AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 2003
REGISTRATION NO. 333-106943
333-106943-01
333-106943-02
333-106943-03
333-106943-04
333-106943-05
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ENCORE ACQUISITION COMPANY
(AND ITS SUBSIDIARIES IDENTIFIED ON THE FOLLOWING PAGE)
(Exact name of registrant as specified in its charter)
<Table>
777 MAIN STREET, SUITE 1400 75-2759650
FORT WORTH, TEXAS 76102 (I.R.S. Employer
(817) 877-9955 Identification No.)
(Address, including zip code, and telephone number,
DELAWARE including
(State or other jurisdiction area code, of registrant's principal executive
of incorporation or organization) offices)
</Table>
I. JON BRUMLEY
CHIEF EXECUTIVE OFFICER
777 MAIN STREET, SUITE 1400
FORT WORTH, TEXAS 76102
(817) 877-9955
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPY TO:
SEAN T. WHEELER
BAKER BOTTS L.L.P.
ONE SHELL PLAZA
910 LOUISIANA
HOUSTON, TEXAS 77002-4995
(713) 229-1268
FAX: (713) 229-7868
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this registration statement.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
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Debt Securities, including additional 8 3/8% Senior
Subordinated Notes Due 2012(2)............................
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Common Stock, par value $.01 per share(2)...................
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Preferred Stock, par value $.01 per share(2)................
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Subsidiary Guarantees of Debt Securities(2)(3)..............
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Total....................................................... $400,000,000 $32,360
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</Table>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). The aggregate initial offering price of all
securities issued from time to time pursuant to this Registration Statement
will not exceed $400,000,000 or the equivalent thereof in foreign
currencies, foreign currency units or composite currencies. Any securities
registered hereunder may be sold separately or as units with other
securities registered hereunder.
(2) There are being registered hereunder an indeterminate principal amount of
Debt Securities and an indeterminate number of shares of Common Stock and
Preferred Stock, including Debt Securities, Common Stock and Preferred Stock
issuable on conversion, redemption, repurchase, exchange or exercise of the
Debt Securities or Preferred Stock registered hereunder or pursuant to any
applicable antidilution provisions. If any Debt Securities are issued at an
original issue discount, then the principal amount of such Debt Securities
being registered hereunder shall be such principal amount as shall result in
an aggregate initial offering price of up to $400,000,000.
(3) Guarantees may be provided by subsidiaries of the Registrant of the payment
of principal of and interest on the Debt Securities. Pursuant to Rule 457(n)
of the Securities Act, no separate registration fee is payable for the
guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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SUBSIDIARY GUARANTOR REGISTRANTS
<Table>
<Caption>
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
</Table>
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* 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.
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus to be used in
connection with offerings of the following securities:
(1) Debt Securities other than 8 3/8% Senior Subordinated Notes Due
2012, Preferred Stock and Common Stock of the Registrant and Subsidiary
Guarantees of the Subsidiary Guarantor Registrants; and
(2) 8 3/8% Senior Subordinated Notes Due 2012 of the Registrant and
related Subsidiary Guarantees of the Subsidiary Guarantor Registrants.
We may offer any combination of the securities described in these two
prospectuses in one or more offerings with a total aggregate initial offering
price of up to $400,000,000.
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 AUGUST 21, 2003
PROSPECTUS
(ENCORE LOGO)
$400,000,000
ENCORE ACQUISITION COMPANY
777 MAIN STREET, SUITE 1400
FORT WORTH, TEXAS 76102
(817) 877-9955
SENIOR DEBT SECURITIES
SUBORDINATED DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
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We may offer from time to time senior debt securities, subordinated debt
securities, preferred stock and common stock. Our subsidiaries may guarantee the
senior or subordinated debt securities offered by this prospectus.
We will provide additional terms of our securities in one or more
prospectus supplements to this prospectus. You should read this prospectus and
the related prospectus supplement carefully before you invest in our securities.
Our common stock is listed on the New York Stock Exchange under the symbol
"EAC."
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YOU SHOULD CONSIDER CAREFULLY "RISK FACTORS" BEGINNING ON PAGE 1 BEFORE
INVESTING IN THE NOTES.
---------------------
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.
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The date of this prospectus is , 2003.
TABLE OF CONTENTS
<Table>
About This Prospectus....................................... i
About Encore Acquisition Company............................ 1
Risk Factors................................................ 1
Forward-Looking Information................................. 10
Use of Proceeds............................................. 11
Ratio of Earnings to Fixed Charges.......................... 11
Description of Debt Securities.............................. 12
Description of Capital Stock................................ 18
Plan of Distribution........................................ 22
Legal Opinions.............................................. 23
Independent Auditors........................................ 24
Independent Petroleum Engineers............................. 24
Where You Can Find More Information......................... 24
</Table>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission under a "shelf" registration process.
Using this process, we may offer the securities this prospectus describes in one
or more offerings with a total initial offering price of up to $400,000,000.
This prospectus provides you with a general description of the securities we may
offer. Each time we use this prospectus to offer securities, we will provide a
prospectus supplement and, if applicable, a pricing supplement. The prospectus
supplement and any pricing supplement will describe the specific terms of that
offering. The prospectus supplement and any pricing supplement may also add to,
update or change the information contained in this prospectus. Please carefully
read this prospectus, the prospectus supplement and any pricing supplement, in
addition to the information contained in the documents we refer to under the
heading "Where You Can Find More Information."
i
ABOUT ENCORE ACQUISITION COMPANY
We are a growing independent energy company engaged in the acquisition,
development, exploitation and production of onshore North American oil and
natural gas reserves. Since inception in 1998, we have sought to acquire high
quality assets with potential for upside through low-risk development drilling
projects.
Our properties are currently 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, the Paradox Basin of Utah and the
North Louisiana Salt Basin of Louisiana. Our growth has come primarily from the
acquisition of producing oil and natural gas properties and subsequent
development of these properties. Since our inception through June 30, 2003, we
have invested $379.6 million in acquiring producing oil and natural gas
properties. Through June 30, 2003, we have invested another $249.1 million for
development and exploitation of these properties.
Our principal executive offices are located at 777 Main Street, Suite 1400,
Fort Worth, Texas 76102. Our main telephone number is (817) 877-9955. We
maintain a website on the Internet at http://www.encoreacq.com. The information
on our website is not incorporated by reference into this prospectus.
RISK FACTORS
You should carefully consider the following matters, in addition to the
other information we have provided in this prospectus, the accompanying
prospectus supplement and the documents we incorporate by reference, before
reaching a decision regarding an investment in our securities.
RISKS RELATED TO OUR BUSINESS
OIL AND NATURAL GAS PRICES ARE VOLATILE AND SUSTAINED PERIODS OF LOW PRICES
COULD MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Historically, the markets for oil and natural gas have been volatile, and
these markets are likely to continue to be volatile in the future. Our revenues,
profitability and future growth depend substantially on prevailing oil and
natural gas prices. Lower oil and natural gas prices may reduce the amount of
oil and natural gas that we can economically produce. Prevailing oil and natural
gas prices also affect the amount of internally generated cash flow available
for repayment of indebtedness and capital expenditures. In addition, the amount
we can borrow under our revolving credit facility is subject to periodic
redetermination based in part on changing expectations of future oil and natural
gas prices.
The factors that can cause oil and natural gas price volatility include:
- the supply of domestic and foreign oil and natural gas;
- the ability of members of the Organization of Petroleum Exporting
Countries (OPEC) to agree upon and maintain oil prices and production
levels;
- political instability or armed conflict in oil or natural gas producing
regions;
- the level of consumer demand;
- weather conditions;
- the price and availability of alternative fuels;
- domestic and foreign governmental regulations and taxes;
- domestic political developments; and
- worldwide economic conditions.
The volatile nature of markets for oil and natural gas makes it difficult
to reliably estimate future prices. Any decline in oil and natural gas prices
adversely affects our financial condition. If oil or natural gas prices
decline significantly for a sustained period of time, we may, among other
things, be unable to meet our financial obligations, make planned expenditures
or raise additional capital.
RESERVE ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY PROVE 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.
Estimating quantities of proved oil and natural gas reserves is a complex
process that requires interpretations of available technical data and numerous
assumptions, including certain economic assumptions. Any significant
inaccuracies in these interpretations or assumptions or changes in 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 involves economic assumptions relating to
commodity prices, production costs, severance and excise taxes, capital
expenditures and workover and remedial costs. Actual results most likely will
vary from our estimates. Any significant variance could reduce the estimated
quantities and present value of our reserves.
You should not assume that the present value of future net cash flows from
our proved reserves referred to or incorporated by reference in this prospectus
is the current market value of our estimated oil and natural gas reserves. In
accordance with SEC requirements, we base the estimated discounted future net
cash flows from our proved reserves on prices and costs in effect on the date of
the estimate, holding the prices and costs constant throughout the life of the
properties. 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.
IF OIL AND NATURAL GAS PRICES DECREASE, WE MAY BE REQUIRED TO TAKE WRITE DOWNS.
We may be required to write down the carrying value of our oil and natural
gas properties when future estimated oil and gas prices are low or if we have
substantial downward adjustments to our estimated proved reserves or increases
in our estimates of operating expenses or development costs.
We capitalize the costs to acquire, find and develop our oil and natural
gas properties under the successful efforts accounting method. The net
capitalized costs of our oil and gas properties may not exceed their estimated
fair value. If net capitalized costs of our oil and gas properties exceed their
fair value, we must charge the amount of the excess to earnings. We review the
carrying value of our properties quarterly, based on changes in expectations of
future oil and natural gas prices, expenses and tax rates. Once incurred, a
write down of oil and gas properties is not reversible at a later date even if
oil or gas prices increase.
OUR ACQUISITION STRATEGY SUBJECTS US TO NUMEROUS RISKS THAT COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Acquisitions are an essential part of our growth strategy, and our ability
to acquire additional properties on favorable terms is important to our
long-term growth. 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. Even if we are able to identify suitable acquisition opportunities,
our acquisition strategy depends upon, among other things, our ability to obtain
debt and equity financing and, in some cases, regulatory approvals.
The successful acquisition of producing properties requires an assessment
of several factors, including:
- recoverable reserves;
- future oil and natural gas prices;
2
- operating costs; and
- potential environmental and other liabilities.
The accuracy of these assessments is inherently uncertain. In connection
with these assessments, we perform a review of the subject properties that we
believe to be generally consistent with industry practices. Our review will not
reveal all existing or potential problems nor will it permit us to become
sufficiently familiar with the properties to fully assess their deficiencies and
capabilities. Inspections may not always be performed on every well, and
structural and environmental problems are not necessarily observable even when
an inspection is undertaken. Even when problems are identified, the seller may
be unwilling or unable to provide effective contractual protection against all
or part of the problems. We are often not entitled to contractual
indemnification for environmental liabilities and acquire properties on an "as
is" basis.
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. Furthermore, our
financial position and results of operations may fluctuate significantly from
period to period based on whether significant acquisitions are completed in
particular periods. Competition for acquisitions is intense and may increase the
cost of, or cause us to refrain from, completing acquisitions.
THE FAILURE TO PROPERLY MANAGE GROWTH THROUGH ACQUISITIONS COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Growing through acquisitions and managing that 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. Pursuing
and integrating acquisitions involves a number of risks, including:
- diversion of management attention from existing operations;
- unexpected losses of key employees, customers and suppliers of the
acquired business;
- conforming the financial, technological and management standards,
processes, procedures and controls of the acquired business with those of
our existing operations; and
- increasing the scope, geographic diversity and complexity of our
operations.
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.
