As filed with the Securities and Exchange Commission on September 13, 2002
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ENCORE ACQUISITION COMPANY *
(Exact name of Registrant as specified in its charter)
Delaware 1311 75-2759650
------------------------------- ---------------------------- ----------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
* Subsidiary Guarantor Registrants appear on the following page
777 Main Street, Suite 1400
Fort Worth, Texas 76102
(817) 877-9955
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(Address including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
John H. Karnes
Vice President and General Counsel
777 Main Street, Suite 1400
Fort Worth, Texas 76102
(817) 877-9955
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(Name, address, including ZIP Code, and telephone number, including area
code, of agent for service)
Copies to:
F. Richard Bernasek
Michael W. Stoltz
Kelly, Hart & Hallman, P.C.
201 Main Street, Suite 2500
Fort Worth, Texas 76102
(817) 332-2500
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
Title of each class
of securities to be Amount to be Proposed maximum Proposed maximum Amount of
registered registered offering price per unit offering price registration fee(1)
----------------------- ----------------- ----------------------- ----------------- -------------------
8 3/8% Senior
Subordinated Notes $150,000,000 100% $150,000,000 $13,800
due 2012
Subsidiary
Guarantees of Senior 0 0 0 None(3)
Subordinated Notes(2)
(1) Calculated pursuant to Rule 457 under the Securities Act of 1933.
(2) Each of the subsidiaries of Encore Acquisition Company that is listed on the
Table of Additional Subsidiary Guarantor Registrants on the following page has
guaranteed the notes being registered pursuant hereto.
(3) Pursuant to Rule 457(n) of the Securities Act of 1933, no separate fee for
the guarantees is payable.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
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.
2
ADDITIONAL SUBSIDIARY GUARANTOR REGISTRANTS
EXACT NAME OF SUBSIDIARY STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER
GUARANTOR REGISTRANT(*) INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER
------------------------ ------------------------------ ---------------------
Encore Operating, L.P. ..... Texas 75-2807888
EAP Operating, Inc. ........ Delaware 75-2807621
EAP Properties, Inc. ....... Delaware 75-2807620
EAP Energy, Inc. ........... Delaware 75-2807622
EAP Energy Services, L.P ... Texas 75-2808458
(*) The address for each Subsidiary Guarantor Registrant is 777 Main Street,
Suite 1400, Fort Worth, Texas 76102, except EAP Properties, Inc., the address of
which is 1209 Orange Street, Wilmington, Delaware 19801.
3
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 2002
PROSPECTUS
[GRAPHIC]
ENCORE ACQUISITION COMPANY
OFFER TO EXCHANGE
ALL OUTSTANDING 8 3/8% SENIOR SUBORDINATED NOTES DUE 2012
($150,000,000 PRINCIPAL AMOUNT)
FOR
8 3/8% SENIOR SUBORDINATED NOTES DUE 2012
($150,000,000 PRINCIPAL AMOUNT),
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 2002,
UNLESS WE EXTEND THE OFFER.
WE DO NOT CURRENTLY INTEND TO EXTEND THE OFFER.
We are offering to exchange up to $150.0 million aggregate principal amount of
new 8 3/8% Senior Subordinated Notes due 2012 of Encore Acquisition Company
which have been registered under the Securities Act of 1933, as amended, for any
and all outstanding 8 3/8% Senior Subordinated Notes due 2012 that Encore
Acquisition Company issued in a private offering on June 25, 2002.
The terms of the notes offered for exchange are identical in all material
respects to the notes issued in the private placement except their transfer
restrictions, registration rights, and exchange offer provisions have been
removed.
We will exchange all notes previously issued in our private placement that are
validly tendered and not validly withdrawn prior to the closing of the exchange
for an equal principal amount of exchange notes.
You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
We believe that the exchange of notes will not be a taxable exchange for U.S.
federal income tax purposes.
We will not receive any proceeds from the exchange offer.
The notes to be exchanged for the outstanding notes will not be listed on any
securities exchange or stock market, and, as a result, we do not anticipate an
active trading market for them.
4
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YOU SHOULD CONSIDER CAREFULLY "RISK FACTORS" BEGINNING ON PAGE 19 BEFORE
PARTICIPATING IN THE EXCHANGE OFFER.
Each broker-dealer that receives exchange notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act of 1933, as amended. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for your notes that were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
consummation of the exchange offer, we will make this prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This Prospectus is dated , 2002.
5
TABLE OF CONTENTS
Page
Where You Can Find More Information............................... 7
Special Note Regarding Forward-Looking Statements................. 8
Summary........................................................... 9
Risk Factors...................................................... 19
Use of Proceeds................................................... 30
Capitalization.................................................... 31
The Exchange Offer................................................ 32
Description of Certain Indebtedness............................... 41
Description of the Notes.......................................... 42
Certain United States Federal Income Tax Consequences............. 88
Plan of Distribution.............................................. 91
Legal Matters..................................................... 92
Independent Public Accountants.................................... 92
Independent Petroleum Engineers................................... 92
Glossary of Oil and Natural Gas Terms............................. 93
6
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC's
website at http://www.sec.gov. Reports and other information concerning us can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005. Our common stock is listed and traded on the
New York Stock Exchange under the trading symbol "EAC."
This prospectus, which constitutes a part of a registration statement on
Form S-4 filed by us with the SEC under the Securities Act of 1933, as amended,
or the "Securities Act," omits certain of the information set forth in the
registration statement. Accordingly, you should refer to the registration
statement and its exhibits for further information with respect to us and the
exchange notes. Copies of the registration statement and its exhibits are on
file at the offices of the SEC. Furthermore, statements contained in this
prospectus concerning any document filed as an exhibit are not necessarily
complete and, in each instance, we refer you to the copy of such document filed
as an exhibit to the registration statement.
The information included in the following documents is incorporated by
reference and is considered to be a part of this prospectus. The most recent
information that we file with the SEC automatically updates and supersedes older
information. We have previously filed the following documents with the SEC and
we are incorporating them by reference into this prospectus:
o Annual Report on Form 10-K for the fiscal year ended December 31, 2001
filed on March 15, 2002;
o Definitive Proxy Statement on Schedule 14A filed on March 20, 2002;
o Current Report on Form 8-K filed on April 5, 2002;
o Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 filed
on May 6, 2002;
o Current Reports on Form 8-K filed on June 10, 2002;
o Current Reports on Form 8-K filed on June 26, 2002;
o Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 filed
on August 9, 2002; and
o Current Report on Form 8-K filed on August 27, 2002.
From the initial filing of the registration statement on Form S-4 until the
offering made under this prospectus is terminated, we will also incorporate by
reference all documents that we may file in the future under Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, or the
Exchange Act.
You may request copies of these documents by contacting us at: Encore
Acquisition Company, 777 Main Street, Suite 1400, Fort Worth, Texas 76102
(telephone number: (817) 877-9955), Attention: Corporate Secretary.
To obtain timely delivery of any of our filings, agreements or other
documents, you must make your request to us no later that five business days
before the expiration date of the exchange offer. The exchange offer will expire
at 5:00 p.m. New York City time on , 2002. The exchange offer can be
extended by us in our sole discretion. See the caption "The Exchange Offer"
for more detailed information
7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act, Section 21E of the Exchange Act and the
Private Securities Litigation Reform Act of 1995 that are subject to risks and
uncertainties. Forward-looking statements give our current expectations and
projections relating to the financial condition, results of operations, plans,
objectives, future performance and business of Encore Acquisition Company and
its subsidiaries. You can identify these statements by the fact that they do not
relate strictly to historical or current facts. These statements may include
words such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or financial performance
or other events. All statements other than statements of historical facts
included in this prospectus that address activities, events or developments that
we expect, believe or anticipate will or may occur in the future are
forward-looking statements. Forward looking statements may relate to various
financial and operational matters, including, among other things: amount, nature
and timing of capital expenditures; drilling of wells; timing and amount of
future production of oil and natural gas; costs of exploiting and developing our
properties and conducting other operations, in the aggregate and on a barrel of
oil equivalent basis; increases in proved reserves; operating costs and other
expenses; cash flow and anticipated liquidity; estimates of proved reserves,
exploitation potential or property acquisitions; and marketing of oil and
natural gas.
These forward-looking statements are based on our expectations and beliefs
concerning future events affecting us. They are subject to uncertainties and
factors relating to our operations and business environment, all of which are
difficult to predict and many of which are beyond our control. Although we
believe that the expectations reflected in our forward-looking statements are
reasonable, we do not know whether our expectations will prove correct. The
forward-looking statements in this prospectus may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Many factors mentioned in our discussion in this prospectus,
including the risks outlined under "Risk Factors," will be important in
determining future results. Actual future results may vary materially. Because
of these factors, we caution that investors should not place undue reliance on
any of our forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made, and except as required by law we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to reflect the
occurrence of anticipated or unanticipated events or circumstances.
8
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you consider
important. We encourage you to read this prospectus and the documents to which
we have referred you in their entirety. References to "Encore," "we," "our," or
"us" refer to Encore Acquisition Company and our subsidiaries. You will find
definitions for oil and natural gas industry terms used throughout this
prospectus in "Glossary of Oil and Natural Gas Terms."
ENCORE ACQUISITION COMPANY
Encore is a growing independent energy company engaged in the acquisition,
development, exploitation and production of oil and natural gas reserves. Our
strategy is to build a portfolio of long-lived, high quality properties through
a balanced effort of selective acquisitions and low-risk drilling opportunities.
Our growth has come primarily from the acquisition of producing oil and
natural gas properties. We have maintained a highly disciplined acquisition
process to seek and acquire high quality assets with potential for upside
through low-risk development drilling projects.
Since April 1998, we have been successful in purchasing seven major packages
of producing properties located in the Williston Basin of Montana and North
Dakota, the Permian Basin of Texas and New Mexico, the Anadarko Basin of
Oklahoma, the Powder River Basin of Montana and, most recently, the Paradox
Basin of Utah. Moreover, we have increased our original interests in some of
these areas through additional acquisitions. From inception to December 31,
2001, we had invested $300.8 million in acquiring producing oil and natural gas
properties, and we invested an additional $59.5 million for acquisitions from
January 1, 2002 through June 30, 2002. We have invested an additional $122.5
million and $40.8 million, respectively, from inception to December 31, 2001 and
during the first half of 2002 for development and exploitation of our
properties.
In 2001, all of our growth was achieved organically through the drill bit by
harvesting a portion of our extensive inventory of drilling projects. We drilled
108 gross operated wells and participated in drilling another 35 gross
non-operated wells for a total of 143 gross wells for the year. On a net basis,
we drilled 95 net operated wells and participated in 12 non-operated wells for a
total of 107 net wells in 2001. Since our drilling program is based on low-risk
development opportunities, our success rate for 2001 exceeded 99%. In 2001, we
invested $87.2 million to drill and complete the 107 net wells, or approximately
$815,000 per net well. The 2001 drilling program added 23.7 million BOE at an
average cost of $3.68 per BOE. For the six months ended June 30, 2002, we
drilled an additional 45 gross (39.3 net) wells, of which 43 gross (39.2 net)
wells were operated by us.
Our estimated proved reserves at December 31, 2001 were 102.1 MMBbls of oil
and 78.0 Bcf of natural gas, or 115.0 million BOE. The proved developed
producing reserves were 89.0 million BOE, or 77% of total proved reserves at
December 31, 2001. Our Reserve-to-Production ratio averaged 18.0 years based
upon December 31, 2001 proved reserves and the prior 12 months' production. The
present value, discounted at 10% per annum, of future net revenues of our proved
reserves at December 31, 2001, was $360.4 million. Prevailing prices as of
December 31, 2001 were $19.84 per Bbl of oil and $2.57 per Mcf of natural gas.
Production from our properties averaged 13,820 Bbls/D of oil and 22,197
Mcf/D of natural gas, or 17,520 BOE/D, for 2001 and 15,784 Bbls/D of oil and
23,163 Mcf/D of natural gas, or 19,644 BOE/D for the first six months of 2002.
The direct lifting costs for our properties averaged $3.93 per BOE for 2001 and
$3.76 per BOE for the first six months of 2002. Production, severance, and ad
valorem taxes for 2001 were $2.16 per BOE and were $1.84 per BOE for the first
six months of 2002.
9
In addition to our completed acquisitions in 2002, we plan to invest
approximately $81.0 million during the year to exploit and develop existing core
properties. This will support a four-rig, 110 well drilling program in the Cedar
Creek Anticline, waterflood improvements, workovers, recompletions and our
high-pressure air injection program in the Cedar Creek Anticline. If attractive
opportunities arise during the rest of the year, we will acquire additional
producing oil and natural gas properties.
RECENT DEVELOPMENTS
On January 4, 2002, we closed the purchase of our sixth major producing
property package since inception. These Central Permian properties were
purchased from Conoco for approximately $50.1 million and were not a part of our
2001 reserve or production base. The properties include two major operated
fields: East Cowden Grayburg and Fuhrman-Nix; and two non-operated fields: North
Cowden and Yates. We believe that we will be able to exploit significant
opportunities in these fields to increase production through development
drilling and waterflood enhancements. During the second quarter of 2002, we
closed a second, follow-on acquisition of additional working interests in the
East Cowden Field for $8.4 million.
On August 29, 2002, we completed an acquisition of interests in oil and
natural gas properties in southeast Utah's Paradox Basin. The final purchase
price after the exercise of preferential rights was $17.9 million ($17.0 million
after closing adjustments). The properties are divided between two oil producing
units: the Ratherford Unit operated by ExxonMobil and the Aneth Unit operated
by ChevronTexaco. The net production to Encore from these properties is
currently approximately 900 BOE per day, comprised primarily of oil.
STRATEGY
Our strategy is to grow our reserves and production through selective
acquisitions and low-risk development drilling. We intend to maximize internally
generated cash flow and shareholder value by continuing our low-risk development
program on our existing properties and by acquiring properties with similar
upside potential to our current producing properties portfolio. We plan to focus
on acquisitions of additional properties during periods of low acquisition
values and to focus on exploiting the extensive inventory of development
opportunities on our existing properties when the acquisition market is
unfavorable. Based on our ability to grow our reserves with internally generated
cash flow, we expect our balance sheet to remain strong.
Each year, we budget a portion of internally generated cash flow to
secondary and tertiary recovery projects whose results will not be seen until
future years. Our secondary recovery projects primarily involve our
implementation and further enhancements of waterfloods on our quality asset
base. Our tertiary recovery project is an initial high-pressure air injection
project on our Cedar Creek Anticline asset in Montana.
To execute our strategy, we intend to:
o pursue an active low-risk development and exploitation program on our
existing properties;
o control costs through efficient operations of our existing properties;
o continue our disciplined acquisition program; and
o maintain our financial flexibility and conservative capital structure.
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DEVELOPMENT OF EXISTING PROPERTIES. Our properties generally have long
reserve lives and reasonably stable and predictable reservoir production
characteristics. The R/P Index for our proved reserves and proved developed
reserves at December 31, 2001 was 18.0 and 15.1 years, respectively, based on
the prior 12 months' production.
The inventory of potential development drilling locations or major
recompletion opportunities on our existing properties is sufficient to sustain
our 2002 level of capital investment for approximately four years. Longer term,
we believe that there is significant value to be created through our
High-Pressure Air Injection project in the Cedar Creek Anticline.
EFFICIENT OPERATIONS. We operate properties representing approximately 86%
of the PV-10 value of our proved reserves at December 31, 2001, which allows us
to control capital allocation and expenses. For the year ended December 31, 2001
and the six months ended June 30, 2002, our lease operating expenses consisted
of direct lifting costs per BOE of $3.93 and $3.76, respectively, and
production, ad valorem, and severance tax payments per BOE produced of $2.16 and
$1.84, respectively. Our general and administrative costs, excluding non-cash
stock based compensation expense, averaged $0.79 per BOE produced in 2001 and
$0.81 per BOE produced in the first six months of 2002.
CONTINUED SUCCESSFUL ACQUISITION PROGRAM. Using the experience of our senior
management team, we have developed and refined an acquisition program designed
to increase our reserves and to complement our core properties. We have an
extensive staff of engineering and geoscience professionals who manage our core
properties and use their experience and expertise to target attractive
acquisition opportunities. Following an acquisition, our technical professionals
seek to enhance the value of the new assets through a proven development and
exploitation program.
MAINTAIN FINANCIAL FLEXIBILITY AND CONSERVATIVE CAPITAL STRUCTURE. We plan
to maintain our financial flexibility and a conservative capital structure,
which is critical to our ability to successfully implement our strategy.
FAILURE TO EXCHANGE YOUR NOTES.
The notes that you do not tender or that we do not accept will, following
the exchange offer, continue to be restricted securities. Therefore, you may
only transfer or resell them in a transaction registered under or exempt from
the Securities Act and applicable state securities laws. We will issue the
exchange notes in exchange for the notes under the exchange offer only following
the satisfaction of the procedures and conditions discussed under the caption
"The Exchange Offer."
Because we anticipate that most holders of the notes will elect to exchange
their notes, we expect that the liquidity of the market, if any, for any notes
remaining after the completion of the exchange offer will be substantially
limited. Any notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount outstanding of the notes.
EXECUTIVE OFFICES
Our executive offices are located at 777 Main Street, Suite 1400, Fort
Worth, Texas 76102. Our main telephone number is (817) 877-9955.
11
THE EXCHANGE OFFER
On June 25, 2002, we sold the outstanding notes to Credit Suisse First
Boston Corporation, Deutsche Bank Securities Inc., Fleet Securities, Inc.,
Goldman, Sachs & Co., Wachovia Securities, Inc., BNP PARIBAS Securities Corp.,
Fortis Investment Services, LLC, Comerica Securities, Inc., and Frost
Securities, Inc. in a private offering exempt from the registration requirements
of the Securities Act. We collectively refer to these parties as the "initial
purchasers." The initial purchasers subsequently resold these outstanding notes
(i) to qualified institutional buyers pursuant to Rule 144A under the Securities
Act and (ii) outside the United States, or U.S., in accordance with Regulation S
under the Securities Act.
When we issued the outstanding notes, we entered into a registration rights
agreement with the initial purchasers in which we agreed to use our best efforts
to complete the exchange offer.
The Exchange Offer.................. Under the terms of the exchange offer,
we are offering to exchange the exchange
notes, which have been registered under
the Securities Act, for your outstanding
notes. In order to be exchanged, an
outstanding note must be properly
tendered and accepted. The outstanding
notes may be tendered only in integral
multiples of $1,000. All outstanding
notes that are validly tendered and not
validly withdrawn will be exchanged. We
will issue the exchange notes promptly
after the expiration of the exchange
offer.
Resales of Exchange Notes........... We believe that the exchange notes
issued in the exchange offer may be
offered for resale, resold or otherwise
transferred by you without compliance
with the registration and prospectus
delivery provisions of the Securities
Act, provided that:
o you are acquiring the exchange notes
in the ordinary course of your
business;
o you are not participating, and have
no arrangement or understanding
with any person to participate, in
the distribution of the exchange
notes issued to you in the exchange
offer; and
o you are not an "affiliate" of ours.
If any of the foregoing are not true and
you transfer any exchange note without
delivering a prospectus meeting the
requirements of the Securities Act or
without an exemption from the
registration requirements of the
Securities Act, you may incur liability
under the Securities Act. We will not
assume, nor will we indemnify you
against, any such liability.
If you are a broker-dealer and receive
exchange notes for your own account in
exchange for outstanding notes that you
acquired as a result of market making or
other trading activities, you must
acknowledge that you will deliver a
prospectus meeting the requirements of
the Securities Act in connection with
any resale of the exchange notes. A
broker-dealer may use this prospectus
for an offer to resell, resale or other
transfer of the exchange notes. See
"Plan of Distribution."
Failure to Exchange Outstanding Notes
May Affect You Adversely............ If you do not exchange your outstanding
notes for exchange notes, you will no
longer be able to require us to register
the outstanding notes under the
Securities Act. In addition, you will
not be able to offer or sell the
outstanding notes unless:
12
o they are registered under the
Securities Act; or
o you offer or sell them under an
exemption from the requirements
of, or in a transaction not subject
to, the Securities Act.
Expiration Date..................... The exchange offer will expire at 5:00
p.m., New York City time, on , 2002,
unless we decide to extend the
expiration date.
Interest on the Exchange Notes...... The exchange notes will accrue interest
at 8 3/8% per year, beginning on the
last date we paid interest on the
outstanding notes you exchanged or, if
no interest has been paid on such
outstanding notes, from June 25, 2002.
We will pay interest on the exchange
notes on June 15 and December 15 of each
year, beginning on December 15, 2002.
Conditions to the Exchange Offer.... We will proceed with the exchange offer,
so long as:
o the exchange offer does not violate
any applicable law or applicable
interpretation of law by the staff
of the SEC;
o no litigation materially impairs
our ability to proceed with the
exchange offer; and
o we obtain all the governmental
approvals we deem necessary for the
exchange offer.
Procedures for Tendering Notes...... If you wish to accept the exchange
offer, you must:
o complete, sign and date the letter
of transmittal, or a facsimile of
it; and
o send the letter of transmittal and
all other documents required by it,
including the outstanding notes to
be exchanged, to Wells Fargo Bank,
National Association, as exchange
agent at the address set forth on
the cover page of the letter of
transmittal. Alternatively, you can
tender your outstanding notes by
following the procedures for
book-entry transfer, as described
in the prospectus.
Guaranteed Delivery Procedure....... If you wish to tender your outstanding
notes and you cannot get your required
documents to the exchange agent by the
expiration date, you may tender your
outstanding notes according to the
guaranteed delivery procedure described
under the section "The Exchange Offer"
under the heading "Terms of the Exchange
Offer - Guaranteed Delivery Procedure."
Withdrawal Rights................... You may withdraw the tender of your
outstanding notes at any time prior to
5:00 p.m., New York City time, on the
expiration date. To withdraw, you must
send a written or facsimile transmission
notice of withdrawal to the exchange
agent at its address set forth in this
prospectus under the section "The
Exchange Offer" under the heading
"Exchange Agent" by 5:00 p.m., New York
City time, on the expiration date.
Acceptance of Outstanding Notes and
Delivery of Exchange Notes.......... If all of the conditions to the exchange
offer are satisfied or waived, we will
accept any and all outstanding notes
that are properly tendered in the
exchange offer prior to 5:00 p.m., New
York City time, on the expiration date.
We will deliver the exchange notes
promptly after the expiration date.
13
Use of Proceeds..................... We will not receive any cash proceeds
from the issuance of the exchange notes.
Tax Considerations.................. We believe that the exchange of
outstanding notes for exchange notes
will not be a taxable exchange for
federal income tax purposes. However,
you should consult your tax adviser
about the tax consequences of this
exchange as they apply to your
individual circumstances.
Exchange Agent...................... Wells Fargo Bank, National Association,
is serving as exchange agent for the
exchange offer.
Fees and Expenses................... We will bear all expenses related to
consummating the exchange offer and
complying with the registration rights
agreement.
14
DESCRIPTION OF EXCHANGE NOTES
The exchange notes will be freely tradable and otherwise substantially
identical to the outstanding notes. The exchange notes will not have
registration rights or provisions for additional interest. The exchange notes
will evidence the same debt as the outstanding notes, and the outstanding notes
are, and the exchange notes will be, governed by the same indenture.
Issuer................................ Encore Acquisition Company.
Notes Offered......................... $150.0 million principal amount of 8 3/8%
senior subordinated notes due 2012.
Issue Price........................... 100% plus accrued interest, if any, from
June 25, 2002.
Interest Rate and Payment
Dates................................. 8 3/8% per annum payable on June 15 and
December 15 of each year, commencing on
December 15, 2002.
Maturity Date........................ June 15, 2012.
Ranking............................... The exchange notes will be our senior
subordinated unsecured obligations. They
will rank equal in right of payment with
any of our future Senior Subordinated
Indebtedness and subordinated in right
of payment to our obligations under our
Revolving Credit Facility and any of our
other existing and future Senior
Indebtedness. As of September 1, 2002,
we had approximately $16.0 million of
Senior Indebtedness. The terms
"Revolving Credit Facility," "Senior
Indebtedness" and "Senior Subordinated
Indebtedness" are defined under
"Description of the Notes -- Certain
Definitions."
Optional Redemption................... Prior to June 15, 2005, we are entitled
to redeem up to 35% of the original
principal amount of the notes, including
the original principal amount of any
additional notes we may issue, from the
proceeds of certain equity offerings, so
long as:
o we pay to the holders of such notes
a redemption price of 108.375% of
the principal amount of the notes,
plus accrued and unpaid interest to
the date of redemption; and
o at least 65% of the original
aggregate principal amount of the
notes and any additional notes
remain outstanding after each such
redemption, other than notes held by
us or our affiliates.
Prior to June 15, 2007, we are entitled
to redeem the notes as a whole at a
redemption price equal to the principal
amount of the notes plus the Applicable
Premium and accrued and unpaid interest
to the date of redemption. The term
"Applicable Premium" is defined under
"Description of the Notes -- Certain
Definitions."
On or after June 15, 2007, we may redeem
some or all of the notes at any time at
the prices listed under "Description of
the Notes -- Optional Redemption," plus
accrued and unpaid interest to the date
of redemption.
15
Guarantees............................ The payment of the principal, interest,
and premium on the notes will be fully
and unconditionally guaranteed on a
senior subordinated basis by our
existing and some of our future
restricted subsidiaries. See
"Description of the Notes --
Guarantees."
Restrictive Covenants................. The indenture governing the notes will
limit what we and our restricted
subsidiaries do. The provisions of the
indenture will limit our and such
subsidiaries' ability, among other
things, to:
o incur additional indebtedness;
o pay dividends on our capital stock
or redeem, repurchase or retire our
capital stock or subordinated
indebtedness;
o make investments;
o incur liens;
o create any consensual limitation on
the ability of our restricted
subsidiaries to pay dividends, make
loans or transfer property to us;
o engage in transactions with our
affiliates;
o sell assets, including capital
stock of our subsidiaries; and
o consolidate, merge or transfer
assets.
