437) Accounts payable (435,396) 219,571 1,010,077 (633,403) 1,021,449 Accrued expenses 161,694 (50,208) 76,178 39,228 (52,521) ------------ ---------- ----------- ----------- ----------- Net cash (used in) provided by operating activities (541,975) (160,642) 1,129,951 407,629 485,184 ------------ ---------- ----------- ----------- ----------- INVESTING ACTIVITIES: Purchase of marketable securities -- -- -- -- (5,281,930) Sale of marketable securities -- -- -- 2,014,708 10,204,140 Investment in property and equipment (1,882,324) (997,067) (3,988,233) (6,844,206) (6,278,393) Proceeds from sale of oil and gas assets and support equipment 350,000 21,000 540,413 1,324,390 1,125,875 Proceeds from sale of subsidiary -- -- 580,000 -- -- Designated cash (289,157) 207,562 (177,052) (144,307) (165,405) Change in production taxes payable 289,157 (207,562) 177,052 144,307 158,655 Change in other assets 11,880 112,889 104,058 546,843 (69,821) ------------ ---------- ----------- ----------- ----------- Net cash used in investing activities (1,520,444) (863,178) (2,763,762) (2,958,265) (306,879) ------------ ---------- ----------- ----------- ----------- FINANCING ACTIVITIES: Proceeds from issuance of redeemable preferred stock, net -- -- 3,714,736 3,685,532 -- Dividends paid on preferred stock (150,000) (75,000) (504,620) (94,167) -- Proceeds from issuance of common stock -- -- 303,904 77,584 47,117 Principal payments on capital lease obligations (16,033) (13,283) (46,526) -- -- Debt issue costs -- (23,546) (49,037) (57,541) (33,689) Change in cash held from operating oil and gas properties (29,897) 535,567 (89,880) 23,964 228,071 ------------ ---------- ----------- ----------- ----------- Net cash (used in) provided by financing activities (195,930) 423,738 3,328,577 3,635,372 241,499 ------------ ---------- ----------- ----------- ----------- Effect of exchange rate changes on cash (3,713) 10,425 (30,412) 23,148 (1,081) ------------ ---------- ----------- ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,262,062) (589,657) 1,664,354 1,107,884 418,723 CASH AND CASH EQUIVALENTS, beginning of period 3,702,511 2,038,742 2,038,157 930,273 511,550 ------------ ---------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $1,440,449 $1,449,085 $ 3,702,511 $ 2,038,157 $ 930,273 ------------ ---------- ----------- ----------- ----------- ------------ ---------- ----------- ----------- -----------
See accompanying summary of accounting policies and notes to consolidated financial statements. F-11 EVERGREEN RESOURCES, INC. SUMMARY OF ACCOUNTING POLICIES CONSOLIDATION The financial statements include the accounts of Evergreen Resources, Inc. (ERI) and its wholly-owned subsidiaries (the "Company"); Evergreen Operating Corporation (EOC) and Evergreen Resources (UK) Ltd. EOC has a 50% ownership in a joint venture, Primero Gas Marketing Co., formerly known as Primero Gas Gathering Co., (Primero), which is recorded on a pro-rata consolidation basis. The companies are engaged in the operation, acquisition, exploration and development of oil and gas properties. All significant intercompany balances and transactions have been eliminated in consolidation. CONCENTRATIONS OF CREDIT RISK 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 investment policy limits the Company's exposure to concentrations of credit risk. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. OIL AND GAS PROPERTIES The Company follows the full-cost method of accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells and other related costs. If the net investment in oil and gas properties exceeds an amount equal to the sum of (1) the standardized measure of discounted future net cash flows from proved reserves (see Note 15), and (2) the lower of cost or fair market value of properties in process of development and unexplored acreage, the excess is charged to expense as additional depletion. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized. Depreciation and depletion of proved oil and gas properties is computed on the units-of-production method based upon estimates of proved reserves with oil and gas being converted to a common unit of measure based on their relative energy content. Unproved oil and gas properties, including any related capitalized interest expense, are not amortized, but are assessed for impairment either individually or on an aggregated basis. GAS GATHERING AND SUPPORT EQUIPMENT Gas gathering and support equipment are stated at cost. Depreciation and amortization for the gas gathering system is computed on the units-of-production method based upon estimated gas production over a twenty-year life. Certain gas gathering system components and other support equipment are depreciated using the straight-line method over the estimated useful lives of the assets of 3 to 20 years. F-12 EVERGREEN RESOURCES, INC. 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 accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires the use of the "liability method". Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. MANAGEMENT AND OPERATOR FEES The Company receives management fees for services performed as the managing venturer and operator for a gas gathering and pipeline joint venture. Such fees are included in income. Income from operating wells for third parties is recognized pursuant to the applicable operating agreements when the services are performed. NET INCOME (LOSS) PER SHARE Net income (loss) per common share has been computed by dividing net income (loss), after reduction for preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding during each of the periods presented. Options and warrants to purchase stock are included as common stock equivalents when dilutive. In 1994, common stock equivalents of 221,029 shares are included in the weighted average number of common shares outstanding. Common stock equivalents are not utilized in 1996 and 1995 as their effect is antidilutive. CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 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. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No. 121 provides standards for accounting for the impairment of various long-lived assets. The Company uses the full cost method of accounting for its oil and gas properties, which requires an impairment to be recorded when total capitalized costs exceed the present value, discounted at 10%, of estimated future net cash flows from proved oil and gas F-13 EVERGREEN RESOURCES, INC. SUMMARY OF ACCOUNTING POLICIES (CONTINUED) reserves. Therefore, the adoption of SFAS 121 is not expected to have a material effect on the financial position or results of operations of the Company. SFAS No. 123 encourages the accounting for stock-based employee compensation programs to be reported within the financial statements on a fair value based method. If the fair value based method is not adopted, then the statement requires pro-forma disclosure of net income and earnings per share as if the fair value based method had been adopted. The Company has not yet determined how SFAS No. 123 will be adopted nor its impact on the financial statements. Both statements are effective for fiscal years beginning after December 15, 1995. DEFERRED OFFERING COSTS Costs incurred in connection with the Company's anticipated public offering are deferred and will be charged against stockholder's equity upon the successful completion of the offering or charged to expense if the offering is not consummated. RECLASSIFICATIONS Certain items included in prior years financial statements have been reclassified to conform to current year presentation. UNAUDITED PERIODS The financial information with respect to the three months ended June 30, 1996 and 1995, is unaudited. In the opinion of management, such information contains all adjustments, consisting only of normal recurring accruals necessary for a fair presentation of the results for such period. The results of operations for interim periods are not necessarily indicative of the results of operations for the full fiscal year. F-14 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 1. ACQUISITION AGREEMENT On August 15, 1996, effective 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 is comprised of 1,162,266 shares of restricted common stock valued at $7.7 million and the assumption of $3.6 million of long-term debt. The assets acquired included 37.5 billion cubic feet (BCF) of proved natural gas reserves, approximately 24 BCF of which are developed, together with 25% working interest in 120,000 gross acres and a 50% interest in an associated gas gathering and marketing system, Primero, which EOC already owns a 50% interest in. All of these assets are located on the Company's present acreage position in the Raton Basin, Las Animas County, Colorado. The acquisition will be accounted for under the purchase method of accounting. Assuming the Company's acquisition as discussed above had been completed at the beginning of the periods below, pro forma results of operations for such period would have been:
THREE MONTHS ENDED JUNE 30, YEAR ENDED 1996 MARCH 31, 1996 -------------- --------------- Revenues $ 1,073,134 $ 3,210,379 Net income (loss) 89,265 (389,946) Net loss attributable to common stock (60,735) (894,566) Loss per share of common stock (.01) (.13)
The pro forma information is not necessarily indicative of the combined results of operations that would have occurred had the acquisition been completed for such periods. 2. FINANCING AGREEMENTS The Company has a revolving line of credit with a bank. Subsequent to March 31, 1996 the available borrowing base (derived from oil and gas reserves) was increased to $15,000,000. Interest on any borrowings outstanding is at the bank's prime rate and is paid monthly. The line of credit matures in August 1997. There are no restrictions associated with advances under the line. An annual facility fee of one-half of one percent is charged quarterly for any unused portion of the credit line. The agreement is collateralized by oil and gas properties and also contains certain net worth and ratio requirements. No amounts were outstanding under the line of credit at June 30, 1996, March 31, 1996 and 1995. 3. DESIGNATED CASH AND RELATED PRODUCTION TAXES PAYABLE Designed cash represents the cash withheld for payment of production taxes from third party revenue interest owners. The non-current portion of production taxes payable relates to ad valorem taxes collected for production through March, 1996 which is not payable until fiscal 1997 or later. The related cash collected from third party revenue interest owners designated for payment of non-current ad valorem taxes is reflected as a non-current asset. 4. INCOME TAXES Due primarily to the availability of net operating loss carryovers, the Company had no significant taxable income during the years ended March 31, 1996, 1995 and 1994. F-15 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 4. INCOME TAXES (CONTINUED) A reconciliation of the effective tax rates and the statutory U.S. federal income tax rates is as follows:
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31, ---------------------- ---------------------------------- 1996 1995 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Percent of pre-tax income tax at U.S. federal statutory rates (34.0)% (34.0)% (34.0)% (34.0)% 34.0% State income taxes, net of federal tax benefit (3.3) (3.3) (3.3) (3.3) 3.3 Expenses not deductible for taxes -- -- -- 2.2 1.8 Increase in deferred tax asset valuation allowance 37.3 37.3 37.3 35.1 (39.1) ----- ----- ----- ----- ----- Effective tax rate --% --% --% --% --% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
The components of the net deferred income tax in the accompanying balance sheets are as follows:
MARCH 31, JUNE 30, ------------------------ 1996 1996 1995 ----------- ----------- ----------- Deferred tax assets $ 2,354,000 $ 2,064,000 $ 1,224,000 Valuation allowance $(2,354,000) (2,064,000) (1,224,000) ----------- ----------- ----------- Net deferred tax asset $ -- $ -- $ -- ----------- ----------- ----------- ----------- ----------- -----------
The Company recorded a valuation allowance at June 30, 1996 and March 31, 1996 and 1995 equal to the excess of deferred tax assets over deferred tax liabilities as they are unable to determine that these tax benefits are more likely than not to be realized. The components of the net deferred tax assets and liabilities are shown below:
MARCH 31, JUNE 30, ------------------------ 1996 1996 1995 ----------- ----------- ----------- Net operating loss carryforward $ 4,903,000 $ 4,551,000 $ 3,680,000 Revenues and other 151,000 201,000 9,000 ----------- ----------- ----------- Total gross deferred tax assets 5,054,000 4,752,000 3,689,000 Valuation allowance (2,354,000) (2,064,000) (1,224,000) ----------- ----------- ----------- Net deferred tax asset 2,700,000 2,688,000 2,465,000 Deferred tax liability-- depreciation, depletion and amortization (2,700,000) (2,688,000) (2,465,000) ----------- ----------- ----------- Net deferred taxes $ -- $ -- $ -- ----------- ----------- ----------- ----------- ----------- -----------
F-16 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 4. INCOME TAXES (CONTINUED) As of June 30, 1996, the Company has net operating loss carryforwards for tax purposes of approximately $12,000,000. Issuances of common stock and common stock equivalents during 1988 and 1990 limits a portion of this amount to approximately $330,000 per year (additional amounts would be available to offset gains on the sale of assets) through 2003. In addition, unused investment tax credits of $89,000 are available to offset income taxes payable through 2001. 5. REDEEMABLE PREFERRED STOCK In December 1994, the Company issued $3,750,000 in redeemable preferred stock. The Company received an additional $3,750,000 in July 1995 by issuing an additional 3,750,000 shares. All outstanding shares of the preferred stock plus accrued dividends must be redeemed by the Company on the tenth anniversary of the original issuance. Commencing in December 1999, the Company is required to fund an annual mandatory sinking fund of $1,250,000. The preferred stock is also callable at the Company's option at a call price equal to par value, plus accrued dividends. Cumulative annual cash dividends of 8% are payable quarterly. During the year ended March 31, 1996 and 1995, the Company paid $504,620 and $94,167 in dividends. The preferred stock is convertible at a price of $8.34 per share into 899,281 shares of the Company's common stock. During the three months ended June 30, 1996 and 1995 the Company paid $150,000 and $75,000 in dividends. 6. STOCKHOLDERS' EQUITY During the year ended March 31, 1996, pursuant to the exercise of certain stock purchase warrants, 71,250 shares of common stock were issued at $2.50 per share, in exchange for 30,941 shares of common stock currently issued and outstanding with a market value of approximately $5.50. In addition, 118,750 shares of common stock were issued under terms of warrants previously granted, resulting in proceeds to the Company of $303,907. In 1996, the Company issued common stock valued at $117,390 as a bonus to certain employees. Subsequent to June 30, 1996, the Company issued common stock as a bonus to certain employees and 10,000 shares were distributed to the Company's Employee Stock Ownership Plan. During the year ended March 31, 1995, 31,250 shares of common stock were issued under terms of warrants previously granted, yielding proceeds to the Company of $78,126. Additionally, the Company issued common stock valued at $168,000 as a bonus to employees and $50,000 as payment in lieu of salary. In August 1994, the Company issued 501,040 shares of common stock valued at $1,753,640 in exchange for certain working interest in wells in the San Juan Basin in a non-cash transaction. In 1994, the Company issued common stock valued at $125,625 to the Employee Stock Ownership Plan and issued common stock as a bonus valued at $176,313 to employees. F-17 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 7. STOCK OPTIONS Under the terms of its Key Employee Equity Plan, options and/or warrants are granted to key employees at not less than the market price of the Company's common stock on the date of grant. The presently outstanding warrants expire in 1997 to 2000.