A SUBSTANTIAL PORTION OF OUR PRODUCING PROPERTIES IS LOCATED IN ONE GEOGRAPHIC
AREA.
We have extensive operations in the Williston Basin of Montana and North
Dakota. As of December 31, 2002, our Cedar Creek Anticline properties in the
Williston Basis represented approximately 75% of our proved reserves and 61% of
our 2002 production. Any circumstance or event that negatively impacts
production or marketing of oil and natural gas in the Williston Basin could
reduce our earnings and cash flow.
DERIVATIVE INSTRUMENTS EXPOSE US TO RISKS OF FINANCIAL LOSS IN A VARIETY OF
CIRCUMSTANCES.
We use derivative instruments in an effort to reduce our exposure to
fluctuations in the prices of oil and natural gas and to reduce our cash
outflows related to interest. Our derivative instruments expose us to risks of
financial loss in a variety of circumstances, including when:
- a counterparty to our derivative instruments is unable to satisfy its
obligations;
- production is less than expected; or
- there is an adverse change in the expected differential between the
underlying price in the derivative instrument and actual prices received
for our production.
Derivative instruments may limit our ability to realize increased revenue
from increases in the prices for oil and natural gas.
3
We adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), on January 1,
2001. SFAS 133 generally requires us to record each hedging transaction as an
asset or liability measured at its fair value. Each quarter we must record
changes in the fair value of our hedges, which could result in significant
fluctuations in net income and stockholders' equity from period to period.
Please read our most recently filed annual report on Form 10-K and quarterly
report on Form 10-Q for a more detailed discussion of our hedging program.
DRILLING OIL AND NATURAL GAS WELLS IS A HIGH-RISK ACTIVITY.
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 discovered. We often are uncertain as to the
future cost or timing of drilling, completing and producing wells. We may not
recover all or any portion of our investment in drilling oil and natural gas
wells.
Our drilling operations may be curtailed, delayed or canceled as a result
of a variety of factors, including:
- unexpected drilling conditions or miscalculations;
- title problems;
- pressure or irregularities in formations;
- equipment failures or accidents;
- adverse weather conditions;
- compliance with environmental and other governmental requirements, which
may increase our costs or restrict our activities; and
- 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.
Substantial capital is required to replace and grow reserves. If lower oil
and natural gas prices or operating difficulties result in our cash flow from
operations being less than expected or limit on our ability to borrow under our
revolving credit facility, we may be unable to expend the capital necessary to
find, develop or acquire new oil and natural gas reserves.
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.
4
OUR BUSINESS INVOLVES MANY OPERATING RISKS THAT CAN CAUSE SUBSTANTIAL LOSSES;
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:
- fires;
- natural disasters;
- explosions;
- formations with abnormal pressures;
- blowouts;
- collapses of wellbore, casing or other tubulars;
- failure of oilfield drilling and service tools;
- uncontrollable flows of oil, natural gas, formation water or drilling
fluids;
- pressure forcing oil or natural gas out of the wellbore at a dangerous
velocity coupled with the potential for fire or explosion;
- changes in below-ground pressure in a formation that cause surface
collapse or cratering;
- pipeline ruptures or cement failures;
- environmental hazards, such as oil spills, natural gas leaks and
discharges of toxic gases; and
- weather.
If any of these events occur, we could incur substantial losses as a result of:
- injury or loss of life;
- damage to and destruction of property, natural resources and equipment;
- pollution and other environmental damage;
- regulatory investigations and penalties;
- suspension of our operations; and
- repair and remediation costs.
We do not maintain insurance against the loss of oil or natural gas
reserves as a result of operating hazards, nor do we maintain business
interruption insurance. In addition, pollution and environmental risks generally
are not fully insurable. We may experience losses for uninsurable or uninsured
risks or losses 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.
TERRORIST ACTIVITIES AND THE POTENTIAL FOR MILITARY AND OTHER ACTIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
The threat of terrorism and the impact of military and other action have
caused instability in world financial markets and could lead to increased
volatility in prices for oil and natural gas, all of which could adversely
affect the markets for our operations. Future acts of terrorism could be
directed against companies operating in the United States. 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.
5
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 capital expenditures. 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 of the Board 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 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 OIL AND NATURAL GAS PRODUCTION IS DEPENDENT UPON
TRANSPORTATION FACILITIES OVER WHICH WE HAVE NO CONTROL.
The marketability of our oil and natural gas production depends in part
upon the availability, proximity and capacity of pipelines, oil and 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:
- acquiring desirable producing properties or new leases for future
exploration;
- marketing our oil and natural gas production;
- integrating new technologies; and
- acquiring 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, which may adversely affect our ability to
compete with these 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
6
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, development, 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 and environmental laws and regulations.
We may be required to make large expenditures to comply with applicable laws and
regulations, which could adversely affect our results of operations and
financial condition. Matters subject to regulation include:
- discharge permits for drilling operations;
- drilling bonds;
- spacing of wells;
- unitization and pooling of properties;
- environmental protection;
- reports concerning operations; and
- taxation.
Under these laws and regulations, we could be liable for:
- personal injuries;
- property damage;
- oil spills;
- discharge of hazardous materials;
- reclamation costs;
- remediation and clean-up costs; and
- 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. We could 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 CESSATION OF OPERATIONS BY ARTHUR ANDERSEN LLP WILL LIMIT OUR ABILITY TO USE
THE CONSOLIDATED FINANCIAL STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP AND COULD
IMPACT OUR ABILITY TO ACCESS PUBLIC CAPITAL MARKETS AS WELL AS OUR INVESTORS'
ABILITY TO SEEK POTENTIAL RECOVERIES FROM ARTHUR ANDERSEN LLP.
Our consolidated financial statements as of and for the years ended
December 31, 2001 and 2000 were audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated in this prospectus in reliance upon the authority of said firm as
experts in giving said reports. Subsequent to Arthur Andersen LLP's completion
of our 2001 audit, the firm was convicted of
7
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 LLP'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 LLP has not consented to the incorporation
by reference of their report in this prospectus, you will not be able to recover
against Arthur Andersen LLP under Section 11 of the Securities Act for any
untrue statements of a material fact contained in the consolidated financial
statements audited by Arthur Andersen LLP or any omissions to state a material
fact required to be stated therein.
WE MAY ISSUE PREFERRED STOCK WHOSE TERMS COULD ADVERSELY AFFECT THE VOTING POWER
OR VALUE OF OUR COMMON STOCK.
Our certificate of incorporation authorizes us to issue, without the
approval of our stockholders, one or more classes or series of preferred stock
having such preferences, powers and relative, participating, optional and other
rights, including preferences over our common stock respecting dividends and
distributions, as our board of directors generally may determine. The terms of
one or more classes or series of preferred stock could adversely impact the
voting power or value of our common stock. For example, we might grant holders
of preferred stock the right to elect some number of our directors in all events
or on the happening of specified events or the right to veto specified
transactions. Similarly, the repurchase or redemption rights or liquidation
preferences we might assign to holders of preferred stock could affect the
residual value of the common stock. Please read "Description of Capital
Stock -- Preferred Stock" beginning on page 20.
RISKS RELATED TO OUR INDEBTEDNESS
OUR LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW AND
HAVE OTHER IMPORTANT AND POTENTIALLY ADVERSE CONSEQUENCES TO YOU.
We had total indebtedness of $150.0 million as of June 30, 2003. Our debt
level could have several important consequences to you, including:
- it may be more difficult for us to satisfy our obligations;
- we may have difficulties borrowing money in the future for acquisitions,
to meet our operating expenses or for other purposes;
- 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;
- 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
fund working capital, capital expenditures and other business activities;
- we may be more vulnerable to economic downturns and adverse developments
in our industry; and
- 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, many of which are beyond our control. Our earnings
may not be sufficient to allow us to pay the principal and interest on our debt
and meet our other obligations. If we do not have enough money, we may need to
refinance all or part of our existing debt, sell assets, borrow more money or
raise equity, which we may not be able to do on terms acceptable to us, if at
all.
8
OUR REVOLVING CREDIT FACILITY AND OTHER DEBT INSTRUMENTS HAVE RESTRICTIVE
COVENANTS THAT COULD AFFECT OUR FINANCIAL CONDITION.
Our revolving credit facility and the indenture related to the 8 3/8%
senior subordinated notes, which we refer to as the 8 3/8% notes, contain
financial and other restrictive covenants that limit our ability to engage in
activities that may be in our long-term best interests. The covenants under our
revolving credit facility are similar but generally more restrictive than the
covenants under the indenture.
Our ability to borrow under our revolving credit facility is subject to
financial covenants, including leverage, interest and fixed charge coverage
ratios. Our revolving credit facility limits our ability to effect mergers,
asset sales and change of control events. These covenants also contain
restrictions regarding our ability to incur additional indebtedness in the
future. In some cases, our subsidiaries are subject to similar restrictions that
may restrict their ability to make distributions to us.
The indenture related to our 8 3/8% notes also contains limitations on our
ability to effect mergers and change of control events, as well as other
limitations, including:
- limitations on incurring additional indebtedness;
- limitations on the sale of assets;
- limitations on the declaration and payment of dividends or other
restricted payments;
- limitations on transactions with affiliates; and
- limitations on liens.
If we do not comply with these or other covenants and restrictions
contained in our revolving credit facility, the indenture or the other
agreements governing our other indebtedness, we could be in default under those
agreements, and the debt, together with accrued interest, could then be declared
due and payable. If we were unable to repay any borrowings when due, the lenders
under our revolving credit facility could proceed against their collateral,
which includes most of the assets we own, including the stock and assets of our
subsidiaries. In addition, a default under our revolving credit facility or
agreements governing our other indebtedness could lead to an acceleration of
debt under other debt instruments that contain cross-acceleration or
cross-default provisions. We do not have sufficient working capital to satisfy
our debt obligations in the event of an acceleration of all or a significant
portion of our outstanding indebtedness.
IN ADDITION TO OUR CURRENT INDEBTEDNESS, WE MAY INCUR SUBSTANTIALLY MORE DEBT.
THIS COULD EXACERBATE THE RISKS DESCRIBED ABOVE.
Together with our subsidiaries, we may incur substantially more debt in the
future. Our revolving credit facility and the indenture governing the 8 3/8%
notes contain restrictions on our incurrence of additional indebtedness.
However, these restrictions are subject to 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 obligations that do not constitute indebtedness. As of June 30,
2003, we had approximately $220.0 million additional borrowing capacity under
our revolving credit facility, 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
9
debt in the future, 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.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE RELATED TO THE 8 3/8% NOTES.
Upon the occurrence of a change of control, as defined in the indenture for
our 8 3/8% notes, we will be required to offer to repurchase all outstanding
8 3/8% notes. We may not have sufficient funds available to us to make the
required repurchase of the 8 3/8% notes. In addition, our revolving credit
facility provides that the occurrence of any change of control event constitutes
an event of default, which could require that we repay all unpaid and
outstanding indebtedness under the revolving credit facility and may limit the
funds available for us to make any payments with respect to the 8 3/8% notes,
including for the repurchase of the 8 3/8% notes. Our failure to purchase
tendered 8 3/8% notes would constitute a default under the indenture governing
the 8 3/8% notes which, in turn, could constitute a further event of default
under our revolving credit facility.
FORWARD-LOOKING INFORMATION
This prospectus, including the information we incorporate by reference,
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
You can identify our forward-looking statements by words such as "estimate,"
"project," "predict," "believe," "expect," "anticipate," "plan," "forecast,"
"budget," "goal" or other words that convey the uncertainty of future events or
outcomes. When considering these forward-looking statements, you should keep in
mind the risk factors and other cautionary statements contained in this
prospectus, any prospectus supplement and the documents we have incorporated by
reference.