During any period that the notes have
investment grade ratings from both
Moody's Investors Services, Inc. and
Standard and Poor's Ratings Group and no
default has occurred and is continuing,
the foregoing covenants will cease to be
in effect with the exception of
covenants that contain limitations on
liens and on, among other things,
certain consolidations, mergers and
transfers of assets.
These covenants are subject to important
exceptions and qualifications described
under "Description of the Notes --
Certain Covenants."
Change of Control..................... If we experience a Change of Control,
subject to certain conditions, we must
give holders of the notes the
opportunity to sell to us their notes at
101% of the principal amount, plus
accrued and unpaid interest. The term
"Change of Control" is defined under
"Description of the Notes -- Change of
Control."
Absence of a Public Market for the
Exchange Notes........................ The exchange notes will generally be
freely transferable, but will be new
securities for which there may not
initially be a market. We cannot assure
you as to the development or liquidity
of any market for the exchange notes. We
do not intend to apply for listing of
the exchange notes on any securities
exchange or any automated dealer
quotation system.
16
SUMMARY FINANCIAL AND OPERATING DATA
The following table presents summary consolidated financial data for the
years ended December 31, 2001, 2000, and 1999 and for the six months ended June
30, 2002 and 2001. In the opinion of management, the accompanying unaudited
consolidated interim financial information includes all adjustments necessary to
present fairly our financial position as of June 30, 2002 and results of
operations for the six months ended June 30, 2002 and 2001. All adjustments are
of a recurring nature. These interim results are not necessarily indicative of
results for an entire year. Certain amounts of prior periods have been
reclassified in order to conform to the current period presentation. The
following data should be read in conjunction with the financial reports,
consolidated financial statements, and related notes thereto incorporated by
reference in this prospectus.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ----------------------------------------
2002 2001 2001 2000 1999
--------- ----------- ---------- ---------- ----------
INCOME STATEMENT DATA:
REVENUES:
Oil ........................................... $ 58,369 $ 53,882 $ 105,768 $ 92,441 $ 30,454
Natural gas ................................... 11,735 16,947 30,149 16,509 810
--------- ----------- ---------- ---------- ----------
Total revenues .................................. 70,104 70,829 135,917 108,950 31,264
EXPENSES:
Direct lifting costs .......................... 13,384 12,421 25,139 18,669 8,408
Production, ad valorem, and severance taxes ... 6,559 7,910 13,809 15,159 5,427
General and administrative (excluding
non-cash stock based compensation)........... 2,877 2,522 5,053 4,345 4,047
Non-cash stock based compensation ............. -- 9,587 9,587 26,012 --
Depletion, depreciation, and amortization ..... 17,332 15,388 31,721 22,103 5,283
Derivative fair value (gain) loss ............. (679) 139 680 -- --
Bad debt expense .............................. -- -- 7,005 -- --
Impairment of oil and natural gas properties .. -- -- 2,598 -- --
Other operating expense ....................... 470 -- 934 -- --
--------- ----------- ---------- ---------- ----------
Total expenses .................................. 39,943 47,967 96,526 86,288 23,165
--------- ----------- ---------- ---------- ----------
Operating income ................................ 30,161 22,862 39,391 22,662 8,099
Other income (expenses):
Interest ...................................... (3,714) (3,713) (6,041) (10,490) (4,037)
Other ......................................... 20 61 46 512 202
--------- ----------- ---------- ---------- ----------
Total other income (expenses) ................... (3,694) (3,652) (5,995) (9,978) (3,835)
--------- ----------- ---------- ---------- ----------
Income before income taxes ...................... 26,467 19,210 33,396 12,684 4,264
Provision for income taxes (current) ............ (460) (1,204) (1,919) (7,272) --
Provision for income taxes (deferred) ........... (9,597) (9,738) (14,414) (7,547) (1,259)
--------- ----------- ---------- ---------- ----------
Income (loss) before accounting change .......... 16,410 8,268 17,063 (2,135) 3,005
Cumulative effect of accounting change (net
of income taxes of $541) ....................... -- (884) (884) -- --
Extraordinary loss from early extinguishment
of debt (net of income taxes of $107) .......... (174) -- -- -- --
--------- ----------- ---------- ---------- ----------
NET INCOME (LOSS) ............................... $ 16,236(1) $ 7,384(2) $ 16,179(3) $ (2,135)(4) $ 3,005
========= =========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA (5) .................................. 45,285 47,837 90,302 70,777 13,382
EBITDA to interest expense ................... 12.2x 12.9x 14.9x 6.7x 3.3x
Total debt/EBITDA (6) ....................... 1.6x 0.7x 0.9x 2.3x 7.4x
Ratio of earnings to fixed charges (7)........ 7.8x 6.0x 6.3x 2.2x 2.0x
AS OF JUNE 30, AS OF DECEMBER 31,
---------------------------- -----------------------------------------
2002 2001 2001 2000 1999
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital ................................ $ 5,091 $ (8,506) $ 1,107 $ (15,275) $ 5,126
Total assets ................................... 493,483 363,541 402,000 343,756 215,571
Total debt ..................................... 150,000 64,540 79,107 162,045 99,250
Stockholders' equity ........................... 276,151 249,221 269,302 147,811 102,422
17
----------
(1) Net income for the six months ended June 30, 2002 includes $0.2 million
extraordinary loss from early extinguishment of debt.
(2) Net income for the six months ended June 30, 2001 includes $9.6 million of
non-cash stock based compensation and $0.9 million cumulative effect of
accounting change related to the adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities", effective January 1, 2001.
(3) Operating income for the year ended December 31, 2001 includes $9.6 million
of non-cash compensation expense, $7.0 million of bad debt expense, and $2.6
million of impairment of oil and natural gas properties, and net income for
the year ended December 31, 2001 includes a $0.9 million cumulative effect
of accounting change. See Note (2) above.
(4) Net income for the year ended December 31, 2000 includes $26.0 million of
non-cash compensation expense.
(5) EBITDA (as used herein) is defined as net income (loss) before interest
income and expense, income taxes, depletion, depreciation, and amortization,
non-cash stock based compensation expense, bad debt expense and the
associated amortization of the Enron gain, impairment of oil and natural gas
properties, cumulative effect of accounting change, and extraordinary loss
from early extinguishment of debt. While EBITDA should not be considered in
isolation or as a substitute for net income (loss), operating income (loss),
cash flow provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as
an indicator of a company's financial performance, we believe that it
provides additional information with respect to our ability to meet our
future debt service, capital expenditures and working capital requirements.
When evaluating EBITDA, investors should consider, among other factors, (i)
increasing or decreasing trends in EBITDA, (ii) whether EBITDA has remained
at positive levels historically and (iii) how EBITDA compares to levels of
interest expense. Because EBITDA excludes some, but not all, items that
affect net income and may vary among companies, the EBITDA presented above
may not be comparable to similarly titled measures of other companies. While
we believe that EBITDA may provide additional information with respect to
our ability to meet our future debt service, capital expenditures and
working capital requirements, certain functional or legal requirements of
our business may require us to utilize our available funds for other
purposes.
(6) Total debt/EBITDA for the six months ended June 30, 2002 and 2001 are
calculated using the annualized EBITDA for the corresponding periods.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of the sum of income from continuing operations before income taxes
and the cumulative effect of change in accounting method, interest expense
and the portion of the rent expense deemed to represent interest. Fixed
charges consist of interest incurred, whether expensed or capitalized,
including amortization of debt issuance costs, if applicable, and the
portion of rent expense deemed to represent interest. On a pro forma basis,
giving effect to our issuance of the notes and the application of the net
proceeds therefrom, as if such issuance had occurred on January 1, 2001, our
ratio of earnings to fixed charges would have been 3.0x for the year ended
December 31, 2001, and 2.2x for the six months ended June 30, 2002.
18
RISK FACTORS
Our material risks are described below. You should carefully consider these
risks together with all of our other information included in this prospectus and
the documents to which we have referred before deciding whether to exchange your
outstanding notes for exchange notes in the exchange offer.
RISKS RELATED TO OUR BUSINESS
Oil and Natural Gas Prices are volatile and sustained periods of low prices
could reduce or eliminate our net income and affect our ability to pay the
notes.
Historically, the markets for oil and natural gas have been volatile and are
likely to continue to be volatile in the future. Our revenues, profitability and
future growth and the book carrying value of our properties depend substantially
on prevailing oil and natural gas prices. Prices also affect the amount of
internally generated cash flow available for payment of the notes and for
capital expenditures and our ability to borrow and raise additional capital. The
amount we will be able to borrow under our Revolving Credit Facility will be
subject to periodic redetermination based in part on changing expectations of
future prices. Lower prices may also reduce the amount of oil and natural gas
that we can economically produce.
Among the factors that can cause price volatility are:
o the supply of domestic and foreign oil and natural gas;
o the ability of members of the Organization of Petroleum Exporting
Countries (OPEC) to agree upon and maintain oil prices and production
levels;
o political instability or armed conflict in oil or natural gas producing
regions;
o the level of consumer demand;
o weather conditions;
o the price and availability of alternative fuels;
o domestic and foreign governmental regulations and taxes;
o domestic political developments; and
o worldwide economic conditions.
These external factors and the volatile nature of the energy markets make it
difficult to reliably estimate future prices of oil and natural gas.
Any decline in oil and natural gas prices adversely affects our financial
condition. If the oil and natural gas industry experiences significant price
declines, we may, among other things, be unable to meet our financial
obligations or make planned expenditures.
Reserve estimates depend on many assumptions that may turn out to be inaccurate.
Any material inaccuracies in our reserve estimates or underlying assumptions
could cause the quantities and net present value of our reserves to be
overstated.
19
Estimating quantities of proved oil and natural gas reserves is a complex
process. It requires interpretations of available technical data and various
assumptions, including assumptions relating to economic factors. Any significant
inaccuracies in these interpretations or assumptions or changes of conditions
could cause the quantities and net present value of our reserves to be
overstated.
To prepare estimates of economically recoverable oil and natural gas
reserves and future net cash flows, we must analyze many variable factors, such
as historical production from the area compared with production rates from other
producing areas. We must also analyze available geological, geophysical,
production and engineering data, and the extent, quality and reliability of this
data can vary. The process also requires economic assumptions such as future
commodity prices, production costs, severance and excise taxes, capital
expenditures and workover and remedial costs, and the assumed effect of
governmental regulation. Actual results most likely will vary from our
estimates. Any significant variance could reduce the estimated quantities and
present value of reserves shown in this prospectus.
You should not assume that the present value of future net cash flows from
our proved reserves referred to in this prospectus is the current market value
of our estimated oil and natural gas reserves. In accordance with Securities and
Exchange Commission requirements, we base the estimated discounted future net
cash flows from our proved reserves on prices and costs on the date of the
estimate. Actual future prices and costs may differ materially from those used
in the net present value estimate and future net present value estimates using
then current prices and costs may be significantly less than the current
estimate.
Our failure to complete future acquisitions successfully could reduce our
earnings and slow our growth.
Acquisitions are an essential part of our growth strategy, and our ability
to acquire additional properties on favorable terms is key to our long-term
growth. There is intense competition for acquisition opportunities in our
industry. The level of competition varies depending on numerous factors.
Depending on conditions in the acquisition market, it may be difficult or
impossible for us to identify properties for acquisition or we may not be able
to make acquisitions on terms that we consider economically acceptable.
Competition for acquisitions may increase the cost of, or cause us to refrain
from, completing acquisitions. Our strategy of completing acquisitions is
dependent upon, among other things, our ability to obtain debt and equity
financing and, in some cases, regulatory approvals. Our ability to pursue our
growth strategy may be hindered if we are not able to obtain financing or
regulatory approvals. Our ability to grow through acquisitions and manage growth
will require us to continue to invest in operational, financial and management
information systems and to attract, retain, motivate and effectively manage our
employees. The inability to manage the integration of acquisitions effectively
could reduce our focus on subsequent acquisitions and current operations, which,
in turn, could negatively impact our earnings and growth. Our financial position
and results of operations may fluctuate significantly from period to period,
based on whether or not significant acquisitions are completed in particular
periods.
There are risks in acquiring producing properties.
Our business strategy includes growing our reserve base through
acquisitions. Our failure to integrate acquired businesses successfully into our
existing business, or the expense incurred in consummating future acquisitions,
could result in our company incurring unanticipated expenses and losses. In
addition, we may assume cleanup or reclamation obligations in connection with
these acquisitions, and the scope and cost of these obligations may ultimately
be materially greater than estimated at the time of the acquisition.
We are continually investigating opportunities for acquisitions. In
connection with future acquisitions, the process of integrating acquired
operations into our existing operations may result in unforeseen operating
difficulties and may require significant management attention and financial
resources that would otherwise be available for the ongoing development or
expansion of existing operations. Our ability to make future acquisitions may be
constrained by our ability to obtain additional financing.
Acquisitions may involve a number of special risks, including:
o diversion of management attention from existing operations;
20
o unexpected losses of key employees, customers and suppliers of the
acquired business;
o conforming the financial, technological and management standards,
processes, procedures and controls of the acquired business with those
of our existing operations; and
o increasing the scope, geographic diversity and complexity of our
operations.
Possible future acquisitions could result in our incurring additional debt,
contingent liabilities and expenses, all of which could have a material adverse
effect on our financial condition and operating results.
Because a substantial portion of our producing properties is located in the
Williston Basin, we are vulnerable to risks associated with operating in one
major geographic area.
We have extensive operations in the Williston Basin, particularly our Cedar
Creek Anticline properties, which represented approximately 90% of our proved
reserves at December 31, 2001. Any circumstance or event that negatively impacts
production or marketing of oil and natural gas in that geographic area could
reduce our earnings and cash flow.
Our use of hedging arrangements could result in financial losses or reduce our
income.
To reduce our exposure to fluctuations in the prices of oil and natural gas,
we currently and may in the future enter into hedging arrangements for a portion
of our oil and natural gas production. Hedging arrangements for a portion of our
oil and natural gas production expose us to risk of financial loss in some
circumstances, including when:
o production is less than expected;
o the counter-party to the hedging contract defaults on its contract
obligations; or
o there is a change in the expected differential between the underlying
price in the hedging agreement and actual prices received.
In addition, these hedging arrangements may limit the benefit we would
receive from increases in the prices for oil and natural gas.
Our limited operating history makes it difficult to predict our future
performance.
We have limited operating history dating back to 1999, which makes it
difficult to predict our future performance.
Drilling oil and natural gas wells is a high-risk activity and subjects us to a
variety of factors that we cannot control.
Drilling oil and natural gas wells, including development wells, involves
numerous risks, including the risk that no commercially productive oil or
natural gas reservoirs will be encountered. There can be no assurance that we
will recover all or any portion of our investment in new wells. The presence of
unanticipated pressures or irregularities in formations, miscalculations or
accidents may cause our drilling activities to be unsuccessful, resulting in a
total loss of our investment. In addition, we often are uncertain as to the
future cost or timing of drilling, completing and producing wells. Further, our
drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, including:
o unexpected drilling conditions;
o title problems;
21
o pressure or irregularities in formations;
o equipment failures or accidents;
o adverse weather conditions;
o compliance with environmental and other governmental requirements, which
may increase our costs or restrict our activities; and
o cost of, or shortages or delays in the availability of, drilling rigs
and equipment.
The failure to replace our reserves could adversely affect our financial
condition.
Our future success depends upon our ability to find, develop or acquire
additional oil and natural gas reserves that are economically recoverable. Our
proved reserves generally decline when reserves are produced, unless we conduct
successful exploitation or development activities or acquire properties
containing proved reserves, or both. We may not be able to find, develop or
acquire additional reserves on an economic basis. Furthermore, while our
revenues may increase if oil and natural gas prices increase significantly, our
finding costs for additional reserves could also increase.
We have limited control over the activities on properties we do not operate.
Other companies operate some of the properties in which we have an interest.
We have limited ability to influence or control the operation or future
development of these non-operated properties or the amount of capital
expenditures that we are required to fund with respect to them. Our dependence
on the operator and other working interest owners for these projects and our
limited ability to influence or control the operation and future development of
these properties could materially adversely affect the realization of our
targeted returns on capital in drilling or acquisition activities and lead to
unexpected future costs.
Our business involves many operating risks, which may result in substantial
losses, and insurance may be unavailable or inadequate to protect us against
these risks.
Our operations are subject to hazards and risks inherent in drilling for,
producing and transporting oil and natural gas, such as:
o fires;
o natural disasters;
o explosions;
o formations with abnormal pressures;
o blowouts;
o collapses of wellbore, casing or other tubulars;
o failure of oilfield drilling and service tools;
o uncontrollable flows of underground natural gas, oil and formation
water;
o pressure forcing oil or natural gas out of the wellbore at a dangerous
velocity coupled with the potential for fire or explosion;
o changes in below ground pressure in a formation that causes the surface
to collapse or crater;
22
o pipeline ruptures or cement failures;
o environmental hazards, such as natural gas leaks, oil spills and
discharges of toxic gases; and
o weather.
Any of these risks can cause substantial losses resulting from:
o injury or loss of life;
o damage to and destruction of property, natural resources and equipment;
o pollution and other environmental damage;
o regulatory investigations and penalties;
o suspension of our operations; and
o repair and remediation costs.
As protection against operating hazards, we maintain insurance coverage
against some, but not all, potential losses. We do not maintain insurance
against the loss of oil or natural gas reserves as a result of operating hazards
or business interruption insurance. Losses could occur for uninsurable or
uninsured risks, or in amounts in excess of existing insurance coverage. The
occurrence of an event that is not fully covered by insurance could harm our
financial condition and results of operations.
Recent terrorist activities and the potential for military and other actions
could adversely affect our business.
On September 11, 2001, the United States was the target of terrorist attacks
of unprecedented scope, and the United States and others instituted military
action in response. These conditions caused instability in world financial
markets and may generate global economic instability. The continued threat of
terrorism and the impact of military and other action will likely lead to
increased volatility in prices for oil and natural gas and could affect the
markets for our operations. In addition, future acts of terrorism could be
directed against companies operating in the United States. Further, the U.S.
government has issued public warnings that indicate that energy assets might be
specific targets of terrorist organizations. These developments have subjected
our operations to increased risk and, depending on their ultimate magnitude,
could have a material adverse affect on our business.
Our development and exploitation operations require substantial capital, and we
may be unable to obtain needed financing on satisfactory terms.
We make and will continue to make substantial capital expenditures in
development and exploitation projects. We intend to finance these capital
expenditures through a combination of cash flow from operations and external
financing arrangements. Additional financing sources may be required in the
future to fund our developmental drilling. Financing may not continue to be
available under existing or new financing arrangements, or on acceptable terms,
if at all. If additional capital resources are not available, we may be forced
to curtail our drilling and other activities or be forced to sell some of our
assets on an untimely or unfavorable basis.
The loss of key personnel could adversely affect our business.
We depend to a large extent on the efforts and continued employment of I.
Jon Brumley, our Chairman and Chief Executive Officer, Jon S. Brumley, our
President, and other key personnel. The loss of the services of Mr. I. Jon
Brumley or Mr. Jon S. Brumley or other key personnel could adversely affect our
business, and we do not have employment agreements with, and do not maintain key
man insurance on the lives of, any of these persons. Our drilling success and
the success of other activities integral to our operations will depend, in part,
on our ability to attract and retain experienced geologists, engineers and other
professionals. Competition for
23
experienced geologists, engineers and some other professionals is extremely
intense. If we cannot retain our technical personnel or attract additional
experienced technical personnel, our ability to compete could be harmed.
The marketability of our production is dependent upon transportation facilities
over which we have no control.
The marketability of our production depends in part upon the availability,
proximity and capacity of pipelines, natural gas gathering systems and
processing facilities. Any significant change in market factors affecting these
infrastructure facilities could harm our business. We deliver oil and natural
gas through gathering systems and pipelines that we do not own. These facilities
may not be available to us in the future.
Competition in the oil and natural gas industry is intense, and many of our
competitors have greater financial, technological and other resources than we
do.
We operate in the highly competitive areas of oil and natural gas
acquisition, development, exploitation and production. The oil and natural gas
industry is characterized by rapid and significant technological advancements
and introductions of new products and services using new technologies. We face
intense competition from independent, technology-driven companies as well as
from both major and other independent oil and natural gas companies in each of
the following areas:
o seeking to acquire desirable producing properties or new leases for
future exploration;
o marketing our oil and natural gas production;
o integrating new technologies; and
o seeking to acquire the equipment and expertise necessary to develop and
operate our properties.
Many of our competitors have financial, technological and other resources
substantially greater than ours, and some of them are fully integrated oil
companies. These companies may be able to pay more for development prospects and
productive oil and natural gas properties and may be able to define, evaluate,
bid for and purchase a greater number of properties and prospects than our
financial or human resources permit. Further, these companies may enjoy
technological advantages and may be able to implement new technologies more
rapidly than we can. Our ability to develop and exploit our oil and natural gas
properties and to acquire additional properties in the future will depend upon
our ability to successfully conduct operations, implement advanced technologies,
evaluate and select suitable properties and consummate transactions in this
highly competitive environment.
We are subject to complex federal, state and local laws and regulations that
could adversely affect our business.
Exploration for and development, exploitation, production and sale of oil
and natural gas in North America are subject to extensive federal, state,
provincial and local laws and regulations, including complex tax laws and
environmental laws and regulations. These laws and their interpretations are
subject to change, the effects of which cannot be predicted. Existing laws or
regulations, as currently interpreted or reinterpreted in the future, or future
laws or regulations could harm our business, results of operations and financial
condition. We may be required to make large expenditures to comply with
environmental and other governmental regulations. Matters subject to regulation
include:
o discharge permits for drilling operations;
o drilling bonds;
o spacing of wells;
o unitization and pooling of properties;
o environmental protection;
24
o reports concerning operations; and
o taxation.
Under these laws and regulations, we could be liable for:
o personal injuries;
o property damage;
o oil spills;
o discharge of hazardous materials;
o reclamation costs;
o remediation and clean-up costs; and
o other environmental damages.
We do not believe that full insurance coverage for all potential
environmental damages is available at a reasonable cost, and we may need to
expend significant financial and managerial resources to comply with
environmental regulations and permitting requirements. Although we believe that
our operations generally comply with applicable laws and regulations, we may
incur substantial additional costs and liabilities in our oil and natural gas
operations as a result of stricter environmental laws, regulations and
enforcement policies.
Failure to comply with these laws and regulations also may result in the
suspension or termination of our operations and subject us to administrative,
civil and criminal penalties. Further, these laws and regulations could change
in ways that substantially increase our costs. Any of these liabilities,
penalties, suspensions, terminations or regulatory changes could make it more
expensive for us to conduct our business or cause us to limit or curtail some of
our operations.
The departure of the partners and employees of Arthur Andersen who worked on our
audits will limit our ability to use the financial statements audited by Arthur
Andersen and could impact our ability to complete the exchange offer or access
public capital markets as well as our investors' ability to seek potential
recoveries from Arthur Andersen.
25
Our consolidated financial statements as of and for the years ended December
31, 2001, 2000 and 1999 incorporated by reference in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are incorporated herein in
reliance upon the authority of said firm as experts in giving said reports.
Subsequent to Arthur Andersen's completion of our 2001 audit, the firm was
convicted of obstruction of justice charges relating to a federal investigation
of Enron Corporation, has ceased practicing before the SEC, and has lost the
services of the material personnel responsible for our audit. As a result, it is
not possible to obtain Arthur Andersen's consent to the incorporation by
reference of their report in this prospectus, and we have dispensed with the
requirement to file their consent in reliance upon Rule 437a of the Securities
Act of 1933. Because Arthur Andersen has not consented to the incorporation by
reference of their report in this prospectus, you will not be able to recover
against Arthur Andersen under Section 11 of the Securities Act for any untrue
statements of a material fact contained in the financial statements audited by
Arthur Andersen or any omissions to state a material fact required to be stated
therein.
RISKS RELATED TO OUR INDEBTEDNESS
Our leverage and debt service obligations may adversely affect our cash flow and
our ability to make payments on the notes.
We had total debt of $150.0 million and stockholders' equity of $276.2
million as of June 30, 2002. Our debt levels could have several potential
consequences, including:
o it may be more difficult for us to satisfy our obligations with respect
to the notes;
o we may have difficulties borrowing money in the future for acquisitions,
to meet our operating expenses or for other purposes;
o the amount of our interest expense may increase because certain of our
borrowings not subject to interest rate protection hedges are at
variable rates of interest, which, if interest rates increase, could
result in higher interest expense;
o we will need to use a portion of the money we earn to pay principal and
interest on our debt which will reduce the amount of money we have to
finance our operations and other business activities;
o we may be more vulnerable to economic downturns and adverse developments
in our industry; and
o our debt level could limit our flexibility in planning for, or reacting
to, changes in our business and the industry in which we operate.
Our ability to meet our expenses and debt obligations will depend on our
future performance, which will be affected by financial, business, economic,
regulatory and other factors. We will not be able to control many of these
factors, such as economic conditions and governmental regulation. We cannot be
certain that our earnings will be sufficient to allow us to pay the principal
and interest on our debt, including the notes, and meet our other obligations.
If we do not have enough money, we may be required to refinance all or part of
our existing debt, including the notes, sell assets, borrow more money or raise
equity. We may not be able to refinance our debt, sell assets, borrow more money
or raise equity on terms acceptable to us, if at all. Further, failing to comply
with the financial and other restrictive covenants in our indebtedness could
result in an event of default under such indebtedness, which could adversely
affect our business, financial condition and results of operations.
In addition to our current indebtedness, we may be able to incur substantially
more debt. This could exacerbate the risks described above.