EXERCISE PRICE PER WARRANTS SHARE ----------- ----------- April 1, 1993 468,300 $ 2.50-8.75 Granted 79,000 9.50 Exercised (18,750) 2.50 ----------- ----------- March 31, 1994 528,550 2.50-9.50 Exercised (31,250) 2.50 ----------- ----------- March 31, 1995 497,300 2.50-9.50 Granted 20,000 4.25 Exercised (190,000) 2.50 ----------- ----------- March 31, 1996 327,300 $3.625-9.50 ----------- ----------- ----------- -----------
There were no warrants granted or exercised during the three months ended June 30, 1996. Subsequent to June 30, 1996, the Company granted 10,000 warrants to an employee at the market price on the date of grant. The warrants expire in July 2001. 8. MAJOR CUSTOMERS During the three months ended June 30, 1996 and 1995 and the years ended March 31, 1996, 1995 and 1994, 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:
YEAR ENDED MARCH 31, A B C D E - ---------------------------------------------------- --- --- --- --- --- 1996 41% 11% 25% --% --% 1995 35 10 -- -- -- 1994 18 14 -- 16 -- Three months ended June 30, 1996 19 -- -- -- 68 1995 47 14 12 -- --
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the years ended March 31, 1996, 1995 and 1994, for interest was approximately $37,000, $22,000 and $4,000. Cash paid during the three months ended June 30, 1996 and 1995, for interest was approximately $9,000 and $9,000. During the year ended March 31, 1995, approximately $1,978,000 of common stock was issued for services and acquisition of well interests. Also in 1995, the Company assumed approximately $267,000 in liabilities for the acquisition of certain equipment. See Notes 6 and 10 for additional noncash transactions. F-18 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 10. COMMITMENTS The Company leases its primary office space for approximately $12,800 a month under a lease expiring in March 1998. The Company has the option to cancel the lease at anytime subsequent to March 31, 1996. Rental expense, net of sublease income, for all facilities was approximately $32,000, $37,000, $143,000, $177,000 and $178,000 for the three months ended June 30, 1996 and 1995 and the years ended March 31, 1996, 1995 and 1994. The Company had leased additional office space from an affiliated entity under a month-to-month operating lease which was cancelled during fiscal 1996. Rent expense was approximately $2,300 and $28,000 for this facility in 1996 and 1995. The Company has an Employee Stock Ownership Plan (ESOP), with contributions to the ESOP determined at the discretion of the Company. For the years ended March 31, 1996, 1995 and 1994, the Company contributed $20,000, $0 and $125,625 to the plan. No contributions were made during the periods ended June 30, 1996 and 1995. Under the terms of certain gas gathering and tie-in agreements, EOC is committed to meeting certain minimum volume levels during the term of the agreement. Through June 30, 1996 and March 31, 1996, volume levels have been below the required minimums and EOC has accrued approximately $1,831,000 and $1,631,000 for this shortfall, which is included with long-term liabilities. Such amount is refundable if future volumes exceed the minimums and EOC is currently having discussions with the owner of the system concerning obtaining additional volumes or other possible alternatives which includes the purchase of a portion of the system. 11. OTHER INCOME Other income consisted of the following:
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31, -------------------- ------------------------------- 1996 1995 1996 1995 1994 --------- --------- --------- --------- --------- Gain on sales of subsidiaries/assets $ -- $ -- $ 525,287 $ 330,856 $ -- Lawsuit settlement -- -- -- -- 561,050 Other 10,028 15,210 30,934 129,092 233,328 --------- --------- --------- --------- --------- $ 10,028 $ 15,210 $ 556,221 $ 459,948 $ 794,378 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
In September 1995, the Company sold its interest in ANGI Limited for $580,000 which resulted in a gain of approximately $525,000. The income related to a lawsuit settlement for the year ended March 31, 1994, resulted from the allocated settlement of a dispute regarding previous gathering fees. In December 1994, the Company sold certain assets and its 100% interest in a former subsidiary which had been acquired in March 1993. Prior to the consummation of the sale, oil and gas properties with a cost of approximately $300,000 were transferred by the Company into the subsidiary. The sales price was $1,000,000 cash and a gain of approximately $331,000 was recognized from the transaction. Included in the group acquiring these properties and JCI, was an affiliate of the Company, which represented approximately 39% of the group. F-19 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 12. RELATED PARTIES EOC provides well services to an affiliated entity for which it receives fees pursuant to written operating agreements. For the three months ended June 30, 1996 and 1995 and the year ended March 31, 1996 and 1995, such fees totalled approximately $126,000, $96,000, $450,000 and $316,000. Additionally, EOC provides non-operating services to affiliates, as requested by them for engineering, evaluation, acquisition and similar services for which EOC was compensated approximately $0, $19,000, $24,000 and $229,000 during the three months ended June 30, 1996 and 1995 and the years ended March 31, 1996 and 1995. As of June 30, 1996 and March 31, 1996 and 1995, approximately $41,000, $40,000 and $103,000 was payable to EOC from the affiliates for fees and other services. 13. SECTION 29 TAX CREDITS Effective June 1, 1996, the Company sold, pending a favorable IRS ruling, its working interests in six producing wells in the San Juan Basin. The wells qualify for the Section 29 tax credit. The Company will receive $53,000 cash and a volumetric production payment under which the Company will receive 99% of the cash flow from the wells until approximately 1.1 billion cubic feet of gas have been produced and sold net to the well interests. In addition to the production payment, Evergreen will receive monthly payments based on production from the wells through 2002. If no favorable IRS ruling is obtained by November 30, 1996, the transaction is subject to cancellation at the option of the purchaser. 14. PUBLIC OFFERING The Company has entered into a letter of intent with an underwriter for a proposed public offering of 2,000,000 shares of common stock. F-20 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 15. SUPPLEMENTAL INFORMATION OF OIL AND GAS PRODUCING ACTIVITIES The Company's oil and gas activities are conducted in the United States and the United Kingdom. The following costs were incurred in oil and gas acquisition, exploration, development and producing activities at March 31:
UNITED UNITED STATES KINGDOM TOTAL ---------- ---------- ---------- 1996 Acquisition costs: Proved $ -- $ -- $ -- Unproved -- -- -- Exploration 155,000 -- 155,000 Development 3,476,707 516,659 3,993,366 1995 Acquisition costs: Proved $1,753,640 $ -- $1,753,640 Unproved -- -- -- Exploration 317,890 -- 317,890 Development 1,565,690 1,841,964 3,407,654 1994 Acquisition costs: Proved $ -- $ -- $ -- Unproved -- -- -- Exploration 4,176,809 -- 4,176,809 Development 233,145 1,770,908 2,004,053
F-21 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 15. SUPPLEMENTAL INFORMATION OF OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) Aggregate capitalized costs and related accumulated depreciation, depletion and amortization relating to oil and gas producing activities at March 31 are as follows:
UNITED UNITED STATES KINGDOM TOTAL ------------- ---------- ------------- 1996 Proved properties $ 36,378,828 $ -- $ 36,378,828 Unproved properties 896,301 6,896,438 7,792,739 ------------- ---------- ------------- 37,275,129 6,896,438 44,171,567 Accumulated depletion, depreciation and amortization (11,169,882) -- (11,169,882) ------------- ---------- ------------- Net capitalized costs $ 26,105,247 $6,896,438 $ 33,001,685 ------------- ---------- ------------- ------------- ---------- ------------- 1995 Proved properties $ 33,442,534 $ -- $ 33,442,534 Unproved properties 1,127,475 7,009,044 8,136,519 ------------- ---------- ------------- 34,570,009 7,009,044 41,579,053 Accumulated depletion, depreciation and amortization (10,776,960) -- (10,776,960) ------------- ---------- ------------- Net capitalized costs $ 23,793,049 $7,009,044 $ 30,802,093 ------------- ---------- ------------- ------------- ---------- -------------
Costs of oil and gas properties excluded from the amortization base, at March 31, are as follows:
UNITED UNITED STATES KINGDOM TOTAL ---------- ---------- ---------- 1996 Leasehold costs $ 896,301 $2,232,588 $3,128,889 Development costs -- 4,663,850 4,663,850 ---------- ---------- ---------- $ 896,301 $6,896,438 $7,792,739 ---------- ---------- ---------- ---------- ---------- ---------- 1995 Leasehold costs $1,127,475 $2,225,064 $3,352,539 Development costs -- 4,783,980 4,783,980 ---------- ---------- ---------- $1,127,475 $7,009,044 $8,136,519 ---------- ---------- ---------- ---------- ---------- ----------
Depreciation and depletion per equivalent MCF was $.39, $.51 and $.51 for the years ended March 31, 1996, 1995 and 1994. Results of operations from United States production activities for 1996, 1995 and 1994 are presented below in accordance with Financial Accounting Standards No. 69, "Disclosures About Oil and F-22 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) 15. SUPPLEMENTAL INFORMATION OF OIL AND GAS PRODUCING ACTIVITIES (CONTINUED) Gas Activities," which excludes consideration of general and administrative, and interest expense. There was no production activity in the United Kingdom.
YEAR ENDED MARCH 31, 1996 1995 1994 - --------------------------------------- ---------- ---------- ---------- Oil and gas sales $1,392,695 $1,916,262 $2,207,102 ---------- ---------- ---------- Cost of production and operations 875,543 1,231,669 1,259,478 Depreciation and depletion 393,581 510,538 503,222 ---------- ---------- ---------- 1,269,124 1,742,207 1,762,700 ---------- ---------- ---------- Results of operations from producing activities (excluding corporate overhead and interest costs) $ 123,571 $ 174,055 $ 444,402 ---------- ---------- ---------- ---------- ---------- ----------
OIL AND GAS RESERVE INFORMATION (UNAUDITED) The estimates of the Company's proved reserves and related future net cash flows that are presented in the following tables are based upon estimates made by independent petroleum engineering consultants for the United States only. The Company is in the process of developing properties in the United Kingdom and is unable to prepare reserve information in this area. The Company's reserve information was prepared as of March 31, 1996, 1995 and 1994. 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. F-23 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED) 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:
OIL AND NATURAL GAS LIQUIDS NATURAL GAS PROVED RESERVES (BBLS) (MCF) - ------------------------------------------------ ------------ ------------ At April 1, 1993 2,457,900 36,663,100 Revisions of previous estimates (746,300) (9,275,000) Extensions and discoveries -- 24,903,900 Sales of reserves (11,000) (66,000) Production (57,500) (637,900) ------------ ------------ At March 31, 1994 1,643,100 51,588,100 Revisions of previous estimates (609,300) (12,474,600) Extensions and discoveries -- 18,441,300 Sales of reserves (154,300) (3,891,100) Purchases of reserves -- 5,000,000 Production (36,600) (781,700) ------------ ------------ At March 31, 1995 842,900 57,882,000 Revisions of previous estimates -- (3,482,000) Extensions and discoveries -- 31,163,500 Sales of reserves (828,400) (3,696,300) Production (9,700) (941,200) ------------ ------------ At March 31, 1996 4,800 80,926,000 ------------ ------------ ------------ ------------
OIL AND NATURAL GAS LIQUIDS NATURAL GAS PROVED DEVELOPED RESERVES (BBLS) (MCF) - ------------------------------------------------ ------------- ------------ March 31, 1994 349,600 23,721,000 March 31, 1995 289,800 18,007,300 March 31, 1996 4,800 41,359,700
The following table sets forth a standardized measure of the estimated discounted future net cash flows attributable to the Company's proved oil and gas reserves. Estimated future cash inflows were computed by applying year-end prices of oil and gas to the estimated future production of proved oil and gas reserves at March 31, 1996, 1995 and 1994. 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 F-24 EVERGREEN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995) OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED) operating loss and excess statutory depletion carryovers, reduced by investment tax and Section 29 credits. In 1995, the Company determined that the likelihood of paying income tax in the future was minimal due to net operating losses and future drilling plans. As such, the effects of income taxes were excluded from this calculation. In 1996, future income taxes were included in the standardized measure of the future net cash flows due to the monetization of the Section 29 tax credits and the increase in future cash inflows which are the result of additional reserves.