The forward-looking statements are not guarantees of future performance,
and we caution you not to rely unduly on them. We have based many of these
forward-looking statements on expectations and assumptions about future events
that may prove to be inaccurate. While our management considers these
expectations and assumptions to be reasonable, they are inherently subject to
significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. These risks, contingencies and uncertainties
relate to, among other matters, the following:
- the risks associated with operating in one or two major geographic areas;
- the risks associated with drilling of oil and natural gas wells in our
exploitation efforts;
- our ability to find, acquire, market, develop and produce new properties;
- oil and natural gas price volatility;
- uncertainties in the estimation of proved reserves and in the projection
of future rates of production and timing of exploitation expenditures;
- operating hazards attendant to the oil and natural gas business;
- drilling and completion risks that are generally not recoverable from
third parties or insurance;
- potential mechanical failure or underperformance of significant wells;
- climatic conditions;
- availability and cost of material and equipment;
- derivative instruments;
- actions or inactions of third-party operators of our properties;
- our ability to find and retain skilled personnel;
- availability of capital;
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- the strength and financial resources of our competitors;
- regulatory developments;
- environmental risks; and
- general economic and business conditions and industry trends.
We have discussed some of these factors in more detail in the "Risk Factors"
section of this prospectus. These factors are not necessarily all the important
factors that could affect us. We advise you that you should (1) be aware that
important factors we do not refer to above could affect the accuracy of our
forward-looking statements and (2) use caution and common sense when considering
our forward-looking statements. We do not intend to update these statements
unless the securities laws require us to do so.
11
USE OF PROCEEDS
Unless we inform you otherwise in the prospectus supplement, we will use
the net proceeds from the sale of the offered securities for general corporate
purposes. These purposes may include funding working capital requirements,
capital expenditures, repayment and refinancing of indebtedness and repurchases
and redemptions of securities. Pending any specific application, we may
initially invest those funds in short-term marketable securities or apply them
to the reduction of short-term indebtedness.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for each of the periods shown is as
follows:
<Table>
<Caption>
SIX PERIOD FROM
MONTHS APRIL 22, 1998
ENDED YEAR ENDED DECEMBER 31, (INCEPTION) TO
JUNE 30, ------------------------- DECEMBER 31,
2003 2002 2001 2000 1999 1998
-------- ---- ---- ---- ---- --------------
Ratio of earnings to fixed charges............ 6.9x 5.8x 6.3x 2.2x 2.0x --
</Table>
We have computed the ratios of earnings to fixed charges by dividing
earnings by fixed charges. For this purpose, "earnings" consist of income before
income taxes plus fixed charges exclusive of capitalized interest. "Fixed
charges" consist of interest, whether expensed or capitalized, amortization of
capitalized expenses relating to indebtedness and an estimate of the portion of
annual rental expense on operating leases that represents the interest factor.
We began operations on April 22, 1998. From inception until December 31,
1998, earnings were insufficient to cover fixed charges by $1,010,000.
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DESCRIPTION OF DEBT SECURITIES
The debt securities covered by this prospectus will be our general
unsecured obligations. The debt securities will be either senior debt securities
or subordinated debt securities. Subject to compliance with our revolving credit
agreement and the indenture related to the 8 3/8% notes, we will issue the debt
securities under one or more separate indentures between us and a trustee that
we will name in the prospectus supplement. Senior debt securities will be issued
under a senior indenture, and subordinated debt securities will be issued under
a subordinated indenture. In this description, we sometimes call the senior
indenture and the subordinated indenture the "indentures."
We have summarized the provisions of the indentures and the debt securities
below. You should read the indentures for more details regarding the provisions
we describe below and for other provisions that may be important to you. We have
filed the forms of the indentures with the SEC as exhibits to the registration
statement, and we will include the applicable final indenture and any other
instrument establishing the terms of any debt securities we offer as exhibits to
a filing we will make with the SEC in connection with that offering. Please read
"Where You Can Find More Information."
In this summary description of the debt securities, all references to
"Encore," "us" or "our" mean Encore Acquisition Company only, unless we state
otherwise or the context clearly indicates otherwise.
GENERAL
The senior debt securities will constitute senior debt and will rank
equally with all our unsecured and unsubordinated debt. The subordinated debt
securities will be subordinated to, and thus have a junior position to, any
senior debt securities and all our other senior debt. The indentures will not
limit the amount of debt we may issue under the indentures, and, unless we
inform you otherwise in the prospectus supplement, they will not limit the
amount of other unsecured debt or securities we may incur or issue. We may issue
debt securities under either indenture from time to time in one or more series,
each in an amount we authorize prior to issuance.
We conduct a substantial part of our operations through our subsidiaries,
and our subsidiaries generate a significant part of our operating income and
cash flow. As a result, distributions or advances from our subsidiaries are
important sources of funds to meet our debt service obligations. Contractual
provisions or laws, as well as our subsidiaries' financial condition and
operating requirements, may limit our ability to obtain from our subsidiaries
cash that we need to pay our debt service obligations, including payments on the
debt securities. In addition, holders of the debt securities will have a junior
position to the claims of creditors of our subsidiaries on their assets and
earnings.
Unless we inform you otherwise in the prospectus supplement, the indentures
and the debt securities will not contain:
- any covenants or other provisions designed to protect holders of the debt
securities in the event we participate in a highly leveraged transaction;
or
- provisions that give holders of the debt securities the right to require
us to repurchase their securities in the event of a decline in our credit
rating resulting from a takeover, recapitalization or similar
restructuring or otherwise.
The prospectus supplement relating to any series of debt securities being
offered will include specific terms relating to the offering. These terms will
include some or all of the following:
- the title of the debt securities;
- the total principal amount of the debt securities;
- whether the debt securities are senior debt securities or subordinated
debt securities;
- whether we will issue the debt securities in individual certificates to
each holder or in the form of temporary or permanent global securities
held by a depositary on behalf of holders;
13
- the date or dates on which the principal of and any premium on the debt
securities will be payable;
- any interest rate, the date from which interest will accrue, interest
payment dates and record dates for interest payments;
- whether and under what circumstances any additional amounts with respect
to the debt securities will be payable;
- the place or places where payments on the debt securities will be
payable;
- any provisions for redemption or early repayment;
- any sinking fund or other provisions that would obligate us to redeem,
purchase or repay the debt securities prior to maturity;
- the denominations in which we may issue the debt securities;
- whether payments on the debt securities will be payable in foreign
currency or currency units or another form, and whether payments on the
debt securities will be payable by reference to any index or formula;
- the portion of the principal amount of the debt securities that will be
payable if the maturity is accelerated, if other than the entire
principal amount;
- any additional means of defeasance of the debt securities, any additional
conditions or limitations to defeasance of the debt securities or any
changes to those conditions or limitations;
- any changes or additions to the events of default or covenants this
prospectus describes;
- any restrictions or other provisions relating to the transfer or exchange
of the debt securities;
- any terms for the conversion or exchange of the debt securities for other
securities issued by Encore or any other entity; and
- any other terms of the debt securities, whether in addition to, or by
modification or deletion of, the terms described herein.
We may sell the debt securities at a discount, which may be substantial,
below their stated principal amount. Those debt securities may bear no interest
or may bear interest at a rate that at the time of issuance is below market
rates.
SUBORDINATION
Under the subordinated indenture, payment of the principal, interest and
any premium on the subordinated debt securities will generally be subordinated
and junior in right of payment to the prior payment in full of all Senior Debt.
Unless we inform you otherwise in the prospectus supplement, we may not make any
payment of principal, interest or any premium on the subordinated debt
securities if:
- we fail to pay the principal, interest, premium or any other amounts on
any Senior Debt when due; or
- we default in performing any other covenant (a "covenant default") in any
Senior Debt that we have designated if the covenant default allows the
holders of that Senior Debt to accelerate the maturity of the Senior Debt
they hold.
Unless we inform you otherwise in the prospectus supplement, a covenant
default will prevent us from making payments on the subordinated debt securities
only for up to 179 days after holders of the Senior Debt give the trustee for
the subordinated debt securities notice of the covenant default.
The subordination provisions will not affect our obligation, which will be
absolute and unconditional, to pay, when due, principal of, premium, if any, and
interest on the subordinated debt securities. In addition, the subordination
provisions will not prevent the occurrence of any default under the subordinated
indenture.
14
Unless we inform you otherwise in the prospectus supplement, the
subordinated indenture will not limit the amount of Senior Debt that we may
incur. As a result of the subordination of the subordinated debt securities, if
we became insolvent, holders of subordinated debt securities may receive less on
a proportionate basis than our other creditors.
Unless we inform you otherwise in the prospectus supplement, "Senior Debt"
will mean all notes or other indebtedness, including guarantees, of Encore for
money borrowed and similar obligations, unless the indebtedness states that it
is not senior to the subordinated debt securities or our other junior debt.
SUBSIDIARY GUARANTEES
If specified in the prospectus supplement, subsidiaries of Encore may
guarantee the obligations of Encore relating to its debt securities issued under
this prospectus. The specific terms and provisions of each subsidiary guarantee,
including any provisions relating to the subordination of any subsidiary
guarantee, will be described in the applicable prospectus supplement. The
obligations of each subsidiary guarantor under its subsidiary guarantee will be
limited as necessary to seek to prevent that subsidiary guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
federal or state law.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The indentures generally will permit a consolidation or merger between us
and another entity. They also will permit the sale by us of our assets
substantially as an entirety. The indentures will provide, however, that we may
consolidate with another entity to form a new entity or merge into any other
entity or transfer or dispose of our assets substantially as an entirety to any
other entity only if:
- the resulting or surviving entity assumes the due and punctual payments
on the debt securities and the performance of our covenants and
obligations under the applicable indenture and the debt securities; and
- immediately after giving effect to the transaction, no default or event
of default would occur and be continuing.
EVENTS OF DEFAULT
Unless we inform you otherwise in the prospectus supplement, the following
will be events of default with respect to a series of debt securities:
- our failure to pay interest or any required additional amounts on any
debt securities of that series for 30 days;
- our failure to pay principal of or any premium on any debt securities of
that series when due;
- our failure to deposit any mandatory sinking fund payment for that series
of debt securities when due for 30 days;
- our failure to comply with any of our covenants or agreements in the debt
securities of that series or the applicable indenture, other than an
agreement or covenant that we have included in that indenture solely for
the benefit of other series of debt securities, for 90 days after written
notice by the trustee or by the holders of at least 25% in principal
amount of all the outstanding debt securities issued under that indenture
that are affected by that failure;
- specified events involving bankruptcy, insolvency or reorganization of
Encore; and
- any other event of default provided for that series of debt securities.
A default under one series of debt securities will not necessarily be a
default under another series. The trustee may withhold notice to the holders of
the debt securities of any default or event of default, except in any payment on
the debt securities, if the trustee in good faith determines that withholding
notice is in the interest of the holders of the debt securities.
15
If an event of default for any series of debt securities occurs and is
continuing, the trustee or the holders of at least 25% in principal amount of
the outstanding debt securities of the series affected by the default, or, in
some cases, 25% in principal amount of all senior debt securities or
subordinated debt securities affected, voting as one class, may declare the
principal of and all accrued and all unpaid interest on those debt securities to
be immediately due and payable. If an event of default relating to events of
bankruptcy, insolvency or reorganization occurs, the principal of and all
accrued and unpaid interest on all the debt securities will become immediately
due and payable without any action on the part of the applicable trustee or any
holder. The holders of a majority in principal amount of the outstanding debt
securities of the series affected by the default, or of all senior debt
securities or subordinated debt securities affected, voting as one class, may in
some cases rescind this accelerated payment requirement. Depending on the terms
of our other indebtedness, an event of default under either of the indentures
may give rise to cross defaults on our other indebtedness.