Together with our subsidiaries, we may be able to incur substantially more
debt in the future. Although the indenture governing the notes contains
restrictions on our incurrence of additional indebtedness, these restrictions
are subject to a number of qualifications and exceptions, and under certain
circumstances, indebtedness incurred in compliance with these restrictions could
be substantial. Also, these restrictions do not prevent us from incurring
26
obligations that do not constitute indebtedness. As of September 1, 2002, we had
approximately $204.0 million additional borrowing capacity under our Revolving
Credit Agreement, subject to specific requirements, including compliance with
financial covenants. To the extent new debt is added to our current debt levels,
the risks described above could substantially increase.
Any failure to meet our debt obligations could harm our business, financial
condition and results of operations.
If our cash flow and capital resources are insufficient to fund our debt
obligations, we may be forced to sell assets, seek additional equity or debt
capital or restructure our debt. In addition, any failure to make scheduled
payments of interest and principal on our outstanding indebtedness would likely
result in a reduction of our credit rating, which could harm our ability to
incur additional indebtedness on acceptable terms. Our cash flow and capital
resources may be insufficient for payment of interest on and principal of our
debt in the future, including payments on the notes, and any such alternative
measures may be unsuccessful or may not permit us to meet scheduled debt service
obligations, which could cause us to default on our obligations and impair our
liquidity.
RISKS RELATING TO THE NOTES
Subordination of the notes may limit payment on the notes.
Our obligations under the notes are subordinate in right of payment to all
of our existing and future Senior Indebtedness, including borrowings under our
Revolving Credit Facility. As of September 1, 2002,we had approximately $16.0
million of Senior Indebtedness outstanding and $204.0 million of additional
borrowing capacity under our Revolving Credit Facility. We may incur additional
Senior Indebtedness from time to time, subject to certain restrictions imposed
by the indenture governing the notes. By reason of the subordination of the
notes, in the event of our insolvency, liquidation or other reorganization,
creditors who are holders of Senior Indebtedness must be paid in full before any
payments may be made to holders of the notes. There may not be sufficient assets
remaining after payment of prior claims to pay amounts due on the notes. In
addition, under certain circumstances, no payments may be made with respect to
the notes if a default exists with respect to Senior Indebtedness. See
"Description of the Notes -- Ranking." The term "Senior Indebtedness" is defined
in "Description of the Notes -- Certain Definitions."
Federal and state statutes allow courts, under specific circumstances, to void
guarantees and require noteholders to return payments received from guarantors.
Federal and state statutes allow courts, under specific circumstances, to
void guarantees and require creditors such as the noteholders to return payments
received from guarantors. Under federal bankruptcy law and comparable provisions
of state fraudulent transfer laws, a guarantee could be voided or claims in
respect of a guarantee could be subordinated to all other debts of that
guarantor if, for example, the guarantor, at the time it issued its guarantee:
o intended to hinder, delay or defraud any present or future creditor or
received less than reasonably equivalent value or fair compensation for
the guarantee;
o was insolvent or rendered insolvent by making the guarantee;
o was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond its
ability to pay them as they mature.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, a guarantor would be considered
insolvent if:
o the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets;
27
o the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
o it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history and
other factors, we believe that the subsidiary guarantees are being incurred for
proper purposes and in good faith and that each guarantor, after giving effect
to its guarantee of the notes, will not be insolvent, have unreasonably small
capital for the business in which it is engaged or have incurred debts beyond
its ability to pay as they mature. We cannot be certain, however, that a court
would agree with our conclusions in this regard.
We may not have the ability to raise the funds necessary to finance the Change
of Control offer required by the indenture.
Upon the occurrence of a Change of Control, we will be required to offer to
repurchase all outstanding notes. However, it is possible that we will not have
sufficient funds available to us to make the required repurchase of notes. In
addition, our Revolving Credit Facility provides that the occurrence of any
Change of Control event constitutes an event of default, in which case we may be
prohibited by the subordination provisions of the notes from making any payments
with respect to the notes, including for the repurchase of the notes. Our
failure to purchase tendered notes would constitute a default under the
indenture governing the notes which, in turn, could constitute a further event
of default under our Revolving Credit Facility.
28
We are subject to restrictive debt covenants.
Our Revolving Credit Facility contains covenants that are similar to but
more restrictive to us than those contained in the indenture governing the
notes, and requires us to maintain specified financial ratios. Our ability to
meet those financial ratios can be affected by events beyond our control, and we
cannot assure you that we will meet those ratios. A breach of any of these
covenants, ratios or restrictions could result in an event of default under our
Revolving Credit Facility. Upon the occurrence of an event of default under our
Revolving Credit Facility, the lenders could elect to declare all amounts
outstanding under our Revolving Credit Facility, together with accrued interest,
to be immediately due and payable. If we were unable to repay those amounts, the
lenders could proceed against the collateral granted to them to secure the
indebtedness. If the lenders under our Revolving Credit Facility accelerate the
payment of the indebtedness, we cannot assure you that our assets would be
sufficient to repay in full that indebtedness and our other indebtedness,
including the notes.
Receipt of payment on the notes, as well as the enforcement of remedies under
the subsidiary guarantees may be limited in bankruptcy or in equity.
An investment in the notes, as in any type of security, involves insolvency
and bankruptcy considerations that investors should carefully consider. If we or
any of our subsidiary guarantors become a debtor subject to insolvency
proceedings under the bankruptcy code, it is likely to result in delays in the
payment of the notes and in the exercise of enforcement remedies under the notes
or the subsidiary guarantees. Provisions under the bankruptcy code or general
principles of equity that could result in the impairment of your rights include
the automatic stay, avoidance of preferential transfers by a trustee or a
debtor-in-possession, substantive consolidation, limitations of collectability
of unmatured interest or attorneys' fees and forced restructuring of the notes.
If a bankruptcy court substantively consolidated us and our subsidiaries,
the assets of each entity would be subject to the claims of creditors of all
entities. This would expose you not only to the usual impairments arising from
bankruptcy, but also to potential dilution of the amount ultimately recoverable
because of the larger creditor base. Furthermore, forced restructuring of the
notes could occur through the "cram-down" provision of the bankruptcy code.
Under this provision, the notes could be restructured over your objections as to
their general terms, primarily interest rate and maturity.
RISKS RELATING TO THE EXCHANGE OFFER
There is no established trading market for the exchange notes, the value of the
exchange notes may fluctuate significantly and any market for the exchange notes
may be illiquid.
The exchange notes are a new issue of securities with no established trading
market. We cannot assure you that a liquid market will develop for the exchange
notes, that you will be able to sell your exchange notes at a particular time or
that the prices you will receive when you sell will be favorable. Moreover, we
do not intend to apply for the exchange notes to be listed on any securities
exchange or to arrange for quotation on any automated dealer quotation system.
The trading prices of the exchange notes could be subject to significant
fluctuations in response to government regulations, variations in quarterly
operating results, demand for oil and natural gas, general economic conditions
and various other factors. In addition, the liquidity of the trading market in
these exchange notes and the market price quoted for the exchange notes may be
adversely affected by changes in the overall market for high yield securities
and by changes in our financial performance or prospects or in the prospects for
companies in our industry generally. As a result, we can give you no assurance
that an active trading market will develop for the exchange notes. If no active
trading market develops, you may not be able to resell your exchange notes at
their fair market value or at all. This offer to exchange the exchange notes for
the outstanding notes does not depend on any minimum amount of notes being
tendered for exchange.
29
If you do not exchange your notes, they may be difficult to resell.
It may be difficult for you to sell your notes that are not exchanged in the
exchange offer, since any outstanding notes not exchanged will remain subject to
existing transfer restrictions. These restrictions on transfer of your notes
exist because we issued the outstanding notes pursuant to an exemption from the
registration requirements of the Securities Act and applicable state securities
laws. Generally, the notes that are not exchanged for exchange notes pursuant to
the exchange offer will remain restricted securities. Accordingly, such notes
may be resold only:
o to us (upon redemption of the exchange notes or otherwise);
o pursuant to an effective registration statement under the Securities
Act;
o so long as the notes are eligible for resale pursuant to Rule 144A under
the Securities Act to a qualified institutional buyer within the meaning
of Rule 144A in a transaction meeting the requirements of Rule 144A;
o outside the United States to a foreign person pursuant to the exemption
from the registration requirements of the Securities Act provided by
Regulation S under the Securities Act;
o pursuant to an exemption from registration under the Securities Act
provided by Rule 144 thereunder (if available); or
o pursuant to another available exemption from the registration
requirements of the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
Other than in this exchange offer, we do not intend to register the notes
under the Securities Act. To the extent any notes are tendered and accepted in
the exchange offer, the trading market, if any, for the notes that remain
outstanding after the exchange offer would be adversely affected due to a
reduction in market liquidity.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. In consideration for issuing the exchange notes, we will receive in
exchange a like principal amount of outstanding notes, the form and terms of
which are the same as the form and terms of the exchange notes, except as
otherwise described in this prospectus. The outstanding notes surrendered in
exchange for the exchange notes will be retired and canceled and cannot be
reissued. Accordingly, the issuance of the exchange notes will not result in any
change in our capitalization. We have agreed to bear the expenses of the
exchange offer.
The net proceeds received from the sale of the outstanding notes were used
to repay and retire all of our outstanding indebtedness under our previous
credit facility and the fees and expenses related to our Revolving Credit
Facility and for general corporate purposes.
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CAPITALIZATION
The following table shows our actual capitalization at June 30, 2002. The
exchange offer will not affect our capitalization. After the exchange offer, we
will continue to have outstanding $150 million of 8 3/8% senior subordinated
notes due 2012.
JUNE 30, 2002
--------------
(IN THOUSANDS)
CASH AND CASH EQUIVALENTS ........................ $ 2,417
==========
TOTAL DEBT:
Revolving credit facility(1) ................... $ --
8 3/8% senior subordinated notes due 2012 ...... 150,000
----------
Total debt .................................. 150,000
STOCKHOLDERS' EQUITY:
Preferred stock ................................ --
Common stock ................................... 300
Additional paid-in capital ..................... 248,786
Retained earnings .............................. 32,275
Accumulated other comprehensive income ......... (5,210)
----------
Total stockholders' equity .................. 276,151
----------
Total capitalization ........................ $ 426,151
==========
----------
(1) Our Revolving Credit Facility has a maximum committed amount of $300.0
million, subject to a borrowing base determination, which as of
September 1, 2002 was $220.0 million subject to a semi-annual
redetermination.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the issuance of the outstanding notes, we entered into a
Registration Rights Agreement dated June 19, 2002, with the initial purchasers
of the outstanding notes. Pursuant to the Registration Rights Agreement, we
agreed to file a registration statement (the "Exchange Offer Registration
Statement"), of which this prospectus is a part, with the SEC with respect to
the exchange of the outstanding notes for registered notes having terms
substantially identical in all material respects. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Exchange Offer Registration
Statement.
Under the Registration Rights Agreement, we also agreed to, at our cost:
o file the Exchange Offer Registration Statement not later than 90 days
after June 25, 2002;
o use our best efforts to cause the Exchange Offer Registration Statement
to be declared effective under the Securities Act not later than 165
days after June 25, 2002; and
o keep the exchange offer open for not less than 20 business days nor more
than 30 business days (or longer if required by applicable law) after
the date notice of the exchange offer is mailed to the holders of the
outstanding notes.
We are conducting the exchange offer to satisfy our obligations under the
Registration Rights Agreement. The form and terms of the exchange notes are the
same as the form and terms of the outstanding notes, except the exchange notes
will be registered under the Securities Act and not contain transfer
restrictions and holders of the exchange notes will not be entitled to payment
of any additional interest.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, all outstanding notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the expiration date will be
accepted for exchange. Exchange notes of the same class will be issued in
exchange for an equal principal amount of outstanding notes accepted in the
exchange offer. Outstanding notes may be tendered only in integral multiples of
$1,000. This prospectus, together with the letter of transmittal, is being sent
to all registered holders of outstanding notes. The exchange offer is not
conditioned upon any minimum principal amount of outstanding notes being
tendered in exchange. However, our obligation to accept outstanding notes for
exchange is subject to certain conditions as set forth in this section under the
heading "-Conditions."
Outstanding notes will be deemed accepted when, as and if we have given oral
(promptly confirmed in writing) or written notice to the exchange agent. The
exchange agent will act as agent for the tendering holders of outstanding notes
for the purposes of receiving the exchange notes and delivering them to the
holders.
RESALE OF EXCHANGE NOTES
Based on interpretations of the SEC staff in no-action letters issued to
third parties, we believe that the exchange notes will be freely transferable by
holders of the outstanding notes, other than our affiliates, after the exchange
offer without further registration under the Securities Act if the holder of the
exchange notes represents that:
o it is acquiring the exchange notes in the ordinary course of its
business;
o it has no arrangement or understanding with any person to participate in
the distribution of the exchange notes; and
o it is not an "affiliate" of ours, as that term is defined in Rule 405
under the Securities Act;
provided that broker-dealers ("Participating Broker-Dealers") receiving exchange
notes in the exchange offer will have a prospectus delivery requirement with
respect to resales of such exchange notes.
32
The SEC has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to exchange notes (other
than a resale of an unsold allotment from the original sale of the outstanding
notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Rights Agreement, we are required to allow
Participating Broker-Dealers to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such exchange
notes.
A holder of outstanding notes who wishes to exchange such notes for exchange
notes in the exchange offer will be required to represent that:
o any exchange notes to be received by it will be acquired in the ordinary
course of its business;
o it has no arrangement or understanding with any person to participate in
the distribution (within the meaning of the Securities Act) of the
exchange notes; and
o it is not an "affiliate" of ours, as defined in Rule 405 under the
Securities Act, or, if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
exchange notes. If the holder is a broker-dealer that will receive exchange
notes for its own account in exchange for outstanding notes that were acquired
as a result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such exchange notes.
If a holder of outstanding notes is engaged in or intends to engage in a
distribution of the exchange notes or has any arrangement or understanding with
respect to the distribution of the exchange notes to be acquired pursuant to the
exchange offer, the holder may not rely on the applicable interpretations of the
staff of the SEC and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "expiration date" shall mean , 2002 (30 calendar days
following the commencement of the exchange offer), unless the exchange offer is
extended by us, in which case the term "expiration date" shall mean the latest
date to which the exchange offer is extended.
In order to extend the expiration date, we will notify the exchange agent of
any extension and may notify the holders of the outstanding notes by mailing an
announcement or by means of a press release or other public announcement, each
prior to 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
We reserve the right, in our sole discretion, (1) to delay acceptance of any
outstanding notes, to extend the exchange offer or to terminate the exchange
offer and not permit acceptance of outstanding notes not previously accepted if
any of the conditions set forth in this section under the heading "-Conditions"
shall have occurred and shall not have been waived by us (if permitted to be
waived), by giving notice of such delay, extension or termination to the
exchange agent, or (2) to amend the terms of the exchange offer. Any such delay
in acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral (promptly confirmed in writing) or written notice of the
delay to the exchange agent. If the exchange offer is amended in a manner
determined by us to constitute a material change, we will promptly disclose the
amendment in a manner reasonably calculated to inform the holders of the
outstanding notes of the amendment including providing public announcement, or
giving oral or written notice to the holders of the outstanding notes.
INTEREST ON THE EXCHANGE NOTES
Interest on each exchange note will accrue from the last interest payment
date on which interest was paid on the outstanding note surrendered in exchange
thereof or, if no interest has been paid on such outstanding note, from the date
of its original issue.
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SINGLE CLASS OF NOTES
The outstanding notes and the exchange notes will be treated as a single
class for all purposes under the Indenture (except for provisions dealing
specifically with registration and exchange offer issues).
PROCEDURES FOR TENDERING
To tender in the exchange offer, a holder of outstanding notes must:
o complete, sign and date the letter of transmittal or a facsimile of it;
have the signatures guaranteed if the letter of transmittal so requires;
and mail or otherwise deliver the letter of transmittal or facsimile to
the exchange agent prior to 5:00 p.m., New York City time, on the
expiration date; or
o comply with the Automated Tender Offer Program procedures of the
Depository Trust Company ("DTC") described below.
In addition, either:
o the exchange agent must receive certificates for the outstanding notes
along with the letter of transmittal;
o the exchange agent must receive, prior to the expiration date, a timely
confirmation of a book-entry transfer of the outstanding notes into the
exchange agent's account at DTC and an agent's message according to the
procedure for book-entry transfer described below; or
o the holder must comply with the guaranteed delivery procedures described
below.
The method of delivery of outstanding notes, letters of transmittal and all
other required documents is at the election and risk of the holders. As an
alternative to delivery by mail, it is recommended that holders use an overnight
or hand-delivery service. If such delivery is by mail, it is recommended that
registered mail, properly insured, with return receipt requested, be used. In
all cases, sufficient time should be allowed to assure timely delivery. No
letters of transmittal or outstanding notes should be sent to us. Holders of
outstanding notes may request their respective brokers, dealers, commercial
banks, trust companies or nominees to tender outstanding notes for them.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program ("ATOP") to tender. Participants in ATOP may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the outstanding notes to the exchange
agent in accordance with its procedures for transfer. DTC will then send an
agent's message to the exchange agent. The term "agent's message" means a
computer generated message transmitted by means of DTC's ATOP, received by the
exchange agent and forming a part of a confirmation of book-entry transfer. The
agent's message contains an express acknowledgment from the participant in the
book-entry transfer facility tendering the outstanding notes that (1) such
participant has received and agrees to be bound by the terms of the letter of
transmittal and (2) we may enforce the agreement against the participant.
The tender by a holder of outstanding notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth here and in the letter of transmittal.
Only a holder of outstanding notes may tender the outstanding notes in the
exchange offer. The term "holder" for this purpose means any person in whose
name outstanding notes are registered on our books or a person whose name
appears on a security position listing provided by DTC or any other person who
has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose outstanding notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on his or her behalf. If the beneficial owner wishes
to tender on his or her own behalf, such beneficial owner must, prior to
completing and executing the letter of transmittal and delivering his or her
outstanding notes, either make appropriate arrangements to register ownership of
the outstanding notes in such
34
owner's name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act (each, an "Eligible Institution"), unless the outstanding
notes are tendered:
o by a registered holder (or by a participant in DTC whose name appears on
a security position listing as the owner) who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal and the exchange notes are
being issued directly to such registered holder (or deposited into the
participant's account at DTC); or
o for the account of an Eligible Institution.
If the letter of transmittal is signed by the recordholder(s) of the
outstanding notes tendered, the signature must correspond with the name(s)
written on the face of the outstanding notes without alteration, enlargement or
any change whatsoever. If the letter of transmittal is signed by a participant
in DTC, the signature must correspond with the name as it appears on the
security position listing as the holder of the outstanding notes.
If the letter of transmittal is signed by a person other than the registered
holder of any outstanding notes listed therein, those outstanding notes must be
endorsed or accompanied by a properly completed bond power and a proxy that
authorize such person to tender the outstanding notes on behalf of the
registered holder, in each case as the name of the registered holder or holders
appears on the outstanding notes.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
us, evidence satisfactory to us of their authority to so act must be submitted
with the letter of transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed letter of transmittal accompanied by outstanding
notes, or a timely confirmation of a book-entry transfer of outstanding notes
into the exchange agent's account at DTC with an agent's message, or a notice of
guaranteed delivery from an Eligible Institution is received by the exchange
agent. Issuances of exchange notes in exchange for outstanding notes tendered
pursuant to a notice of guaranteed delivery by an Eligible Institution will be
made only against receipt of the letter of transmittal and any other required
documents and the tendered outstanding notes by the exchange agent or receipt of
a timely confirmation of a book-entry transfer of outstanding notes with an
agent's message into the exchange agent's account at DTC.
All questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of the tendered outstanding notes will be determined
by us in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all outstanding notes not properly
tendered or any outstanding notes which, if accepted, would, in our or our
counsel's opinion, be unlawful. We also reserve the absolute right to waive any
conditions of the exchange offer or irregularities or defects in tender as to
particular outstanding notes. Our interpretation of the terms and conditions of
the exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of outstanding notes must be cured
within the time we determine. Neither we, the exchange agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of outstanding notes, nor shall we, the exchange agent
or any other person incur any liability for failure to give such notification.
Tenders of outstanding notes will not be deemed to have been made until the
defects or irregularities have been cured or waived. Any outstanding notes
received by the exchange agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
without cost by the exchange agent to the tendering holders of such outstanding
notes, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
35
In addition, we reserve the right in our sole discretion, subject to the
provisions of the Indenture, to:
o purchase or make offers for any outstanding notes that remain
outstanding subsequent to the expiration date or, as set forth in this
section under the heading "-Expiration Date; Extensions; Amendments;
Termination," to terminate the exchange offer in accordance with the
terms of the Registration Rights Agreement; and
o to the extent permitted by applicable law, purchase outstanding notes in
the open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
exchange offer.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
all outstanding notes properly tendered will be accepted, promptly after the
expiration date, and the exchange notes will be issued promptly after acceptance
of the outstanding notes. See the heading "-Conditions" below. For purposes of
the exchange offer, outstanding notes shall be deemed to have been accepted as
validly tendered for exchange when, as and if we have given oral (promptly
confirmed in writing) or written notice thereof to the exchange agent.
In all cases, issuance of exchange notes for outstanding notes that are
accepted for exchange pursuant to the exchange offer will be made only after
timely receipt by the exchange agent of certificates for such outstanding notes
or a timely book-entry confirmation of such outstanding notes into the exchange
agent's account at DTC, properly completed and duly executed letter of
transmittal and all other required documents or an agent's message in lieu
thereof. If any tendered outstanding notes are not accepted for any reason set
forth in the terms and conditions of the exchange offer or if outstanding notes
are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged outstanding notes will be returned
without expense to the tendering holder as promptly as practicable after the
expiration or termination of the exchange offer. In the case of outstanding
notes tendered by the book-entry transfer procedures described below, the
non-exchanged outstanding notes will be credited to an account maintained with
DTC.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the outstanding notes at DTC for purposes of facilitating the exchange offer
promptly after the date of this prospectus. Any financial institution that is a
participant in DTC's system may make book-entry delivery of outstanding notes by
causing DTC to transfer such outstanding notes into the exchange agent's account
at DTC in accordance with DTC procedures for transfer. Although delivery of
outstanding notes may be effected through book-entry transfer into the exchange
agent's account at DTC, unless an agent's message is received by the exchange
agent in compliance with ATOP, a properly completed and signed letter of
transmittal or facsimile thereof with any required signature guarantees and any
other required documents must, in any case, be transmitted to and received by
the exchange agent at one of the addresses set forth below under the heading
"-Exchange Agent" prior to the expiration date or the guaranteed delivery
procedures described below must be complied with. Delivery of documents to DTC
does not constitute delivery to the exchange agent. All references in this
prospectus to deposit of outstanding notes shall be deemed to include DTC's
book-entry delivery method.
GUARANTEED DELIVERY PROCEDURE
Holders who desire to tender their outstanding notes and (1) whose
outstanding notes are not immediately available, (2) who cannot deliver their
outstanding notes, the letter of transmittal or other required documents to the
exchange agent prior to the expiration date or (3) who cannot complete the
procedures for book-entry transfer prior to the expiration date, may effect a
tender if:
o the tender is made through an Eligible Institution;
o prior to the expiration date, the exchange agent receives from such
Eligible Institution a notice of guaranteed delivery, substantially in
the form provided by us, by facsimile transmission, mail or hand
delivery:
- setting forth the name and address of the holder of the outstanding
notes and the amount of outstanding notes tendered;
36
- stating that the tender is being made thereby; and
- guaranteeing that within five business days after the expiration
date, the certificates for all physically tendered outstanding
notes, in proper form for transfer, or a book-entry confirmation, as
the case may be, the letter of transmittal or an agent's message in
lieu thereof and any other documents required by the letter of
transmittal will be deposited by the Eligible Institution with the
exchange agent; and
o the certificates for all physically tendered outstanding notes, in
proper form for transfer, or a book-entry confirmation, as the case may
be, the letter of transmittal or an agent's message in lieu thereof and
all other documents required by the letter of transmittal are received
by the exchange agent within five business days after the expiration
date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of outstanding
notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the expiration date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent prior to 5:00 p.m., New York City time on the
expiration date at the address set forth below under the heading "-Exchange
Agent" and prior to acceptance for exchange thereof by us. Any notice of
withdrawal must:
o specify the name of the person having tendered the outstanding notes to
be withdrawn (the "Depositor");
o identify the outstanding notes to be withdrawn, including, if
applicable, the registration number or numbers and total principal
amount of such outstanding notes;
o be signed by the Depositor in the same manner as the original signature
on the letter of transmittal by which such outstanding notes were
tendered (including any required signature guarantees) or be accompanied
by documents of transfer sufficient to permit the Trustee with respect
to the outstanding notes to register the transfer of such outstanding
notes into the name of the Depositor withdrawing the tender;
o specify the name in which any such outstanding notes are to be
registered, if different from that of the Depositor; and
o if the outstanding notes have been tendered pursuant to the book-entry
procedures, specify the name and number of the participant's account at
DTC to be credited, if different than that of the Depositor.
All questions as to the validity, form and eligibility, and time of receipt
of such notices will be determined by us, which determination shall be final and
binding on all parties. Any outstanding notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the exchange offer and
no exchange notes will be issued with respect to the withdrawn notes unless the
outstanding notes so withdrawn are validly re-tendered. Any outstanding notes
that have been tendered for exchange and that are not exchanged for any reason
will be returned to the holder thereof without cost to such holder (or, in the
case of outstanding notes tendered by book-entry transfer, such outstanding
notes will be credited to an account maintained with DTC for the outstanding
notes) as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn outstanding notes may be
re-tendered by following one of the procedures described above under the
headings "-Procedures for Tendering" and "-Book-Entry Transfer" at any time on
or prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or issue exchange notes for, any outstanding
notes, and we may terminate or amend the exchange offer as provided in this
prospectus before the acceptance of the outstanding notes, if:
o because of any change in law, or applicable interpretations of law by
the SEC, we determine that we are not permitted to effect the exchange
offer;
o any action or proceeding has been instituted or threatened that would
materially impair our ability to proceed with the exchange offer; or
o any government approval that we deem necessary for the consummation of
the exchange offer has not been received.