YEAR ENDED MARCH 31, 1996 1995 1994 - ------------------------------------------------- ------------- ------------ ------------- Future cash inflows $ 121,049,400 $ 86,666,340 $ 113,077,100 Future cash outflows: Production costs (30,640,700) (20,671,010) (23,959,500) Development costs (7,389,400) (9,460,563) (11,479,300) ------------- ------------ ------------- Future net cash flows before future income taxes 83,019,300 56,534,767 77,638,300 Future income taxes (13,789,400) -- (16,117,900) ------------- ------------ ------------- Future net cash flows 69,229,900 56,534,767 61,520,400 Effect of discounting future annual net cash flows at 10% (44,076,600) (33,222,437) (35,811,500) ------------- ------------ ------------- Standardized measure of discounted future net cash flows $ 25,153,300 $ 23,312,330 $ 25,708,900 ------------- ------------ ------------- ------------- ------------ -------------
The following summarizes the principal factors comprising the changes in the standardized measure of discounted future net cash flows for the years ended March 31, 1996, 1995 and 1994:
YEAR ENDED MARCH 31, 1996 1995 1994 - --------------------------------------------------- ----------- ----------- ------------ Standardized measure, beginning of period $23,312,300 $25,708,900 $ 29,403,300 Sales of oil and gas, net of production costs (517,100) (684,600) (947,600) Extensions and discoveries 10,500,400 6,110,500 11,419,300 Net change in sales prices, net of production costs 2,866,900 (9,124,600) (2,921,300) Purchase of reserves -- 2,073,700 -- Sale of reserves (5,542,300) (2,901,100) (75,900) Revisions of quantity estimates (1,567,000) (9,536,000) (12,854,000) Accretion of discount 1,664,300 3,244,400 3,510,300 Net change in income taxes (5,010,100) 6,735,500 (1,034,800) Changes in future development costs 2,293,900 3,628,100 -- Changes in rates of production and other (2,848,000) (1,942,500) (790,400) ----------- ----------- ------------ Standardized measure, end of period $25,153,300 $23,312,300 $ 25,708,900 ----------- ----------- ------------ ----------- ----------- ------------
F-25 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALES PERSON REPRESENTATIVE, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS PAGE - ----------------------------------------------------- Prospectus Summary........................ 3 Risk Factors.............................. 8 Capitalization............................ 13 Dilution.................................. 14 Use Of Proceeds........................... 15 Price Range Of Common Stock............... 16 Dividend Policy........................... 16 Selected Consolidated Financial Data...... 17 Management's Discussion and Analysis of Financial Condition And Results Of Operations.............................. 18 Business And Properties................... 24 Management................................ 35 Compensation Of Executive Officers And Directors............................... 37 Certain Transactions...................... 38 Beneficial Owners Of Securities........... 39 Description Of Capital Stock.............. 41 Underwriting.............................. 43 Certain Definitions....................... 44 Legal Matters............................. 45 Experts................................... 45 Available Information..................... 45 Incorporation Of Certain Documents By Reference............................... 46 Index to Financial Statements............. F-1
2,000,000 SHARES [LOGO] COMMON STOCK --------------- PROSPECTUS ------------------------ Paulson Investment Company, Inc. Capital West Securities, Inc. , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Registration Fee--Securities and Exchange Commission.......... $ 5,105.60 Filing Fee--NASD.............................................. 1,981.00 Blue Sky Fees................................................. 5,000.00* Printing...................................................... 50,000.00* Legal Fees.................................................... 30,000.00* Accounting Fees............................................... 25,000.00* Due Diligence and Travel...................................... 40,000.00* Miscellaneous................................................. 42,913.40* ----------- Total....................................................... $ 200,000 ----------- -----------
- ------------------------ * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The only charter provision, bylaw, contract, arrangement or statute under which any Director or Officer of the Registrant is insured or indemnified in any manner against any liability which he may incur in his capacity as such, is as follows: (a) Section 7-109-102, 103, 104, 105, 106, 107, 108, 109 and 110 of the Colorado Business Corporation Act provides that each corporation shall have the following powers: "7-109-102. Authority to Indemnify directors (1) Except as provided in subsection (4) of this section, a corporation may indemnify a person made a party to a proceeding because the person is or was a director against liability incurred in the proceeding if: (a) The person conducted himself or herself in good faith; and (b) The person reasonably believed: (I) In the case of conduct in an official capacity with the corporation, that his or her conduct was in the corporation's best interests; and (II) In all other cases, that his or her conduct was at least not opposed to the corporation's best interests; and (c) In the case of any criminal proceeding, the person had no reasonable cause to believe his or her conduct was unlawful. (2) A director's conduct with respect to an employee benefit plan for a purpose the director reasonably believed to be in the interests of the participants in or beneficiaries of the plan is conduct that satisfies the requirement of subparagraph (II) of paragraph (b) of subsection (1) of this section. A director's conduct with respect to an employee benefit plan for a purpose that the director did not reasonably believe to be in the interests of the participants in or beneficiaries of the plan shall be deemed not to satisfy the requirements of paragraph (a) of subsection (1) of this section. (3) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this section. II-1 (4) A corporation may not indemnify a director under this section: (a) In connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (b) In connection with any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which proceeding the director was adjudged liable on the basis that he or she derived an improper personal benefit. (5) Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. "7-109-103. Mandatory indemnification of directors Unless limited by its articles of incorporation, a corporation shall indemnify a person who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because the person is or was a director, against reasonable expenses incurred by him or her in connection with the proceeding. "7-109-104. Advance of expenses to directors (1) A corporation may pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding if: (a) The director furnishes to the corporation a written affirmation of the director's good faith belief that he or she has met the standard of conduct described in section 7-109-102; (b) The director furnishes to the corporation a written undertaking, executed personally or on the director's behalf, to repay the advance if it is ultimately determined that he or she did not meet the standard of conduct; and (c) A determination is made that the facts then known to those making the determination would not preclude indemnification under this article. (2) The undertaking required by paragraph (b) of subsection (1) of this section shall be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment. (3) Determinations and authorizations of payments under this section shall be made in the manner specified in section 7-109-106. "7-109-105. Court-ordered indemnification of directors (1) Unless otherwise provided in the articles of incorporation, a director who is or was a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court considers necessary, may order indemnification in the following manner: (a) If it determines that the director is entitled to mandatory indemnification under section 7-109-103, the court shall order indemnification, in which case the court shall also order the corporation to pay the director's reasonable expenses incurred to obtain court-ordered indemnification. (b) If it determines that the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not the director met the standard of conduct set forth in section 7-109-102(1) or was adjudged liable in the circumstances described in section 7-109-102(4), the court may order such indemnification as the court deems proper; except that the indemnification with respect to any proceeding in II-2 which liability shall have been adjudged in the circumstances described in section 7-109-102(4) is limited to reasonable expenses incurred in connection with the proceeding and reasonable expenses incurred to obtain court-ordered indemnification. "7-109-106. Determination and authorization of indemnification of directors (1) A corporation may not indemnify a director under section 7-109-102 unless authorized in the specific case after a determination has been made that indemnification of the director is permissible in the circumstances because the director has met the standard of conduct set forth in section 7-109-102. A corporation shall not advance expenses to a director under section 7-109-104 unless authorized in the specific case after the written affirmation and undertaking required by section 7-109-104(1)(a) and (1)(b) are received and the determination required by section 7-109-104(1)(c) has been made. (2) The determinations required by subsection (1) of this section shall be made: (a) By the board of directors by a majority vote of those present at a meeting at which a quorum is present, and only those directors not parties to the proceeding shall be counted in satisfying the quorum; or (b) If a quorum cannot be obtained, by a majority vote of a committee of the board of directors designated by the board of directors, which committee shall consist of two or more directors not parties to the proceeding; except that directors who are parties to the proceeding may participate in the designation of directors for the committee. (3) If a quorum cannot be obtained as contemplated in paragraph (a) of subsection (2) of this section, and a committee cannot be established under paragraph (b) of subsection (2) of this section, or, even if a quorum is obtained or a committee is designated, if a majority of the directors constituting such quorum or such committee so directs, the determination required to be made by subsection (1) of this section shall be made: (a) By independent legal counsel selected by a vote of the board of directors or the committee in the manner specified in paragraph (a) or (b) of subsection (2) of this section or, if a quorum of the full board cannot be obtained and a committee cannot be established, by independent legal counsel selected by a majority vote of the full board of directors; or (b) By the shareholders. (4) Authorization of indemnification and advance of expenses shall be made in the same manner as the determination that indemnification or advance of expenses is permissible; except that, if the determination that indemnification or advance of expenses is permissible is made by independent legal counsel, authorization of indemnification and advance of expenses shall be made by the body that selected such counsel. "7-109-107. Indemnification of officers, employees, fiduciaries, and agents (1) Unless otherwise provided in the articles of incorporation: (a) An officer is entitled to mandatory indemnification under section 7-109-103, and is entitled to apply for court-ordered indemnification under section 7-109-105, in each case to the same extent as a director; (b) A corporation may indemnify and advance expenses to an officer, employee, fiduciary, or agent of the corporation to the same extent as to a director; and (c) A corporation may also indemnify and advance expenses to an officer, employee, fiduciary, or agent who is not a director to a greater extent, if not inconsistent with II-3 public policy, and if provided for by its bylaws, general or specific action of its board of directors or shareholders, or contract. "7-109-108. Insurance A corporation may purchase and maintain insurance on behalf of a person who is or was a director, officer, employee, fiduciary, or agent of the corporation, or who, while a director, officer, employee, fiduciary, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, fiduciary, or agent of another domestic or foreign corporation or other person or of an employee benefit plan, against liability asserted against or incurred by the person in that capacity or arising from his or her status as a director, officer, employee, fiduciary, or agent, whether or not the corporation would have power to indemnify the person against the same liability under section 7-109-102, 7-109-103, or 7-109-107. Any such insurance may be procured from any insurance company designated by the board of directors, whether such insurance company is formed under the laws of this state or any other jurisdiction of the United States or elsewhere, including any insurance company in which the corporation has an equity or any other interest through stock ownership or otherwise. "7-109-109. Limitation of indemnification of directors (1) A provision treating a corporation's indemnification of, or advance of expenses to, directors that is contained in its articles of incorporation or bylaws, in a resolution of its shareholders or board of directors, or in a contract, except an insurance policy, or otherwise, is valid only to the extent the provision is not inconsistent with sections 7-109-101 to 7-109-108. If the articles of incorporation limit indemnification or advance of expenses, indemnification and advance of expenses are valid only to the extent not inconsistent with the articles of incorporation. (2) Sections 7-109-101 to 7-109-108 do not limit a corporation's power to pay or reimburse expenses incurred by a director in connection with an appearance as a witness in a proceeding at a time when he or she has not been made a named defendant or respondent in the proceeding. "7-109-110. Notice to shareholders of indemnification of director If a corporation indemnifies or advances expenses to a director under this article in connection with a proceeding by or in the right of the corporation, the corporation shall give written notice of the indemnification or advance to the shareholders with or before the notice of the next shareholders' meeting. If the next shareholder action is taken without a meeting at the instigation of the board of directors, such notice shall be given to the shareholders at or before the time the first shareholders signs a writing consenting to such action. (b) Articles VII and XIII of Registrant's Articles of Incorporation provide as follows: ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OTHERS The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduce was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction or upon a plea of NOLO CONTENDERE or its II-4 equivalent shall not of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation; but no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court in which such action or suit was brought determines upon application that, despite the adjudication of liability, but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which such court deems proper. To the extent that a director, officer, employee, or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in this article or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Any indemnification under paragraph 1 or 2 of this article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in said paragraphs 1 or 2 of this article. Such determination shall be made by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or, if such a quorum is not obtainable or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the shareholders. Expenses (including attorneys' fees) incurred in defending a civil or criminal action, suit, or proceeding may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding as authorized in paragraph 4 of this article upon receipt of an undertaking by or on behalf of the director, officer, employee, or agent to repay such amount unless it shall ultimately as authorized in this article. The indemnification provided by this article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under the Articles of Incorporation, any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, and any procedure provided for by any of the foregoing, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of heirs, executors, and administrators of such a person. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the corporation or who is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provision of this article. A unanimous vote of each class of shares entitled to vote shall be required to amend this article. II-5 ARTICLE XIII LIMITATION OF LIABILITY OF DIRECTORS TO CORPORATIONS AND SHAREHOLDERS No director shall be liable to the Corporation or any shareholder for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director (a) shall be liable under C.R.S. Section 7-5-114 or any amendment thereto or successor provision thereto; (b) shall have breached the director's duty of loyalty to the Corporation or its shareholders; (c) shall have not acted in good faith; (d) shall have acted or failed to act in a manner involving intentional misconduct or a knowing violation of law; or (e) shall have derived an improper personal benefit. Neither the amendment nor repeal of this Article, nor the adoption of any provision in the Articles of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring prior to such amendment, repeal or adoption of any inconsistent provision. This Article shall apply to the full extent now permitted by Colorado law or as may be permitted in the future by changes or enactments in Colorado law, including without limitation C.R.S. Section 7-2-102 and/or C.R.S. Section 7-3-101. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The following Exhibits, Financial Statements and Financial Statement Schedules are filed as part of this Registration Statement: (a) Exhibits. 1.1 Proposed Form of Underwriting Agreement. 1.2 Form of Representatives' Warrants 4.1 Articles of Incorporation (filed as Exhibit 3.1 of the Registrant's Registration Statement on Form S-1 (No. 33-273035)). 4.2 Articles of Incorporation as amended, (incorporated herein by reference to Exhibit I of Registrant's Report on Form 8-K dated December 9, 1994). 4.3 Bylaws (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (No. 33-273035)). 5. Opinion of John B. Wills, Attorney at Law, regarding the legality of shares being sold. 10.1 Office Lease dated April 1, 1989 (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-2 (No. 33-37267)). 10.5 Hibernia Bank Credit Agreement (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-2 (No. 33-37267)). 10.7 U.K. Licenses. (filed as an exhibit to the Registrant's Registration Statement on Form S-2 (No. 33-44885)). 10.8 Agreement and Plan of Merger dated August 14, 1996 by and among Power- bridge, Inc., Evergreen Resources, Inc. and Evergreen Raton Properties, Inc. (Filed as Exhibits 1, 2 and 3 to the Registrant's Form 8-K dated August 21, 1996.) 10.9 Agreement for Acquisition of Limited Partnership Interests between Evergreen Resources, Inc. and both Energy Investors Fund LP and Energy Investors Fund II, LP dated August 14, 1996. (Filed as Exhibits 1, 2 and 3 to the Registrant's Form 8-K dated August 21, 1996.) 10.11 Amended Hibernia Bank Credit Agreement 10.12 Agreement between the Registrant and Coastal Interstate Gas Company. 10.13 Agreement between Registrant and Colorado Interstate Gas Company 23.1 Consent of John B. Wills, Attorney at Law, counsel to the Registrant.