A holder of a debt security of any series will be able to pursue any remedy
under the applicable indenture only if:
- the holder gives the trustee written notice of a continuing event of
default for that series;
- the holders of at least 25% in principal amount of the outstanding debt
securities of that series make a written request to the trustee to pursue
the remedy;
- the holder or holders offer to the trustee indemnity reasonably
satisfactory to it;
- the trustee fails to act for a period of 60 days after receipt of notice
and offer of indemnity; and
- during that 60-day period, the holders of a majority in principal amount
of the debt securities of that series do not give the trustee a direction
inconsistent with the request.
This provision will not, however, affect the right of a holder of a debt
security to sue for enforcement of any overdue payment.
In most cases, holders of a majority in principal amount of the outstanding
debt securities of a series, or of all debt securities affected, voting as one
class, will be able to direct the time, method and place of:
- conducting any proceeding for any remedy available to the applicable
trustee; and
- exercising any trust or power conferred on the applicable trustee not
relating to or arising under an event of default.
Each indenture will require us to file with the trustee each year a written
statement as to our compliance with the covenants contained in that indenture.
MODIFICATION AND WAIVER
We may amend or supplement either indenture if the holders of a majority in
principal amount of the outstanding debt securities of all series issued under
the applicable indenture and affected by the amendment or supplement, acting as
one class, consent to it. Without the consent of the holder of each debt
security affected, however, no amendment or supplement may:
- reduce the amount of debt securities whose holders must consent to an
amendment, supplement or waiver;
- reduce the rate of or change the time for payment of interest on any debt
security;
- reduce the principal of, premium on or any mandatory sinking fund payment
for any debt security;
- change the stated maturity of any debt security;
- reduce any premium payable on the redemption of any debt security or
change the time at which any debt security may or must be redeemed;
- change any obligation to pay additional amounts on any debt security;
16
- make the payments on any debt security payable in any currency or
currency unit other than as the debt security originally states;
- impair the holder's right to institute suit for the enforcement of any
payment on any debt security;
- make any change in the percentage of principal amount of debt securities
necessary to waive compliance with specified provisions of the applicable
indenture or to make any change in the applicable indenture's provisions
for modification;
- waive a continuing default or event of default regarding any payment on
any debt security; or
- with respect to the subordinated indenture, modify the provisions
relating to the subordination of any subordinated debt security in a
manner adverse to the holder of that security.
We and the applicable trustee may agree to amend or supplement either
indenture or waive any provision of either indenture without the consent of any
holders of debt securities in some circumstances, including:
- to cure any ambiguity, omission, defect or inconsistency;
- to provide for the assumption of our obligations under the indenture by a
successor upon any merger, consolidation or asset transfer;
- to provide for uncertificated debt securities in addition to or in place
of certificated debt securities or to provide for bearer debt securities;
- to provide any security for or add guarantees of any series of debt
securities;
- to comply with any requirement to effect or maintain the qualification of
the indenture under the Trust Indenture Act of 1939;
- to add covenants that would benefit the holders of any debt securities or
to surrender any rights we have under the indenture;
- to add events of default with respect to any debt securities;
- to make any change that does not adversely affect any outstanding debt
securities of any series in any material respect;
- to facilitate the defeasance or discharge of any series of debt
securities if that change does not adversely affect the holders of debt
securities of that series or any other series under the indenture in any
material respect; and
- to provide for the acceptance of a successor or another trustee.
The holders of a majority in principal amount of the outstanding debt
securities of any series, or of all senior debt securities or subordinated debt
securities affected, voting as one class, may waive any existing or past default
or event of default with respect to those debt securities. Those holders may
not, however, waive any default or event of default in any payment on any debt
security or compliance with a provision that cannot be amended or supplemented
without the consent of each holder affected.
DISCHARGE AND DEFEASANCE
We will be discharged from all obligations under the applicable indenture
with respect to any series of debt securities, except for surviving obligations
relating to any conversion rights and to register the transfer or exchange of
the debt securities, if:
- all debt securities of the series previously authenticated and delivered
under the relevant indenture have been delivered to the indenture trustee
for cancellation; or
- all debt securities of that series have become due and payable or will
become due and payable within one year, at maturity or by redemption, and
we deposit with the applicable trustee funds or government
17
securities sufficient to make payments on the debt securities of that
series on the dates those payments are due.
To exercise our right to be discharged, we must deliver to the applicable
trustee an opinion of counsel and an officers' certificate stating that all
conditions precedent to the satisfaction and discharge of the applicable
indenture have been complied with.
In addition to our right of discharge described above, we may deposit with
the applicable trustee funds or government securities sufficient to make
payments on the debt securities of a series on the dates those payments are due
and payable, then, at our option, either of the following will occur:
- we will be discharged from our obligations with respect to the debt
securities of that series ("legal defeasance"); or
- we will no longer have any obligation to comply with the restrictive
covenants under the applicable indenture, and the related events of
default will no longer apply to us, but some of our other obligations
under the indenture and the debt securities of that series, including our
obligation to make payments on those debt securities, will survive
("covenant defeasance").
If we defease a series of debt securities, the holders of the debt
securities of the series affected will not be entitled to the benefits of the
applicable indenture, except for our obligations to:
- register the transfer or exchange of debt securities;
- replace stolen, lost or mutilated debt securities; and
- maintain paying agencies and hold moneys for payment in trust.
Unless we inform you otherwise in the prospectus supplement, we will be
required to deliver to the applicable trustee an opinion of counsel that the
deposit and related defeasance would not cause the holders of the debt
securities to recognize income, gain or loss for United States federal income
tax purposes. If we elect legal defeasance, that opinion of counsel must be
based on a ruling from the United States Internal Revenue Service or a change in
law to that effect.
GOVERNING LAW
New York law will govern the indentures and the debt securities.
TRUSTEE
If an event of default occurs and is continuing, the trustee will be
required to use the degree of care and skill of a prudent person in the conduct
of his own affairs. The trustee will become obligated to exercise any of its
powers under the indenture at the request of any of the holders of any debt
securities only after those holders have offered the trustee indemnity
reasonably satisfactory to it.
Each indenture will limit the right of the trustee, if it becomes one of
our creditors, to obtain payment of claims or to realize on certain property
received for any such claim, as security or otherwise. The trustee may engage in
other transactions with us. If it acquires any conflicting interest, however, it
must eliminate that conflict or resign.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
We will issue the debt securities in registered form, without interest
coupons. We will not charge a service charge for any registration of transfer or
exchange of the debt securities. We may, however, require the payment of any tax
or other governmental charge payable for that registration.
Debt securities of any series will be exchangeable for other debt
securities of the same series with the same total principal amount and the same
terms but in different authorized denominations in accordance with the
applicable indenture. Holders may present debt securities for registration of
transfer at the office of the security registrar or any transfer agent we
designate. The security registrar or transfer agent will effect the
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transfer or exchange when it is satisfied with the documents of title and
identity of the person making the request.
Unless we inform you otherwise in the prospectus supplement, we will
appoint the trustee under each indenture as security registrar for the debt
securities we issue under that indenture. If the prospectus supplement refers to
any transfer agents initially designated by us, we may at any time rescind that
designation or approve a change in the location through which any transfer agent
acts. We will be required to maintain an office or agency for transfers and
exchanges in each place of payment. We may at any time designate additional
transfer agents for any series of debt securities or rescind the designation of
any transfer agent.
In the case of any redemption, neither the security registrar nor the
transfer agent will be required to register the transfer or exchange of any debt
security:
- during a period beginning 15 business days before the day of mailing of
the relevant notice of redemption and ending on the close of business on
that day of mailing; or
- if we have called the debt security for redemption in whole or in part,
except the unredeemed portion of any debt security being redeemed in
part.
PAYMENT AND PAYING AGENTS
Unless we inform you otherwise in the prospectus supplement, we will make
payments on the debt securities in U.S. dollars at the office of the applicable
trustee or any paying agent we designate. At our option, we may make payments by
check mailed to the holder's registered address or, with respect to global debt
securities, by wire transfer. Unless we inform you otherwise in the prospectus
supplement, we will make interest payments to the person in whose name the debt
security is registered at the close of business on the record date for the
interest payment.
Unless we inform you otherwise in the prospectus supplement, we will
designate the trustee under each indenture as our paying agent for payments on
debt securities we issue under that indenture. We may at any time designate
additional paying agents or rescind the designation of any paying agent or
approve a change in the office through which any paying agent acts.
Subject to the requirements of any applicable abandoned property laws, the
trustee and paying agent will repay to us upon written request any funds held by
them for payments on the debt securities that remain unclaimed for two years
after the date upon which that payment has become due. After repayment to us,
holders entitled to those funds must look only to us for payment.
BOOK-ENTRY DEBT SECURITIES
We may issue the debt securities of a series in the form of one or more
global debt securities that would be deposited with a depositary or its nominee
identified in the prospectus supplement. We may issue global debt securities in
either temporary or permanent form. We will describe in the prospectus
supplement the terms of any depositary arrangement and the rights and
limitations of owners of beneficial interests in any global debt security.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of:
- 60,000,000 shares of common stock; and
- 5,000,000 shares of preferred stock, issuable in series.
As of June 30, 2003, there were 30,211,215 shares of common stock issued
and outstanding, and no shares of our preferred stock were issued and
outstanding.
In the discussion that follows, we refer to our certificate of
incorporation, as amended and restated, as our "certificate of incorporation"
and to our amended and restated by-laws as our "by-laws." You should read our
19
certificate of incorporation and by-laws as currently in effect for more details
regarding the provisions we describe below and for other provisions that may be
important to you. We have filed copies of those documents with the SEC, and they
are incorporated by reference as exhibits to the registration statement. Please
read "Where You Can Find More Information."
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Holders of common stock may not
cumulate their votes in the election of directors. As a result, the holders of a
majority of the voting power of the shares voting for the election of directors
can elect all directors to be elected if they choose to do so. Our board of
directors may grant holders of preferred stock, in the resolutions creating the
series of preferred stock, the right to vote on the election of directors or any
questions affecting us.
Holders of common stock will be entitled to dividends in such amounts and
at such times as our board of directors in its discretion may declare out of
funds legally available for the payment of dividends. We have not paid dividends
and intend to retain future earnings to provide funds for use in the operation
and expansion of our business. In addition, the payment of dividends on the
common stock may be limited by obligations we may have to holders of any
preferred stock or by the provisions of our debt instruments. In particular, we
are prohibited from paying any cash dividends by our revolving credit facility.
If we liquidate or dissolve our business, the holders of common stock will
share ratably in all assets available for distribution to stockholders after our
creditors are paid in full and the holders of all series of our outstanding
preferred stock, if any, receive their liquidation preferences in full.
The common stock has no preemptive rights and is not convertible or
redeemable or entitled to the benefits of any sinking or repurchase fund. All
issued and outstanding shares of common stock are fully paid and nonassessable.
Any shares of common stock we offer and sell under this prospectus will also be
fully paid and nonassessable.
Our outstanding shares of common stock are listed on the New York Stock
Exchange and trade under the symbol "EAC." Any additional shares of common stock
we offer and sell under this prospectus and related prospectus supplements will
also be listed on the New York Stock Exchange.
PREFERRED STOCK
At the direction of our board of directors, without any action by the
holders of common stock, we may issue one or more series of preferred stock from
time to time. Our board of directors can determine the number of shares of each
series of preferred stock and, subject to some limitations our articles of
incorporation set forth, the voting powers, designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions applicable to any of those rights,
including dividend rights, voting rights, conversion or exchange rights, terms
of redemption and liquidation preferences, of each series.