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We have no obligation to, and will not knowingly, permit acceptance of
tenders of outstanding notes:
o from affiliates of ours within the meaning of Rule 405 under the
Securities Act;
o from any other holder or holders who are not eligible to participate in
the exchange offer under applicable law or interpretations by the SEC;
or
o if the exchange notes to be received by such holder or holders of
outstanding notes in the exchange offer, upon receipt, will not be
tradable by such holder without restriction under the Securities Act and
the Exchange Act and without material restrictions under the "blue sky"
or securities laws of substantially all of the states of the United
States.
ACCOUNTING TREATMENT
We will record the exchange notes in our accounting records at the same
carrying value as the outstanding notes, as reflected in our accounting records
on the date of the exchange. Accordingly, we will not recognize any gain or loss
for accounting purposes. The costs of the exchange offer and the unamortized
expenses related to the issuance of the outstanding notes will be amortized over
the term of the exchange notes.
EXCHANGE AGENT
Wells Fargo Bank, National Association has been appointed as exchange agent
for the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for a notice of guaranteed delivery should be directed to the exchange
agent addressed as follows:
By Hand or Overnight Delivery: Facsimile Transmissions By Registered or Certified Mail:
(Eligible Institutions Only):
Wells Fargo Bank, Wells Fargo Bank, Wells Fargo Bank,
National Association National Association National Association
Corporate Trust Operations (612) 667-4927 Corporate Trust Operations
MAC N9303-121 Attention: MAC N9303-121
Sixth and Marquette To Confirm by Telephone P.O. Box 1517
Minneapolis, MN 55479 or for Information Call: Minneapolis, MN 55480-1517
(800) 344-5128
FEES AND EXPENSES
We will pay the expenses of soliciting tenders under the exchange offer. The
principal solicitation for tenders pursuant to the exchange offer is being made
by mail; however, additional solicitations may be made by telegraph, telephone,
telecopy or in person by officers and regular employees of ours.
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We have not retained any dealer-manager in connection with the exchange
offer and we will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse the exchange
agent for its reasonable out-of-pocket expenses. We may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of the prospectus,
letters of transmittal and related documents to the beneficial owners of the
outstanding notes, and in handling or forwarding tenders for exchange.
We will pay the expenses to be incurred in connection with the exchange
offer. Such expenses include SEC registration fees, fees and expenses of the
exchange agent and trustee, accounting and legal fees and printing costs, among
others.
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes pursuant to the exchange offer. If, however:
o certificates representing exchange notes or outstanding notes for
principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the outstanding notes
tendered; or
o if tendered outstanding notes are registered in the name of any person
other than the person signing the letter of transmittal; or
o if a transfer tax is imposed for any reason other than the exchange of
outstanding notes pursuant to the exchange offer;
then the amount of any such transfer taxes, whether imposed on the registered
holder or any other persons, will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption from such taxes is
not submitted with the letter of transmittal, the amount of the transfer taxes
will be billed directly to the tendering holder.
SHELF REGISTRATION STATEMENT
We may be required to file a shelf registration statement ("Shelf
Registration Statement") to permit certain holders of outstanding notes or
exchange notes to resell such notes without being limited by transfer
restrictions. We will only be required to file a Shelf Registration Statement
if:
o there is a change in law or applicable interpretations of law by the
staff of the SEC and, as a result, we are not permitted to effect the
exchange offer;
o for any other reason the Exchange Offer Registration Statement is not
declared effective within 165 days of the original issuance date of the
outstanding notes or the exchange offer is not consummated within 45
days after the date the Exchange Offer Registration Statement is
declared effective under the Securities Act;
o under certain circumstances the initial purchasers so request with
respect to outstanding notes that are not eligible to be exchanged for
exchange notes in the exchange offer;
o under certain circumstances any holder of outstanding notes (other than
an initial purchaser) is not eligible to participate in the exchange
offer or does not receive freely tradable exchange notes in the exchange
offer other than by reason of such holder being an affiliate of ours; or
o in the case that an initial purchaser participates in the exchange offer
or otherwise acquires exchange notes pursuant to the Registration Rights
Agreement, such initial purchaser does not receive freely tradable
exchange notes in exchange for outstanding notes constituting any
portion of an unsold allotment (it being understood that the requirement
that a Participating Broker-Dealer deliver the prospectus contained in
the Exchange Offer Registration Statement in connection with sales of
exchange notes will not result in such exchange notes being not "freely
tradable").
In the event we are required to file a Shelf Registration Statement, we will, at
our cost:
o file the Shelf Registration Statement with the SEC covering resales of
the outstanding notes or the exchange notes, as the case may be, as
promptly as practicable;
39
o use our best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act; and
o use our best efforts to keep the Shelf Registration Statement effective
until two years after its effective date.
A holder selling outstanding notes or exchange notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a copy of the
prospectus to purchasers. If we are required to file a Shelf Registration
Statement, we will:
o provide to each holder for whom the Shelf Registration Statement was
filed copies of the prospectus which is a part of the Shelf Registration
Statement;
o notify each such holder when the Shelf Registration Statement has become
effective; and
o take certain other actions as are required to permit unrestricted
resales of the outstanding notes or the exchange notes, as the case may
be.
Any such holder will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
ADDITIONAL INTEREST
In the event that:
o on or prior to the 90th day after June 25, 2002, neither the Exchange
Offer Registration Statement nor the Shelf Registration Statement has
been filed with the SEC;
o on or prior to the 165th day after June 25, 2002, neither the Exchange
Offer Registration Statement nor the Shelf Registration Statement has
been declared effective;
o on or prior to the 45th day after the date the Exchange Offer
Registration Statement is declared effective under the Securities Act,
neither the exchange offer has been consummated nor the Shelf
Registration Statement has been declared effective; or
o after either the Exchange Offer Registration Statement or the Shelf
Registration Statement has been declared effective, such Registration
Statement thereafter ceases to be effective or usable (subject to
certain exceptions) in connection with resales of outstanding notes or
exchange notes in accordance with and during the periods specified in
the Registration Rights Agreement
(each such event referred to above in this paragraph, a "Registration Default");
then, as liquidated damages for such Registration Default, additional interest
("Special Interest") will accrue on the principal amount of the outstanding
notes and the exchange notes (in addition to the stated interest on the
outstanding notes and the exchange notes) from and including the date on which
any such Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured.
Special Interest will accrue in an amount equal to $.05 per calendar week
per $1,000 principal amount of the outstanding notes and exchange notes during
the 90-day period immediately following the occurrence of such Registration
Default and shall increase by an amount equal to $.05 per calendar week per
$1,000 principal amount of the outstanding notes and exchange notes at the end
of each subsequent 90-day period, but in no event shall such amount exceed $.30
per calendar week per $1,000 principal amount of the outstanding notes and
exchange notes.
FAILURE TO EXCHANGE OUTSTANDING NOTES MAY AFFECT YOU ADVERSELY
Upon consummation of the exchange offer, subject to certain exceptions,
holders of outstanding notes who do not exchange their outstanding notes for
exchange notes in the exchange offer will no longer be entitled to registration
rights and will not be able to offer or sell their outstanding notes, unless the
outstanding notes are subsequently registered under the Securities Act (which,
subject to certain limited exceptions, we will have no
40
obligation to do), except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws.
DESCRIPTION OF CERTAIN INDEBTEDNESS
REVOLVING CREDIT FACILITY
On June 25, 2002, we entered into a new Revolving Credit Facility with a
syndicate of banks, which replaced our prior credit facility. All of our
subsidiaries are guarantors of our Revolving Credit Facility. The maximum amount
available under our Revolving Credit Facility is $300.0 million, which is
secured by a first priority lien on our proved oil and natural gas reserves
representing at least 80% of the present discounted reserve value. As of
September 1, 2002, the amount available to us under our Revolving Credit
Facility is $220.0 million which may be increased and decreased subject to a
borrowing base calculation. The maturity date is June 25, 2006.
We may choose between two base loan interest rates. The first base interest
rate (the "ABR Rate") is a rate calculated as the highest of:
o the annual rate of interest announced by the Agent Bank as its "base
rate"; and
o the federal funds effective rate plus 0.5%;
plus a margin of 0% to 0.75% based upon the level of borrowing. The second base
rate (the "LIBOR Rate") is equal to the London InterBank offered rate plus a
margin of 0% to 1.75% based upon the level of borrowing. In addition to the
foregoing rates, we must pay a commitment fee on unused portions of the
available borrowing base. Interest on ABR Rate loans is paid quarterly in
arrears. At our election, interest periods for LIBOR Rate loans are one, three,
six or twelve months, and interest is payable at the end of each interest period
and at the end of each succeeding three month period.
Borrowings under our Revolving Credit Facility are guaranteed by each of our
subsidiaries and are secured by a mortgage of our oil and natural gas properties
and a pledge of the capital stock and equity interests of our subsidiaries. We
pay customary fees to the various banks and agents.
The borrowing base is to be redetermined each June 1 and December 1. The
bank syndicate has the ability to request one additional borrowing base
redetermination per year, and we are permitted to request two additional
borrowing base redeterminations per year. Generally, if amounts outstanding ever
exceed the borrowing base, we must reduce the amounts outstanding to the
redetermined borrowing base within six months, provided that if amounts
outstanding exceed the borrowing base as a result of any sale of our assets, we
must reduce the amounts outstanding immediately upon consummation of the sale.
Our Revolving Credit Facility contains a number of negative and financial
covenants. These covenants include, among others:
o a prohibition against incurring debt in excess of $15.0 million, except
for borrowings under our Revolving Credit Facility, the outstanding
notes, and the exchange notes;
o a prohibition against paying dividends or purchasing or redeeming
capital stock or prepaying indebtedness (including the outstanding notes
and the exchange notes);
o a restriction on creating liens on our assets;
o restrictions on merging and selling assets outside the ordinary course
of business;
41
o restrictions on use of proceeds, investments, transactions with
affiliates, changing our principal business and incurring funding
obligations under ERISA;
o a provision limiting oil and natural gas hedging transactions to a
volume not exceeding 75% of anticipated production from proved reserves;
o a requirement that we maintain a ratio of consolidated current assets to
consolidated current liabilities of not less than 1.0 to 1.0; and
o a requirement that we maintain a ratio of consolidated EBITDA (as
defined in our Revolving Credit Facility agreement) to the sum of
consolidated net interest expense plus our letter of credit fees of not
less than 2.5 to 1.0.
DESCRIPTION OF THE NOTES
The outstanding notes were, and the exchange notes will be, issued under an
Indenture (the "Indenture") dated June 25, 2002, between Encore and Wells Fargo
Bank, National Association, as trustee (the "Trustee"). The terms of the notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act. In this section, we collectively refer to
the outstanding notes and the exchange notes as the "Notes."
Certain terms used in this description are defined under the subheading "--
Certain Definitions". In this description, the words "Company," "we," "us" and
"our" refer only to Encore Acquisition Company and not to any of its
subsidiaries.
The following description is only a summary of the material provisions of
the Indenture and the Registration Rights Agreement. We urge you to read the
Indenture and the Registration Rights Agreement because they, not this
description, define your rights as holders of these Notes. A copy of the
Indenture has been filed with the SEC as an exhibit to the registration
statement of which this prospectus is a part and is available from us upon
request.
BRIEF DESCRIPTION OF THE NOTES
The exchange notes will be issued in exchange for the outstanding notes
pursuant to the Registration Rights Agreement, as further described in "The
Exchange Offer." The terms of the exchange notes are substantially identical to
the terms of the outstanding notes except that the exchange notes will have been
registered under the Securities Act and, therefore, will not contain terms with
respect to restrictions on their transfer and will not contain provisions
providing for an increase in the interest rate thereon under circumstances
described under "The Exchange Offer - Additional Interest," the provisions of
which will terminate upon consummation of the exchange offer.
These Notes:
o are unsecured senior subordinated obligations of the Company;
o are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
o are senior in right of payment to any future Subordinated Obligations of
the Company;
o are guaranteed by each Subsidiary Guarantor; and
PRINCIPAL, MATURITY AND INTEREST
The Company will issue the Notes initially with a maximum aggregate
principal amount of $150 million, in denominations of $1,000 and any integral
multiple of $1,000. The Notes will mature on June 15, 2012. Subject to our
compliance with the covenant described under the subheading "-- Certain
Covenants -- Limitation on Indebtedness", we are entitled to, without the
consent of the holders, issue more Notes under the Indenture on the same terms
and conditions and with the same CUSIP numbers as the Notes being offered
42
hereby in an unlimited principal amount (the "Additional Notes"). The Notes and
the Additional Notes, if any, will be treated as a single class for all purposes
of the Indenture, including waivers, amendments, redemptions and offers to
purchase. Except as specifically otherwise provided or unless the context
otherwise requires, for all purposes of the Indenture and this "Description of
the Notes", references to the Notes include any Additional Notes actually
issued.
Interest on these Notes will accrue at the rate of 8 3/8% per annum and will
be payable semiannually in arrears on June 15 and December 15, commencing on
December 15, 2002. We will make each interest payment to the holders of record
of these Notes on the immediately preceding June 1 and December 1. We will pay
interest on overdue principal at 1% per annum in excess of the above rate and
will pay interest on overdue installments of interest at such higher rate to the
extent lawful.
Interest on these Notes will accrue from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Additional interest may accrue on the Notes in certain circumstances
pursuant to the Registration Rights Agreement.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the Notes at
our option prior to June 15, 2007.
On and after June 15, 2007, we will be entitled at our option to redeem all
or a portion of these Notes upon not less than 30 nor more than 60 days' notice,
at the redemption prices (expressed in percentages of principal amount on the
redemption date), plus accrued interest to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12-month period
commencing on June 15 of the years set forth below:
REDEMPTION
PERIOD PRICE
------ ----------
2007..................... 104.188%
2008..................... 102.792%
2009..................... 101.396%
2010 and thereafter...... 100.000%
Prior to June 15, 2005, we may at our option on one or more occasions redeem
Notes in an aggregate principal amount not to exceed 35% of the aggregate
principal amount of the Notes issued prior to the redemption date at a
redemption price (expressed as a percentage of principal amount) of 108.375%,
plus accrued and unpaid interest to the redemption date, with the net cash
proceeds from one or more Public Equity Offerings; provided that
(1) at least 65% of such aggregate principal amount of Notes remains
outstanding immediately after the occurrence of each such redemption
(other than Notes held, directly or indirectly, by the Company or its
Affiliates); and
(2) each such redemption occurs within 90 days after the date of the related
Public Equity Offering.
We will be entitled, at our option, at any time as a whole prior to June 15,
2007, to redeem the Notes at a redemption price equal to the sum of:
(1) the principal amount thereof, plus
(2) accrued and unpaid interest, if any, to the redemption date, plus
(3) the Applicable Premium at the redemption date.
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SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the Notes at any time, the Trustee will
select Notes on a pro rata basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem Notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note will state the portion of the principal amount thereof to
be redeemed. We will issue a new Note in a principal amount equal to the
unredeemed portion of the original Note in the name of the holder upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund
payments with respect to the Notes. However, under certain circumstances, we may
be required to offer to purchase Notes as described under the captions "--
Change of Control" and "-- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock". We may at any time and from time to time purchase Notes
in the open market or otherwise.
GUARANTIES
The Subsidiary Guarantors will jointly and severally guarantee, on a senior
subordinated basis, our obligations under these Notes. The Subsidiary Guarantors
include all of our Subsidiaries existing on the Issue Date and, subject to
certain exceptions, will include any of our future Restricted Subsidiaries that
Incur Indebtedness. The obligations of each Subsidiary Guarantor under its
Subsidiary Guaranty will be limited as necessary to prevent that Subsidiary
Guaranty from constituting a fraudulent conveyance under applicable law. See
"Risk Factors -- Risks Relating to the Notes -- Federal and state statutes allow
courts, under specific circumstances, to void guarantees and require noteholders
to return payments received from guarantors."
Each Subsidiary Guarantor that makes a payment under its Subsidiary Guaranty
will be entitled upon payment in full of all guarantied obligations under the
Indenture to a contribution from each other Subsidiary Guarantor in an amount
equal to such other Subsidiary Guarantor's pro rata portion of such payment
based on the respective net assets of all the Subsidiary Guarantors at the time
of such payment determined in accordance with GAAP.
If a Subsidiary Guaranty were rendered voidable, it could be subordinated by
a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors -- Risks
Relating to the Notes -- Federal and state statutes allow courts, under specific
circumstances, to void guarantees and require noteholders to return payments
received from guarantors."
The Subsidiary Guaranty of a Subsidiary Guarantor will be released:
(1) upon the sale or other disposition (including by way of
consolidation or merger) of that Subsidiary Guarantor;
(2) upon the sale or disposition of all or substantially all the assets
of that Subsidiary Guarantor; or
(3) upon the designation of such Subsidiary Guarantor as an Unrestricted
Subsidiary;
in each case other than to the Company or an Affiliate of the Company and as
permitted by the Indenture.
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RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium, if any, and interest on the Notes
and the payment of any Subsidiary Guaranty will be subordinate in right of
payment to the prior payment in full of all Senior Indebtedness of the Company
or the relevant Subsidiary Guarantor, as the case may be, including the
obligations of the Company and such Subsidiary Guarantor under the Revolving
Credit Facility.
As of September 1, 2002:
(1) the Company's Senior Indebtedness was approximately $16.0 million,
all of which is secured indebtedness; and
(2) the Senior Indebtedness of the Subsidiary Guarantors was
approximately $16.0 million, all of which consisted of their respective
guaranties of Senior Indebtedness of the Company under our Revolving Credit
Facility.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company and the Subsidiary Guarantors may incur, under
certain circumstances the amount of such Indebtedness could be substantial and,
in any case, such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Limitation on Indebtedness".
LIABILITIES OF SUBSIDIARIES VERSUS NOTES
All of our operations are conducted through our subsidiaries. Although all
of our current subsidiaries are guaranteeing the Notes, we may in the future
have subsidiaries that are not Subsidiary Guarantors. Claims of creditors of
such non-guarantor subsidiaries, including trade creditors holding indebtedness
or guarantees issued by such non-guarantor subsidiaries, and claims of preferred
stockholders of such non-guarantor subsidiaries generally will have priority
with respect to the assets and earnings of such non-guarantor subsidiaries over
the claims of our creditors, including holders of the Notes, even if such claims
do not constitute Senior Indebtedness. Accordingly, the Notes will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders, if any, of such non-guarantor subsidiaries.
Although the Indenture limits the incurrence of Indebtedness and preferred
stock of certain of our subsidiaries, such limitation is subject to a number of
significant qualifications. Moreover, the Indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness under the Indenture. See "-- Certain Covenants --
Limitation on Indebtedness".
OTHER SENIOR SUBORDINATED INDEBTEDNESS VERSUS NOTES
Only Indebtedness of the Company or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the Notes and the relevant Subsidiary Guaranty
in accordance with the provisions of the Indenture. The Notes and each
Subsidiary Guaranty will in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company and the relevant Subsidiary Guarantor,
respectively.
We and the Subsidiary Guarantors have agreed in the Indenture that we and
they will not Incur, directly or indirectly, any Indebtedness that is
contractually subordinate or junior in right of payment to our Senior
Indebtedness or the Senior Indebtedness of such Subsidiary Guarantors, unless
such Indebtedness is Senior Subordinated Indebtedness of the Company or the
Subsidiary Guarantors, as applicable, or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness of the Company or the Subsidiary
Guarantors, as applicable. The Indenture does not treat unsecured Indebtedness
as subordinated or junior to Secured Indebtedness merely because it is
unsecured.
PAYMENT OF NOTES
We are not permitted to pay principal of, premium, if any, or interest on
the Notes or make any deposit pursuant to the provisions described under "--
Defeasance" below and may not purchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes") if either of the following occurs (a "Payment
Default"):
45
(1) any Obligation on any Designated Senior Indebtedness of the Company
is not paid in full in cash when due; or
(2) any other default on Designated Senior Indebtedness of the Company
occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms;
unless, in either case, the Payment Default has been cured or waived and any
such acceleration has been rescinded or such Designated Senior Indebtedness has
been paid in full in cash. Regardless of the foregoing, we are permitted to pay
the Notes if we and the Trustee receive written notice approving such payment
from the Representatives of all Designated Senior Indebtedness with respect to
which the Payment Default has occurred and is continuing.
During the continuance of any default (other than a Payment Default) with
respect to any Designated Senior Indebtedness of the Company pursuant to which
the maturity thereof may be accelerated without further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods, we are not permitted to pay the Notes for a period (a
"Payment Blockage Period") commencing upon the receipt by the Trustee (with a
copy to us) of written notice (a "Blockage Notice") of such default from the
Representative of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter. The Payment
Blockage Period will end earlier if such Payment Blockage Period is terminated:
(1) by written notice to the Trustee and us from the Person or Persons
who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is cured,
waived or otherwise no longer continuing; or
(3) because such Designated Senior Indebtedness has been discharged or
repaid in full in cash.
Notwithstanding the provisions described above, unless the holders of such
Designated Senior Indebtedness or the Representative of such Designated Senior
Indebtedness have accelerated the maturity of such Designated Senior
Indebtedness, we are permitted to resume paying the Notes after the end of such
Payment Blockage Period. The Notes shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period irrespective of the number of
defaults with respect to Designated Senior Indebtedness of the Company during
such period, except that if any Blockage Notice is delivered to the Trustee by
or on behalf of holders of Designated Senior Indebtedness of the Company (other
than holders of the Bank Indebtedness), a Representative of holders of Bank
Indebtedness may give another Blockage Notice within such period. However, in no
event may the total number of days during which any Payment Blockage Period or
Periods is in effect exceed 179 days in the aggregate during any consecutive
360-day period, and there must be 181 days during any consecutive 360-day period
during which no Payment Blockage Period is in effect.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property:
(1) the holders of Senior Indebtedness of the Company will be entitled
to receive payment in full in cash of such Senior Indebtedness before the
holders of the Notes are entitled to receive any payment;
(2) until the Senior Indebtedness of the Company is paid in full in
cash, any payment or distribution to which holders of the Notes would be
entitled but for the subordination provisions of the Indenture will be made
to holders of such Senior Indebtedness as their interests may appear, except
that holders of Notes may receive certain Capital Stock and subordinated
debt obligations; and
(3) if a distribution is made to holders of the Notes that, due to the
subordination provisions, should not have been made to them, such holders of
the Notes are required to hold it in trust for the holders of Senior
Indebtedness of the Company and pay it over to them as their interests may
appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee must promptly notify the holders of Designated Senior
Indebtedness of the Company or the Representative of such Designated Senior
Indebtedness of the acceleration.
46
A Subsidiary Guarantor's obligations under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior Indebtedness
of such Subsidiary Guarantor. The terms of the subordination provisions
described above with respect to the Company's obligations under the Notes apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of the subordination provisions contained in the Indenture, in the
event of a liquidation or insolvency proceeding, creditors of the Company or a
Subsidiary Guarantor who are holders of Senior Indebtedness of the Company or a
Subsidiary Guarantor, as the case may be, may recover more, ratably, than the
holders of the Notes, and creditors of ours who are not holders of Senior
Indebtedness may recover less, ratably, than holders of our Senior Indebtedness
and may recover more, ratably, than the holders of the Notes.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "-- Defeasance".
BOOK-ENTRY, DELIVERY AND FORM
We will initially issue the Notes in the form of one or more global notes
(the "Global Note"). The Global Note will be deposited with, or on behalf of,
The Depository Trust Company (the "Depository") and registered in the name of
the Depository or its nominee. Except as set forth below, the Global Note may be
transferred, in whole and not in part, and only to the Depository or another
nominee of the Depository. You may hold your beneficial interests in the Global
Note directly through the Depository if you have an account with the Depository
or indirectly through organizations which have accounts with the Depository.
The Depository has advised the Company as follows: the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the initial purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
(collectively, the "indirect participants") that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository, upon the deposit of the Global Note with the Depository, the
Depository will credit, on its book-entry registration and transfer system, the
principal amount of Notes represented by such Global Note to the accounts of
participants. The accounts to be credited shall be designated by the initial
purchasers. Ownership of beneficial interests in the Global Note will be limited
to participants or persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depository (with respect to participants' interests), the
participants and the indirect participants (with respect to the owners of
beneficial interests in the Global Note other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of any related Notes
evidenced by the Global Note for all purposes of such Notes and the Indenture.
Except as set forth below, as an owner of a beneficial interest in the Global
Note, you will not be entitled to have the Notes represented by the Global Note
registered in your name, will not receive or be entitled to receive physical
delivery of certificated Notes
47
and will not be considered to be the owner or holder of any Notes under the
Global Note. We understand that under existing industry practice, in the event
an owner of a beneficial interest in the Global Note desires to take any action
that the Depository, as the holder of the Global Note, is entitled to take, the
Depository would authorize the participants to take such action, and the
participants would authorize beneficial owners owning through such participants
to take such action or would otherwise act upon the instructions of beneficial
owners owning through them.
We will make payments of principal of, premium, if any, and interest on
Notes represented by the Global Note registered in the name of and held by the
Depository or its nominee to the Depository or its nominee, as the case may be,
as the registered owner and holder of the Global Note.
We expect that the Depository or its nominee, upon receipt of any payment of
principal of, premium, if any, or interest on the Global Note will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. We also expect that
payments by participants or indirect participants to owners of beneficial
interests in the Global Note held through such participants or indirect
participants will be governed by standing instructions and customary practices
and will be the responsibility of such participants or indirect participants. We
will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership interests in
the Global Note for any Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for any other aspect
of the relationship between the Depository and its participants or indirect
participants or the relationship between such participants or indirect
participants and the owners of beneficial interests in the Global Note owning
through such participants.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility or liability for the
performance by the Depository or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
Subject to certain conditions, the Notes represented by the Global Note are
exchangeable for certificated Notes in definitive form of like tenor in
denominations of $1,000 and integral multiples thereof if:
(1) the Depository notifies us that it is unwilling or unable to
continue as Depository for the Global Note or the Depository ceases to be a
clearing agency registered under the Exchange Act and, in either case, we
are unable to locate a qualified successor within 90 days;
(2) we in our discretion at any time determine not to have all the Notes
represented by the Global Note; or
(3) a default entitling the holders of the Notes to accelerate the
maturity thereof has occurred and is continuing.