II-6 23.2 Consent of BDO Seidman, LLP, Independent Certified Public Accountants. 23.3 Consent of Deloitte & Touche LLP, Independent Auditors. 23.4 Consent of Resource Services International, Inc., Independent Engineers. 99.1 Reserve Report by Resource Services International, Inc. (filed as an exhibit to the Registrant's Form 10-K dated March 31, 1996). 99.2 August 14, 1996 Reserve Report prepared by Resources Services International, Inc. (Filed as Exhibits 1, 2 and 3 to the Registrant's Form 8-K dated August 21, 1996.)
(b) Financial Statements and Schedules. (i) The Financial Statements included in the Prospectus are listed on page F-1 hereof. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) For purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (5) The undersigned Registrant hereby undertakes to provide to the Underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado on September 10, 1996. EVERGREEN RESOURCES, INC. By: /s/ MARK S. SEXTON ----------------------------------------- Mark S. Sexton, President and CEO By: /s/ KEVIN R. COLLINS ----------------------------------------- Kevin R. Collins, Vice President, Treasurer and Principal Financial Officer, Principal Accounting Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ ALAIN BLANCHARD - ------------------------------ Director September 10, 1996 Alain Blanchard /s/ DENNIS R. CARLTON - ------------------------------ Director September 10, 1996 Dennis R. Carlton /s/ LARRY D. ESTRIDGE - ------------------------------ Director September 10, 1996 Larry D. Estridge /s/ JOHN J. RYAN III - ------------------------------ Director September 10, 1996 John J. Ryan III /s/ MARK S. SEXTON - ------------------------------ Director September 10, 1996 Mark S. Sexton /s/ SCOTT D. SHEFFIELD - ------------------------------ Director September 10, 1996 Scott D. Sheffield /s/ JAMES S. WILLIAMS - ------------------------------ Director September 10, 1996 James S. Williams II-8 EVERGREEN RESOURCES, INC. FORM S-2 REGISTRATION STATEMENT EXHIBIT INDEX The following Exhibits are filed as part of this Registration Statement pursuant to Item 601 of Regulation S-K:
EXHIBIT NUMBER IN REGISTRATION SEQUENTIALLY STATEMENT DESCRIPTION NUMBERED PAGE - --------------- ------------------------------------------------------------------------------ --------------------- 1.1 Proposed Form of Underwriting Agreement. 1.2 Form of Representatives' Warrants 4.1 Articles of Incorporation (filed as Exhibit 3.1 of the Registrant's Registration Statement on Form S-1 (No. 33-273035)). 4.2 Articles of Incorporation as amended, (incorporated herein by reference to Exhibit I of Registrant's Report on Form 8-K dated December 9, 1994). 4.3 Bylaws (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (No. 33-273035)). 5. Opinion of John B. Wills, Attorney at Law, regarding the legality of shares being sold. 10.1 Office Lease dated April 1, 1989 (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-2 (No. 33-37267)). 10.5 Hibernia Bank Credit Agreement (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-2 (No. 33-37267)). 10.7 U.K. Licenses. (filed as an exhibit to the Registrant's Registration Statement on Form S-2 (No. 33-44885)). 10.8 Agreement and Plan of Merger dated August 14, 1996 by and among Powerbridge, Inc., Evergreen Resources, Inc. and Evergreen Raton Properties, Inc. (Filed as Exhibits 1, 2 and 3 to the Registrant's Form 8-K dated August 21, 1996.) 10.9 Agreement for Acquisition of Limited Partnership Interests between Evergreen Resources, Inc. and both Energy Investors Fund LP and Energy Investors Fund II, LP dated August 14, 1996. (Filed as Exhibits 1, 2 and 3 to the Registrant's Form 8-K dated August 21, 1996.) 10.11 Amended Hibernia Bank Credit Agreement 10.12 Agreement between the Registrant and Coastal Interstate Gas Company. 10.13 Agreement between Registrant and Colorado Interstate Gas Company 23.1 Consent of John B. Wills, Attorney at Law, counsel to the Registrant. 23.2 Consent of BDO Seidman, LLP, Independent Certified Public Accountants.
II-9 23.3 Consent of Deloitte & Touche LLP, Independent Auditors. 23.4 Consent of Resource Services International, Inc., Independent Engineers. 99.1 Reserve Report by Resource Services International, Inc. (filed as an exhibit to the Registrant's Form 10-K dated March 31, 1996). 99.2 August 14, 1996 Reserve Report prepared by Resources Services International, Inc. (Filed as Exhibits 1, 2 and 3 to the Registrant's Form 8-K dated August 21, 1996.)
II-10 EX-1.1 2 EXHIBIT 1.1 2,000,000 SHARES OF COMMON STOCK OF EVERGREEN RESOURCES, INC. UNDERWRITING AGREEMENT ____________, 1996 Paulson Investment Company, Inc. Capital West Securities, Inc. As Representatives of the Several Underwriters c/o Paulson Investment Company, Inc. 811 SW Front Avenue Portland, Oregon 97204 Gentlemen: Evergreen Resources, Inc., a Colorado corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as Representatives (the "Representatives") an aggregate of 2,000,000 Shares (the "Firm Shares"). The respective number of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to grant to the Representatives an option to purchase in aggregate up to 300,000 additional Shares, identical to the Firm Shares, (the "Option Shares") as set forth below. As the Representatives, you have advised the Company (a) that you are authorized to enter into this Agreement for yourself as Representatives and on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: -1- 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form SB-2 (File No. 333-- ) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462 (b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Colorado, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Company, directly or indirectly wholly owns or has the specified percentage ownership of each of the corporations or other business entities set forth in Schedule II, attached hereto (each a "Subsidiary" and, collectively the "Subsidiaries" and, with the Company, collectively, the "Group") and does not own and never has owned a controlling interest in any other corporation or other business entity that has or ever has had any material assets, liabilities or operations. Each Subsidiary has been duly organized and is validly existing as a corporation or other entity in good standing under the laws of its jurisdiction of organization, with power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Company and each Subsidiary is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification. . (c) The outstanding shares of Common Stock of the Company and each Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable -2- and have been issued and sold by the Company or such Subsidiary, as the case may be, in compliance in all material respects with applicable securities laws; the issuance and sale of the Shares have been duly authorized by all necessary corporate action and, when issued and paid for as contemplated herein, the Shares will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any security of the Company or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock or other securities of the Company. (d) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. The Common Stock conforms to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of Colorado. (e) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform, to the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (f) The consolidated financial statements of the Company and its consolidated Subsidiaries, together with related notes and schedules as set forth in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company and such Subsidiaries at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary consolidated financial and statistical data of the Company and its Subsidiaries included in the Registration Statement presents fairly the -3- information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. (g) BDO Seidman, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (h) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against any member of the Group before any court or administrative agency or otherwise which if determined adversely to the Group might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Group or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (i) The Group has title that is defendable or customary in the oil and gas industry to all properties and assets, tangible and intangible, reflected in the financial statements (or as described in the Registration Statement) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. All of the leases and subleases under which the Company or any Subsidiary holds properties are in full force and effect (with only such exceptions as are commonly accepted by prudent companies in the oil and gas business) and neither the Company nor any Subsidiary has received notice of any material claim of any sort that has been asserted by anyone materially adverse to the rights of the Company or such Subsidiary under any of such leases or subleases, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises or property under any such lease or sublease. (j) Each of the Company and its Subsidiaries has filed all Federal, State, local and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by it to the extent that such taxes have become due and are not being contested in good faith. All tax liabilities have been adequately provided for in the consolidated financial statements of the Company and its consolidated Subsidiaries. (k) Since the respective dates as of which information is given in the Registration Statement, as it may have been amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise), or prospects of the Group, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Group, other than transactions -4- in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Group has no material contingent obligations which are not disclosed in the Company's financial statements or elsewhere in the Prospectus which are included in the Registration Statement. (l) Neither the Company nor any Subsidiary is, nor, with the giving of notice or lapse of time or both, will it be, in violation of or in default under its Charter or By-Laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition, financial or otherwise of the Group or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Group. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which any member of the Group is a party, or of the Charter or by-laws of any member of the Group or any order, rule or regulation applicable to any member of the Group of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (n) The Group holds all material patents, patent rights trademarks, trade names, copyrights, trade secrets and licenses of any of the foregoing (collectively, "Intellectual Property Rights") that are necessary to the conduct of its businesses; there is no claim pending or, to the best knowledge of the Company, threatened against any member of the Group alleging any infringement of Intellectual Property Rights, or any violation of the terms of any licence relating to Intellectual Property Rights, nor does the Company know of any basis for any such claim. The Company knows of no material infringement by others of Intellectual Property Rights owned by or licensed to any member of the Group. The Group has obtained, is in compliance in all material respect with and maintains in full force and effect all material licenses, certificates, permits, orders or other, similar authorizations granted or issued by any governmental agency (collectively "Government Permits") required to conduct its business as it is presently conducted. In particular, and without limiting the generality of the foregoing, the Group is in compliance with all conditions, limitations, restrictions or other provisions of all Government Permits related to the exploration for, development of, extraction, transportation or sale of hydrocarbons. All applications for additional Government Permits -5- described in the Prospectus as having been made by the Group have been properly and effectively made in accordance with the applicable laws and regulations with respect thereto and such applications constitute, in the best judgment of the Company's management, those reasonably required to have been made in order to carry out the Company's business plan as described in the Prospectus. No proceeding to revoke, limit or otherwise materially change any Government Permit has been commenced or, to the Company's best knowledge, is threatened against the Company or any supplier to the Group with respect to materials supplied to the group, and the Company has no reason to anticipate that any such proceeding will be commenced against any member of the Group or any such supplier. Except as disclosed or contemplated in the Prospectus, the Company has no reason to believe that any pending application for a Government Permit will be denied or limited in a manner inconsistent with the Company's business plan as described in the Prospectus. (o) The Group is in all material respects in compliance with all applicable Environmental Laws. The Company has no knowledge of any past, present or, as anticipated by the Company, future events, conditions, activities, investigation, studies, plans or proposals that (i) would interfere with or prevent compliance with any Environmental Law by the Group or (ii) could reasonably be expected to give rise to any common law or other liability, or otherwise form the basis of a claim, action, suit, proceeding, hearing or investigation, involving the Group and related in any way to Hazardous Substances or Environmental Laws. Except for the prudent and safe use and management of Hazardous Substances in the ordinary course of the Group's business, (i) no Hazardous Substance is or has been used, treated, stored, generated, manufactured or otherwise handled on or at any Facility and (ii) to the Company's best knowledge, no Hazardous Substance has otherwise come to be located in, on or under any Facility. No Hazardous Substances are stored at any Facility except in quantities necessary to satisfy the reasonably anticipated use or consumption by the Group. No litigation, claim, proceeding or governmental investigation is pending regarding any environmental matter for which any member of the Group has been served or otherwise notified or, to the knowledge of the Company threatened or asserted against any member of the Group, or the officers or directors of any such member in their capacities as such, or any Facility or the Group's business. There are no orders, judgments or decrees of any court or of any governmental agency or instrumentality under any Environmental Law which specifically apply to any member of the Group, any Facility or any of the Group's operations. No member of the Group has received from a governmental authority or other person (i) any notice that it is a potentially responsible person for any Contaminated site or (ii) any request for information about a site alleged to be Contaminated or regarding the disposal of Hazardous Substances. There is no litigation or proceeding against any other person by the Group regarding any environmental matter. The Company has disclosed in the Prospectus or made available to the Underwriters and their counsel true, complete and correct copies of any reports, studies, investigations, audits, analysis, tests or monitoring in the possession of or initiated by the Company pertaining to any environmental matter relating to the Company, its past or present operations or any Facility. -6- For the purposes of the foregoing paragraph, "Environmental Laws" means any applicable federal, state or local statute, regulation, code, rule, ordinance, order, judgment, decree, injunction or common law pertaining in any way to the protection of human health or the environment, including without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any similar or comparable state or local law; "Hazardous Substance" means any hazardous, toxic, radioactive or infectious substance, material or waste as defined, listed or regulated under any Environmental Law; "Contaminated" means the actual existence on or under any real property of Hazardous Substances, if the existence of such Hazardous Substances triggers a requirement to perform any investigatory, remedial, removal or other response action under any Environmental Laws or if such response action legally could be required by any governmental authority; "Facility" means any property currently owned, leased or occupied by the Company. (p) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or intends to take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (q) The Company is not an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. (r) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (s) The Group carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (t) Each