The prospectus supplement relating to any series of preferred stock we
offer will include specific terms relating to the offering. These terms will
include some or all of the following:
- the series designation of the preferred stock;
- the maximum number of shares of the series;
- the dividend rate or the method of calculating the dividend, the date
from which dividends will accrue and whether dividends will be
cumulative;
- any liquidation preference;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us to redeem or
repurchase the preferred stock;
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- any terms for the conversion or exchange of the preferred stock for any
other securities;
- any voting rights; and
- any other preferences and relative, participating, optional or other
special rights or any qualifications, limitations or restrictions on the
rights of the shares.
Any preferred stock we offer and sell under this prospectus will be fully
paid and nonassessable.
The registration statement will include the certificate of designation as
an exhibit or will incorporate the certificate of designation by reference. You
should read that document for provisions that may be important to you.
Undesignated preferred stock may enable our board of directors to render
more difficult or to discourage an attempt to obtain control of us by means of a
tender offer, proxy contest, merger or otherwise, and to thereby protect the
continuity of our management. The issuance of shares of preferred stock may
adversely affect the rights of the holders of common stock. For example, any
preferred stock issued may rank prior to the common stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of common stock. As a result, the issuance of shares
of preferred stock may discourage bids for common stock or may otherwise
adversely affect the market price of the common stock or any existing preferred
stock.
LIMITATION ON DIRECTORS' LIABILITY
Our certificate of incorporation limits the liability of our directors to
us or our stockholders such that no member of our board of directors will be
personally liable for monetary damages for any breach of the member's fiduciary
duty as a director, except for liability:
- for any breach of the member's duty of loyalty to us or our stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
- for any transaction from which the member derived an improper personal
benefit.
This provision could have the effect of discouraging or deterring our
stockholders from bringing a lawsuit against our directors for breach of their
duty of care, even though such an action, if successful, might otherwise have
benefited our stockholders and us. Our by-laws provide indemnification to our
officers and directors and other specified persons with respect to their conduct
in various capacities, and we have entered into agreements with each of our
directors which provide them with contractual rights of indemnification
consistent with our by-laws.
ANTI-TAKEOVER PROVISIONS OF OUR BY-LAWS
Our by-laws establish an advance notice procedure for the nomination of
candidates for election as directors. In general, notice of intent to nominate a
director at the annual meeting of stockholders or a special meeting of
stockholders must contain specified information concerning the person to be
nominated and be delivered to our principal executive offices:
- with respect to elections to be held at the annual meeting of
stockholders:
- not less than 90 days or more than 120 days prior to the first
anniversary of the preceding year's annual meeting;
- if the date of the annual meeting is advanced by more than 30 days prior
to or delayed by more than 90 days after that anniversary date, not
earlier than the 120th day before the meeting and not later than the
close of business on the later of (1) the 90th day before the meeting or
(2) the tenth day following the day on which we first make a public
announcement of the date of the meeting; or
21
- with respect to elections to be held at a special meeting of stockholders
for the election of directors, not earlier than the 120th day before the
meeting and not later than the close of business on the later of (1) the
90th day before the meeting or (2) the tenth day following the day on
which we first make a public announcement of the date of the meeting and
of the nominees proposed by the board of directors to be elected at the
meeting.
These procedures may operate to limit the ability of stockholders to nominate
candidates for election as directors.
DELAWARE TAKEOVER STATUTE
We have opted out of Section 203 of the Delaware General Corporation Law.
Section 203 regulates corporate acquisitions and prevents certain Delaware
corporations, including those whose securities are listed on the New York Stock
Exchange, from engaging, under certain circumstances, in a "business
combination" with any "interested stockholder" for three years following the
date that such stockholder became an interested stockholder. For purposes of
Section 203, a "business combination" includes, among other things, a merger or
consolidation involving Encore and the interested stockholder and the sale of
10% or more of our assets to the interested stockholder. In general, Section 203
defines an "interested stockholder" as any entity or person beneficially owning
15% or more of our outstanding voting stock and any entity or person affiliated
with or controlling or controlled by such entity or person.
DELAWARE CORPORATE OPPORTUNITY PROVISION
As permitted by Section 122(17) of the DGCL, our certificate of
incorporation contains a provision that permits any of our current investor
stockholders and their affiliates to participate in transactions relating
exclusively to the acquisition, development and exploitation of North American
oil and natural gas reserves without making such opportunities available to
Encore. Our investor stockholders believe this provision is necessary and
appropriate because of their other significant investments in entities that
conduct operations in the oil and natural gas industry.
REGISTRATION RIGHTS
The holders of approximately 18,503,426 shares of common stock are entitled
to rights with respect to the registration of such shares under the Securities
Act. Under the terms of the agreement between us and the holders of such
registrable securities, if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such common
stock in the registration. Additionally, such holders are also entitled to
demand registration rights, pursuant to which they may require us on up to three
occasions to file a registration statement under the Securities Act at our
expense with respect to their shares of common stock, and we are required to use
all reasonable efforts to effect such registration. All of these registration
rights are subject to certain conditions and limitations, including the right of
the underwriters of an offering to limit the number of shares included in such
registration and our right not to effect a requested registration within 180
days following an offering of our securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Mellon Investor
Services LLC.
22
PLAN OF DISTRIBUTION
We may sell the offered securities in and outside the United States (1)
through underwriters or dealers, (2) directly to purchasers or (3) through
agents. The prospectus supplement will set forth the following information:
- the terms of the offering;
- the names of any underwriters or agents;
- the name or names of any managing underwriter or underwriters;
- the purchase price of the securities from us;
- the net proceeds we will receive from the sale of the securities;
- any delayed delivery arrangements;
- any underwriting discounts, commissions and other items constituting
underwriters' compensation;
- the initial public offering price;
- any discounts or concessions allowed or reallowed or paid to dealers; and
- any commissions paid to agents.
SALE THROUGH UNDERWRITERS OR DEALERS
If we use underwriters in the sale of the offered securities, the
underwriters will acquire the securities for their own account. The underwriters
may resell the securities from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. Underwriters may offer securities
to the public either through underwriting syndicates represented by one or more
managing underwriters or directly by one or more firms acting as underwriters.
Unless we inform you otherwise in the prospectus supplement, the obligations of
the underwriters to purchase the securities will be subject to several
conditions, and the underwriters will be obligated to purchase all the offered
securities if they purchase any of them. The underwriters may change from time
to time any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers.
If we use underwriters in the sale of the offered securities, rules of the
SEC may limit the ability of the underwriters and certain selling group members
to bid for and purchase our securities until the distribution of the offered
securities is completed. As an exception to these rules, the underwriters are
permitted to engage in certain transactions that stabilize, maintain or
otherwise affect the price of the offered securities.
In connection with an underwritten offering, the underwriters may make
short sales of the offered securities and may purchase our securities on the
open market to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of securities than they are
required to purchase in the offering. "Covered" short sales are made in an
amount not greater than the over-allotment option we may grant to the
underwriters in connection with the offering. The underwriters may close out any
covered short position by either exercising the over-allotment option or
purchasing our securities in the open market. In determining the source of
securities to close out the covered short position, the underwriters will
consider, among other things, the price of securities available for purchase in
the open market as compared to the price at which they may purchase securities
through the over-allotment option. "Naked" short sales are sales in excess of
the over-allotment option. The underwriters must close out any naked short
position by purchasing our securities in the open market. A naked short position
is more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the securities in the open market after
pricing that could adversely affect investors who purchase in the offering.
The underwriters may also impose a penalty bid on certain selling group
members. This means that if the underwriters purchase our securities in the open
market to reduce the selling group members' short position or
23
to stabilize the price of the securities, they may reclaim the amount of the
selling concession from the selling group members who sold those securities as
part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases or those purchases could prevent
or retard a decline in the price of the security. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither we nor the underwriters will make any representation or prediction
as to the direction or magnitude of any effect that the transactions we describe
above may have on the price of the offered securities. In addition, neither we
nor the underwriters will make any representation that the underwriters will
engage in these transactions or that these transactions, once commenced, will
not be discontinued without notice.
If we use dealers in the sale of securities, we will sell the securities to
them as principals. They may then resell those securities to the public at
varying prices determined by the dealers at the time of resale. We will include
in the prospectus supplement the names of the dealers and the terms of the
transaction.
DIRECT SALES AND SALES THROUGH AGENTS
We may sell the securities directly. In that event, no underwriters or
agents would be involved. We may also sell the securities through agents we
designate from time to time. In the prospectus supplement, we will name any
agent involved in the offer or sale of the offered securities, and we will
describe any commissions payable by us to the agent. Unless we inform you
otherwise in the prospectus supplement, any agent will agree to use its
reasonable best efforts to solicit purchases for the period of its appointment.
We may sell the securities directly to institutional investors or others
who may be deemed to be underwriters within the meaning of the Securities Act of
1933 with respect to any sale of those securities. We will describe the terms of
any such sales in the prospectus supplement.
DELAYED DELIVERY CONTRACTS
If we so indicate in the prospectus supplement, we may authorize agents,
underwriters or dealers to solicit offers from selected types of institutions to
purchase securities from us at the public offering price under delayed delivery
contracts. These contracts would provide for payment and delivery on a specified
date in the future. The contracts would be subject only to those conditions
described in the prospectus supplement. The prospectus supplement will describe
the commission payable for solicitation of those contracts.
GENERAL INFORMATION
We may have agreements with the agents, dealers and underwriters to
indemnify them against civil liabilities, including liabilities under the
Securities Act of 1933, or to contribute with respect to payments that the
agents, dealers or underwriters may be required to make. Agents, dealers and
underwriters may be customers of, engage in transactions with or perform
services for us in the ordinary course of their businesses.
LEGAL OPINIONS
Baker Botts L.L.P., Houston, Texas, our counsel, will issue an opinion
about the legality of any common stock, preferred stock or debt securities we
offer through this prospectus. Any underwriters will be advised about issues
relating to any offering by their own legal counsel.
24
INDEPENDENT AUDITORS
The consolidated financial statements of Encore Acquisition Company at
December 31, 2002, and for the year then ended, appearing in Encore Acquisition
Company 's Annual Report (Form 10-K) for the year ended December 31, 2002, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
Our consolidated financial statements as of and for the years ended
December 31, 2001 and 2000 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 LLP'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 LLP'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 LLP has not
consented to the incorporation by reference of their report in this prospectus,
you will not be able to recover against Arthur Andersen LLP under Section 11 of
the Securities Act for any untrue statements of a material fact contained in the
consolidated financial statements audited by Arthur Andersen LLP 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.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You can read and copy any materials we file with the
SEC at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can obtain information about the operation of the SEC's public
reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
Web site that contains information we file electronically with the SEC, which
you can access over the Internet at http://www.sec.gov. You can also obtain
information about us at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
This prospectus is part of a registration statement we have filed with the
SEC relating to the securities. This prospectus does not contain all the
information the registration statement sets forth or includes in its exhibits
and schedules, in accordance with the rules and regulations of the SEC, and we
refer you to that omitted information. The statements this prospectus makes
pertaining to the content of any contract, agreement or other document that is
an exhibit to the registration statement necessarily are summaries of their
material provisions, and we qualify them in their entirety by reference to those
exhibits for complete statements of their provisions. The registration statement
and its exhibits and schedules are available at the SEC's public reference room
or through its Web site.