Any Note that is exchangeable as described above is exchangeable for
certificated Notes issuable in authorized denominations and registered in such
names as the Depository shall direct. Subject to the foregoing, the Global Note
is not exchangeable, except for a Global Note of the same aggregate denomination
to be registered in the name of the Depository or its nominee. In addition, such
certificates will bear the legend referred to under "Transfer Restrictions"
(unless we determine otherwise in accordance with applicable law), subject, with
respect to such certificated Notes, to the provisions of such legend.
SAME-DAY PAYMENT
The Indenture requires us to make payments in respect of Notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the U.S. dollar accounts with banks in the U.S. specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address.
48
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), then unless the Company shall have exercised its right to redeem all
the Notes each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof on the date of purchase plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), except that for purposes of this clause (1) such person shall
be deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 35% of
the total voting power of the Voting Stock of the Company; provided,
however, that the Permitted Holders beneficially own (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock
of the Company than such other person and do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (1),
such other person shall be deemed to beneficially own any Voting Stock of a
Person (the "specified person") held by any other Person (the "parent
entity"), if such other person is the beneficial owner (as defined above in
this clause (1)), directly or indirectly, of more than 35% of the voting
power of the Voting Stock of such parent entity and the Permitted Holders
beneficially own (as defined in this Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser percentage
of the voting power of the Voting Stock of such parent entity and do not
have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of such parent
entity);
(2) during any period of two consecutive years, individuals who, at the
beginning of such period, constituted the Board of Directors (together with
(A) any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by a
vote of the majority of the directors of the Company then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved and (B) any
representative of a Permitted Holder) cease for any reason to constitute a
majority of the Board of Directors then in office;
(3) the adoption of a plan relating to the liquidation or dissolution of
the Company; or
(4) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the sale
of all or substantially all the assets of the Company (determined on a
consolidated basis) to another Person (other than, in all such cases, a
Person that is controlled by the Permitted Holders), other than a
transaction following which (A) in the case of a merger or consolidation
transaction, holders of securities that represented 100% of the Voting Stock
of the Company immediately prior to such transaction (or other securities
into which such securities are converted as part of such merger or
consolidation transaction) own directly or indirectly at least a majority of
the voting power of the Voting Stock of the surviving Person in such merger
or consolidation transaction immediately after such transaction and (B) in
the case of a sale of assets transaction, each transferee becomes an obligor
in respect of the Notes and a Subsidiary of the transferor of such assets.
Unless the Company has exercised its right to redeem all the Notes and shall
have delivered an irrevocable notice of redemption to the Trustee, within 30
days following any Change of Control, we will mail a notice to each Holder with
a copy to the Trustee (the "Change of Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require us to purchase such Holder's Notes at a purchase price in
cash equal to 101% of the principal amount thereof on the date of purchase,
plus accrued and unpaid interest, if any, to the date of purchase (subject
to the right of Holders of record on the relevant record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma historical income,
cash flow and capitalization, in each case after giving effect to such
Change of Control);
49
(3) the purchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by us, consistent with the covenant
described hereunder, that a Holder must follow in order to have its Notes
purchased.
We will not be required to make a Change of Control Offer following a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by us and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of Notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached our obligations under the covenant described hereunder by virtue of our
compliance with such securities laws or regulations.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature is a result of negotiations between the Company and the initial
purchasers. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we could decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenants described under "-- Certain Covenants -- Limitation on
Indebtedness". Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the Notes then outstanding. Except
for the limitations contained in such covenants, however, the Indenture will not
contain any covenants or provisions that may afford holders of the Notes
protection in the event of a highly leveraged transaction.
The Revolving Credit Facility provides that the occurrence of any change of
control event with respect to the Company constitutes a default thereunder. In
the event that at the time of such Change of Control the terms of any Senior
Indebtedness of the Company (including the Revolving Credit Facility) restrict
or prohibit the purchase of Notes following such Change of Control, then prior
to the mailing of the notice to Holders but in any event within 30 days
following any Change of Control, we undertake to (1) repay in full all such
Senior Indebtedness or (2) obtain the requisite consents under the agreements
governing such Senior Indebtedness to permit the repurchase of the Notes. If we
do not repay such Senior Indebtedness or obtain such consents, we will remain
prohibited from purchasing Notes. In such case, our failure to comply with the
foregoing undertaking, after appropriate notice and lapse of time would result
in an Event of Default under the Indenture, which would, in turn, constitute a
default under the Credit Agreement. In such circumstances, the subordination
provisions in the Indenture would likely restrict payment to the Holders of
Notes.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the holders of their right to require us to repurchase the Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on us. Finally,
our ability to pay cash to the holders of Notes following the occurrence of a
Change of Control may be limited by our then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases.
The definition of "Change of Control" includes a disposition of all or
substantially all of the assets of the Company (determined on a consolidated
basis) to any Person. Although there is a limited body of case law interpreting
the phrase "substantially all", there is no precise established definition of
the phrase under applicable
50
law. Accordingly, in certain circumstances there may be a degree of uncertainty
as to whether a particular transaction would involve a disposition of "all or
substantially all" of the assets of the Company. As a result, it may be unclear
as to whether a Change of Control has occurred and whether a holder of Notes may
require the Company to make an offer to repurchase the Notes as described above.
The provisions under the Indenture relative to our obligation to make an
offer to repurchase the Notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
COVENANT SUSPENSION
During any period that the Notes have a rating equal to or higher than BBB--
by S&P and Baa3 by Moody's ("Investment Grade Ratings") and no Default has
occurred and is continuing, the Company and the Restricted Subsidiaries will not
be subject to the following covenants:
(a) paragraphs (a) through (d) of the covenant described under "--
Limitation on Indebtedness;"
(b) "-- Limitation on Restricted Payments;"
(c) "-- Limitation on Restrictions on Distributions from Restricted
Subsidiaries;"
(d) "-- Limitation on Sales of Assets and Subsidiary Stock;"
(e) "-- Limitation on Affiliate Transactions;"
(f) clause (3) of the covenant described under "-- Merger and
Consolidation;" and
(g) "-- Future Guarantors,"
(collectively, the "Suspended Covenants"). In the event that the Company and the
Restricted Subsidiaries are not subject to the Suspended Covenants for any
period of time as a result of the preceding sentence, and subsequently one or
both of S&P and Moody's downgrades the rating assigned to the Notes below BBB--,
in the case of S&P, and below Baa3, in the case of Moody's, then the Company and
the Restricted Subsidiaries will thereafter again be subject to the Suspended
Covenants (subject to subsequent suspension if the Notes again receive
Investment Grade Ratings), and, with respect to Restricted Payments proposed to
be made after the time of such downgrade, the permissibility of such proposed
Restricted Payments will be calculated in accordance with the terms of the
covenant described below under "-- Limitation on Restricted Payments" as though
such covenant had been in effect since the Issue Date.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company and the Subsidiary Guarantors will be entitled to Incur Indebtedness if,
on the date of such Incurrence and after giving effect thereto on a pro forma
basis, no Default has occurred and is continuing and the Consolidated Coverage
Ratio exceeds 2.5 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred by the Company and its Restricted Subsidiaries
pursuant to Credit Facilities; provided, however, that, immediately after
giving effect to any such Incurrence, the aggregate principal amount of all
Indebtedness Incurred under this clause (1) and then outstanding does not
exceed the greater of (A) $300
51
million less the sum of all principal payments with respect to such
Indebtedness pursuant to paragraph (a)(3)(A) of the covenant described under
"-- Limitation on Sales of Assets and Subsidiary Stock" and (B) $150 million
plus 20% of ACNTA as of the date of such Incurrence;
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that (A) any subsequent issuance or transfer
of any Capital Stock which results in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Wholly Owned Subsidiary) shall
be deemed, in each case, to constitute the Incurrence of such Indebtedness
by the obligor thereon and (B) if the Company is the obligor on such
Indebtedness, unless such Indebtedness is owing to a Subsidiary Guarantor,
such Indebtedness is expressly subordinated to the prior payment in full in
cash of all obligations with respect to the Notes;
(3) the Notes including the Exchange Notes (but excluding any Additional
Notes) and all Subsidiary Guaranties;
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3) of this covenant);
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding on
or prior to the date on which such Subsidiary became a Restricted Subsidiary
or was acquired by the Company (other than Indebtedness Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Restricted
Subsidiary or was acquired by the Company); provided, however, that on the
date such Subsidiary became a Restricted Subsidiary or was acquired by the
Company and after giving pro forma effect thereto, the Company would have
been able to Incur at least $1.00 of additional Indebtedness pursuant to
paragraph (a) of this covenant;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4), or (5) or this
clause (6); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness of a Restricted
Subsidiary Incurred pursuant to clause (5), such Refinancing Indebtedness
shall be Incurred only by such Restricted Subsidiary;
(7) Hedging Obligations consisting of Interest Rate Agreements directly
related to Indebtedness outstanding on the Issue Date or permitted to be
Incurred by the Company and its Restricted Subsidiaries pursuant to the
Indenture;
(8) Hedging Obligations consisting of Oil and Natural Gas Hedging
Contracts and Currency Agreements entered into in the ordinary course of
business for the purpose of limiting risks that arise in the ordinary course
of business of the Company and its Subsidiaries;
(9) obligations in respect of performance, bid and surety bonds,
including Guarantees and letters of credit functioning as or supporting such
performance, bid and surety bonds, completion guarantees and other
reimbursement obligations provided by the Company or any Restricted
Subsidiary in the ordinary course of business (in each case other than for
an obligation for money borrowed);
(10) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business; provided, however,
that such Indebtedness is extinguished within two Business Days of its
Incurrence;
(11) Indebtedness consisting of any Guarantee by the Company or a
Subsidiary Guarantor of Indebtedness of the Company or a Subsidiary
Guarantor outstanding on the Issue Date or permitted by the Indenture to be
Incurred by the Company or a Subsidiary Guarantor;
(12) Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, Incurred for the
purpose of financing all or any part of the purchase price, cost of
construction or improvement or carrying cost of assets used in the business
of the Company and its Restricted Subsidiaries and related financing costs,
and Refinancing Indebtedness Incurred to Refinance any Indebtedness
52
Incurred pursuant to this clause, in an aggregate principal amount at any
one time outstanding not to exceed $25 million;
(13) Indebtedness arising from any agreement providing for indemnities,
Guarantees, purchase price adjustments, holdbacks, contingency payment
obligations based on the performance of the acquired or disposed assets or
similar obligations (other than Guarantees of Indebtedness) Incurred by any
Person in connection with the acquisition or disposition of assets;
(14) in-kind obligations relating to net oil or natural gas balancing
positions arising in the ordinary course of business; and
(15) Indebtedness of the Company or of any of its Restricted
Subsidiaries in an aggregate principal amount which, when taken together
with all other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (14) above or paragraph (a)) does not
exceed $25 million of which not more than $10 million may be Indebtedness of
Restricted Subsidiaries that are not Subsidiary Guarantors.
(c) Notwithstanding the foregoing, neither the Company nor any Subsidiary
Guarantor will incur any Indebtedness pursuant to the foregoing paragraph (b) if
the proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations of the Company or any Subsidiary Guarantor unless such
Indebtedness shall be subordinated to the Notes or the applicable Subsidiary
Guaranty to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant:
(1) the Indebtedness that remained outstanding under the Revolving
Credit Facility after the application of the net proceeds from the sale of
the Notes is treated as Incurred on the Issue Date under clause (1) of
paragraph (b) above;
(2) in the event that an item of Indebtedness (or any portion thereof)
meets the criteria of more than one of the types of Indebtedness described
above, or is entitled to be incurred in compliance with the Consolidated
Coverage Ratio in clause (a) of this covenant, the Company, in its sole
discretion, may classify such item of Indebtedness (or any portion thereof)
in any manner that complies with this covenant and will only be required to
include the amount and type of such Indebtedness in one of the above
clauses; and
(3) the Company will be entitled to divide and classify an item of
Indebtedness in more than one of the types of Indebtedness described above
or as having been incurred in compliance with the Consolidated Coverage
Ratio in clause (a) of this covenant.
(e) Notwithstanding paragraphs (a) and (b) above, neither the Company nor
any Subsidiary Guarantor will Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in right of payment to any Senior Indebtedness
of such Person, as applicable, unless such Indebtedness is Senior Subordinated
Indebtedness or is expressly subordinated in right of payment to Senior
Subordinated Indebtedness of such Person.
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under "--
Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of (without
duplication):
53
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal quarter
immediately following the fiscal quarter during which the Issue Date occurs
to the end of the most recent fiscal quarter for which financial statements
of the Company are publicly available prior to the date of such Restricted
Payment (or, in case such Consolidated Net Income shall be a deficit, minus
100% of such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds or the fair market value of
property other than cash (including Capital Stock of Persons engaged in the
Oil and Gas Business or assets used in the Oil and Gas Business) received by
the Company from the issuance or sale of its Capital Stock (other than
Disqualified Stock) subsequent to the Issue Date (other than an issuance or
sale to a Subsidiary of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company or
any of its Subsidiaries for the benefit of their employees) and 100% of any
cash capital contribution received by the Company from its shareholders
subsequent to the Issue Date; plus
(C) the aggregate Net Cash Proceeds received by the Company subsequent
to the Issue Date from the issuance or sale of its Capital Stock (other than
Disqualified Stock) to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the benefit of
their employees; provided, however, that if such employee stock ownership
plan or trust Incurs any Indebtedness to finance the purchase of such
Capital Stock, such aggregate amount shall be limited to the excess of such
Net Cash Proceeds over the amount of such Indebtedness plus an amount equal
to any increase in the Consolidated Net Worth of the Company resulting from
principal repayments made from time to time by such employee stock ownership
plan or trust with respect to such Indebtedness; plus
(D) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness
of the Company convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the fair
value of any other property, distributed by the Company upon such conversion
or exchange); provided, however, that the foregoing amount shall not exceed
the Net Cash Proceeds received by the Company or any Restricted Subsidiary
from the sale of such Indebtedness (excluding Net Cash Proceeds from sales
to a Subsidiary of the Company or to an employee stock ownership plan or to
a trust established by the Company or any of its Subsidiaries for the
benefit of their employees); plus
(E) an amount equal to the sum of (x) the net reduction in the
Investments (other than Permitted Investments) made by the Company or any
Restricted Subsidiary in any Person resulting from repurchases, repayments
or redemptions of such Investments by such Person, proceeds realized on the
sale of such Investment and proceeds representing the return of capital
(excluding dividends and distributions), in each case received by the
Company or any Restricted Subsidiary, and (y) to the extent such Person is
an Unrestricted Subsidiary, the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net
assets of such Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however, that to
the extent the foregoing sum exceeds, in the case of any such Person or
Unrestricted Subsidiary, the amount of Investments (excluding Permitted
Investments) previously made (and treated as a Restricted Payment) by the
Company or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary, such excess shall not be included in this clause (E) unless the
amount represented by such excess has not been and will not be taken into
account in one of the foregoing clauses (A)-(D); plus
(F) $15.0 million.
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent issuance or sale of, or made by conversion into or
exchange for, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary of the Company
or an employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees) or a
substantially concurrent cash capital contribution received by the Company
from one or more of its shareholders; provided, however, that (A) such
Restricted Payment shall be excluded in the calculation of the
54
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale
or such cash capital contribution (to the extent so used for such Restricted
Payment) shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of the
Company or any Subsidiary Guarantor made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness which is
permitted to be Incurred pursuant to the covenant described under "--
Limitation on Indebtedness"; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of Restricted
Payments;
(3) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Disqualified Stock of the Company or
a Subsidiary Guarantor made by conversion into or exchange for, or out of
the proceeds of the substantially concurrent issuance or sale (other than to
a Subsidiary of the Company or an employee stock ownership plan or to a
trust established by the Company or any of its Subsidiaries for the benefit
of their employees) of, Disqualified Stock of the Company which is permitted
to be issued pursuant to the covenant described under "-- Limitation on
Indebtedness;" provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value shall be
excluded in the calculation of the amount of Restricted Payments;
(4) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend,
no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments at the time of
payment;
(5) so long as no Default has occurred and is continuing, the purchase,
redemption or other acquisition or retirement for value of shares of Capital
Stock of the Company or any of its Subsidiaries from employees, former
employees, directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments thereto) approved
by the Board of Directors under which such individuals purchase or sell or
are granted the option to purchase or sell, shares of such Capital Stock;
provided, however, that the aggregate amount of such purchases, redemptions
and other acquisitions and retirements (excluding amounts representing
cancellation of Indebtedness) shall not exceed $2.0 million in any calendar
year; provided further, however, that such purchases, redemptions and other
acquisitions and retirements shall be excluded in the calculation of the
amount of Restricted Payments;
(6) repurchases, acquisitions or retirements of shares of Company common
stock deemed to occur upon the exercise of stock options or similar rights
issued under employee benefit plans when shares are surrendered to pay all
or a portion of the exercise price or to satisfy any federal income tax
obligations; provided, however, that such repurchases, acquisitions or
retirements shall be excluded in the calculation of the amount of Restricted
Payments;
(7) the payment of cash in lieu of fractional shares of Capital Stock in
connection with any transaction otherwise permitted under this covenant;
provided, however, that such payment will be excluded in the calculation of
the amount of Restricted Payments;
(8) upon the occurrence of a Change of Control or an Asset Disposition
and within 60 days after the completion of the offer to repurchase the Notes
pursuant to the covenants described under "-- Change of Control" above or
"-- Limitation on Sales of Assets and Subsidiary Stock" below, (including
the purchase of all Notes tendered), any purchase, repurchase, redemption,
defeasance, acquisition or other retirement for value of Subordinated
Obligations required pursuant to the terms thereof as a result of such
Change of Control or Asset Disposition at a purchase or redemption price not
to exceed 101% of the outstanding principal amount thereof, plus accrued and
unpaid interest thereon, if any; provided, however, that (A) at the time of
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, no Default shall have occurred and be continuing (or
would result therefrom), and (B) such purchase, repurchase redemption,
defeasance or
55
other acquisition and retirement for value will be excluded in the
calculation of the amount of Restricted Payments.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the assets proposed to be
transferred by the Company or such Restricted Subsidiary, as the case may be, in
accordance with the Restricted Payment.
For purposes of determining compliance with this covenant, in the event that
a Restricted Payment meets the criteria of more than one of the types of
Restricted Payments described above, the Company, in its sole discretion, may
order and classify such Restricted Payment in any manner in compliance with this
covenant.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except:
(1) with respect to clauses (a), (b) and (c),
(i) any encumbrance or restriction pursuant to an agreement governing
Indebtedness or Capital Stock and other agreements or instruments in effect
at or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by
such Restricted Subsidiary or Capital Stock or other agreement or instrument
of such Restricted Subsidiary in existence on or prior to the date on which
such Restricted Subsidiary was acquired by the Company or otherwise became a
Restricted Subsidiary (other than Indebtedness Incurred, Capital Stock
issued or agreements or instruments entered into as consideration in, or to
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
acquired by the Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing in whole or in part of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of clause (1) of this covenant
or this clause (iii) or clause (B) of clause (2) of this covenant or
contained in any amendment to, or modification, restatement, renewal,
increase, supplement, replacement or extension of, an agreement referred to
in clause (i) or (ii) of clause (1) of this covenant or this clause (iii)or
clause (B) of clause (2) of this covenant; provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment, modification,
restatement, renewal, increase, supplement, replacement or extension
agreement are not materially more restrictive, taken as a whole, than
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in such predecessor agreements;
(iv) any customary encumbrance or restriction with respect to a
Restricted Subsidiary imposed pursuant to a merger agreement or an agreement
entered into for the sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition;
(v) customary encumbrances and restrictions contained in agreements of
the types described in the definition of the term "Permitted Business
Investments;" and
(vi) customary supermajority voting provisions and other customary
provisions with respect to the disposition or distribution of assets, each
contained in corporate charters, bylaws, stockholders' agreements, limited
liability company agreements, partnership agreements, joint venture
agreements and other similar agreements entered into in the ordinary course
of business of the Company and its Restricted Subsidiaries; and
(2) with respect to clause (c) only,
56
(A) any such encumbrance or restriction consisting of customary
nonassignment provisions (including provisions forbidding subletting or
sublicensing) in leases governing leasehold interests and licenses to the
extent such provisions restrict the transfer of the lease or license or the
property leased, or licensed thereunder;
(B) any encumbrance or restriction contained in credit agreements,
security agreements or mortgages securing Indebtedness of the Company or a
Restricted Subsidiary to the extent such encumbrance or restriction
restricts the transfer of the property subject to such credit agreements,
security agreements or mortgages;
(C) encumbrances and restrictions contained in any agreement, instrument
or Capital Stock assumed by the Company or any of its Restricted
Subsidiaries or for which any of them becomes liable as in effect at the
time of such transaction (except to the extent such agreement, instrument or
Capital Stock was entered into in connection with or in contemplation of
such transaction), which encumbrances and restrictions are not applicable to
any assets other than assets acquired in connection with such transaction
and all improvements, additions and accessions thereto and products and
proceeds thereof;
(D) restrictions on cash or other deposits imposed by customers under
contracts entered into in the ordinary course of business;
(E) encumbrances and restrictions contained in contracts entered into in
the ordinary course of business, not relating to any Indebtedness, and that
do not, individually or in the aggregate, detract from the value of, or from
the ability of the Company and the Restricted Subsidiaries to realize the
value of, property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; and
(F) restrictions on the transfer of property or assets required by any
regulatory authority having jurisdiction over the Company or such Restricted
Subsidiary.
LIMITATION ON LIENS
The Company will not, and will not permit any Subsidiary Guarantor to,
directly or indirectly, create, incur, assume or suffer to exist or become
effective any Lien securing Indebtedness of any kind except for Permitted Liens,
on or with respect to any of its assets, whether owned at the Issue Date or
thereafter acquired, unless (A) in the case of any Lien securing Subordinated
Obligations, the Notes are secured by a Lien on such assets that is senior in
priority to such Lien and (B) in the case of any other Lien, the Notes are
either secured equally and ratably with such Indebtedness or are secured by a
Lien on such assets that is senior in priority to such Lien.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration at
the time of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash consideration) (as determined in
good faith by the Board of Directors, an Officer or an officer of such
Restricted Subsidiary with responsibility for such transaction, which
determination shall be conclusive evidence of compliance with this
provision), of the shares and assets subject to such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Company or
such Restricted Subsidiary is in the form of cash or cash equivalents, oil
and natural gas properties or capital assets to be used by the Company or
any Restricted Subsidiary in the Oil and Gas Business; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as the
case may be)
(A) first, to the extent the Company elects (or is required by the terms
of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness of the Company or any Subsidiary Guarantor or Indebtedness
(other
57
than any Disqualified Stock) of a Wholly Owned Subsidiary that is not a
Subsidiary Guarantor (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) within one year from the later of
the date of such Asset Disposition or the receipt of such Net Available
Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent the Company
elects, to acquire Additional Assets or to make capital expenditures in the
Oil and Gas Business within one year from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; and
(C) third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to the
holders of the Notes (and to holders of other Senior Subordinated
Indebtedness of the Company designated by the Company) to purchase Notes
(and such other Senior Subordinated Indebtedness of the Company) pursuant to
and subject to the conditions contained in the Indenture;
provided, however, that in connection with any prepayment, repayment,
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness pursuant to clause (A) or (C) above,
the Company or such Restricted Subsidiary shall permanently retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased.
Upon any Asset Disposition by an Oil and Gas Royalty Trust in which the
Company or any Restricted Subsidiary owns Capital Stock, the Company or such
Restricted Subsidiary will apply the Net Available Cash therefrom as provided in
clause (a)(3) of this covenant.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which is not applied in accordance
with this covenant exceeds $20 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments or applied to temporarily reduce revolving credit
indebtedness.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary from
all liability on such Indebtedness in connection with such Asset
Disposition; and
(2) securities received by the Company or any Restricted Subsidiary from
the transferee that are converted by the Company or such Restricted
Subsidiary into cash within 120 days of receipt.
Notwithstanding the foregoing, the 75% limitation referred to in paragraph
(a)(2) above shall be deemed satisfied with respect to any Asset Disposition in
which the cash or cash equivalents portion of the consideration received
therefrom, determined in accordance with the foregoing provision on an after-tax
basis, is equal to or greater than what the after-tax proceeds would have been
had such Asset Disposition complied with the aforementioned 75% limitation.
The requirement of clause (a)(3)(B) above shall be deemed to be satisfied if
an agreement (including a lease, whether a capital lease or an operating lease)
committing to make the acquisitions or expenditures referred to therein is
entered into by the Company or its Restricted Subsidiary within the time period
specified in such clause and such Net Available Cash is subsequently applied in
accordance with such agreement within six months following such agreement.