member of the Group is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not -7- incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (u) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (v) Each member of the Group is in material compliance with all laws, rules, regulations, orders of any court or administrative agency, operating licenses or other requirements imposed by any governmental body applicable to it, including, without limitation, all applicable laws, rules, regulations, licenses or other governmental standards applicable to the oil and gas industry; and the conduct of the business of the Group, as described in the Prospectus, will not cause the Company to be in violation of any such requirements. (w) The Representatives' Warrants (as defined in Paragraph (d) of Section 2 hereof) have been authorized for issuance to the Representatives and will, when issued, possess rights, privileges, and characteristics as represented in the most recent form of Representatives' Warrants filed as an exhibit to the Registration Statement; the securities to be issued upon exercise of the Representatives' Warrants, when issued and delivered against payment therefor in accordance with the terms of the Representatives' Warrants, will be duly and validly issued, fully paid, nonassessable and free of preemptive rights, and all corporate action required to be taken for the authorization and issuance of the Representatives' Warrants, and the securities to be issued upon their exercise, have been validly and sufficiently taken. (x) Except as disclosed in the Prospectus, neither the Company nor any of its officers, directors or affiliates have caused any person, other than the Underwriters, to be entitled to reimbursement of any kind, including, without limitation, any compensation that would be includable as underwriter compensation under the NASD's Corporate Financing Rule with respect to the offering of the Shares, as a result of the consummation of such offering based on any activity of such person as a finder, agent, broker, investment adviser or other financial service provider. -8- (y) The Company has timely filed with the Commission all reports required to be filed by it during the last three years under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and the rules and regulations thereunder, including, but not limited to, any such reports incorporated by reference in the Registration Statement. All such reports have been in proper form and have included all information required to be disclosed therein. No such report has contained a misstatement of any material fact or omitted to state any fact necessary to make the statements therein not materially misleading. During the last three years, the Company has complied in all material respects with regulations of the NASD applicable to it as a NASDAQ listed company. The Company has not taken, in anticipation of the offering of the Shares, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (z) Resource Services International, Inc., which has rendered its report with respect to the net proved oil and gas reserves and the estimated future net revenues from proved oil and gas reserves (the "Reserve Information"), is professionally qualified to issue a report with respect to the Reserve Information and has no material relationship with the Company or any Subsidiary; the Reserve Information is fairly presented in a manner consistent with industry practice with respect to such information; subsequent to the date of the Reserve Information, and except as disclosed in the Prospectus, there has been no material adverse change in the net proved oil and gas reserves and the estimated future net revenues from proved oil and gas reserves of the Company. 2. PURCHASE, SALE AND DELIVERY OF THE SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $______ per Share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. (b) Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds and, at the option of the Representatives, by certified or bank cashier's checks drawn to the order of the Company or bank wire to an account specified by the Company against either uncertificated delivery of Firm Shares or of certificates therefor (which delivery, if certificated, shall take place in such location in New York, New York as may be specified by the Representatives) to the Representatives for the several accounts of the Underwriters. Such payment is to be made at the offices of the Representatives at the address set forth on the first page of this agreement, at 7:00 a.m., Pacific time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for -9- business and not permitted by law or executive order to be closed.) Except to the extent uncertificated Firm Shares are delivered at closing, the certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives requests in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Representatives to purchase the Option Shares at the price per Share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 45 days after the date of this Agreement, by the Representatives to the Company setting forth the number of Option Shares as to which the Representatives is exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which certificate representing such Shares are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. The Representatives may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company and the Attorney-in-Fact. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds and, at the option of the Representatives, by certified or bank cashier's check drawn to the order of the Company for the Option Shares to be sold by the Company or bank wire to an account specified by the Company against delivery of certificates therefor at the offices of Paulson Investment Company, Inc. set forth on the first page of this Agreement. (d) In addition to the sums payable to the Representatives as provided elsewhere herein, the Representatives shall be entitled to receive at the Closing, for themselves alone and not as Representatives of the Underwriters, as additional compensation for their services, purchase warrants (the "Representatives' Warrants") for the purchase of up to 200,000 shares of Common Stock at a price of $_____ per share, upon the terms and subject to adjustment and conversion as described in the form of Representatives' Warrants filed as an exhibit to the Registration Statement. 3. OFFERING BY THE UNDERWRITERS. -10- It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deems it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Representatives will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with an Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters that: (a) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (b) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such -11- statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representatives may reasonably request. (e) The Company will comply with the Act and the Rules and Regulations, and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (g) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities Exchange Act of 1934, as amended. The Company will deliver to the -12- Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (h) No offering, sale, short sale or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of one year after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of the Representatives, which consent will not be unreasonably withheld. (i) The Company will use its best efforts to list, subject to notice of issuance, the Shares on The NASDAQ National Market. (j) The Company has caused each officer and director and each person who owns, beneficially or of record, 5% or more of the Common Stock outstanding immediately prior to this offering to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters ("Lockup Agreements"), pursuant to which each such person shall agree (A) not to offer, sell, sell short or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Stock or derivatives of Common Stock owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of one year after the date of this Agreement, directly or indirectly, except with the prior written consent of the Representatives, provided, however, that, on or after the 61st day following the effective date of the date of this Agreement, each such person may, without restriction imposed hereby, sell or otherwise dispose of a number of shares not greater than ten percent of the number of shares owned by such person on the date of this Agreement; and (B) to give prior written notice to the Representatives for a period of five years from the effective date of the Registration Statement, with respect to any sales of Common Stock of the Company pursuant to Rule 144 under the Securities Act or any similar rule. (k) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (l) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company or any of the Subsidiaries to register as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). -13- (m) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (n) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. COSTS AND EXPENSES. (a) Paulson Investment Company, Inc. shall be entitled to reimbursement from the Company, for itself alone and not as Representative of the Underwriters, for its accountable expenses up to a maximum amount of $75,000. The Representatives shall be entitled to withhold this allowance on the Closing Date. (b) In addition to the payment described in Paragraph (a) of this Section 5, the Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses (including legal fees and disbursements) incident to securing any required review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the Listing Fee of The NASDAQ Stock Market; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Company. The Company agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of directed shares of the Common Stock by the Underwriters to employees and persons having business relationships with the Company. The Company shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if this Agreement shall not be consummated, then the Company shall reimburse the several Underwriters for accountable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder up to $75,000; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. -14- The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of John B. Wills, Esq., counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Colorado, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each Subsidiary has been duly organized and is validly existing as a corporation or other business entity in good standing under the laws of its jurisdiction of organization, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each Subsidiary is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Group. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; all of the securities of the Company conform to the description thereof contained in the Prospectus; the certificates for the Common Stock, assuming they are in the form filed with the Commission, are in due and proper form; the shares of Common Stock to be sold by the Company pursuant to this Agreement, including shares of Common Stock to be -15- sold as a part of the Option Shares have been duly authorized and, upon issuance and delivery thereof as contemplated in this Agreement and the Registration Statement, will be validly issued, fully paid and non-assessable; no preemptive rights of stockholders exist with respect to any of the Common Stock of the Company or the issuance or sale thereof pursuant to any applicable statute or the provisions of the Company's charter documents or, to such counsel's best knowledge, pursuant to any contractual obligation. The Representatives' Warrants have been authorized for issuance to the Representatives and will, when issued, possess rights, privileges, and characteristics as represented in the most recent form of Representatives' Warrants filed as an exhibit to the Registration Statement; the securities to be issued upon exercise of the Representatives' Warrants, when issued and delivered against payment therefor in accordance with the terms of the Representatives' Warrants, will be duly and validly issued, fully paid, nonassessable and free of preemptive rights, and all corporate action required to be taken for the authorization and issuance of the Representatives' Warrants, and the securities to be issued upon their exercise, has been validly and sufficiently taken. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein). (vi) The statements under the captions "Shares Eligible for Future Sale" and "Description of Capital Stock" in the Prospectus and in Item 15 of the Registration Statement, insofar as such statements constitute a summary of documents referred to therein -16- or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Charter or by-laws of the Company, or any agreement or instrument known to such counsel to which the Company is a party or by which the Company may be bound. (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. In rendering such opinion, such counsel may rely as to matters governed by the laws of states other than Colorado or Federal laws on local counsel in such jurisdictions, provided that in each case such counsel shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, the opinion of John B. Wills, Esq. shall also include a statement to the effect that nothing has come to the attention of such counsel that has caused him to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary -17- to make the statements therein not, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). (c) The Representatives shall have received from Stoel Rives LLP, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6. In rendering such opinion Stoel Rives LLP may rely as to all matters governed other than by the laws of the State of Oregon or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that has caused them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Stoel Rives LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representatives shall have received at or prior to the Closing Date from Stoel Rives LLP a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (e) The Representatives, on behalf of the several Underwriters, shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representative, of BDO Seidman confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations and containing such other statements and -18- information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (f) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Acting Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He or she has carefully examined the Registration Statement and the Prospectus and, in his or her opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company, whether or not arising in the ordinary course of business. (g) The Company shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. -19- (h) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the NASDAQ National Market. (i) The Lockup Agreements described in Section 4(j) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Stoel Rives LLP, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any -20- such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related -21- to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received -22- by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. -23- 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of Shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Paulson Investment Company, Inc., 811 SW Front Avenue, Portland, Oregon 97204, Attention: Chester L.F. Paulson; with a copy to Stoel Rives LLP, 900 SW 5th Avenue, Portland, Oregon 97204, Attention: John J. Halle; if to the Company, to Evergreen Resources, Inc., 1000 Writer Square, 1512 Larimer Street, Denver Colorado 80202 Attention: James S. Williams; with a copy to John B. Wills, Esq., 410 Seventeenth Street, Suite 1940, Denver, Colorado 80202. -24- 11. TERMINATION. This Agreement may be terminated by you by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, (iii) the Dow Jones Industrial Average shall have fallen by 15 percent or more from its closing price on the day immediately preceding the date that the Registration Statement is declared effective by the Commission, (iv) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (v) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (vi) declaration of a banking moratorium by United States or New York State authorities, (vii) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (viii) the suspension of trading of the Company's common stock by the Commission on the NASDAQ Stock Market or (ix) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and their respective successors, executors, administrators, heirs and assigns, and -25- the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. -26- 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Oregon. All disputes relating to this Underwriting Agreement shall be adjudicated before a court located in Multnomah county, Oregon to the exclusion of all other courts that might have jurisdiction. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, EVERGREEN RESOURCES, INC. By:___________________________ President The foregoing Underwriting Agreement s hereby confirmed and accepted as of the date first above written. PAULSON INVESTMENT COMPANY, INC. As Representatives of the several Underwriters listed on Schedule I By: ------------------------------------- Authorized Officer -27- SCHEDULE I SCHEDULE OF UNDERWRITERS Number of Firm Shares Underwriter to be Purchased ----------- --------------------- Paulson Investment Company, Inc. Total 2,000,000 --------- --------- -28- SCHEDULE II LIST OF SUBSIDIARIES -29- EX-1.2 3 EXHIBIT 1.2 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND IS NOT TRANSFERABLE EXCEPT AS PROVIDED HEREIN EVERGREEN RESOURCES, INC. PURCHASE WARRANT Issued to: PAULSON INVESTMENT COMPANY, INC. AND CAPITAL WEST SECURITIES, INC. Exercisable to Purchase 200,000 Shares of EVERGREEN RESOURCES, INC. Void after _________, 2001 This is to certify that, for value received and subject to the terms and conditions set forth below, the Warrantholder (hereinafter defined) is entitled to purchase, and the Company promises and agrees to sell and issue to the Warrantholder, at any time on or after _________, 1997 and on or before___________, 2001, up to 300,000 Shares (hereinafter defined) at the Exercise Price (hereinafter defined). This Warrant Certificate is issued subject to the following terms and conditions: 1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly required by the context, the following terms have the following meanings: (a) "Act" means the Securities Act of 1933, as amended. (b) "Closing Date" means the date on which the Offering is closed. (c) "Commission" means the Securities and Exchange Commission. (d) "Common Stock" means the common stock, no par value, of the Company. (e) "Company" means Evergreen Resources, Inc., a Colorado corporation. (f) "Company's Expenses" means any and all expenses payable by the Company or the Warrantholder in connection with an offering described in Section 6 hereof, except Warrantholder's Expenses. (g) "Effective Date" means the date on which the Registration Statement is declared effective by the Commission. (h) "Exercise Price" means the price at which the Warrantholder may purchase one Share upon exercise of Warrants as determined from time to time pursuant to the provisions hereof. The initial Exercise Price is $_____ per Share. (i) "Offering" means the public offering of Shares made pursuant to the Registration Statement. (j) "Participating Underwriter" means any underwriter participating in the sale of the Securities pursuant to a registration under Section 6 of this Warrant Certificate. (k) "Registration Statement" means the Company's registration statement (File No. 333-_____) as amended on the Closing Date. (l) "Rules and Regulations" means the rules and regulations of the Commission adopted under the Act. 2 (m) "Securities" means the securities obtained or obtainable upon exercise of the Warrant or securities obtained or obtainable upon exercise, exchange, or conversion of such securities. (n) "Share" means, as the case may require, either one of the Shares of Common Stock offered to the Public pursuant to the Registration Statement or one of the Shares of Common Stock obtainable on exercise of a Warrant. (p) "Warrant Certificate" means a certificate evidencing the Warrant. (q) "Warrantholder" means a record holder of the Warrant or Securities. The initial Warrantholder is Paulson Investment Company, Inc. and Capital West Securities, Inc. (r) "Warrantholder's Expenses" means the sum of (i) the aggregate amount of cash payments made to an underwriter, underwriting syndicate, or agent in connection with an offering described in Section 6 hereof multiplied by a fraction the numerator of which is the aggregate sales price of the Securities sold by such underwriter, underwriting syndicate, or agent in such offering and the denominator of which is the aggregate sales price of all of the securities sold by such underwriter, underwriting syndicate, or agent in such offering and (ii) all out-of-pocket expenses of the Warrantholder, except for the fees and disbursements of one firm retained as legal counsel for the Warrantholder that will be paid by the Company. (s) "Warrant" means the warrant evidenced by this certificate, any similar certificate issued in connection with the Offering, or any certificate obtained upon transfer or partial exercise of the Warrant evidenced by any such certificate. 2. EXERCISE OF WARRANTS. All or any part of the Warrant may be exercised commencing on the first anniversary of the Effective Date and ending at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date by surrendering this Warrant Certificate, together with appropriate instructions, duly executed by the Warrantholder or by its duly authorized attorney, at the office of the Company, 1000 Writer Square, 1512 Larimer Street, Denver, Colorado 80202, or at such other office or agency as the Company may designate. Upon receipt of notice of exercise, the Company shall immediately instruct its transfer agent to prepare certificates for the Securities to be received by the Warrantholder upon completion of the Warrant exercise. When such certificates are prepared, the Company shall notify the Warrantholder and deliver such certificates to the Warrantholder or as per the Warrantholder's instructions immediately upon payment in full by the Warrantholder, in lawful money of the United States, of the Exercise Price payable with respect to the Securities being purchased. If the Warrantholder shall represent and warrant that all applicable registration and prospectus delivery requirements for their sale have been complied with upon sale of the Securities received upon exercise of the Warrant, such certificates shall not bear a legend with respect to the Securities Act of 1933. If fewer than all the Securities purchasable under the Warrant are purchased, the Company will, upon such partial exercise, execute and deliver to the Warrantholder a new Warrant Certificate (dated the date hereof), in form and tenor similar to this Warrant Certificate, evidencing that portion of the Warrant not exercised. The Securities to be obtained on exercise 3 of the Warrant will be deemed to have been issued, and any person exercising the Warrants will be deemed to have become a holder of record of those Securities, as of the date of the payment of the Exercise Price. 3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of Securities for which this Warrant Certificate may be exercised are subject to adjustment from time to time upon the happening of certain events as follows: (a) If the outstanding shares of the Company's Common Stock are divided into a greater number of shares or a dividend in stock is paid on the Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately increased and the Exercise Price will be proportionately reduced; and, conversely, if the outstanding shares of Common Stock are combined into a smaller number of shares of Common Stock, the number of shares of Common Stock for which the Warrant is then exercisable will be proportionately reduced and the Exercise Price will be proportionately increased. The increases and reductions provided for in this subsection 3(a) will be made with the intent and, as nearly as practicable, the effect that neither the percentage of the total equity of the Company obtainable on exercise of the Warrants nor the price payable for such percentage upon such exercise will be affected by any event described in this subsection 3(a). (b) In case of any change in the Common Stock through merger, consolidation, reclassification, reorganization, partial or complete liquidation, purchase of substantially all the assets of the Company, or other change in the capital structure of the Company, then, as a condition of such change, lawful and adequate provision will be made so that the holder of this Warrant Certificate will have the right thereafter to receive upon the exercise of the Warrant the kind and amount of shares of stock or other securities or property to which he would have been entitled if, immediately prior to such event, he had held the number of shares of Common Stock obtainable upon the exercise of the Warrant. In any such case, appropriate adjustment will be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Warrantholder, to the end that the provisions set forth herein will thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. The Company will not permit any change in its capital structure to occur unless the issuer of the shares of stock or other securities to be received by the holder of this Warrant Certificate, if not the Company, agrees to be bound by and comply with the provisions of this Warrant Certificate. (c) When any adjustment is required to be made in the number of shares of Common Stock, other securities, or the property purchasable upon exercise of the Warrant, the Company will promptly determine the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (i) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new number of such shares or other securities or property purchasable upon exercise of the Warrant and (ii) cause a copy of such statement to be mailed to the Warrantholder within thirty (30) days after the date of the event giving rise to the adjustment. 4 (d) No fractional shares of Common Stock or other securities will be issued in connection with the exercise of the Warrant, but the Company will pay, in lieu of fractional shares, a cash payment therefor on the basis of the mean between the bid and asked prices of the Common Stock in the over-the-counter market or the closing price on a national securities exchange on the day immediately prior to exercise. (e) If securities of the Company or securities of any subsidiary of the Company are distributed pro rata to holders of Common Stock, such number of securities will be distributed to the Warrantholder or his assignee upon exercise of his rights hereunder as such Warrantholder or assignee would have been entitled to if this Warrant Certificate had been exercised prior to the record date for such distribution. The provisions with respect to adjustment of the Common Stock provided in this Section 3 will also apply to the securities to which the Warrantholder or his assignee is entitled under this subsection 3(e). (f) Notwithstanding anything herein to the contrary, there will be no adjustment made hereunder on account of the sale of the Common Stock or other Securities purchasable upon exercise of the Warrant. 4. RESERVATION OF SECURITIES. The Company agrees that the number of shares of Common Stock or other Securities sufficient to provide for the exercise of the Warrant upon the basis set forth above will at all times during the term of the Warrant be reserved for exercise. 5. VALIDITY OF SECURITIES. All Securities delivered upon the exercise of the Warrant will be duly and validly issued in accordance with their terms, and the Company will pay all documentary and transfer taxes, if any, in respect of the original issuance thereof upon exercise of the Warrant. 6. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT CERTIFICATE. (a) The Company will register the Securities with the Commission pursuant to the Act so as to allow the unrestricted sale of the Securities to the public from time to time commencing on the first anniversary of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Registration Period"). The Company will also file such applications and other documents necessary to permit the sale of the Securities to the public during the Registration Period in those states in which the Shares were qualified for sale in the Offering or such other states as the Company and the Warrantholder agree to. In order to comply with the provisions of this Section 6(a), the Company is not required to file more than one registration statement. No registration right of any kind, "piggyback" or otherwise, will last longer than five years from the Closing Date. (b) The Company will pay all of the Company's Expenses and each Warrantholder will pay its pro rata share of the Warrantholder's Expenses relating to the registration, offer, and sale of the Securities. (c) Except as specifically provided herein, the manner and conduct of the registration, including the contents of the registration, will be entirely in the control and at the discretion of 5 the Company. The Company will file such post-effective amendments and supplements as may be necessary to maintain the currency of the registration statement during the period of its use. In addition, if the Warrantholder participating in the registration is advised by counsel that the registration statement, in their opinion, is deficient in any material respect, the Company will use its best efforts to cause the registration statement to be amended to eliminate the concerns raised. (d) The Company will furnish to the Warrantholder the number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as it may reasonably request in order to facilitate the disposition of Securities owned by it. (e) The Company will, at the request of Warrantholders holding at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the counsel representing the Company for the purposes of the registration pursuant to this Section 6, addressed to the Warrantholders and any Participating Underwriter, (ii) furnish an appropriate letter from the independent public accountants of the Company, addressed to the Warrantholders and any Participating Underwriter, and (iii) make representations and warranties to the Warrantholders and any Participating Underwriter. A request pursuant to this subsection (e) may be made on three occasions. The documents required to be delivered pursuant to this subsection (e) will be dated within ten days of the request and will be, in form and substance, equivalent to similar documents furnished to the underwriters in connection with the Offering, with such changes as may be appropriate in light of changed circumstances. 7. INDEMNIFICATION IN CONNECTION WITH REGISTRATION. (a) If any of the Securities are registered, the Company will indemnify and hold harmless each selling Warrantholder, any person who controls any selling Warrantholder within the meaning of the Act, and any Participating Underwriter against any losses, claims, damages, or liabilities, joint or several, to which any Warrantholder, controlling person, or Participating Underwriter may be subject under the Act or otherwise; and it will reimburse each Warrantholder, each controlling person, and each Participating Underwriter for any legal or other expenses reasonably incurred by the Warrantholder, controlling person, or Participating Underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities, joint or several (or actions in respect thereof), arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, on the effective date thereof, in any such registration statement or any preliminary prospectus or final prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that the Company will not be liable in any case to the extent that any loss, claim, damage, or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any registration statement, preliminary prospectus, final prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished by a Warrantholder for use in the preparation thereof. The indemnity agreement contained in this subparagraph (a) will not apply to amounts paid to any claimant in settlement of any suit or claim 6 unless such payment is first approved by the Company, such approval not to be unreasonably withheld. (b) Each selling Warrantholder, as a condition of the Company's registration obligation, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement or other filing or any amendment or supplement thereto, and any person who controls the Company within the meaning of the Act, against any losses, claims, damages, or liabilities to which the Company or any such director, officer, or controlling person may become subject under the Act or otherwise, and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in said registration statement, any preliminary or final prospectus, or other filing, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, preliminary or final prospectus, or other filing, or amendment or supplement, in reliance upon and in conformity with written information furnished by such Warrantholder for use in the preparation thereof; PROVIDED, HOWEVER, that the indemnity agreement contained in this subparagraph (b) will not apply to amounts paid to any claimant in settlement of any suit or claim unless such payment is first approved by the Warrantholder, such approval not to be unreasonably withheld. (c) Promptly after receipt by an indemnified party under subparagraphs (a) or (b) above of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof; but the omission to notify the indemnifying party will not relieve it from any liability that it may have to any indemnified party otherwise than under subparagraphs (a) and (b). (d) If any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 8. RESTRICTIONS ON TRANSFER. This Warrant Certificate and the Warrant may not be sold, transferred, assigned or hypothecated for a one-year period after the Effective Date except to underwriters of the Offering or to individuals who are either a partner or an officer of such an underwriter or by will or by operation of law. The Warrant may be divided or combined, upon 7 request to the Company by the Warrantholder, into a certificate or certificates evidencing the same aggregate number of Warrants. 