The SEC allows us to "incorporate by reference" the information we file
with it, which means we can disclose important information to you by referring
you to those documents. The information we incorporate by reference is an
important part of this prospectus, and later information we file with the SEC
will automatically update and supersede that information. We incorporate by
reference the documents listed below, and any
25
future filings we make with the SEC under Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934 until we sell all the offered securities.
The documents we incorporate by reference are:
- our annual report on Form 10-K for the year ended December 31, 2002;
- our quarterly reports on Form 10-Q for the quarters ended March 31, 2003
and June 30, 2003;
- our current reports on Form 8-K filed with the SEC on February 3, 2003,
February 13, 2003, March 27, 2003, and July 10, 2003; and
- the description of our common stock in our registration statement on Form
8-A filed with the SEC on December 21, 2000.
We will provide without charge to each person, including any beneficial
owner, to whom a copy of this prospectus has been delivered, upon written or
oral request, a copy of any or all the documents we incorporate by reference in
this prospectus, other than any exhibit to any of those documents, unless we
have specifically incorporated that exhibit by reference into the information
this prospectus incorporates. You may request copies by writing or telephoning
us at the following address:
Encore Acquisition Company
777 Main Street, Suite 1400
Fort Worth, Texas 76102
Attention: Corporate Secretary
Telephone: (817) 877-9955
You should rely only on the information we have provided or incorporated by
reference in this prospectus or any prospectus supplement. We have not
authorized any person to provide information other than that provided in this
prospectus or any prospectus supplement. We have not authorized anyone to
provide you with different information. We are not making an offer of the
securities in any jurisdiction where the offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on its cover page or that any
information contained in any document we have incorporated by reference is
accurate as of any date other than the date of the document incorporated by
reference. Accordingly, we urge you to review each document we subsequently file
with the SEC and incorporate by reference as we describe above for updated
information.
26
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 AUGUST 21, 2003
PROSPECTUS
(ENCORE LOGO)
$400,000,000
ENCORE ACQUISITION COMPANY
777 MAIN STREET, SUITE 1400
FORT WORTH, TEXAS 76102
(817) 877-9955
8 3/8% SENIOR SUBORDINATED NOTES DUE 2012
We may offer from time to time additional 8 3/8% Senior Subordinated Notes
Due 2012. Our subsidiaries may guarantee any additional 8 3/8% Senior
Subordinated Notes Due 2012. You should read this prospectus and the related
prospectus supplement carefully before you invest in the 8 3/8% Senior
Subordinated Notes Due 2012.
---------------------
YOU SHOULD CONSIDER CAREFULLY "RISK FACTORS" BEGINNING ON PAGE 1 BEFORE
INVESTING IN THE NOTES.
---------------------
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.
---------------------
The date of this prospectus is , 2003.
TABLE OF CONTENTS
<Table>
About This Prospectus....................................... i
About Encore Acquisition Company............................ 1
Risk Factors................................................ 1
Forward-Looking Information................................. 11
Use of Proceeds............................................. 12
Ratio of Earnings to Fixed Charges.......................... 12
Description of the Notes.................................... 13
Plan of Distribution........................................ 59
Legal Opinions.............................................. 60
Independent Auditors........................................ 60
Independent Petroleum Engineers............................. 61
Where You Can Find More Information......................... 61
</Table>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission under a "shelf" registration process.
Using this process and subject to compliance with our revolving credit facility
and the indenture related to the 8 3/8% Senior Subordinated Notes Due 2012, we
may offer 8 3/8% Senior Subordinated Notes Due 2012 in one or more offerings
with a total initial offering price of up to $400,000,000. Each time we use this
prospectus to offer securities, we will provide a prospectus supplement and, if
applicable, a pricing supplement. The prospectus supplement and any pricing
supplement will describe the specific terms of that offering. The prospectus
supplement and any pricing supplement may also add to, update or change the
information contained in this prospectus. Please carefully read this prospectus,
the prospectus supplement and any pricing supplement, in addition to the
information contained in the documents we refer to under the heading "Where You
Can Find More Information."
i
ABOUT ENCORE ACQUISITION COMPANY
We are a growing independent energy company engaged in the acquisition,
development, exploitation and production of onshore North American oil and
natural gas reserves. Since inception in 1998, we have sought to acquire high
quality assets with potential for upside through low-risk development drilling
projects.
Our properties are currently 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, the Paradox Basin of Utah and the
North Louisiana Salt Basin of Louisiana. Our growth has come primarily from the
acquisition of producing oil and natural gas properties and subsequent
development of these properties. Since our inception through June 30, 2003, we
have invested $379.6 million in acquiring producing oil and natural gas
properties. Through June 30, 2003, we have invested another $249.1 million for
development and exploitation of these properties.
Our principal executive offices are located at 777 Main Street, Suite 1400,
Fort Worth, Texas 76102. Our main telephone number is (817) 877-9955. We
maintain a website on the Internet at http://www.encoreacq.com. The information
on our website is not incorporated by reference into this prospectus.
RISK FACTORS
You should carefully consider the following matters, in addition to the
other information we have provided in this prospectus, the accompanying
prospectus supplement and the documents we incorporate by reference, before
reaching a decision regarding an investment in our securities.
RISKS RELATED TO OUR BUSINESS
OIL AND NATURAL GAS PRICES ARE VOLATILE AND SUSTAINED PERIODS OF LOW PRICES
COULD MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Historically, the markets for oil and natural gas have been volatile, and
these markets are likely to continue to be volatile in the future. Our revenues,
profitability and future growth depend substantially on prevailing oil and
natural gas prices. Lower oil and natural gas prices may reduce the amount of
oil and natural gas that we can economically produce. Prevailing oil and natural
gas prices also affect the amount of internally generated cash flow available
for repayment of indebtedness and capital expenditures. In addition, the amount
we can borrow under our revolving credit facility is subject to periodic
redetermination based in part on changing expectations of future oil and natural
gas prices.
The factors that can cause oil and natural gas price volatility include:
- the supply of domestic and foreign oil and natural gas;
- the ability of members of the Organization of Petroleum Exporting
Countries (OPEC) to agree upon and maintain oil prices and production
levels;
- political instability or armed conflict in oil or natural gas producing
regions;
- the level of consumer demand;
- weather conditions;
- the price and availability of alternative fuels;
- domestic and foreign governmental regulations and taxes;
- domestic political developments; and
- worldwide economic conditions.
The volatile nature of markets for oil and natural gas makes it difficult
to reliably estimate future prices. Any decline in oil and natural gas prices
adversely affects our financial condition. If oil or natural gas prices
decline significantly for a sustained period of time, we may, among other
things, be unable to meet our financial obligations, make planned expenditures
or raise additional capital.
RESERVE ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY PROVE 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.
Estimating quantities of proved oil and natural gas reserves is a complex
process that requires interpretations of available technical data and numerous
assumptions, including certain economic assumptions. Any significant
inaccuracies in these interpretations or assumptions or changes in 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 involves economic assumptions relating to
commodity prices, production costs, severance and excise taxes, capital
expenditures and workover and remedial costs. Actual results most likely will
vary from our estimates. Any significant variance could reduce the estimated
quantities and present value of our reserves.
You should not assume that the present value of future net cash flows from
our proved reserves referred to or incorporated by reference in this prospectus
is the current market value of our estimated oil and natural gas reserves. In
accordance with SEC requirements, we base the estimated discounted future net
cash flows from our proved reserves on prices and costs in effect on the date of
the estimate, holding the prices and costs constant throughout the life of the
properties. 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.
IF OIL AND NATURAL GAS PRICES DECREASE, WE MAY BE REQUIRED TO TAKE WRITE DOWNS.
We may be required to write down the carrying value of our oil and natural
gas properties when future estimated oil and gas prices are low or if we have
substantial downward adjustments to our estimated proved reserves or increases
in our estimates of operating expenses or development costs.
We capitalize the costs to acquire, find and develop our oil and natural
gas properties under the successful efforts accounting method. The net
capitalized costs of our oil and gas properties may not exceed their estimated
fair value. If net capitalized costs of our oil and gas properties exceed their
fair value, we must charge the amount of the excess to earnings. We review the
carrying value of our properties quarterly, based on changes in expectations of
future oil and natural gas prices, expenses and tax rates. Once incurred, a
write down of oil and gas properties is not reversible at a later date even if
oil or gas prices increase.
OUR ACQUISITION STRATEGY SUBJECTS US TO NUMEROUS RISKS THAT COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Acquisitions are an essential part of our growth strategy, and our ability
to acquire additional properties on favorable terms is important to our
long-term growth. 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. Even if we are able to identify suitable acquisition opportunities,
our acquisition strategy depends upon, among other things, our ability to obtain
debt and equity financing and, in some cases, regulatory approvals.
The successful acquisition of producing properties requires an assessment
of several factors, including:
- recoverable reserves;
- future oil and natural gas prices;
2
- operating costs; and
- potential environmental and other liabilities.
The accuracy of these assessments is inherently uncertain. In connection
with these assessments, we perform a review of the subject properties that we
believe to be generally consistent with industry practices. Our review will not
reveal all existing or potential problems nor will it permit us to become
sufficiently familiar with the properties to fully assess their deficiencies and
capabilities. Inspections may not always be performed on every well, and
structural and environmental problems are not necessarily observable even when
an inspection is undertaken. Even when problems are identified, the seller may
be unwilling or unable to provide effective contractual protection against all
or part of the problems. We are often not entitled to contractual
indemnification for environmental liabilities and acquire properties on an "as
is" basis.
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. Furthermore, our
financial position and results of operations may fluctuate significantly from
period to period based on whether significant acquisitions are completed in
particular periods. Competition for acquisitions is intense and may increase the
cost of, or cause us to refrain from, completing acquisitions.
THE FAILURE TO PROPERLY MANAGE GROWTH THROUGH ACQUISITIONS COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Growing through acquisitions and managing that 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. Pursuing
and integrating acquisitions involves a number of risks, including:
- diversion of management attention from existing operations;
- unexpected losses of key employees, customers and suppliers of the
acquired business;
- conforming the financial, technological and management standards,
processes, procedures and controls of the acquired business with those of
our existing operations; and
- increasing the scope, geographic diversity and complexity of our
operations.
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.
A SUBSTANTIAL PORTION OF OUR PRODUCING PROPERTIES IS LOCATED IN ONE GEOGRAPHIC
AREA.
We have extensive operations in the Williston Basin of Montana and North
Dakota. As of December 31, 2002, our Cedar Creek Anticline properties in the
Williston Basis represented approximately 75% of our proved reserves and 61% of
our 2002 production. Any circumstance or event that negatively impacts
production or marketing of oil and natural gas in the Williston Basin could
reduce our earnings and cash flow.
DERIVATIVE INSTRUMENTS EXPOSE US TO RISKS OF FINANCIAL LOSS IN A VARIETY OF
CIRCUMSTANCES.
We use derivative instruments in an effort to reduce our exposure to
fluctuations in the prices of oil and natural gas and to reduce our cash
outflows related to interest. Our derivative instruments expose us to risks of
financial loss in a variety of circumstances, including when:
- the counterparty to our derivative instruments is unable to satisfy its
obligations;
- production is less than expected; or
- there is an adverse change in the expected differential between the
underlying price in the derivative instrument and actual prices received
for our production.
Derivative instruments may limit our ability to realize increased revenue
with increases in the prices for oil and natural gas.
3
We adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), on January 1,
2001. SFAS 133 generally requires us to record each hedging transaction as an
asset or liability measured at its fair value. Each quarter we must record
changes in the fair value of our hedges, which could result in significant
fluctuations in net income and stockholders' equity from period to period.
Please read our most recently filed annual report on Form 10-K and quarterly
report on Form 10-Q for a more detailed discussion of our hedging program.