(b) In the event of an Asset Disposition that requires the purchase of Notes
(and other Senior Subordinated Indebtedness of the Company) pursuant to clause
(a)(3)(C) above, the Company will make such offer to purchase Notes on or before
the 366th day after the date of such Asset Disposition or the receipt of such
Net Available Cash, and will purchase Notes tendered pursuant to an offer by the
Company for the Notes (and such other Senior Subordinated Indebtedness of the
Company) at a purchase price of 100% of their principal amount (or, in the event
58
such other Senior Subordinated Indebtedness of the Company was issued with
significant original issue discount, 100% of the accreted value thereof) without
premium, plus accrued but unpaid interest (or, in respect of such other Senior
Subordinated Indebtedness of the Company, such lesser price, if any, as may be
provided for by the terms of such Senior Subordinated Indebtedness of the
Company) in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
the securities tendered exceeds the Net Available Cash allotted to their
purchase, the Company will select the securities to be purchased on a pro rata
basis but in round denominations, which in the case of the Notes will be
denominations of $1,000 principal amount or multiples thereof. The Company shall
not be required to make such an offer to purchase Notes (and other Senior
Subordinated Indebtedness of the Company) pursuant to this covenant if the Net
Available Cash available therefor is less than $20 million (which lesser amount
shall be carried forward for purposes of determining whether such an offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition). Upon completion of such an offer to purchase, Net Available Cash
will be deemed to be reduced by the aggregate amount of such offer.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue of its compliance
with such securities laws or regulations.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into any transaction (including the purchase, sale, lease or exchange of
any property, employee compensation arrangements or the rendering of any
service) with, or for the benefit of, any Affiliate of the Company (an
"Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary than those that could reasonably be
expected to be obtained at the time of the Affiliate Transaction in
arm's-length dealings with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $5
million, the terms of the Affiliate Transaction are set forth in writing and
a majority of the non-employee directors of the Company disinterested with
respect to such Affiliate Transaction have determined in good faith that the
criteria set forth in clause (1) are satisfied and have approved the
relevant Affiliate Transaction as evidenced by a resolution of the Board of
Directors; and
(3) if such Affiliate Transaction involves an amount in excess of $20
million, the Board of Directors shall also have received a written opinion
from an Independent Qualified Party to the effect that such Affiliate
Transaction is fair, from a financial standpoint, to the Company and its
Restricted Subsidiaries or is not less favorable to the Company and its
Restricted Subsidiaries than could reasonably be expected to be obtained at
the time in an arm's-length transaction with a Person who was not an
Affiliate.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case not prohibited to be made pursuant to the
covenant described under "-- Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans and other benefit
plans approved by the Board of Directors;
(3) loans or advances to officers, directors and employees in the
ordinary course of business of the Company or its Restricted Subsidiaries,
but in any event not to exceed $3.0 million in the aggregate outstanding at
any one time;
59
(4) any transaction with a Restricted Subsidiary or joint venture or
similar entity which would constitute an Affiliate Transaction solely
because the Company or a Restricted Subsidiary owns an equity interest in or
otherwise controls such Restricted Subsidiary, joint venture or similar
entity;
(5) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company;
(6) reasonable fees and reasonable compensation paid to, and indemnity
and similar arrangements provided on behalf of, officers, directors and
employees of the Company or any Restricted Subsidiary as determined in good
faith by the Board of Directors or the Company's senior management; and
(7) any agreement as in effect on the Issue Date and described in the
Prospectus or any renewals or extensions of any such agreement (so long as
such renewals or extensions are not less favorable to the Company or the
Restricted Subsidiaries) and the transactions evidenced thereby.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all the assets of the Company and its
Restricted Subsidiaries, taken as a whole, to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under
the Notes and the Indenture;
(2) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "-- Limitation on
Indebtedness";
(4) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and such supplemental indenture (if
any) comply with the Indenture; and
(5) the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Holders will not recognize income, gain or
loss for Federal income tax purposes as a result of such transaction and
will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such transaction
had not occurred.
provided, however, that clause (3) will not be applicable to (A) the Company or
a Restricted Subsidiary consolidating with, merging into, conveying,
transferring or leasing all or part of its properties and assets to the Company
or a Subsidiary Guarantor or (B) the Company merging with an Affiliate of the
Company solely for the purpose and with the sole effect of reincorporating the
Company in another jurisdiction within the United States of America or (C) at a
time when the Company and its Restricted Subsidiaries are not subject to the
Suspended Covenants.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
60
The Successor Company (if not the Company) will be the successor to the
Company and shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture, and the predecessor
Company, except in the case of a lease, shall be released from the obligation to
pay the principal of and interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(1) except in the case of a Subsidiary Guarantor (other than Encore
Operating, L.P. and any Subsidiary Guarantor that directly or indirectly
holds any equity interest in Encore Operating, L.P.) that has been disposed
of in its entirety to another Person (other than to the Company or an
Affiliate of the Company), whether through a merger, consolidation or sale
of Capital Stock or assets, if in connection therewith the Company complies
with its obligations under the covenant described under "-- Limitation on
Sales of Assets and Subsidiary Stock" in respect of such disposition, the
resulting, surviving or transferee Person (if not such Subsidiary) shall be
a Person organized and existing under the laws of the jurisdiction under
which such Subsidiary was organized or under the laws of the United States
of America, or any State thereof or the District of Columbia, and, if such
Person is not already a Subsidiary Guarantor, such Person shall expressly
assume, by a Guaranty Agreement, in a form satisfactory to the Trustee, all
the obligations of such Subsidiary, if any, under its Subsidiary Guaranty;
(2) immediately after giving effect to such transaction or transactions
on a pro forma basis (and treating any Indebtedness which becomes an
obligation of the resulting, surviving or transferee Person as a result of
such transaction as having been issued by such Person at the time of such
transaction), no Default shall have occurred and be continuing; and
(3) in the event a Guaranty Agreement is executed and delivered pursuant
to clause (1) above, the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and such Guaranty Agreement, if any,
complies with the Indenture.
FUTURE GUARANTORS
The Company will cause each Restricted Subsidiary that Incurs any
Indebtedness (other than Indebtedness Incurred pursuant to and in compliance
with the last clause of paragraph (b)(15) of the covenant described under "--
Limitation on Indebtedness") to, at the same time, execute and deliver to the
Trustee a Guaranty Agreement pursuant to which such Restricted Subsidiary will
Guarantee payment of the Notes on the same terms and conditions as those set
forth in the Indenture.
SEC REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the SEC (to the extent the SEC will accept such filings) and provide the
Trustee and Noteholders with such annual reports and such information, documents
and other reports as are specified in Sections 13 and 15(d) of the Exchange Act
and applicable to a U.S. corporation subject to such Sections (but, without
exhibits in the case of Noteholders), such information, documents and other
reports to be so filed and provided at the times specified for the filings of
such information, documents and reports under such Sections.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due,
continued for 30 days;
(2) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required purchase, upon
declaration of acceleration or otherwise;
61
(3) the failure by the Company to comply with its obligations under "--
Certain Covenants -- Merger and Consolidation" above;
(4) the failure by the Company to comply for 30 days after notice with
any of its obligations in the covenants described above under "Change of
Control" (other than a failure to purchase Notes) or under "-- Certain
Covenants" under "-- Limitation on Indebtedness", "-- Limitation on
Restricted Payments", "-- Limitation on Restrictions on Distributions from
Restricted Subsidiaries", "-- Limitation on Sales of Assets and Subsidiary
Stock" (other than a failure to purchase Notes), "-- Limitation on Affiliate
Transactions", "-- Future Guarantors", or "-- SEC Reports";
(5) the failure by the Company or any Subsidiary Guarantor to comply for
60 days after notice with its other agreements contained in the Indenture;
(6) Indebtedness of the Company, any Subsidiary Guarantor or any
Significant Subsidiary is not paid within any applicable grace period after
final maturity or is accelerated by the holders thereof because of a default
and the total amount of such Indebtedness unpaid or accelerated exceeds $10
million (the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, a Subsidiary Guarantor or any Significant Subsidiary (the
"bankruptcy provisions");
(8) any judgment or decree for the payment of money in excess of $10
million above the coverage under applicable insurance policies and
indemnities as to which the relevant insurer or indemniter has not
disclaimed responsibility is entered against the Company, a Subsidiary
Guarantor or any Significant Subsidiary, remains outstanding for a period of
60 consecutive days following such judgment and is not discharged, waived or
stayed (the "judgment default provision"); or
(9) a Subsidiary Guaranty ceases to be in full force and effect (other
than in accordance with the terms of such Subsidiary Guaranty) for five days
after notice or a Subsidiary Guarantor denies or disaffirms its obligations
under its Subsidiary Guaranty (the "Guaranty Failure Provision").
However, a default under clauses (4), (5) and (9) will not constitute an Event
of Default until the Trustee or the holders of at least 25% in principal amount
of the outstanding Notes notify the Company of the default and the Company does
not cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
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(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after
the receipt thereof and the offer of security or indemnity; and
(5) holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request within
such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee
must mail to each holder of the Notes notice of the Default within 90 days after
it occurs. Except in the case of a Default in the payment of principal of or
interest on any Note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers determines that withholding notice is not
opposed to the interest of the holders of the Notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or propose to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Notes) and any past default or compliance with any provisions may also be
waived with the consent of the holders of a majority in principal amount of the
Notes then outstanding. However, without the consent of each holder of an
outstanding Note affected thereby, an amendment or waiver may not, among other
things:
(1) reduce the amount of Notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on any
Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the amount payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption" above ;
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note that would
adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guaranty that would adversely
affect the Noteholders in any material respect.
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Notwithstanding the preceding, the covenant described under the caption "--
Change of Control" may be waived or amended as described in the last paragraph
of the description.
Notwithstanding the preceding, without the consent of any holder of the
Notes, the Company, the Subsidiary Guarantors and Trustee may amend the
Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company, or any Subsidiary Guarantor under the Indenture;
(3) to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of
the Code);
(4) to add Guarantees with respect to the Notes, including any
Subsidiary Guaranties, or to secure the Notes;
(5) to add to the covenants of the Company or a Subsidiary Guarantor for
the benefit of the holders of the Notes or to surrender any right or power
conferred upon the Company or a Subsidiary Guarantor;
(6) to make any change that does not adversely affect the rights of any
holder of the Notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Indebtedness
of the Company or a Subsidiary Guarantor then outstanding unless such holder of
such Senior Indebtedness (or its Representative) consents to such change or as
otherwise permitted by the notes, debentures, bonds or other similar instruments
evidencing such Senior Indebtedness.
The consent of the holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are required to
mail to holders of the Notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Notes, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
DEFEASANCE
At any time, we may terminate all our obligations under the Notes and the
Indenture ("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and
to maintain a registrar and paying agent in respect of the Notes.
In addition, at any time we may terminate our obligations under "-- Change
of Control" and under the covenants described under "-- Certain Covenants"
(other than the covenant described under "-- Merger and Consolidation"), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Subsidiary Guarantors and Significant Subsidiaries and the judgment
default and Guarantor failure provision described under "-- Defaults" above and
the limitations contained in clause (3) of the first paragraph under "-- Certain
Covenants -- Merger and Consolidation" above ("covenant defeasance").
64
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default
specified in clause (4), (6), (7) (with respect only to Significant Subsidiaries
and Subsidiary Guarantors), (8) (with respect only to Significant Subsidiaries
and Subsidiary Guarantors) or (9) under "-- Defaults" above or because of the
failure of the Company to comply with clause (3) of the first paragraph under
"-- Certain Covenants -- Merger and Consolidation" above. If we exercise our
legal defeasance option or our covenant defeasance option, each Subsidiary
Guarantor will be released from all of its obligations with respect to its
Subsidiary Guaranty.
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
Wells Fargo Bank, National Association is the Trustee under the Indenture.
We have appointed the Trustee as Registrar and Paying Agent with regard to the
Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
either eliminate such conflict within 90 days, apply to the SEC for permission
to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes have
the right to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee, subject to certain exceptions.
If an Event of Default occurs (and is not cured), the Trustee is required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the is under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder offers to the Trustee
security and indemnity satisfactory to it against any loss, liability or expense
and then only to the extent required by the terms of the Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary Guarantor will have any liability for any obligations of the
Company or any Subsidiary Guarantor under the Notes, any Subsidiary Guaranty or
the Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation. Each Holder of the Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver and release may not be
effective to waive liabilities under the U.S. Federal securities laws, and it is
the view of the SEC that such a waiver is against public policy.
GOVERNING LAW
The Indenture and the Notes are governed by, and construed in accordance
with, the laws of the State of New York without giving effect to applicable
principles of conflicts of law to the extent that the application of the law of
another jurisdiction would be required thereby.
65
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property, plant or equipment used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"Adjusted Consolidated Net Tangible Assets" or "ACNTA" means (without
duplication), as of the date of determination:
(a) the sum of:
(1) discounted future net revenue from proved crude oil and natural gas
reserves of the Company and its Restricted Subsidiaries (including oil and
natural gas reserves attributable to the net profits interests owned by an
Oil and Gas Royalty Trust to the extent such net profits interests are
attributable to the Company or a Restricted Subsidiary by virtue of its
ownership of Capital Stock of such Oil and Gas Royalty Trust) calculated in
accordance with SEC guidelines before any state or federal income taxes, as
estimated in a reserve report prepared as of the end of the fiscal year
ending at least 45 days prior to the date of determination, which reserve
report is prepared or audited by independent petroleum engineers, as
increased by, as of the date of determination, the discounted future net
revenue calculated in accordance with SEC guidelines (utilizing the prices
utilized in such year end reserve report) of:
(A) estimated proved crude oil and natural gas reserves of the Company
and its Restricted Subsidiaries attributable to acquisitions consummated
since the date of such reserve report, and
(B) estimated crude oil and natural gas reserves of the Company and its
Restricted Subsidiaries attributable to extensions, discoveries and other
additions and upward determinations of estimates of proved crude oil and
natural gas reserves (including previously estimated development costs
incurred during the period and the accretion of discount since the prior
period end) due to exploration, development or exploitation, production or
other activities which reserves were not reflected in such reserve report
which would, in accordance with standard industry practice, result in such
determinations,
and decreased by, as of the date of determination, the discounted future net
revenue calculated in accordance with SEC guidelines (utilizing the prices
utilized in such year end reserve report) attributable to:
(C) estimated proved crude oil and natural gas reserves of the Company
and its Restricted Subsidiaries reflected in such reserve report produced or
disposed of since the date of such reserve report, and
(D) reductions in the estimated oil and natural gas reserves of the
Company and its Restricted Subsidiaries reflected in such reserve report
since the date of such reserve report attributable to downward
determinations of estimates of proved crude oil and natural gas reserves due
to exploration, development or exploitation, production or other activities
conducted or otherwise occurring since the date of such reserve report which
would, in accordance with standard industry practice, result in such
determinations;
provided, however, that, in the case of each of the determinations made
pursuant to clauses (A) through (D), such increases and decreases shall be
estimated by the Company's engineers, except that if as a result of such
acquisitions, dispositions, discoveries, extensions or revisions, there is a
Material Change, then such increases and decreases in the discounted future
net revenue shall be confirmed in writing by an independent petroleum
engineer;
66
(2) the capitalized costs that are attributable to crude oil and natural
gas properties of the Company and its Restricted Subsidiaries to which no
proved crude oil and natural gas reserves are attributed, based on the
Company's books and records as of a date no earlier than the end of the most
recent fiscal quarter for which financial statements of the Company have
been made publicly available prior to the date of determination;
(3) the Net Working Capital as of the end of the most recent fiscal
quarter for which financial statements of the Company have been made
publicly available prior to the date of determination; and
(4) the greater of (i) the net book value as of a date no earlier than
the end of the most recent fiscal quarter for which financial statements of
the Company have been made publicly available prior to the date of
determination and (ii) the appraised value, as estimated by independent
appraisers, of other tangible assets of the Company and its Restricted
Subsidiaries as of a date no earlier than the most recent fiscal year for
which financial statements of the Company have been made publicly available
prior to the date of determination (provided that the Company shall not be
required to obtain such an appraisal of such assets if no such appraisal has
been performed); minus
(b) to the extent not otherwise taken into account in the immediately
preceding clause (a), the sum of:
(1) minority interests;
(2) any natural gas balancing liabilities of the Company and its
Restricted Subsidiaries reflected in the Company's latest audited
consolidated financial statements;
(3) the discounted future net revenue, calculated in accordance with SEC
guidelines (utilizing the same prices utilized in the Company's year-end
reserve report), attributable to reserves subject to participation
interests, overriding royalty interests or other interests of third parties,
pursuant to participation, partnership, vendor financing or other agreements
then in effect, or which otherwise are required to be delivered to third
parties;
(4) the discounted future net revenue calculated in accordance with SEC
guidelines (utilizing the same prices utilized in the Company's year-end
reserve report), attributable to reserves that are required to be delivered
to third parties to fully satisfy the obligations of the Company and its
Restricted Subsidiaries with respect to Volumetric Production Payments on
the schedules specified with respect thereto; and
(5) the discounted future net revenue, calculated in accordance with SEC
guidelines, attributable to reserves subject to Dollar-Denominated
Production Payments that, based on the estimates of production included in
determining the discounted future net revenue specified in the immediately
preceding clause (a)(1) (utilizing the same prices utilized in the Company's
year-end reserve report), would be necessary to satisfy fully the
obligations of the Company and its Restricted Subsidiaries with respect to
Dollar-Denominated Production Payments on the schedules specified with
respect thereto.
If the Company changes its method of accounting from the successful efforts
method to the full cost method or a similar method of accounting, "ACNTA" will
continue to be calculated as if the Company were still using the successful
efforts method of accounting.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "-- Certain Covenants -- Limitation on
Restricted Payments", "-- Certain Covenants -- Limitation on Affiliate
Transactions" and "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof. No Person shall be deemed an Affiliate of an Oil and Gas
Royalty Trust solely by virtue of ownership of Capital Stock of such trust.
67
"Applicable Premium" means, with respect to a Note at any time, the greater
of (1) 1.0% of the principal amount of such Note at such time and (2) the excess
of (A) the present value at such time of the principal amount of such Note plus
any required interest payments due on such Note through June 15, 2007, computed
using a discount rate equal to the Treasury Rate plus 50 basis points, over (B)
the principal amount of such Note.
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary or by any Oil and Gas Royalty Trust, the Capital Stock
of which is owned by the Company or a Restricted Subsidiary, including any
disposition by means of a merger, consolidation or similar transaction (each
referred to for the purposes of this definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be held
by a Person other than the Company or a Restricted Subsidiary) or of an Oil
and Gas Royalty Trust;
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary;
(3) any other assets of the Company or any Restricted Subsidiary outside
of the ordinary course of business of the Company or such Restricted
Subsidiary; or
(4) any net profits interests held by any such Oil and Gas Royalty Trust
(other than, in the case of clauses (1), (2) and (3) above,
(A) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly Owned Subsidiary;
(B) for purposes of the covenant described under "-- Certain Covenants
-- Limitation on Sales of Assets and Subsidiary Stock" only, (x) a
disposition that constitutes a Restricted Payment permitted by the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments"
or a Permitted Investment and (y) a disposition of all or substantially all
the assets of the Company in accordance with the covenant described under
"-- Certain Covenants -- Merger and Consolidation"; and
(C) the trade or exchange by the Company or any Restricted Subsidiary of
any oil or natural gas property or interest therein of the Company or such
Restricted Subsidiary for any oil or natural gas property or interest
therein of another Person, including any cash or cash equivalents necessary
in order to achieve an exchange of equivalent value; provided, however, that
the value of the oil or natural gas property or interest therein received by
the Company or any Restricted Subsidiary in such trade or exchange
(including any cash or cash equivalents) is at least equal to the fair
market value (as determined in good faith by the Board of Directors, an
Officer or an officer of such Restricted Subsidiary with responsibility for
such transaction, which determination shall be conclusive evidence of
compliance with this provision) of the oil or natural gas property or
interest therein (including any cash or cash equivalents) so traded or
exchanged;
(D) the creation of a Lien;
(E) a disposition of oil and natural gas properties in connection with
tax credit transactions complying with Section 29 or any successor or
analogous provisions of the Code;
(F) a disposition of the Capital Stock of or any Investment in any
Unrestricted Subsidiary other than an Oil and Gas Royalty Trust;
(G) surrender or waiver of contract rights or the settlement, release or
surrender of contract, tort or other claims of any kind;
(H) any disposition of defaulted receivables that arose in the ordinary
course of business for collection;
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(I) the contribution of net profits interests in oil and natural gas
properties to an Oil and Gas Royalty Trust that is wholly owned by the
Company or a Restricted Subsidiary at the time or as the result of such
contribution; and
(J) a disposition of assets with a fair market value of less than $1.0
million.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded semiannually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended); provided, however, that if such Sale/Leaseback Transaction
results in a Capital Lease Obligation, the amount of Indebtedness represented
thereby will be determined in accordance with the definition of "Capital Lease
Obligation".
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
or redemption or similar payment with respect to such Indebtedness
multiplied by the amount of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means all Obligations pursuant to Credit Facilities.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, units of beneficial
interests (including of an Oil and Gas Royalty Trust), rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which financial information of the Company
has been made publicly available prior to the date of such determination to (y)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that:
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or
if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness and the use of
proceeds thereof as if such Indebtedness had been Incurred on the first day
of such period and such proceeds had been applied as of such date;
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of
such period or if any Indebtedness is to be repaid, repurchased, defeased
69
or otherwise discharged on the date of the transaction giving rise to the
need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated
Interest Expense for such period shall be calculated on a pro forma basis as
if such discharge had occurred on the first day of such period and as if the
Company or such Restricted Subsidiary had not earned the interest income
actually earned (if any) during such period in respect of cash or Temporary
Cash Investments used to repay, repurchase, defease or otherwise discharge
such Indebtedness;
(3) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, EBITDA for such period
shall be reduced by an amount equal to EBITDA (if positive) directly
attributable to the assets which were the subject of such Asset Disposition
for such period, or increased by an amount equal to EBITDA (if negative),
directly attributable thereto for such period and Consolidated Interest
Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
the Company or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale);
(4) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of material assets, including any acquisition of assets
occurring in connection with a transaction requiring a calculation to be
made hereunder, which constitutes all or substantially all of an operating
unit of a business, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition
occurred on the first day of such period; and
(5) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) shall have made
any Asset Disposition, any Investment or acquisition of assets that would
have required an adjustment pursuant to clause (3) or (4) above if made by
the Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness, but if the remaining term of such Interest Rate Agreement is
less than 12 months, then such Interest Rate Agreement shall only be taken into
account for that portion of the period equal to the remaining term thereof).
The Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility, the outstanding principal
balance of which is required to be computed on a pro forma basis in accordance
with the foregoing, shall be computed based upon the average daily balance of
such Indebtedness during the applicable period, provided, that such average
daily balance shall take into account the amount of any repayment of
Indebtedness under such revolving credit facility during the applicable period,
to the extent such repayment permanently reduced the commitments or amounts
available to be borrowed under such facility.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to capital leases and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction;
70
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Interest Rate Agreements;
(7) Preferred Stock dividends in respect of all Preferred Stock held by
Persons other than the Company or a Wholly Owned Subsidiary (other than
dividends payable solely in Capital Stock (other than Disqualified Stock) of
the Company);
(8) interest incurred in connection with Investments in discontinued
operations;
(9) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by (or secured by the assets of) the
Company or any Restricted Subsidiary; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust;
minus, to the extent included above, write-off of deferred financing costs and
interest attributable to Dollar-Denominated Production Payments.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such Person
is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Person for such period shall
be included in such Consolidated Net Income in an amount equal to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend, interest
payment or other distribution (subject, in the case of a dividend, interest
payment or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (3) below); and
(B) the Company's equity in a net loss of any such Person for such
period shall not be included in determining such Consolidated Net Income,
except to the extent of the aggregate cash actually contributed to such
Person by the Company or a Restricted Subsidiary during such period;
(2) solely for the purposes of determining the aggregate amount
available for Restricted Payments under clause (a)(3) of the covenant
described under "Certain Covenants -- Limitation on Restricted Payments,"
any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition;
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income in an amount
71
equal to the aggregate amount of cash that could have been distributed by
such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend, interest payment or other distribution
(subject, in the case of a dividend, interest payment or other distribution
paid to another Restricted Subsidiary, to the limitation contained in this
clause); and
(B) the Company's equity in a net loss of any such Restricted Subsidiary
for such period shall be included in determining such Consolidated Net
Income;
(4) any gain or loss, together with any related provision for taxes on
such gain or loss and all related fees and expenses, realized in connection
with (A) the sale or other disposition of any assets of the Company, its
consolidated Subsidiaries or any other Person (including pursuant to any
Sale/ Leaseback Transaction) which is not sold or otherwise disposed of in
the ordinary course of business and (B) the disposition of any securities of
any Person or the extinguishment of any Indebtedness of the Company or any
of its Subsidiaries;
(5) extraordinary or non-recurring gains or losses, together with any
related provision for taxes on such gains or losses and all related fees and
expenses; and
(6) the cumulative effect of a change in accounting principles;
(7) any impairment losses on oil and natural gas properties;
(8) any unrealized noncash gains or losses or charges in respect of
Hedging Obligations (including those resulting from the application of FAS
133); and
(9) any non-cash compensation charge arising from any grant of stock,
stock options or other equity-based awards.