9. NO RIGHTS AS A SHAREHOLDER. Except as otherwise provided herein, the Warrantholder will not, by virtue of ownership of the Warrant, be entitled to any rights of a shareholder of the Company but will, upon written request to the Company, be entitled to receive such quarterly or annual reports as the Company distributes to its shareholders. 10. NOTICE. Any notices required or permitted to be given hereunder will be in writing and may be served personally or by mail; and if served will be addressed as follows: If to the Company: Evergreen Resources, Inc. 1000 Writer Square, 1512 Larimer Street Denver, Colorado 80202 Attn: Treasurer If to the Warrantholder: at the address furnished by the Warrantholder to the Company for the purpose of notice. Any notice so given by mail will be deemed effectively given 48 hours after mailing when deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid and addressed as specified above. Any party may by written notice to the other specify a different address for notice purposes. 11. APPLICABLE LAW. This Warrant Certificate will be governed by and construed in accordance with the laws of the State of Oregon, without reference to conflict of laws principles thereunder. All disputes relating to this Warrant Certificate shall be tried before the courts of Oregon located in Multnomah County, Oregon to the exclusion of all other courts that might have jurisdiction. Dated as of __________, 1996 EVERGREEN RESOURCES, INC.. By:____________________________ _____________________ 8 Agreed and Accepted as of __________, 1996 PAULSON INVESTMENT COMPANY, INC. By:_________________________ _________________________ CAPITAL WEST SECURITIES, INC. By:_________________________ _________________________ 9 EX-5 4 EXHIBIT 5 [LETTERHEAD] September 9, 1996 Evergreen Resources, Inc. 1000 Writer Square 1512 Lamar Street Denver, Colorado 80202 RE: SEC REGISTRATION STATEMENT ON FORM S-2 Gentlemen: I am counsel for Evergreen Resources, Inc., a Colorado corporation (the "Company"), in connection with its proposed public offering under the Securities Act of 1933, as amended, of up to 2,300,000 shares of the Company's Common Stock through a Registration Statement on Form S-2 as to which this opinion is a part, to be filed with the Securities and Exchange Commission (the "Commission"). In connection with rendering my opinion as set forth below, I have reviewed and examined originals or copies identified to my satisfaction of the following: (1) Articles and Amended Articles of Incorporation of the Company as filed with the Secretary of State of the State of Colorado. (2) Minute Book containing the written deliberations and resolutions of the Board of Directors and Shareholders of the Company. (3) The Registration Statement on Form S-2 and the Preliminary Prospectus contained within the Registration Statement. (4) The other exhibits to the Registration Statement filed with the Commission. I have examined such other documents and records, instruments and certificates of public officials, officers and representatives of the Company, and have made such other investigations as I have deemed necessary or appropriate under the circumstances. EXHIBIT 5 Based upon the foregoing and in reliance thereon, it is my opinion that up to 2,300,000 shares of Common Stock, no value, have been duly and validly authorized, legally issued, and are fully paid and non-assessable. I hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of my name under the caption "Legal Matters" in the Prospectus constituting a part thereof. Very truly yours, John B. Wills ------------------------------------- John B. Wills JBW/db EX-10.11 5 EXHIBIT 10.11 Exhibit 10.11 HIBERNIA September 6, 1996 Mr. Mark S. Sexton President and Chief Executive Officer Evergreen Resources, Inc. 1000 Writer Square 1512 Larimer Street Denver, Colorado 80202 Dear Mark: On behalf of Hibernia National Bank ("Lender"), I am authorized to extend Lender's commitment to make revolving loans to Evergreen Resources, Inc., a Colorado Corporation ("Borrower") subject to the basic terms and conditions set forth below, upon your acceptance of this commitment on or before the date set forth below. The following terms and conditions are not intended to be exhaustive, since final documentation of the facility will require further discussions between Lender and Borrower and approval by Lender's and Borrower's legal counsel. This commitment letter supersedes all prior commitment letters and represents an extension and amendment to the Credit Agreement dated 11/15/90 between Evergreen Resources, Inc. and Hibernia National Bank as amended from time to time. The following are the amended provisions. NOTE AMOUNT: The lesser of $15,000,000 or the Borrowing Base value then in effect (See attached Borrowing Base Schedule). CLOSING CONDITION: Closing under the $15,000,000 note shall occur concurrently with repayment of approximately $3,600,000 of debt outstanding at Lender from Raton Gas Company, LLC (a subsidiary of Evergreen Resources). MATURITY DATE: July 31, 1998 COMMITMENT FEE: Upon acceptance, a commitment fee of $56,250 will be due and payable. FINANCIAL COVENANT: The company shall maintain a ratio of Total Liabilities to Tangible Net Worth at a maximum of 0.50:1.00 at all times. In addition to the above amended provisions, the following provisions continue to apply. INTEREST RATE: Interest rate on borrowings shall be at Lender's Prime Rate. UNUSED FEE: The Borrower will pay to Bank an unused fee of 0.50% per annum on the average daily unused commitment amount, payable quarterly. ENGINEERING FEE: The Borrower will pay to Bank an Engineering fee of $7,000 per annum. DETAILS OF REPAYMENT: Details of repayment mirror those described in the Credit Agreement, in that interest payments are due monthly with principal due at maturity. Borrowing Base schedule redeterminations will be at Lender's sold discretion, but not less often than semi-annually. Principal Mr. Mark S. Sexton Evergreen Resources, Inc. payments will be due if the loan outstanding exceeds the amount permitted under the Borrowing Base schedule. CLOSING COSTS: Borrower shall pay all reasonable fees of Lender's counsel and all other fees and expenses incurred by Lender or Borrower in connection with this commitment or the facility, whether or not the facility closes, including without limitation, inspection fees, legal fees, brokerage fees, appraisal fees, and travel expenses. Borrower understands that Lender will begin incurring these expenses upon acceptance of this letter and that these charges are in addition to the commitment fee referred to hereinabove and that they will be billed to the Borrower regardless of whether the facility closes. SECURITY: First priority mortgage and assignment of production covering 100% of the value of the Raton Basin leases and certain San Juan Basin leases. Title opinions acceptable to Lender will be required on the leases. COMMITMENT LETTER EXPIRY: The commitment described in this letter shall expire and be null and void at the close of business on September 27, 1996, unless an accepted copy of this letter is received by Lender prior to said Expiration Date. ACCEPTED COMMITMENT EXPIRY: The accepted commitment will expire on October 28, 1996 unless the facility closes. Any extensions to the closing deadline must be confirmed in writing by Lender. The above stated conditions encompass only a partial lest of conditions that may appear in the Loan Agreement, and should not be deemed to be exhaustive or all inclusive. Lender's obligation to make the facility described herein shall be subject to Borrower's agreement to conditions, affirmative and negative covenants, and default provisions which are standard in loan documentation for similar loans made by Lender or which in Lender's discretion are required for purposes of this transaction. If these terms and conditions are acceptable, please evidence your acceptance by signing below in the space indicated, and return the executed original of this letter along with the commitment fee to the undersigned. We look forward to working with you on this and future opportunities. Sincerely, Colleen B. Smith Lyndsay P Job Assistant Vice President Senior Vice President Energy/Maritime Division Manager Energy/Maritime Division Acceptance: The foregoing commitment is hereby accepted, and the undersigned agrees to accept the facility described therein, this 10th day of September, 1996. Evergreen Resources, Inc. By: /s/ Mark S. Sexton --------------------------------------------------------- Title: Mark S. Sexton, President and Chief Executive Officer HIBERNIA NATIONAL BANK - P.O. BOX 61540 - NEW ORLEANS, LA 70161 - 504-533-5395 PAGE 2 Evergreen Resources - 8/96 Borrowing Base Schedule, at month end # Month Borrowing MM-YY Base $M 15,000.0 1 Sep-96 14,633.0 2 Oct-96 14,275.0 3 Nov-96 13,914.0 4 Dec-96 13,555.0 5 Jan-97 13,349.0 6 Feb-97 13,131.0 7 Mar-97 12,928.0 8 Apr-97 12,735.0 9 May-97 12,549.0 10 Jun-97 12,357.0 11 Jul-97 12,165.0 12 Aug-97 11,975.0 13 Sep-97 11,779.0 14 Oct-97 11,579.0 15 Nov-97 11,367.0 16 Dec-97 11,146.0 17 Jan-98 10,900.0 18 Feb-98 10,643.0 19 Mar-98 10,403.0 20 Apr-98 10,175.0 21 May-98 9,956.0 22 Jun-98 9,732.0 23 Jul-98 9,508.0 EX-10.12 6 EXHIBIT 10.12 Exhibit 10.12 COASTAL INTERSTATE GAS COMPANY A Subsidiary of the Coastal Corporation PO Box 1087 - Colorado Springs, CO 80944 - 719/473/2300 August 28, 1996 Primero Gas Marketing Company 1000 Writer Square 1512 Larimer St. Denver, CO 80202 RE: PICKETWIRE LATERAL Ladies and Gentlemen: This letter sets forth the agreement between Primero Gas Marketing Company ("Primero") and Colorado Interstate Gas Company ("CIG") with respect to firm transportation of Primero's gas received on CIG's Picketwire Lateral in Las Animas County, Colorado. For and in consideration of the mutual promises of the parties and other good and valuable consideration, Primero and CIG agree as follows: 1. As a condition to CIG constructing the Central Blending Facility, described in Section 6.6 of the proposed Firm Transportation Service Agreement ("FTSA") dated October 1, 1996 (CIG Contract No. 33125000), Primero shall execute the FTSA by September 6, 1996, 2. CIG shall verify the schedule of out-of-pocket expenses (detailed in Primero's letter dated July 18, 1996) incurred by Primero or any of its affiliates as part of the construction of the Picketwire Lateral and the Burro Canyon tap and meter station by September 20, 1996. CIG shall reimburse Primero for all of these out-of-pocket expenses, subject to the verification of the expenditures, up to a maximum of $225,000. 3. Primero shall immediately submit to CIG a firm transportation service request along with the appropriate fee for up to an additional 10,000 Dth per day from the Burro Canyon Point of Receipt. CIG shall then hold this request in abeyance. To assist Primero in its capacity planning, CIG shall advise Primero when either Amoco Energy Trading Company or Apache Canyon LLC, or their respective successors or assigns, contract with CIG for additional firm capacity from the Picketwire Lateral. CIG shall notify Primero when a request for firm capacity is received from any other party. This notification process shall not apply to capacity currently under negotiation (CIG has received two requests to begin negotiations for volumes of approximately 25,000 Dth per day in aggregate. These volumes are subject to change as the negotiation process proceeds). Primero will have the right to exercise this request, subject to available capacity, at the Approved Rate (but not the overrun rate) established for Primero's volumes under the FTSA. The Approved Rate is defined as Transporter's maximum rates under Rate Schedule TF-1 in the Tariff as of October 1, 1996, subject to refund. Should CIG's maximum TF-1 rate be above the Approved Rate at the time Primero seeks to increase its MDQ under this provision, Primero may elect to pay the maximum TF-1 rate for the Primero Gas Gathering Company August 28, 1996 Page 2 additional volumes provided no additional facilities are required by CIG to provide the service. Should Primero elect to pay the Approved Rate, Primero will have the same rights as a maximum rate shipper under Rate Schedule TF-1 for the additional volumes provided CIG is not receiving a higher rate than the Approved Rate from another party for service on the Picketwire Lateral at the time Primero elects to exercise its request. CIG's obligations under this paragraph shall cease once it has 40,000 Dth per day of firm capacity on the Picketwire Lateral (the current capacity of the Picketwire Lateral) under contract, including any new volumes of Primero's. If the foregoing is acceptable to Primero, please signify by signing and returning one copy of this Letter Agreement to CIG. Sincerely, COLORADO INTERSTATE GAS COMPANY /s/ Donald J. Zinko --------------------------------------- Donald J. Zinko Senior Vice President Accepted and agreed to this 5th day of September, 1996. PRIMERO GAS MARKETING COMPANY By: EVERGREEN OPERATING CORPORATION, MANAGER By: /s/ Mark S. Sexton ------------------------------- Name: Mark S. Sexton ----------------------------- Title: Director ---------------------------- EX-10.13 7 EXHIBIT 10.13 Exhibit 10.13 Contract No. 33125000 Firm Transportation Service Agreement Rate Schedule TF-1 between COLORADO INTERSTATE GAS COMPANY and PRIMERO GAS MARKETING COMPANY Dated: OCTOBER 1, 1996 TABLE OF CONTENTS ARTICLE PAGE NO. - -------------------------------------------------------------------------------- I Quantities of Gas to Be Transported . . . . . . . . . . . . . . 1 II Point(s) of Receipt and Point(s) of Delivery. . . . . . . . . . 1 III Applicable Rate Schedule, Incorporation by Reference. . . . . . 2 IV Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 V Cancellation of Prior Contracts . . . . . . . . . . . . . . . . 3 VI Other Operating Provisions. . . . . . . . . . . . . . . . . . . 3 VII Modifications . . . . . . . . . . . . . . . . . . . . . . . . . 5 VIII Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 EXHIBIT "A" EXHIBIT "B" FIRM TRANSPORTATION SERVICE AGREEMENT RATE SCHEDULE TF-1 THIS AGREEMENT is made and entered into as of this 1st day of October, 1996, by and between COLORADO INTERSTATE GAS COMPANY, hereinafter called "Transporter," and PRIMERO GAS MARKETING COMPANY, hereinafter called "Shipper." In consideration of the mutual promises hereinafter contained, Shipper and Transporter agree as follows: ARTICLE I QUANTITIES OF GAS TO BE TRANSPORTED 1.1 MAXIMUM DELIVERY QUANTITY ("MDQ"). Shipper's MDQ is 10,000 Dth per Day. 1.2 TRANSPORTATION SERVICE. Transportation Service at and between Primary Point(s) of Receipt and Primary Point(s) of Delivery shall be on a firm basis. Service involving and at Secondary Point(s) of Receipt and Delivery shall be scheduled, subject to capacity availability, following all firm transportation services between Primary Point(s) of Receipt and Delivery and ahead of any interruptible Transportation Service at such point(s). 1.3 AUTHORIZED OVERRUN QUANTITY. On any Day, upon request of Shipper and with Transporter's consent, Shipper may Tender and Transporter may accept for Transportation quantities of gas in excess of Shipper's MDQ or Shipper's Point of Receipt or Delivery Quantities at each Point of Receipt or Delivery. For any authorized overrun volumes up to 5,000 Dth per Day, Shipper shall pay a rate of $.15 per Dth, plus Fuel Reimbursement and applicable surcharges. ARTICLE II POINT(S) OF RECEIPT AND POINT(S) OF DELIVERY 2.1 RECEIPT. Transporter agrees to accept Receipt Quantities at the Primary Point(s) of Receipt identified in Exhibit "A," which is incorporated herein by reference. 