DRILLING OIL AND NATURAL GAS WELLS IS A HIGH-RISK ACTIVITY.
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 discovered. We often are uncertain as to the
future cost or timing of drilling, completing and producing wells. We may not
recover all or any portion of our investment in drilling oil and natural gas
wells.
Our drilling operations may be curtailed, delayed or canceled as a result
of a variety of factors, including:
- unexpected drilling conditions or miscalculations;
- title problems;
- pressure or irregularities in formations;
- equipment failures or accidents;
- adverse weather conditions;
- compliance with environmental and other governmental requirements, which
may increase our costs or restrict our activities; and
- 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.
Substantial capital is required to replace and grow reserves. If lower oil
and natural gas prices or operating difficulties result in our cash flow from
operations being less than expected or limit on our ability to borrow under our
revolving credit facility, we may be unable to expend the capital necessary to
find, develop or acquire new oil and natural gas reserves.
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.
4
OUR BUSINESS INVOLVES MANY OPERATING RISKS THAT CAN CAUSE SUBSTANTIAL LOSSES;
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:
- fires;
- natural disasters;
- explosions;
- formations with abnormal pressures;
- blowouts;
- collapses of wellbore, casing or other tubulars;
- failure of oilfield drilling and service tools;
- uncontrollable flows of oil, natural gas, formation water or drilling
fluids;
- pressure forcing oil or natural gas out of the wellbore at a dangerous
velocity coupled with the potential for fire or explosion;
- changes in below-ground pressure in a formation that cause surface
collapse or cratering;
- pipeline ruptures or cement failures;
- environmental hazards, such as oil spills, natural gas leaks and
discharges of toxic gases; and
- weather.
If any of these events occur, we could incur substantial losses as a result of:
- injury or loss of life;
- damage to and destruction of property, natural resources and equipment;
- pollution and other environmental damage;
- regulatory investigations and penalties;
- suspension of our operations; and
- repair and remediation costs.
We do not maintain insurance against the loss of oil or natural gas
reserves as a result of operating hazards, nor do we maintain business
interruption insurance. In addition, pollution and environmental risks generally
are not fully insurable. We may experience losses for uninsurable or uninsured
risks or losses 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.
TERRORIST ACTIVITIES AND THE POTENTIAL FOR MILITARY AND OTHER ACTIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
The threat of terrorism and the impact of military and other action have
caused instability in world financial markets and could lead to increased
volatility in prices for oil and natural gas, all of which could adversely
affect the markets for our operations. Future acts of terrorism could be
directed against companies operating in the United States. 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.
5
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 capital expenditures. 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 of the Board 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 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 OIL AND NATURAL GAS PRODUCTION IS DEPENDENT UPON
TRANSPORTATION FACILITIES OVER WHICH WE HAVE NO CONTROL.
The marketability of our oil and natural gas production depends in part
upon the availability, proximity and capacity of pipelines, oil and 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:
- acquiring desirable producing properties or new leases for future
exploration;
- marketing our oil and natural gas production;
- integrating new technologies; and
- acquiring 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, which may adversely affect our ability to
compete with these 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
6
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, development, 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 and environmental laws and regulations.
We may be required to make large expenditures to comply with applicable laws and
regulations, which could adversely affect our results of operations and
financial condition. Matters subject to regulation include:
- discharge permits for drilling operations;
- drilling bonds;
- spacing of wells;
- unitization and pooling of properties;
- environmental protection;
- reports concerning operations; and
- taxation.
Under these laws and regulations, we could be liable for:
- personal injuries;
- property damage;
- oil spills;
- discharge of hazardous materials;
- reclamation costs;
- remediation and clean-up costs; and
- 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. We could 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 CESSATION OF OPERATIONS BY ARTHUR ANDERSEN LLP WILL LIMIT OUR ABILITY TO USE
THE CONSOLIDATED FINANCIAL STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP AND COULD
IMPACT OUR ABILITY TO ACCESS PUBLIC CAPITAL MARKETS AS WELL AS OUR INVESTORS'
ABILITY TO SEEK POTENTIAL RECOVERIES FROM ARTHUR ANDERSEN LLP.
Our consolidated financial statements as of and for the years ended
December 31, 2001 and 2000 were audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated in this prospectus in reliance upon the authority of said firm as
experts in giving said reports. Subsequent to Arthur Andersen LLP's completion
of our 2001 audit, the firm was convicted of
7
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 LLP'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 LLP has not consented to the incorporation
by reference of their report in this prospectus, you will not be able to recover
against Arthur Andersen LLP under Section 11 of the Securities Act for any
untrue statements of a material fact contained in the consolidated financial
statements audited by Arthur Andersen LLP or any omissions to state a material
fact required to be stated therein.
WE MAY ISSUE PREFERRED STOCK WHOSE TERMS COULD ADVERSELY AFFECT THE VOTING POWER
OR VALUE OF OUR COMMON STOCK.
Our certificate of incorporation authorizes us to issue, without the
approval of our stockholders, one or more classes or series of preferred stock
having such preferences, powers and relative, participating, optional and other
rights, including preferences over our common stock respecting dividends and
distributions, as our board of directors generally may determine. The terms of
one or more classes or series of preferred stock could adversely impact the
voting power or value of our common stock. For example, we might grant holders
of preferred stock the right to elect some number of our directors in all events
or on the happening of specified events or the right to veto specified
transactions. Similarly, the repurchase or redemption rights or liquidation
preferences we might assign to holders of preferred stock could affect the
residual value of the common stock.
RISKS RELATED TO OUR INDEBTEDNESS
OUR LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW AND
HAVE OTHER IMPORTANT AND POTENTIALLY ADVERSE CONSEQUENCES TO YOU.
We had total indebtedness of $150.0 million as of June 30, 2003. Our debt
level could have several important consequences to you, including:
- it may be more difficult for us to satisfy our obligations;
- we may have difficulties borrowing money in the future for acquisitions,
to meet our operating expenses or for other purposes;
- 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;
- 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
fund working capital, capital expenditures and other business activities;
- we may be more vulnerable to economic downturns and adverse developments
in our industry; and
- 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, many of which are beyond our control. Our earnings
may not be sufficient to allow us to pay the principal and interest on our debt
and meet our other obligations. If we do not have enough money, we may need to
refinance all or part of our existing debt, sell assets, borrow more money or
raise equity, which we may not be able to do on terms acceptable to us, if at
all.
8
OUR REVOLVING CREDIT FACILITY AND OTHER DEBT INSTRUMENTS HAVE RESTRICTIVE
COVENANTS THAT COULD AFFECT OUR FINANCIAL CONDITION.
Our revolving credit facility and the indenture related to the 8 3/8%
senior subordinated notes, which we refer to as the 8 3/8% notes, contain
financial and other restrictive covenants that limit our ability to engage in
activities that may be in our long-term best interests. The covenants under our
revolving credit facility are similar to but generally more restrictive than the
covenants under the indenture.
Our ability to borrow under our revolving credit facility is subject to
financial covenants, including leverage, interest and fixed charge coverage
ratios. Our revolving credit facility limits our ability to effect mergers,
asset sales and change of control events. These covenants also contain
restrictions regarding our ability to incur additional indebtedness in the
future. In some cases, our subsidiaries are subject to similar restrictions that
may restrict their ability to make distributions to us.
The indenture related to our 8 3/8% notes also contains limitations on our
ability to effect mergers and change of control events, as well as other
limitations, including:
- limitations on incurring additional indebtedness;
- limitations on the sale of assets;
- limitations on the declaration and payment of dividends or other
restricted payments;
- limitations on transactions with affiliates; and
- limitations on liens.
If we do not comply with these or other covenants and restrictions
contained in our revolving credit facility, the indenture or the other
agreements governing our other indebtedness, we could be in default under those
agreements, and the debt, together with accrued interest, could then be declared
due and payable. If we were unable to repay any borrowings when due, the lenders
under our revolving credit facility could proceed against their collateral,
which includes most of the assets we own, including the stock and assets of our
subsidiaries. In addition, a default under our revolving credit facility or
agreements governing our other indebtedness could lead to an acceleration of
debt under other debt instruments that contain cross-acceleration or
cross-default provisions. We do not have sufficient working capital to satisfy
our debt obligations in the event of an acceleration of all or a significant
portion of our outstanding indebtedness.
IN ADDITION TO OUR CURRENT INDEBTEDNESS, WE MAY INCUR SUBSTANTIALLY MORE DEBT.
THIS COULD EXACERBATE THE RISKS DESCRIBED ABOVE.
Together with our subsidiaries, we may incur substantially more debt in the
future. Our revolving credit facility and the indenture governing the 8 3/8%
notes contain restrictions on our incurrence of additional indebtedness.
However, these restrictions are subject to 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 obligations that do not constitute indebtedness. As of June 30,
2003, we had approximately $220.0 million additional borrowing capacity under
our revolving credit facility, 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
9
debt in the future, 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.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE RELATED TO THE 8 3/8% NOTES.
Upon the occurrence of a change of control, as defined in the indenture for
our 8 3/8% notes, we will be required to offer to repurchase all outstanding
8 3/8% notes. We may not have sufficient funds available to us to make the
required repurchase of the 8 3/8% notes. In addition, our revolving credit
facility provides that the occurrence of any change of control event constitutes
an event of default, which could require that we repay all unpaid and
outstanding indebtedness under the revolving credit facility and may limit the
funds available for us to make any payments with respect to the 8 3/8% notes,
including for the repurchase of the 8 3/8% notes. Our failure to purchase
tendered 8 3/8% notes would constitute a default under the indenture governing
the 8 3/8% notes which, in turn, could constitute a further event of default
under our revolving credit facility.
SUBORDINATION OF THE 8 3/8% NOTES MAY LIMIT PAYMENT ON THE 8 3/8% NOTES.
Our obligations under the 8 3/8% 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 June 30, 2003, we had no Senior
Indebtedness outstanding and $220.0 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 8 3/8% notes. By reason of the subordination of the 8 3/8% 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 8 3/8% notes. There may not be sufficient assets
remaining after payment of prior claims to pay amounts due on the 8 3/8% notes.
In addition, under certain circumstances, no payments may be made with respect
to the 8 3/8% notes if a default exists with respect to Senior Indebtedness.
Please read "Description of the Notes -- Ranking" on page 15. The term "Senior
Indebtedness" is defined in "Description of the Notes -- Certain Definitions"
beginning on page 37.
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:
- intended to hinder, delay or defraud any present or future creditor or
received less than reasonably equivalent value or fair compensation for
the guarantee;
- was insolvent or rendered insolvent by making the guarantee;
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- 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:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets;
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- 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
- it could not pay its debts as they become due.
RECEIPT OF PAYMENT ON THE 8 3/8% NOTES, AS WELL AS THE ENFORCEMENT OF REMEDIES
UNDER THE SUBSIDIARY GUARANTEES, MAY BE LIMITED IN BANKRUPTCY OR IN EQUITY.
An investment in the 8 3/8% 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 8 3/8% notes and in the exercise of enforcement
remedies under the 8 3/8% 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 under the bankruptcy code;
- 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 8 3/8% 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
8 3/8% notes could occur through the "cram-down" provision of the bankruptcy
code. Under this provision, the 8 3/8% notes could be restructured over your
objections as to their general terms, primarily interest rate and maturity.
FORWARD-LOOKING INFORMATION
This prospectus, including the information we incorporate by reference,
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
You can identify our forward-looking statements by words such as "estimate,"
"project," "predict," "believe," "expect," "anticipate," "plan," "forecast,"
"budget," "goal" or other words that convey the uncertainty of future events or
outcomes. When considering these forward-looking statements, you should keep in
mind the risk factors and other cautionary statements contained in this
prospectus, any prospectus supplement and the documents we have incorporated by
reference.