Notwithstanding the foregoing, for the purposes of the covenant described under
"-- Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any repurchases, repayments or redemptions
of Investments, proceeds realized on the sale of Investments or return of
capital to the Company or a Restricted Subsidiary to the extent such
repurchases, repayments, redemptions, proceeds or returns increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(E)
thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of the
Company plus
(2) paid-in capital or capital surplus relating to such Capital Stock
plus
(3) any retained earnings or earned surplus
less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities (including under the Revolving Credit
Facility) or commercial paper facilities with banks or other lenders providing
revolving credit loans, term loans, production payments, receivables financing
(including through the sale of receivables) or letters of credit, in each case,
as amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
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"Designated Senior Indebtedness", with respect to a Person means:
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness of such Person which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $25.0 million and is specifically designated by such
Person in the instrument evidencing or governing such Senior Indebtedness as
"Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable (other than redeemable only for
Capital Stock of such Person which is not itself Disqualified Stock)
pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence
of certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to purchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" shall not constitute
Disqualified Stock if:
(1) the "asset sale" or "change of control" provisions applicable to
such Capital Stock are not more favorable, as measured by the purchase or
redemption price or the breadth of the definition of the event or events
triggering such purchase or redemption obligation, to the holders of such
Capital Stock than the terms applicable to the Notes and described under "--
Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Certain Covenants -- Change of Control"; and
(2) any such requirement only becomes operative after compliance with
such terms applicable to the Notes, including the purchase of any Notes
tendered pursuant thereto.
and (B) any Capital Stock that would constitute Disqualified Stock solely
because such Capital Stock is issued pursuant to any plan for the benefit of
employees of the Company or Subsidiaries of the Company or by any such plan to
such employees and may be required to be repurchased by the Company in order to
satisfy applicable statutory or regulatory obligations shall not constitute
Disqualified Stock.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or repurchase price
will be the book value of such Disqualified Stock as reflected in the most
recent financial statements of such Person.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated
Restricted Subsidiaries;
73
(2) Consolidated Interest Expense;
(3) depreciation, depletion, exploration and amortization expense of the
Company and its consolidated Restricted Subsidiaries (excluding amortization
expense attributable to a prepaid operating activity item that was paid in
cash in a prior period); and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period);
in each case for such period, and less, to the extent included in calculating
such Consolidated Net Income and in excess of any costs or expenses attributable
thereto and deducted in calculating such Consolidated Net Income, the sum of:
(A) the amount of deferred revenues that are amortized during such
period and are attributable to reserves that are subject to Volumetric
Production Payments; and
(B) amounts recorded in accordance with GAAP as repayments of principal
and interest pursuant to Dollar-Denominated Production Payments.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation, depletion, exploration and amortization and
non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net
Income to compute EBITDA only to the extent (and in the same proportion,
including by reason of minority interests) that the net income of such
Restricted Subsidiary was included in calculating Consolidated Net Income and
only if a corresponding amount would be permitted at the date of determination
to be dividended to the Company by such Restricted Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the debt securities of the Company issued pursuant to
the Indenture in exchange for, and in an aggregate principal amount equal to,
the Notes, in compliance with the terms of the Registration Rights Agreement.
"Existing Investments" means assets (including securities) held by the
Company or any of the Restricted Subsidiaries as consideration for an Investment
made on or before the Issue Date or acquired thereafter pursuant to any
agreement or obligation as in effect on the Issue Date.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting Standards
Board;
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
74
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any Indebtedness.
"Guaranty Agreement" means a supplemental indenture, in a form satisfactory
to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the
Company's obligations with respect to the Notes on the terms provided for in the
Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Oil and Natural Gas Hedging Contract, Interest Rate Agreement or
Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is registered
on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning. Solely for
purposes of determining compliance with "-- Certain Covenants -- Limitation on
Indebtedness":
(1) amortization of debt discount or the accretion of principal with
respect to a non-interest bearing or other discount security;
(2) the payment of regularly scheduled interest in the form of
additional Indebtedness of the same instrument or the payment of regularly
scheduled dividends on Capital Stock in the form of additional Capital Stock
of the same class and with the same terms;
(3) the obligation to pay a premium in respect of Indebtedness arising
in connection with the issuance of a notice of redemption or making of a
mandatory offer to purchase such Indebtedness; and
(4) unrealized losses or charges in respect of Hedging Obligations
(including those resulting from the application of FAS 133)
will not be deemed to be the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable and accrued expenses);
75
(4) all obligations of such Person for the reimbursement of any obligor
on any letter of credit, bankers' acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (1) through (3)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth Business Day
following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock of such
Person or, with respect to any Preferred Stock of any Restricted Subsidiary
of such Person the principal amount of such Preferred Stock to be determined
in accordance with the Indenture (but excluding, in each case, any accrued
dividends) (and the term "Incur Indebtedness" and similar terms include
issuances of such Disqualified Stock and Preferred Stock);
(6) all obligations of the types referred to in clauses (1) through (5)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(7) all obligations of the types referred to in clauses (1) through (6)
of other Persons secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the liquidation value of
such property or asset and the amount of the obligation so secured;
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person; and
(9) any Guarantee by such Person of production or payment with respect
to a Production Payment,
if and to the extent, in the case of obligations of the types referred to in
clauses (1), (2) and (3) above, such obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP.
Except as expressly provided in clause (9) above, Production Payments and
Reserve Sales shall not constitute "Indebtedness."
Notwithstanding the foregoing, in connection with the purchase by the Company or
any Restricted Subsidiary of any business, the term "Indebtedness" will exclude
post-closing payment adjustments to which the seller may become entitled to the
extent such payment is determined by a final closing balance sheet or such
payment depends on the performance of such business after the closing; provided,
however, that, at the time of closing, the amount of any such payment is not
determinable and, to the extent such payment thereafter becomes fixed and
determined, the amount is paid within 30 days thereafter.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided,
however, that in the case of Indebtedness sold at a discount, the amount of such
Indebtedness at any time will be the accreted value thereof at such time.
"Independent Qualified Party" means an investment banking firm, accounting
firm or appraisal firm of national standing; provided, however, that such firm
is not an Affiliate of the Company.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan or
other extensions of credit (including by way of Guarantee but excluding any such
extension of credit made in the ordinary course of business to any customer or
supplier) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition for value of Capital
76
Stock, Indebtedness or other similar instruments issued by such Person. Except
as otherwise provided for herein, the amount of an Investment shall be its fair
value at the time the Investment is made and without giving effect to subsequent
changes in value.
For purposes of the definition of "Unrestricted Subsidiary", the definition
of "Restricted Payment" and the covenant described under "-- Certain Covenants
-- Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however, that
upon a redesignation of such Subsidiary as a Restricted Subsidiary, the
Company shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary equal to an amount (if positive) equal to (A) the
Company's "Investment" in such Subsidiary at the time of such redesignation
less (B) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary at
the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors.
"Issue Date" means June 25, 2002.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York, Texas or
Minnesota.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices and changes resulting from the incurrence
of previously estimated development costs) of more than 50% during a fiscal
quarter in the discounted future net revenues from proved oil and natural gas
reserves of the Company and its Restricted Subsidiaries, calculated in
accordance with clause (a)(1) of the definition of ACNTA; provided, however,
that the following will be excluded from the calculation of Material Change:
(1) any acquisitions during the fiscal quarter of oil and natural gas
reserves that have been estimated by independent petroleum engineers and
with respect to which a report or reports of such engineers exist; and
(2) any disposition of properties existing at the beginning of such
fiscal quarter that have been disposed of in compliance with the covenant
described under "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock."
"Moody's" means Moody's Investors Services, Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received (and, in the case of an Asset Disposition by an
Oil and Gas Royalty Trust, only as and when received by the Company or any
Restricted Subsidiary), but excluding any other consideration received in the
form of assumption by the acquiring Person of Indebtedness or other obligations
relating to such properties or assets or received in any other non-cash form),
in each case net of:
(1) all accounting, engineering, investment banking, brokerage, legal,
title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local and other
taxes required to be accrued as a liability under GAAP, as a consequence of
such Asset Disposition, and any relocation expenses incurred or assumed in
connection with such Asset Disposition;
77
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such assets, or
which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law, be repaid out of the proceeds from
such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Restricted Subsidiaries as a result of such Asset
Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve for adjustment in respect of the sale price of the assets that were
the subject of such Asset Disposition or as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock
or Indebtedness, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Net Present Value" means, with respect to any proved oil and natural gas
reserves, the discounted future net cash flows associated with such reserves,
determined in accordance with the rules and regulations (including
interpretations thereof) of the SEC in effect on the date of this Prospectus.
"Net Working Capital" means:
(1) all current assets of the Company and its Restricted Subsidiaries,
except current assets from commodity price risk management activities
arising in the ordinary course of business; minus
(2) all current liabilities of the Company and its Restricted
Subsidiaries, except current liabilities included in Indebtedness and
current liabilities from commodity price risk management activities arising
in the ordinary course of business,
determined in accordance with GAAP.
"Obligations" means, with respect to any Indebtedness, all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Oil and Gas Business" means:
(1) the acquisition, exploration, exploitation, development, operation
and disposition of interests in oil, natural gas, other hydrocarbon and
mineral properties;
(2) the gathering, marketing, distribution, treating, processing,
storage, refining, selling and transporting of any production from such
interests or properties and the marketing of oil, natural gas, other
hydrocarbons and minerals obtained from unrelated Persons;
(3) any business relating to or arising from exploration for or
exploitation, development, production, treatment, processing, storage,
refining, transportation, gathering or marketing of oil, natural gas, other
hydrocarbons and minerals and products produced in association therewith;
(4) any other related energy business, including power generation and
electrical transmission business where fuel required by such business is
supplied, directly or indirectly, from oil, natural gas, other hydrocarbons
and
78
minerals produced substantially from properties in which the Company or its
Restricted Subsidiaries, directly or indirectly, participates;
(5) any business relating to oil field sales and service; and
(6) any activity necessary, appropriate or incidental to the activities
described in the preceding clauses (1) through (5) of this definition.
"Oil and Gas Royalty Trust" means a trust that is an Unrestricted Subsidiary
formed by the Company or a Restricted Subsidiary to hold net profits interests
in any of the Company's and its Restricted Subsidiaries' oil and natural gas
properties that, at all times:
(1) holds no assets other than (a) net profits interests in the
Company's and its Restricted Subsidiaries' oil and natural gas properties
and (b) Temporary Cash Investments;
(2) conducts no business or activities other than the holding of the
assets permitted by clause (1) above and the distribution of its available
funds as required by clause (3) below;
(3) distributes all funds (less reasonable reserves, if any, for
operating liabilities as determined by the trustee) held by it to its unit
holders on a pro rata basis no less frequently than monthly;
(4) does not incur, nor permit to exist, directly or indirectly, any
Indebtedness other than Indebtedness Incurred for its routine administrative
expenses;
(5) is not permitted to sell its net profits interests except in
immaterial amounts or when revenue from such interests fall below $1.0
million annually;
(6) is not permitted to sell its net profits interests except for cash
equal to the fair market value thereof (as determined in good faith by the
trustee of such Oil and Gas Royalty Trust, whose determination shall be
conclusive);
(7) is not permitted to issue Capital Stock except to the Company or a
Restricted Subsidiary in exchange for the conveyance to such Oil and Gas
Royalty Trust of net profits interests in connection with its formation; and
(8) is governed by a trust agreement that requires the trustee to
operate the Oil and Gas Royalty Trust in compliance with the terms of
clauses (1) through (7) above.
"Oil and Natural Gas Hedging Contract" means any oil and natural gas hedging
agreement, and other agreement or arrangement designed to protect the Company or
any Restricted Subsidiary against fluctuations in oil and natural gas prices.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Business Investments" means Investments and expenditures made in
the ordinary course of, and of a nature that is or shall have become customary
in, the Oil and Gas Business as means of actively exploiting, exploring for,
acquiring, developing, processing, gathering, marketing or transporting oil,
natural gas, other hydrocarbons and minerals through agreements, transactions,
interests or arrangements that permit one to share risks or costs, comply with
regulatory requirements regarding local ownership or satisfy other objectives
customarily achieved through the conduct of the Oil and Gas Business jointly
with third parties, including:
(1) ownership interests in oil, natural gas, other hydrocarbon and
mineral properties or gathering, transportation, processing, storage or
related systems; and
(2) entry into, and Investments and expenditures in the form of or
pursuant to, operating agreements, working interests, royalty interests,
mineral leases, processing agreements, farm-in agreements, farm-out
agreements,
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contracts for the sale, transportation or exchange of oil, natural gas,
other hydrocarbons and minerals, production sharing agreements, development
agreements, area of mutual interest agreements, unitization agreements,
pooling arrangements, joint bidding agreements, service contracts, joint
venture agreements, partnership agreements (whether general or limited),
limited liability company agreements, subscription agreements, stock
purchase agreements, stockholder agreements and other similar agreements
with third parties (including Unrestricted Subsidiaries).
"Permitted Holders" means
(1) I. Jon Brumley;
(2) Jon S. Brumley;
(3) Warburg Pincus Equity Partners L.P.;
(4) J.P. Morgan Partners (SBIC), LLC;
(5) trusts, the sole beneficiaries and trustees of which are the
individuals listed in clauses (1) and (2) above or their immediate family
members;
(6) corporations, partnerships and other entities (a) of which the
individuals listed in clauses (1) and (2) above or their immediate family
members are the beneficial owners of all Capital Stock and other equity or
voting interests and (b) that are controlled by such individuals and their
immediate family members; and
(7) any Affiliates as of the Issue Date or successors of any of the
entities listed in clauses (3) and (4) above.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Related Business;
(2) cash and Temporary Cash Investments;
(3) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(4) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(5) loans or advances to officers, directors and employees made in the
ordinary course of business consistent with past practices of the Company or
such Restricted Subsidiary;
(6) Capital Stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments;
(7) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "-- Certain Covenants -- Limitation
on Sales of Assets and Subsidiary Stock" or consideration received for a
disposition not constituting an Asset Disposition;
(8) any Person where such Investment was acquired by the Company or any
of its Restricted Subsidiaries (a) in exchange for any other Investment or
accounts receivable held by the Company or any such Restricted
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Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other Investment or
accounts receivable or (b) as a result of a foreclosure by the Company or
any of its Restricted Subsidiaries with respect to any secured Investment or
other transfer of title with respect to any secured Investment in default;
(9) any acquisitions of Capital Stock solely in exchange for Capital
Stock (other than Disqualified Stock) of the Company; provided, however,
that the fair market value of such Capital Stock, when taken together with
all other Capital Stock acquired pursuant to this clause (9) and at the time
owned by the Company or its Restricted Subsidiaries, does not exceed $10.0
million;
(10) Hedging Obligations;
(11) obligations of one or more officers, directors or employees of the
Company or any of its Restricted Subsidiaries in connection with such
individual's acquisition of shares of Capital Stock of the Company (and
refinancings of the principal thereof and accrued interest thereon) so long
as no net cash or other assets of the Company and its Restricted
Subsidiaries is paid by the Company or any of its Restricted Subsidiaries to
such individuals in connection with the acquisition of any such obligations;
(12) Existing Investments and any Investments made with the proceeds of
any dispositions thereof;
(13) Permitted Business Investments;
(14) Guarantees of performance or other obligations (other than
Indebtedness) arising in the ordinary course in the Oil and Gas Business,
including obligations under oil and natural gas exploration, development,
joint operating, and related agreements and licenses or concessions related
to the Oil and Gas Business;
(15) Investments in prepaid expenses, negotiable instruments held for
collection or deposit and lease, utility and workers compensation,
performance and similar deposits entered into as a result of the operations
of the business in the ordinary course of business;
(16) Investments in a wholly-owned Unrestricted Subsidiary that
constructs and owns an office building for use as the Company's headquarters
in an aggregate amount not to exceed $10 million at any one time
outstanding;
(17) Investments in Capital Stock of any Oil and Gas Royalty Trust; and
(18) any Person, not otherwise permitted to be made pursuant to clause
(1) through (17), in an aggregate amount, which when taken together with all
other Investments made on or after the Issue Date pursuant to this clause,
does not exceed $20 million at any one time outstanding.
"Permitted Liens" means the following types of Liens:
(1) Liens securing Senior Indebtedness;
(2) Liens in favor of the Company or a Restricted Subsidiary;
(3) Liens securing the Notes;
(4) Liens existing as of the Issue Date;
(5) Liens for taxes, assessments and governmental charges or claims
either (A) not delinquent or (B) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(6) statutory and contractual Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens
imposed by law or contract incurred in the ordinary course of business
81
for sums not delinquent or being contested in good faith, if such reserve or
other appropriate provision, if any, as shall be required by GAAP shall have
been made in respect thereof;
(7) Liens incurred or deposits or pledges made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, or to secure the payment or performance
of tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, leases, government contracts and leases, performance and return of
money bonds and other similar obligations, including letters of credit and
bank guarantees required or requested by the United States, any State
thereof or any foreign government or any subdivision, department, agency,
organization or instrumentality of any of the foregoing in connection with
any contract or statute (exclusive of obligations for the payment of
borrowed money but including lessee or operator obligations under statutes,
governmental regulations, contracts or instruments related to the ownership,
exploration and production of oil, natural gas, other hydrocarbons and
minerals on state, Federal or foreign lands or waters);
(8) Liens arising out of judgments, decrees, orders or awards not
constituting an Event of Default;
(9) leases, subleases, licenses or sublicenses to third parties entered
into in the ordinary course of business;
(10) Liens on, or related to, assets to secure all or part of the costs
incurred in the ordinary course of the Oil and Gas Business for the
exploration, drilling, development, production, processing, transportation,
marketing, storage or operation thereof;
(11) Liens on pipeline or pipeline facilities that arise under operation
of law;
(12) Liens arising under operating agreements, joint venture agreements,
partnership agreements, oil, natural gas, other hydrocarbon and mineral
leases, farm-out or farm-in agreements, division orders, contracts for the
sale, transportation or exchange of oil or natural gas, unitization and
pooling declarations and agreements, area of mutual interest agreements and
other agreements that are customary in the Oil and Gas Business;
(13) Liens reserved in oil, natural gas, other hydrocarbon and mineral
leases for bonus or rental payments and for compliance with the terms of
such leases;
(14) Liens constituting survey exceptions, encumbrances, easements, and
reservations of, and rights to others for, rights-of-way, zoning and other
restrictions as to the use of real properties, and minor defects of title
which, in the case of any of the foregoing, do not secure the payment of
borrowed money, and in the aggregate do not materially adversely affect the
value of the assets of the Company and its Restricted Subsidiaries, taken as
a whole, or materially impair the use of such properties for the purposes
for which such properties are held by the Company or such Subsidiaries;
(15) Liens encumbering assets under construction arising from progress
or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such assets;
(16) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(17) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(18) Liens arising under the Indenture in favor of the Trustee for its
own benefit and similar Liens in favor of other trustees, agents and
representatives arising under instruments governing Indebtedness permitted
to be incurred under the Indenture, provided, however, that such Liens are
solely for the benefit of the trustees, agents or representatives in their
capacities as such and not for the benefit of the holders of such
Indebtedness;
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(19) set-off, chargeback and other rights of depositary and collection
banks and other regulated financial institutions with respect to money or
instruments of the Company or any of its Restricted Subsidiaries on deposit
with or in the possession of such institutions; and
(20) Liens arising from the deposit of funds or securities in trust for
the purpose of decreasing or defeasing Indebtedness so long as such deposit
of funds or securities and such decreasing or defeasing of Indebtedness are
permitted under the covenant described under "Certain Covenants --
Limitation on Restricted Payments."
In each case set forth above, notwithstanding any stated limitation on the
assets that may be subject to such Lien, a Permitted Lien on a specified asset
or group or type of assets may include Liens on all improvements, additions and
accessions thereto and all products and proceeds thereof (including, without
limitation, dividends, distributions and increases in respect thereof).
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Production Payments and Reserve Sales" means the grant or transfer to any
Person of a Dollar-Denominated Production Payment, Volumetric Production
Payment, royalty, overriding royalty, net profits interest, master limited
partnership interest or other interest in oil and natural gas properties,
reserves or the right to receive all or a portion of the production or the
proceeds from the sale of production attributable to such properties.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal amount (or
if Incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding or
committed (plus accrued interest thereon and fees and expenses, including
any premium and defeasance costs) under the Indebtedness being Refinanced;
83
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Restricted Subsidiary that is not a Subsidiary Guarantor that
Refinances Indebtedness of the Company or (B) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Registration Rights Agreement" means the Registration Rights Agreement
dated June 19, 2002, among the Company, Credit Suisse First Boston Corporation,
BNP Paribas Securities Corp., Comerica Securities, Inc., Deutsche Bank
Securities Inc., Fleet Securities, Inc., Fortis Investment Services LLC, Frost
Securities, Inc., Goldman, Sachs & Co. and Wachovia Securities, Inc.
"Related Business" means the Oil and Gas Business and any other business in
which the Company or a Subsidiary was engaged on the Issue Date and any business
related, ancillary or complementary thereto.
"Representative" means, with respect to a Person, any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of such Person.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of its Capital
Stock (other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and dividends or distributions payable
solely to the Company or a Restricted Subsidiary, and other than pro rata
dividends or other distributions made by a Subsidiary that is not a Wholly
Owned Subsidiary to minority stockholders (or owners of an equivalent
interest in the case of a Subsidiary that is an entity other than a
corporation));
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person (other than a
Restricted Subsidiary) or of any Capital Stock of a Restricted Subsidiary
held by any Affiliate of the Company (other than the Company or a Restricted
Subsidiary), including in connection with any merger or consolidation and
including the exercise of any option to exchange any Capital Stock (other
than into Capital Stock of the Company that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
of such Person (other than the purchase, repurchase, redemption, defeasance
or other acquisition of Subordinated Obligations or retirement for value in
anticipation of satisfying a sinking fund obligation, principal installment
or final maturity, in each case due within one year of the date of such
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value); or
(4) the making of any Investment (other than a Permitted Investment) in
any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the Credit Agreement among the Company,
Encore Operating, L.P., Fleet National Bank, as Administrative Agent, Wachovia
Bank, National Association, as Syndication Agent, Fortis Capital Corp., as
Documentation Agent, and the financial institutions listed on Schedule I thereto
as Banks.
"S&P" means Standard and Poor's Ratings Group.
"Sale/Leaseback Transaction" means an arrangement relating to property owned
by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the Company or a
Restricted Subsidiary transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
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"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue Date
or thereafter Incurred; and
(2) all other Obligations of such Person (including interest accruing on
or after the filing of any petition in bankruptcy or for reorganization
relating to such Person whether or not post-filing interest is allowed in
such proceeding) in respect of Indebtedness described in clause (1) above;
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such Indebtedness or other obligations are subordinate or pari passu in
right of payment to the Notes or the Subsidiary Guaranty of such Person, as the
case may be; provided, however, that Senior Indebtedness shall not include:
(1) any obligation of such Person to any Subsidiary;
(2) any liability for Federal, state, local or other taxes owed or owing
by such Person;
(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(4) any Indebtedness or other Obligation (and any accrued and unpaid
interest in respect thereof) of such Person which is subordinate or junior
in any respect to any other Indebtedness or other Obligation of such Person;
or
(5) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" means, with respect to a Person, the
Notes (in the case of the Company), the Subsidiary Guaranty (in the case of a
Subsidiary Guarantor) and any other Indebtedness of such Person that
specifically provides that such Indebtedness is to rank pari passu with the
Notes or such Subsidiary Guaranty, as the case may be, in right of payment and
is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of such Person which is not Senior Indebtedness of such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to a Person, any Indebtedness
of such Person (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the Notes or a Subsidiary
Guaranty of such Person, as the case may be, pursuant to a written agreement to
that effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
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Unless otherwise specified, "Subsidiary" means a Subsidiary of the Company.
"Subsidiary Guarantor" means EAP Energy, Inc., EAP Operating, Inc., EAP
Properties, Inc., Encore Energy Services, L.P. and Encore Operating, L.P. and
each other Subsidiary of the Company that executes the Indenture as a guarantor
on the Issue Date and each other Subsidiary of the Company that thereafter
guarantees the Notes pursuant to the terms of the Indenture, in each case unless
and until such subsidiary is released from its obligations under its Subsidiary
Guaranty pursuant to the terms of the Indenture.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of America
or any agency thereof or obligations guaranteed by the United States of
America or any agency thereof;
(2) investments in demand accounts and time deposit accounts, bankers
acceptances, overnight bank deposits, certificates of deposit and money
market deposits maturing within twelve months of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any State thereof or any foreign country
recognized by the United States of America, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of $50.0
million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by
a registered broker dealer or mutual fund distributor;
(3) investments in deposits available for withdrawal on demand with any
commercial bank that is organized under the laws of any country in which the
Company or any Restricted Subsidiary maintains an office or is engaged in
the Oil and Gas Business, provided that (i) all such deposits have been made
in such accounts in the ordinary course of business and (ii) such deposits
do not at any one time exceed $10.0 million in the aggregate;
(4) repurchase (or reverse repurchase) obligations with a term of not
more than 30 days for underlying securities of the types described in clause
(1) above entered into with a bank meeting the qualifications described in
clause (2) above;
(5) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P; and
(6) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
S&P or "A" by Moody's.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the date fixed
for redemption or, in the case of defeasance, prior to the date of deposit (or,
if such Statistical Release is no longer published, any publicly available
source of similar market data)) most nearly equal to the then remaining average
life to June 15, 2007 or, in the case of defeasance, to maturity; provided,
however, that if the average life to June 15, 2007 or maturity, as the case may
be, of the Notes is not equal to the constant maturity of a United States
Treasury security for which a weekly average yield is given, the Treasury Rate
shall be obtained by linear interpolation (calculated to the nearest one-twelfth
of a year) from the weekly average yields of United States Treasury securities
for which such yields are given, except that if the average life to June 15,
2007 or maturity, as the case may be, of the Notes is less than one year, the
weekly average yield on actually traded United States Treasury securities
adjusted to a constant maturity of one year shall be used.
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"Trustee" means Wells Fargo Bank, National Association until a successor
replaces it and, thereafter, means the successor.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb) as in effect on the Issue Date.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Company (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, the Company or any other
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated; provided, however, that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments".
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (A) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "-- Certain Covenants --
Limitation on Indebtedness" and (B) no Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
87
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain of the material United States federal
income tax consequences of exchanging for, holding and selling the exchange
notes. Except where we state otherwise, this summary deals only with notes held
as capital assets, as defined in the Internal Revenue Code of 1986, as amended
(the "Code"), by a United States Holder (as defined below) who is the initial
beneficial owner of the exchange note.
We do not address all of the tax consequences that may be relevant to a
United States Holder. We also do not address, except as stated below, any of the
tax consequences to holders that are Foreign Holders (as defined below) or to
holders that may be subject to special tax treatment, including banks, thrift
institutions, certain expatriates, real estate investment trusts, personal
holding companies, insurance companies, and brokers and dealers in securities or
currencies. Further, we do not address:
o the United States federal income tax consequences to stockholders in, or
partners or beneficiaries of, an entity that is a holder of the notes;
o all the United States federal estate and gift or alternative minimum tax
consequences of the purchase, ownership or sale of the notes;
o the United States federal income tax consequences to persons who hold
the notes in a "straddle" or as part of a "hedging," "conversion" or
"constructive sale" transaction or whose "functional currency" is not
the United States dollar; or
o any state, local or foreign tax consequences of the purchase, ownership
and sale of the notes.