2.2 DELIVERY. Transporter agrees to transport and Deliver Delivery Quantities to Shipper (or for Shipper's account) at the Primary Point(s) of Delivery identified in Exhibit "A." 2.3 SECONDARY POINT(S) OF RECEIPT AND DELIVERY. Receipt and Delivery of quantities at Secondary Point(s) of Receipt and/or Secondary Point(s) of Delivery will be scheduled and allocated capacity pursuant to Article 5 of the General Terms and Conditions of Transporter's FERC Gas Tariff, First Revised Volume No. 1 ("The Tariff"). Shipper shall be entitled to receive service at Secondary Point(s) of Receipt and Delivery by nominating for service at such locations. ARTICLE III APPLICABLE RATE SCHEDULE, INCORPORATION BY REFERENCE 3.1 RATE SCHEDULE. Each Month, Shipper shall pay Transporter for Transportation Service provided hereunder at the rates and surcharges set forth in Exhibit "B," which is incorporated herein by reference, for the Term of Rate provided therein. Once the Term of Rate has expired, payment shall be at the maximum rates and surcharges set forth on the Schedule of Rates Sheets of The Tariff unless otherwise agreed. 3.2 INCORPORATION BY REFERENCE. This Agreement in all respects shall be subject to Rate Schedule TF-1 and the General Terms and Conditions of The Tariff filed with, and made effective by, the FERC (as they may be superseded, or as they may be amended pursuant to Article VII of this Agreement) all of which are by reference made a part hereof. Provided, however, that gas tendered at the Primary Point of Receipt will not be subject to the Valley Line input factor specifications set forth in Section 9.6 of the General Terms and Conditions of The Tariff upon Transporter installing the Central Blending Facility described in Section 6.6 of this Agreement. 3.3 CHANGES IN RATES AND TERMS. Transporter shall have the right to propose to the FERC changes in its rates and terms of service, and this Agreement shall be deemed to include any changes which are made effective pursuant to FERC Order or regulation or provisions of law, without prejudice to Shipper's right to protest the same. ARTICLE IV TERM 4 1 EFFECTIVE DATE. This Agreement shall become effective on October 1, 1996. 2 4.2 TERMINATION DATE. This Agreement shall continue in full force and effect for a term extending through September 30, 2006. 4.3 TERMINATION OBLIGATIONS. Termination of this Agreement shall not relieve Transporter and Shipper of the obligation to correct any quantity imbalances, or relieve Shipper of the obligation to pay money due to Transporter. All warranties and indemnities shall survive the termination of this Agreement. ARTICLE V CANCELLATION OF PRIOR CONTRACTS 5.1 CANCELLATION OF PRIOR CONTRACTS. When this Agreement becomes effective, it shall supersede and cancel the following contract(s) between the Parties: None. ARTICLE VI OTHER OPERATING PROVISIONS 6.1 Shippers under this Rate Schedule TF-1 shall be subject to the Joint Monthly Operating Plan and Operational Flow Orders as provided in Article 7 of the General Terms and Conditions of The Tariff. 6.2 FIRST-OF-THE-MONTH NOMINATIONS. By 10:00 a.m., Mountain Time, at least four Business Days, or, for Shippers using Transporter's electronic bulletin board, by 10:00 a.m., Mountain Time, two Business Days, before the first Day of each Month (e.g., 10:00 a.m., Mountain Time, Tuesday, for gas Tendered beginning 12:00 p.m., Mountain Standard Time, Thursday, or 10:00 a.m., Mountain Time, Thursday, for gas Tendered beginning 12:00 p.m., Mountain Standard Time, Monday), Shipper shall provide Transporter with a schedule (in writing or by Electronic Transmission) showing the daily quantity to be Tendered to Transporter during the first four Days of the Month at each Point of Receipt including the producing area (including county and state) of the gas to be Tendered and an allocation of such quantity at each Point of Delivery. Nominations shall be addressed as set forth in Article VIII of this Agreement. 6.3 DAILY NOMINATIONS. Unless otherwise agreed, Shipper shall submit daily nominations to Transporter, by Electronic Transmission, or in writing, by 10:00 a.m., Mountain 3 Time, of the day prior to the Day of Delivery (e.g., nominations shall be made by 10:00 a.m., Mountain Time, on Monday for gas to be Tendered beginning at 12:00 p.m., Mountain Standard Time, on Tuesday). For each Agreement, Shipper shall nominate in writing or by Electronic Transmission the quantity which Shipper intends to Tender at the Point(s) of Receipt and to receive at the Point(s) of Delivery, including an allocation of Point of Receipt Quantities to each Point of Delivery in the event of multiple Delivery Points. In situations involving Northwest Pipeline Corporation, Transporter's nomination deadline is 9:30 a.m. Mountain Time, 30 minutes before Northwest Pipeline Corporation's nomination deadline. Transporter shall exercise reasonable efforts to accommodate changes to Shipper's nomination for injection into and, where applicable, withdrawal from Transporter's Storage Fields under Rate Schedule FS-1 and/or NNT-1 up to 4:00 p.m., Mountain Time, on the Day in which nominations are effective. Transporter shall only accept such changes if they do not affect other already scheduled quantities and subject to confirmation at the Point(s) of Receipt or Point(s) of Delivery, where applicable. Transporter shall attempt to verify all nominations and confirm service to Shipper no later than four hours prior to the Day for which the Nominations are to be effective. Transporter is not responsible for assuring that the nominated quantities are actually Tendered to Transporter at the Point(s) of Receipt. All service performed under this Agreement shall be performed pursuant to 18 CFR 284.221 authority, unless Shipper elects service to be performed pursuant to 18 CFR 284.101 (Section 311) . 6.4 ESTIMATES. For planning purposes, Transporter may, from time to time, request estimates of Shipper's annual quantity, average daily quantity, or peak Day quantities. In the event that such a request is made, Shipper shall reply in writing within 45 days of the request. 6.5 PLANNING INFORMATION. Transporter may request other planning information as needed from time to time and Shipper shall comply with all reasonable requests. 4 6.6 NEW FACILITIES. Transporter agrees to construct a nitrogen blending facility that will have the capability of conditioning all volumes flowing through the Picketwire Lateral to the input factor specifications as stated in Article 9 in Transporter's FERC Gas Tariff. Transporter shall use commercially reasonable efforts to install either the ("Central Blending Facility") or an interim facility capable of blending 20,000 Dth per Day by October 1, 1996. If the necessary blending facilities are not in service by October 1, 1996 (subject to force majeure as defined in The Tariff), Transporter will make firm deliveries for Shipper at Shipper's Primary Point of Delivery until such time as the necessary blending facilities are in-servlce. ARTICLE VII MODIFICATIONS 7.1 MODIFICATIONS. Certain provisions of the General Terms and Conditions of The Tariff and/or Rate Schedule TF-1 are modified for the purpose of this Agreement, as specified below: None. ARTICLE VIII NOTICES 8.1 NOTICES, STATEMENTS, AND BILLS. Any notice, statement, or bill provided for in this Agreement shall be in writing and shall be considered as having been given if hand carried, telecopied, or if mailed by United States mail, postage prepaid, to the following addresses, respectively: TO SHIPPER: Invoices for Transportation: Primero Gas Marketing Company 1000 Writer Square 1512 Larimer Street Denver, Colorado 80202 Attention: Kevin Collins Phone No. (303) 534-0400 Telecopy No. (303) 534-0420 All Notices: Primero Gas Marketing Company 1000 Writer Square 1512 Larimer Street 5 Denver, Colorado 80202 Attention: Mark Sexton Phone No. (303) 534-0400 Telecopy No. (303) 534-0420 TO TRANSPORTER: Payments for Transportation: Colorado Interstate Gas Company Department 208 Denver, Colorado 80291 All Notices: Colorado Interstate Gas Company P. O. Box 1087 Colorado Springs, Colorado 80944 Attention: Account Management, Transmission & Storage Telecopy No. (719) 520-4810 All Nominations: Colorado Interstate Gas Company Colorado Springs, Colorado 80944 Attention: Volume Management, Transmission & Storage Telecopy No. (719) 520-4411 8.2 AGENTS. Shipper must provide written notice to Transporter of the name, and any other pertinent information, of another person ("Agent") that has agency authority to act for Shipper in connection with (1) the Joint Monthly Operating Plan as discussed in Article 7 of the General Terms and Conditions of The Tariff, (2) operation of pipelines, facilities, and wells in connection with this Agreement, (3) Operational Flow Orders as discussed in Article 7 of the General Terms and Conditions of The Tariff, and/or (4) other matters covered by this Agreement. If the Agent has the authority in (2) and (3), above, operating notices shall be served upon the Agent alone. The Shipper remains bound by its obligations under the Agreement, and commitments made by the Agent on behalf of the Shipper are binding on the Shipper as if made by the Shipper. The Shipper must provide prompt written notice of the termination of the agency. 6 IN WITNESS WHEREOF, the Parties have executed this Agreement. COLORADO INTERSTATE GAS COMPANY (Transporter) By /s/ Donald J. Zinko ------------------------------- Donald J. Zinko Senior Vice President PRIMERO GAS MARKETING COMPANY (Shipper) ATTEST: BY: EVERGREEN OPERATING CORP., MANAGER By /s/ Mark S. Sexton ------------------------------- By /s/ J. Keither Martin Mark S. Sexton --------------------- ------------------------------- Title (Print or type name) Evergreen Operating Corp. Corporate Secretary Director ------------------------------- (Print or type title) 7 EXHIBIT "A" to FIRM TRANSPORTATION SERVICE AGREEMENT between COLORADO INTERSTATE GAS COMPANY (Transporter) and PRIMERO GAS MARKETING COMPANY (Shipper) DATED: October 1, 1996 1. Shipper's Maximum Delivery Quantity ("MDQ"): 10,000 Dth per Day. PRIMARY POINT(S) OF MAXIMUM PRIMARY POINT(S) OF RECEIPT RECEIPT QUANTITY RECEIPT (NOTE 1) (DTH PER DAY) PRESSURE (NOTE 2) P.S.I.G. - -------------------------------------------------------------------------------- Burro Canyon 10,000 1,220 MAXIMUM PRIMARY POINT(S) OF DELIVERY PRIMARY POINT(S) OF DELIVERY DELIVERY QUANTITY PRESSURE (NOTE 1) (DTH PER DAY) P.S.I.G. - -------------------------------------------------------------------------------- Dumas 10,000 650 NOTES: (1) Information regarding Point(s) of Receipt and Point(s) of Delivery, including legal descriptions, measuring parties, and interconnecting parties, shall be posted on Transporter's electronic bulletin board. Transporter shall update such information from time to time to include additions, deletions, or any other revisions deemed appropriate by Transporter. (2) Each Point of Receipt Quantity may be increased by an amount equal to Transporter's Fuel Reimbursement percentage. Shipper shall be responsible for providing such Fuel Reimbursement at each Point of Receipt on a pro rata basis based on the quantities received on any Day at a Point of Receipt divided by the total quantity Delivered at all Point(s) of Delivery under this Transportation Service Agreement. Page 1 of 2 EXHIBIT "B" to FIRM TRANSPORTATION SERVICE AGREEMENT between COLORADO INTERSTATE GAS COMPANY (Transporter) and PRIMERO GAS MARKETING COMPANY (Shipper) DATED: OCTOBER 1, 1996 PRIMARY PRIMARY R1 RES- COMMOD- FUEL POINT(S) OF POINT(S) OF ERVATION ITY TERM OF REIMBURSE- SUR- RECEIPT DELIVERY RATE RATE RATE MENT CHARGES - -------------------------------------------------------------------------------- Burro Dumas (Notes 4 (Note 5) 10/1/96 (Note 2) (Note 3) Canyon and 5) through 9/30/2006 SECONDARY SECONDARY R1 RES- COMMOD- FUEL POINT(S) OF POINT(S) OF ERVATION ITY TERM OF REIMBURSE- SUR- RECEIPT DELIVERY RATE RATE RATE MENT CHARGES - -------------------------------------------------------------------------------- All All (Note 1) (Note 1) 10/1/96 (Note 2) (Note 3) through 9/30/2006 NOTES: (1) Unless otherwise agreed by the Parties in writing, the rates for service hereunder shall be Transporter's maximum rates for service under Rate Schedule TF-1, or other superseding Rate Schedule, as such rates may be changed from time to time. (2) Fuel Reimbursement shall be as stated on Transporter's Schedule of Surcharges and Fees in The Tariff, as they may be changed from time to time, unless otherwise agreed between the Parties. (3) Surcharges, if applicable: All applicable surcharges, unless otherwise specified, shall be the maximum surcharge rate as stated in the Schedule of Surcharges and Fees in The Tariff, as such surcharges may be changed from time to time. Page 2 of 2 EXHIBIT "B" NOTES: GQC: The Gas Quality Control Surcharge shall be assessed pursuant to Article 20 of the General Terms and Conditions as set forth in The Tariff. GRI: The GRI Surcharge shall be assessed pursuant to Article 18 of the General Terms and Conditions as set forth in The Tariff. HFS: The Hourly Flexibility Surcharge will be assessed pursuant to Article 20 of the General Terms and Conditions as set forth in The Tariff. ORDER NO. 636 TRANSITION COST MECHANISM: Surcharge(s) shall be assessed pursuant to Article 21 of the General Terms and Conditions as set forth in The Tariff. ACA: The ACA Surcharge shall be assessed pursuant to Article 19 of the General Terms and Conditions as set forth in The Tariff. (4) If Shipper releases any of its capacity (i.e., becomes a Releasing Shipper under Transporter's Capacity Release Program) and the Replacement Shipper is paying more than the Releasing Shipper, Transporter shall be entitled to the difference, if any, between the reservation charge(s), including all applicable surcharges, being paid by the Replacement Shipper, and the reservation charges, including all applicable surcharges, being paid by the Releasing Shipper. (5) The rates for service shall be Transporter's maximum rates under Rate Schedule TF- l in The Tariff as of October 1, 1996, subject to refund. Once the maximum TF-1 rates are approved by the FERC in Rate Proceeding Docket No. RP96-190 ("Approved Rate ) such rate shall remain fixed for the remainder of the term of this Agreement. In the event Transporter is not permitted (by virtue of the Tariff, FERC ruling, or otherwise) to collect the Approved Rate, Transporter and Shipper shall negotiate an amendment to this Agreement or other arrangement which places the Parties in the same economic position they would have been in had Transporter been permitted to collect the full Approved Rate. EX-23.1 8 EXHIBIT 23.1 CONSENT OF ATTORNEYS Reference is made to the Registration Statement on Form S-2 of Evergreen Resources, Inc. I hereby consent to the use of my opinion concerning the legality of the securities being registered dated September 9, 1996 filed as an exhibit to the Registration Statement, and to being named in the Registration Statement as having advised Evergreen Resources, Inc. as to the legality of its securities proposed to be sold. JOHN B. WILLS Attorney at Law By: /s/ JOHN B. WILLS ------------------------------- John B. Wills Denver, Colorado September 9, 1996 EXHIBIT 23.1 EX-23.2 9 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Evergreen Resources, Inc. Denver, Colorado We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 24, 1996, relating to the consolidated financial statements of Evergreen Resources, Inc., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN, LLP Denver, Colorado September 10, 1996 EX-23.3 10 EXHIBIT 23.3 Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement of Evergreen Resources, Inc. on Form S-2 of our report on the consolidated financial statements of Powerbridge, Inc. dated April 12, 1996 (August 15, 1996 as to Note 9) (which expresses an unqualified opinion and includes an explanatory paragraph relating to substantial doubt about Powerbridge, Inc.'s ability to cointinue as a going concern) for the year ended December 31, 1995 appearing in Form 8-K/A dated September 6, 1996, of Evergreen Resources, Inc. and to the reference to us under the heading ""Experts'' in the Prospectus, which is a part of this Registration Statement. Dallas, Texas September 9, 1996 EX-23.4 11 EXHIBIT 23.4 Exhibit 23.4 RESOURCE SERVICES INTERNATIONAL, INC. September 9, 1996 Mr. James S. Williams Evergreen Resources, Inc. 1512 Larimer Street Suite 1000 Denver, Colorado 80202 Gentlemen: We hereby consent to the use in the Prospectus constituting a part of your Registration Statement on Form S-2 of our estimates as of March 31, 1996 and August 1, 1996, relating to the extent and value of the proved oil and gas reserves of Evergreen Resources, Inc. We also consent to the reference to us under the caption "Experts" in the prospectus. Sincerely, RESOURCE SERVICES INTERNATIONAL, INC. -----END PRIVACY-ENHANCED MESSAGE-----