Accordingly, prospective purchasers and holders of notes should consult their
own tax advisors regarding the particular tax consequences to them of
purchasing, owning and selling the notes in light of their circumstances.
A "United States Holder" is a beneficial owner of the notes who, for United
States federal income tax purposes, is:
o an individual who is a citizen or resident of the United States;
o a corporation or another entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision thereof or therein;
o an estate, if its income is subject to United States federal income
taxation regardless of its source; or
o a trust if (1) a United States court can exercise primary supervision
over its administration and (2) one or more United States persons have
the authority to control all of its substantial decisions.
If a partnership holds notes, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of the
partnership.
A "Foreign Holder" is a beneficial owner of the notes other than a United
States Holder.
This summary is based on the currently existing provisions of the Code,
Treasury regulations issued under the Code, and administrative and judicial
interpretations thereof, all as of the date of this prospectus and all of which
are subject to change, possibly with retroactive effect, or different
interpretations.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
PAYMENT OF INTEREST ON THE NOTES. Interest paid or payable on a note will be
taxable to a United States Holder as ordinary income, generally at the time it
is received or accrued, in accordance with such Holder's regular method of
accounting for United States federal income tax purposes.
88
EXCHANGE OFFER. The exchange of notes for Exchange Notes in the Registered
Exchange Offer will not constitute a taxable event for United States Holders.
Consequently, a United States Holder will not recognize gain or loss on the
exchange, the holding period of the Exchange Note will include the holding
period of the note, and the basis of the Exchange Note will be the same as the
basis of the note exchanged therefor immediately before the exchange.
If a United States Holder receives additional interest, we believe it should
be treated in the same manner as regular interest on the notes. However, the
U.S. Holder might instead be required to report it as income when it accrues or
becomes fixed, even if the U.S. Holder is a cash method taxpayer.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a note, a United
States Holder generally will recognize taxable gain or loss equal to the
difference between the sum of cash plus the fair market value of all non-cash
property received on such disposition (except to the extent such cash or
property is attributable to accrued, but unpaid, interest, which will be taxable
as ordinary income) and such United States Holder's adjusted tax basis in the
note. A United States Holder's adjusted tax basis in a note generally will equal
the cost of the note to such United States Holder. Gain or loss recognized on
the disposition of a note will be long-term capital gain or loss if, at the time
of such disposition, the United States Holder's holding period for the note is
more than one year. Long-term capital gain realized by individual taxpayers is
generally taxable at a maximum rate of 20 percent. The deductibility of capital
losses is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Backup withholding and
information reporting requirements may apply to payments made with respect to
the notes. We, or our agent or broker, as the case may be, will be required to
withhold from any payment that is subject to backup withholding tax a portion of
such payment, not to exceed 31%, if a United States Holder fails to furnish its
taxpayer identification number (social security or employer identification
number) or otherwise fails to comply with the applicable requirements of the
backup withholding rules. Corporations and certain other entities are generally
exempt from the backup withholding and information reporting requirements.
Generally, income on the notes will be reported to non-exempt United States
Holders on an applicable Internal Revenue Service Form 1099.
Any amounts withheld under the backup withholding rules from a payment to a
United States Holder will be allowed as a credit against such United States
Holder's United States federal income tax liability and may entitle the United
States Holder to a refund, provided that the required information is furnished
to the Internal Revenue Service by the United States Holder.
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
PAYMENT OF INTEREST ON THE NOTES. Payments of interest to a Foreign Holder
that are not effectively connected to the conduct of a United States trade or
business will generally not be subject to United Stated federal income tax, or
the withholding thereof, provided the Foreign Holder:
o does not own (directly or indirectly, actually or constructively) 10% or
more of the total combined voting power of all classes of our capital
stock entitled to vote;
o is not a controlled foreign corporation that is related to us through
stock ownership; and
o either (A) provides us or our agent with its name and address on an
Internal Revenue Service Form W-8BEN (or successor form), and certifies,
under penalties of perjury, that it is not a United States person, or
(B) holds its notes through certain foreign intermediaries and satisfies
the certification requirements of applicable United States Treasury
regulations. Special certification rules apply to certain Foreign
Holders that are entities rather than individuals.
A Foreign Holder that receives interest payments which are not effectively
connected with a United States trade or business but that does not satisfy each
of the three above mentioned conditions will be subject to withholding tax at a
rate of 30%, unless a United States income tax treaty applies to reduce or
eliminate withholding and such Foreign Holder claims the benefit of such treaty
on a properly executed Internal Revenue Service Form W-8BEN.
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EXCHANGE OFFER. The exchange of notes for Exchange Notes in the Registered
Exchange Offer will not constitute a taxable event for Foreign Holders.
Consequently, for United States federal income tax purposes, a Foreign Holder
will not recognize gain or loss on the exchange, the holding period of the
Exchange Note will include the holding period of the note, and the basis of the
Exchange Note will be the same as the basis of the note immediately before the
exchange. If a Foreign Holder receives additional interest on the notes, we
believe it should be treated in the same manner as regular interest on the
notes.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES. A Foreign Holder will generally
not be subject to United States federal income tax, or the withholding thereof,
on any gain realized upon the sale, exchange, redemption, retirement at maturity
or other disposition of the notes. If, however, the gain is effectively
connected with the conduct of a trade or business within the United States by
the Foreign Holder or if the Foreign Holder is present in the United States for
183 days or more during the taxable year of sale, redemption, retirement or
other disposition and certain other conditions are met, the Foreign Holder may
be subject to income tax on all income and gains recognized.
UNITED STATES TRADE OR BUSINESS. If a Foreign Holder holds the notes in
connection with a trade or business that the Foreign Holder is conducting in the
United States:
o Any interest on the notes, and any gain from disposing of the notes,
generally will be subject to income tax as if the Foreign Holder were a
U.S. Holder, but will not be subject to withholding tax if the Foreign
Holder provides a Form W-8ECI to the payor (or the payor's withholding
agent).
o Corporate Foreign Holders may be subject to the "branch profits tax" on
the earnings that are connected with Foreign Holder's United States
trade or business, including earnings from the notes. This tax is 30%,
but may be reduced or eliminated by an applicable United States income
tax treaty.
UNITED STATES FEDERAL ESTATE TAX. Notes will not be included in the estate
of a Foreign Holder who is an individual for United States federal estate tax
purposes, provided that at the time of the Holder's death, such Holder did not
actually or constructively own 10% or more of the total combined voting power of
all classes of our capital stock entitled to vote and, at the time of the
Holder's death, payments of interest with respect to such notes would not have
been effectively connected with the conduct by such individual of a trade or
business in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Backup withholding
requirements do not apply to payments of interest made to Foreign Holders if the
certification needed to avoid withholding tax on interest, as described above,
is received, provided that the payor does not have actual knowledge that the
Holder is a United States Holder. If the foreign office of a foreign "broker"
(as defined in applicable United States Treasury regulations) pays the proceeds
of the sale of a note effected outside the United States to the seller thereof,
backup withholding and information reporting will not apply. Information
reporting requirements (but not backup withholding) will apply, however, to a
payment by or through a foreign office of a broker of the proceeds of a sale of
a note effected outside the United States if that broker has a specified type of
relationship with the United States, unless the broker has documentary evidence
in its records that the holder is a Foreign Holder and certain other conditions
are met or the Foreign Holder otherwise establishes an exemption. Payment of
sale proceeds by a United States office of a broker is subject to both backup
withholding at a rate not to exceed 31% and information reporting unless the
holder certifies, under penalties of perjury, in the manner required as to its
Foreign Holder status or otherwise establishes an exemption.
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PLAN OF DISTRIBUTION
Based on interpretations of the SEC set forth in no-action letters issued to
third parties, we believe that exchange notes issued under the exchange offer in
exchange for the outstanding notes may be offered for resale, resold and
otherwise transferred by you without compliance with the registration and
prospectus delivery provisions of the Securities Act, if:
o you are not an "affiliate" of ours within the meaning of Rule 405 under
the Securities Act;
o you are acquiring exchange notes in the ordinary course of your
business; and
o you do not intend to participate in the distribution of the exchange
notes.
If you tender your notes in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
o you cannot rely on those interpretations of the SEC; and
o you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction, and the secondary resale transaction must be covered by an
effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation
S-K under the Securities Act.
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for outstanding
notes where such outstanding notes were acquired as a result of market-making
activities or other trading activities. We have agreed that, starting on the
expiration date and ending on the close of business 180 days after the
expiration date, we will make this prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until 90 days after the date of this prospectus, all dealers effecting
transactions in the exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit resulting
from any such resale of exchange notes and any commission or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 180 days after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the outstanding notes,
other than commissions or concessions of any brokers or dealers. We will
indemnify the holders of the outstanding notes, including any broker-dealers,
against certain liabilities, including liabilities under the Securities Act.
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LEGAL MATTERS
Certain matters related to the exchange notes will be passed upon for us by
Kelly, Hart & Hallman, P.C., Fort Worth, Texas. Lawyers with Kelly, Hart &
Hallman, P.C. own an aggregate of 6,600 shares of Encore Common Stock.
INDEPENDENT PUBLIC ACCOUNTANTS
Our consolidated financial statements as of and for the years ended December
31, 2001, 2000 and 1999 incorporated by reference in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are incorporated herein in
reliance upon the authority of said firm as experts in giving said reports.
Subsequent to Arthur Andersen's completion of our 2001 audit, the firm was
convicted of obstruction of justice charges relating to a federal investigation
of Enron Corporation, has ceased practicing before the SEC, and has lost the
services of the material personnel responsible for our audit. As a result, it is
not possible to obtain Arthur Andersen's consent to the incorporation by
reference of their report in this prospectus, and we have dispensed with the
requirement to file their consent in reliance upon Rule 437a of the Securities
Act of 1933. Because Arthur Andersen has not consented to the incorporation by
reference of their report in this prospectus, you will not be able to recover
against Arthur Andersen under Section 11 of the Securities Act for any untrue
statements of a material fact contained in the financial statements audited by
Arthur Andersen or any omissions to state a material fact required to be stated
therein.
INDEPENDENT PETROLEUM ENGINEERS
Certain information with respect to the oil and natural gas reserves
associated with our oil and natural gas properties is derived from the report of
Miller and Lents, Ltd., independent petroleum engineers, and has been
incorporated by reference in this prospectus upon the authority of said firm as
experts with respect to matters covered by such reports and in giving such
report.
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GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and natural gas industry and this prospectus:
ACQUISITION AND DEVELOPMENT COSTS. Capital costs incurred in the
acquisition, development, exploitation, and revisions of proved oil and natural
gas reserves.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in
reference to oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas at standard atmospheric
conditions.
Bbl/D. One stock tank barrel of oil or other liquid hydrocarbons per day.
BOE. One barrel of oil equivalent, calculated by converting natural gas to
oil equivalent barrels at a ratio of six Mcf to one Bbl of oil.
BOE/D. One barrel of oil equivalent per day, calculated by converting
natural gas to oil equivalent barrels at a ratio of six Mcf to one Bbl of oil.
COMPLETION. The installation of permanent equipment for the production of
oil or natural gas.
DELAY RENTALS. Fees paid to the lessor of the oil and natural gas lease
during the primary term of the lease prior to the commencement of production
from a well.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within or in close proximity to an area of
known production targeting existing reservoirs.
DIRECT LIFTING COSTS. All direct costs of producing oil and natural gas
after completion of drilling and before removal of production from the property.
Such costs include labor, superintendence, supplies, repairs, maintenance, and
direct overhead charges.
EXPLORATORY WELL. A well drilled to find and produce oil or natural gas in
an unproved area or to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be, in
which we have a working interest.
HORIZONTAL DRILLING. A drilling operation in which a portion of the well is
drilled horizontally within a productive or potentially productive formation.
MBbl. One thousand barrels of oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent, calculated by converting
natural gas to oil equivalent barrels at a ratio of six Mcf to one Bbl of oil.
Mcf. One thousand cubic feet of natural gas.
Mcf/D. One thousand cubic feet of natural gas per day.
MCFE. One thousand cubic feet of natural gas equivalent, calculated by
converting oil to natural gas equivalent at a ratio of one Bbl of oil to six
Mcf.
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MMBOE. One million barrels of oil equivalent, calculated by converting
natural gas to oil equivalent barrels at a ratio of six Mcf to one Bbl of oil.
MMBTU. One million British thermal units. One British thermal unit is the
amount of heat required to raise the temperature of one pound of water one
degree Fahrenheit.
MMcf. One million cubic feet of natural gas.
NET ACRES OR NET WELLS. Gross acres or wells, as the case may be, multiplied
by the percentage working interest owned by us.
NET PRODUCTION. Production that is owned by Encore less royalties and
production due others.
NYMEX. New York Mercantile Exchange.
OIL. Crude oil or condensate.
OPERATING INCOME. Gross oil and natural gas revenue less applicable
production taxes and lease operating expense.
OPERATOR. The individual or company responsible for the exploration,
exploitation and production of an oil or natural gas well or lease.
PRESENT VALUE OF FUTURE NET REVENUES OR PRESENT VALUE OR PV-10. The pretax
present value of estimated future revenues to be generated from the production
of proved reserves, 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 hedging activities, non-property related expenses such
as general and administrative expenses, debt service and depletion,
depreciation, and amortization, and discounted using an annual discount rate of
10%.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of oil, natural gas, and natural
gas liquids that geological and engineering data demonstrate with reasonable
certainty are recoverable in future years from known reservoirs under existing
economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered from
new wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion.
RESERVE-TO-PRODUCTION INDEX OR R/P INDEX. An estimate expressed in years, of
the total estimated proved reserves attributable to a producing property divided
by production from the property for the 12 months preceding the date as of which
the proved reserves were estimated.
ROYALTY. An interest in an oil and natural gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but does not require the owner
to pay any portion of the costs of drilling or operating the wells on the leased
acreage. Royalties may be either landowner's royalties, which are reserved by
the owner of the leased acreage at the time the lease is granted, or overriding
royalties, which are usually reserved by an owner of the leasehold in connection
with a transfer to a subsequent owner.
STANDARDIZED MEASURE. Future cash inflows from proved oil and natural gas
reserves, less future development and production costs and future income tax
expenses, discounted at 10% per annum to reflect the timing of future cash
flows. Standardized measure differs from PV-10 because standardized measure
includes the effect of future income taxes.
94
TERTIARY RECOVERY. An enhanced recovery operation that normally occurs after
waterflooding in which chemicals or natural gasses are used as the injectant.
UNIT. A specifically defined area within which acreage is treated as a
single consolidated lease for operations and for allocations of costs and
benefits without regard to ownership of the acreage. Units are established for
the purpose of recovering oil and natural gas from specified zones or
formations.
WATERFLOOD. A secondary recovery operation in which water is injected into
the producing formation in order to maintain reservoir pressure and force oil
toward and into the producing wells.
WORKING INTEREST. An interest in an oil and natural gas lease that gives the
owner of the interest the right to drill for and produce oil and natural gas on
the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation provides that no director or officer shall
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duties as a director for any act or omission; provided, however,
that the director may be liable for any claim resulting from an act or omission
that has not met the standard of conduct permissible under the Delaware General
Corporation Law to indemnify the director or officer for the amount claimed.
Our Certificate of Incorporation and our Bylaws provide that we 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
our right) by reason of the fact that he is or was a director or officer of
Encore, or is or was serving at our request 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 our best interests, and with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. Subject to the foregoing, we 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 our right to procure a
judgment in our favor by reason of the fact that he is or was a director or
officer, or is or was serving at our request 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 our best interests and except that 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 to Encore unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper. Pursuant to our Certificate of
Incorporation and Bylaws, we may purchase and maintain insurance on behalf of
any person who is or was a director or officer, or is or was a director or
officer of Encore serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan 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 we would have the power or the obligation to indemnify him
against such liability. Under the Certificate of Incorporation and Bylaws, we
may, to the extent authorized from time to time by our Board of Directors,
provide rights to indemnification and the advancement of expenses to our
employees and agents similar to those rights conferred in our Certificate of
Incorporation and Bylaws to our directors and officers.
We have entered into indemnification agreements with our directors and
officers, which indemnify each person to the fullest extent permitted by
Delaware law and obligate us to purchase and maintain insurance or similar
protection on behalf of our directors and officers against personal liability
against him or incurred by or on behalf of him in the capacity as a director or
officer of Encore. Any insurance policy providing liability coverage for
directors and officers of Encore shall continue until as long as the director or
officer serves in such capacity. Pursuant to the agreements, we also agree to
hold harmless and indemnify each person against expenses incurred by reason of
the fact that the person is or was a director, officer, employee or agent of us,
unless his acts were committed in bad faith, were the result of active and
deliberate dishonesty, or resulted in personal financial profit or other
advantage to which he was not legally entitled.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers of controlling persons pursuant to the
foregoing provisions, Encore has been informed that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
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Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits. The following is a list of all exhibits filed as part of the
Registration Statement on Form S-4, including those incorporated by
reference herein.
Exhibit
Number Exhibit Description
------ -------------------
2.1 Second Amended and Restated Certificate of Incorporation of
Encore Acquisition Company (incorporated by reference to
Exhibit 3.1 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001, filed with the SEC
on November 7, 2001).
2.2 Second Amended and Restated Bylaws of Encore Acquisition
Company (incorporated by reference to Exhibit 3.2 to
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2001, filed with the SEC on November 7, 2001).
4.1 Specimen certificate of Encore Acquisition Company
(incorporated by referenced to Exhibit 4.1 to Registration
Statement on Form S-1, Registration No. 333-47540, filed with
the SEC on December 15, 2000).
4.2 Indenture, dated as of June 25, 2002, among Encore,
subsidiary guarantors party thereto and Wells Fargo Bank,
N.A. (incorporated by reference to Exhibit 4.1 to Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2002, filed with the SEC on August 9, 2002).
4.3 Registration Rights Agreement, dated June 19, 2002, among
Encore, the subsidiary guarantors party thereto and the
initial purchasers named therein (incorporated by reference
to Exhibit 4.2 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, filed with the SEC on
August 9, 2002).
4.4 Form of 8 3/8% Note (contained in the Indenture filed as
Exhibit 4.2 to this Registration Statement).
5.1* Opinion of Kelly, Hart & Hallman, P.C. regarding legality of
the Securities to be registered.
10.1 Credit Agreement, dated June 25, 2002 among Encore
Acquisition Company, Encore Operating, L.P., Fleet National
Bank, a national banking association, as Administrative Agent
("Administrative Agent"), Wachovia Bank, N.A., as Syndication
Agent ("Syndication Agent"), Fortis Capital Corp., as
Documentary Agent ("Documentary Agent") and the financial
institutions listed therein (incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, filed with the SEC on
August 9, 2002).
10.2 Encore Acquisition Company 2000 Incentive Stock Plan
(incorporated by reference to Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 2001, filed with the SEC on November 7, 2001).
12.1* Statement regarding Computation of Ratios.
21.1 Subsidiaries of Encore Acquisition Company (incorporated by
reference to Exhibit 21.1 to Annual Report on Form 10-K for
the annual period ended December 31, 2001, filed with the SEC
on March 15, 2002).
23.1* Consent of Kelly, Hart & Hallman, P.C. (included in the
opinion filed as Exhibit 5.1 to this Registration Statement).
23.2* Consent of Miller & Lents, Ltd.
24.1* Powers of Attorney (included on the signature page of this
Registration Statement).
25.1* Statement of Eligibility of Trustee.
99.1* Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Notice to Investors.
99.4* Form of Notice to Broker Dealers.
--------
* Filed herewith
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Item 22. Undertakings.
(a) The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in this effective Registration
Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
(2) 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.
(3) 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.
(b) The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of a Registrant's Annual Report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in this Registration Statement 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the provisions referred to in
Item 20 of this Registration Statement, or otherwise, the Registrants
have 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
Registrants of expenses incurred or paid by a director, officer or
controlling person of the Registrants 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 Registrants will, unless in the opinion of their 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 Registrants hereby undertake to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other
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equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement
through the date of responding to such request.
The undersigned Registrants hereby undertake to supply by means of
a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the
subject of and included in this Registration Statement when it became
effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrants have duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort Worth,
State of Texas, on September 13, 2002.
ENCORE ACQUISITION COMPANY
By: /s/ I. Jon Brumley
-----------------------------------------------------
Name: I. Jon Brumley
Title: Chairman of the Board, Chief Executive Officer,
and Director
EAP ENERGY, INC.
By: /s/ I. Jon Brumley
-----------------------------------------------------
Name: I. Jon Brumley
Title: Chief Executive Officer
EAP OPERATING, INC.
By: /s/ I. Jon Brumley
-----------------------------------------------------
Name: I. Jon Brumley
Title: Chief Executive Officer
ENCORE OPERATING, L.P.
By: EAP Operating, Inc., general partner
By: /s/ I. Jon Brumley
-----------------------------------------------------
Name: I. Jon Brumley
Title: Chief Executive Officer
EAP ENERGY SERVICES, L.P.
By: EAP Energy, Inc., general partner
By: /s/ I. Jon Brumley
-----------------------------------------------------
Name: I. Jon Brumley
Title: Chief Executive Officer
100
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints I. Jon Brumley, Morris B. Smith and John H.
Karnes, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September 13, 2002.
SIGNATURE TITLE OR CAPACITY
--------- -----------------
/s/ I. Jon Brumley Chairman of the Board and Director of Encore Acquisition Company and Chief
----------------------------------- Executive Officer of Encore Acquisition Company, EAP Energy, Inc., EAP Properties,
I. Jon Brumley Inc. and EAP Operating, Inc.
/s/ Jon S. Brumley President of Encore Acquisition Company, EAP Energy, Inc., EAP Properties, Inc. and
----------------------------------- EAP Operating, Inc. and Director of Encore Acquisition Company
Jon S. Brumley
/s/ Morris B. Smith Chief Financial Officer, Treasurer, Executive Vice President and Director of Encore
----------------------------------- Acquisition Company, EAP Energy, Inc., EAP Properties, Inc. and EAP Operating, Inc.
Morris B. Smith and Principal Financial Officer of Encore Acquisition Company, EAP Energy, Inc.,
EAP Properties, Inc., EAP Operating, Inc., Encore Operating, L.P. and EAP Energy
Services, L.P.
/s/ Robert C. Reeves Vice President and Controller of Encore Acquisition Company, EAP Energy, Inc., EAP
----------------------------------- Properties, Inc. and EAP Operating, Inc. and Principal Accounting Officer of Encore
Robert C. Reeves Acquisition Company, EAP Energy, Inc., EAP Properties, Inc., EAP Operating, Inc.,
Encore Operating, L.P. and EAP Energy Services, L.P.
/s/ Arnold L. Chavkin
----------------------------------- Director of Encore Acquisition Company
Arnold L. Chavkin
/s/ Howard H. Newman
----------------------------------- Director of Encore Acquisition Company
Howard H. Newman
/s/ Ted A. Gardner
----------------------------------- Director of Encore Acquisition Company
Ted A. Gardner
/s/ Ted Collins, Jr.
----------------------------------- Director of Encore Acquisition Company
Ted Collins, Jr.
/s/ James A. Winne, III
----------------------------------- Director of Encore Acquisition Company
James A. Winne, III
101
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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2.1 Second Amended and Restated Certificate of Incorporation of
Encore Acquisition Company (incorporated by reference to
Exhibit 3.1 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001, filed with the SEC
on November 7, 2001).
2.2 Second Amended and Restated Bylaws of Encore Acquisition
Company (incorporated by reference to Exhibit 3.2 to
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2001, filed with the SEC on November 7, 2001).
4.1 Specimen certificate of Encore Acquisition Company
(incorporated by referenced to Exhibit 4.1 to Registration
Statement on Form S-1, Registration No. 333-47540, filed with
the SEC on December 15, 2000).
4.2 Indenture, dated as of June 25, 2002, among Encore,
subsidiary guarantors party thereto and Wells Fargo Bank,
N.A. (incorporated by reference to Exhibit 4.1 to Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2002, filed with the SEC on August 9, 2002).
4.3 Registration Rights Agreement, dated June 19, 2002, among
Encore, the subsidiary guarantors party thereto and the
initial purchasers named therein (incorporated by reference
to Exhibit 4.2 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, filed with the SEC on
August 9, 2002).
4.4 Form of 8 3/8% Note (contained in the Indenture filed as
Exhibit 4.2 to this Registration Statement).
5.1* Opinion of Kelly, Hart & Hallman, P.C. regarding legality of
the Securities to be registered.
10.1 Credit Agreement, dated June 25, 2002 among Encore
Acquisition Company, Encore Operating, L.P., Fleet National
Bank, a national banking association, as Administrative Agent
("Administrative Agent"), Wachovia Bank, N.A., as Syndication
Agent ("Syndication Agent"), Fortis Capital Corp., as
Documentary Agent ("Documentary Agent") and the financial
institutions listed therein (incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, filed with the SEC on
August 9, 2002).
10.2 Encore Acquisition Company 2000 Incentive Stock Plan
(incorporated by reference to Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 2001, filed with the SEC on November 7, 2001).
12.1* Statement regarding Computation of Ratios.
21.1 Subsidiaries of Encore Acquisition Company (incorporated by
reference to Exhibit 21.1 to Annual Report on Form 10-K for
the annual period ended December 31, 2001, filed with the SEC
on March 15, 2002).
23.1* Consent of Kelly, Hart & Hallman, P.C. (included in the
opinion filed as Exhibit 5.1 to this Registration Statement).
23.2* Consent of Miller & Lents, Ltd.
24.1* Powers of Attorney (included on the signature page of this
Registration Statement).
25.1* Statement of Eligibility of Trustee.
99.1* Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Notice to Investors.
99.4* Form of Notice to Broker Dealers.
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* Filed herewith