The forward-looking statements are not guarantees of future performance,
and we caution you not to rely unduly on them. We have based many of these
forward-looking statements on expectations and assumptions about future events
that may prove to be inaccurate. While our management considers these
expectations and assumptions to be reasonable, they are inherently subject to
significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. These risks, contingencies and uncertainties
relate to, among other matters, the following:
- the risks associated with operating in one or two major geographic areas;
- the risks associated with drilling of oil and natural gas wells in our
exploitation efforts;
- our ability to find, acquire, market, develop and produce new properties;
- oil and natural gas price volatility;
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- uncertainties in the estimation of proved reserves and in the projection
of future rates of production and timing of exploitation expenditures;
- operating hazards attendant to the oil and natural gas business;
- drilling and completion risks that are generally not recoverable from
third parties or insurance;
- potential mechanical failure or underperformance of significant wells;
- climatic conditions;
- availability and cost of material and equipment;
- derivative instruments;
- actions or inactions of third-party operators of our properties;
- our ability to find and retain skilled personnel;
- availability of capital;
- the strength and financial resources of our competitors;
- regulatory developments;
- environmental risks; and
- general economic and business conditions and industry trends.
We have discussed some of these factors in more detail in the "Risk
Factors" section of this prospectus. These factors are not necessarily all the
important factors that could affect us. We advise you that you should (1) be
aware that important factors we do not refer to above could affect the accuracy
of our forward-looking statements and (2) use caution and common sense when
considering our forward-looking statements. We do not intend to update these
statements unless the securities laws require us to do so.
USE OF PROCEEDS
Unless we inform you otherwise in the prospectus supplement, we will use
the net proceeds from the sale of the 8 3/8% notes for general corporate
purposes. These purposes may include funding working capital requirements,
capital expenditures, repayment and refinancing of indebtedness and repurchases
and redemptions of securities. Pending any specific application, we may
initially invest those funds in short-term marketable securities or apply them
to the reduction of short-term indebtedness.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for each of the periods shown is as
follows:
<Table>
<Caption>
PERIOD FROM
SIX MONTHS APRIL 22, 1998
ENDED YEAR ENDED DECEMBER 31, (INCEPTION) TO
JUNE 30, ------------------------- DECEMBER 31,
2003 2002 2001 2000 1999 1998
---------- ---- ---- ---- ---- --------------
Ratio of earnings to fixed charges.......... 6.9x 5.8x 6.3x 2.2x 2.0x --
</Table>
We have computed the ratios of earnings to fixed charges by dividing
earnings by fixed charges. For this purpose, "earnings" consist of income before
income taxes plus fixed charges exclusive of capitalized interest. "Fixed
charges" consist of interest, whether expensed or capitalized, amortization of
capitalized expenses relating to indebtedness and an estimate of the portion of
annual rental expense on operating leases that represents the interest factor.
We began operations on April 22, 1998. From inception until December 31,
1998, earnings were insufficient to cover fixed charges by $1,010,000.
12
DESCRIPTION OF THE NOTES
On June 25, 2002, we issued $150,000,000 aggregate principal amount of
8 3/8% Senior Subordinated Notes Due 2012 (the "Original Issue Notes") under an
Indenture (the "Indenture") dated June 25, 2002 between us and Wells Fargo Bank,
National Association, as trustee (the "Trustee"). All of those notes were
subsequently exchanged for new notes in December 2002 in a transaction
registered under the Securities Act of 1933. In this section, we refer to the
notes issued in exchange for the Original Issue Notes as the "Exchange Notes."
Subject to our compliance with the terms of our revolving credit facility
and the covenant described under the subheading "-- Certain
Covenants -- Limitation on Indebtedness" beginning on page 22, we are entitled,
without the consent of the holders of the Exchange Notes, to issue more notes
under the Indenture on the same terms and conditions and with the same CUSIP
numbers as the Exchange Notes in an unlimited principal amount (the "Additional
Notes"). The Exchange 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. The Exchange Notes and any Additional Notes
actually issued are collectively referred to in this section as the "Notes."
Certain terms used in this description are defined under the subheading
"-- Certain Definitions" beginning on page 37. 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. We urge you to read the Indenture because it, not this
description, define your rights as holders of the Additional 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 Additional Notes will be:
- unsecured senior subordinated obligations of the Company;
- subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- senior in right of payment to any future Subordinated Obligations of the
Company; and
- fully and unconditionally guaranteed by each Subsidiary Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The Company will issue the Additional Notes initially in denominations of
$1,000 and any integral multiple of $1,000. The Additional Notes will mature on
June 15, 2012. As described above, Subject to our compliance with the covenant
described under the subheading "-- Certain Covenants -- Limitation on
Indebtedness" beginning on page 22, we are entitled, without the consent of the
holders of the Exchange Notes, to issue Additional Notes under the Indenture on
the same terms and conditions and with the same CUSIP numbers as the Notes being
offered hereby in an unlimited principal amount. The Exchange 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.
Interest on the Additional 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 the first June 15 or December 15 after the date of first issue. We
will make each interest payment to the holders of record of the 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.
13
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 the 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:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
- ------ ----------
2007........................................................ 104.188%
2008........................................................ 102.792%
2009........................................................ 101.396%
2010 and thereafter......................................... 100.000%
</Table>
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.
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
14
Subsidiary Stock" beginning on pages 19 and 28, respectively. We may at any time
and from time to time purchase Notes in the open market or otherwise.
GUARANTIES
The Notes will be fully and unconditionally guaranteed by our Subsidiary
Guarantors, all of which are 100% wholly-owned subsidiaries of the Company. The
Subsidiary Guarantors will jointly and severally guarantee, on a senior
subordinated basis, our obligations under the Notes. The Subsidiary Guarantors
include all of our Subsidiaries existing on the Issue Date and, except as
described under "-- Future Guarantors" on page 32, 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 Related to Our
Indebtedness -- Federal and state statutes allow courts, under specific
circumstances, to void guarantees and require noteholders to return payments
received from guarantors" on page 10.
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 Related
to Our Indebtedness -- Federal and state statutes allow courts, under specific
circumstances, to void guarantees and require noteholders to return payments
received from guarantors" on page 10.
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.
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 June 30, 2003:
(1) the Company had no Senior Indebtedness outstanding;
(2) the Subsidiary Guarantors had no Senior Indebtedness outstanding;
and
(3) the Exchange Notes were not and Additional Notes would not have
been senior to any other Indebtedness.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company and the Subsidiary Guarantors may incur, the
amount of such Indebtedness could be substantial and, in any
15
case, such Indebtedness may be Senior Indebtedness. Please read "-- Certain
Covenants -- Limitation on Indebtedness" beginning on page 22.
LIABILITIES OF SUBSIDIARIES VERSUS NOTES
All of our operations are conducted through our subsidiaries. Although all
of our current subsidiaries are guaranteeing the Exchange Notes and will
guarantee the Additional 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. Please read "-- Certain
Covenants -- Limitation on Indebtedness" beginning on page 22.
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 on page 35 and may not purchase, redeem or otherwise
retire any Notes (collectively, "pay the Notes") if either of the following
occurs (a "Payment Default"):
(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
16
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.
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
17
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" on page 35.
BOOK-ENTRY, DELIVERY AND FORM
We will 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. 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 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.
18
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
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.
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.
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
19
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 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);
(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.
20
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. 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" beginning on page 22. 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 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.
21
CERTAIN COVENANTS
The Indenture contains the following covenants, which are all of the
material covenants included in the Indenture.
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 described in:
(a) paragraphs (a) through (d) of the covenant described under
"-- Limitation on Indebtedness" beginning on this page;
(b) "-- Limitation on Restricted Payments" on page 24;
(c) "-- Limitation on Restrictions on Distributions from Restricted
Subsidiaries" on page 27;
(d) "-- Limitation on Sales of Assets and Subsidiary Stock" on page
28;
(e) "-- Limitation on Affiliate Transactions" on page 30;
(f) clause (3) of the covenant described under "-- Merger and
Consolidation" on page 31; and
(g) "-- Future Guarantors" on page 32;
(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 on page 24 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 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" on page 28 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
22
Indebtedness is expressly subordinated to the prior payment in full in cash
of all obligations with respect to the Notes;
(3) the 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
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
23
(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 Original Issue 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" beginning on page 22; 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):
(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
24
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 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;
25
(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" beginning on page 22; 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" beginning on page 22; 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 on page 19 or "-- Limitation on Sales of Assets and Subsidiary Stock"
below on page 28, (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 other
acquisition and retirement for value will be excluded in the calculation of
the amount of Restricted Payments.
26
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,
27
(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)
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(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 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
29
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 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" on page 24;
(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;
30
(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;
(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
offering circular related to the Original Issue Notes 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" beginning on page 22;
(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
31
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.
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" on page 28 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" beginning on page 22) 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.
32
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;
(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 he 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
33
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;
(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.
The holders of a majority in principal amount of the outstanding Notes
generally 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
The Indenture generally 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" beginning on page 14 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;
34
(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.
Notwithstanding the preceding, the covenant described under the caption
"-- Change of Control" on page 19 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" on page 19 and under the covenants described under "-- Certain
Covenants" beginning on page 22 above (other than the
35
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" beginning on page 33
above and the limitations contained in clause (3) of the first paragraph under
"-- Certain Covenants -- Merger and Consolidation" on page 31 above ("covenant
defeasance").
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" beginning on page 33 above
or because of the failure of the Company to comply with clause (3) of the first
paragraph under "-- Certain Covenants -- Merger and Consolidation" on page 31
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, except the Trustee may refuse to
follow any direction that conflicts with the terms of the Indenture or that the
Trustee determines is unduly prejudicial to the rights of other Holders. 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 Trustee 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
36
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.
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
37
(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;
(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.
38
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.
"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
39
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;
(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.
40
"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 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
41
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;
(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
42
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 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
43
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.
"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
44
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;
(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.
"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 accounting principles generally accepted 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
45
Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
SEC.
"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);
46
(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 Stock,
Indebtedness or other similar instruments issued by such Person.
47
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;
(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
48
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.
"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 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;
49
(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, 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.
50
"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
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;
51
(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 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;
52
(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;
(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
53
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;
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.
"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
54
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.
"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:
(3) any obligation of such Person to any Subsidiary;
(4) any liability for Federal, state, local or other taxes owed or
owing by such Person;
(5) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(6) 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
(7) 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.
55
"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.
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
56
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.
"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.
57
"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.
58
PLAN OF DISTRIBUTION
We may sell the 8 3/8% notes in and outside the United States (1) through
underwriters or dealers, (2) directly to purchasers or (3) through agents. The
prospectus supplement will set forth the following information:
- the terms of the offering;
- the names of any underwriters or agents;
- the name or names of any managing underwriter or underwriters;
- the purchase price of the 8 3/8% notes from us;
- the net proceeds we will receive from the sale of the 8 3/8% notes ;
- any delayed delivery arrangements;
- any underwriting discounts, commissions and other items constituting
underwriters' compensation;
- the initial public offering price;
- any discounts or concessions allowed or reallowed or paid to dealers; and
- any commissions paid to agents.
SALE THROUGH UNDERWRITERS OR DEALERS
If we use underwriters in the sale of the 8 3/8% notes , the underwriters
will acquire the 8 3/8% notes for their own account. The underwriters may resell
the 8 3/8% notes from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. Underwriters may offer 8 3/8% notes to the
public either through underwriting syndicates represented by one or more
managing underwriters or directly by one or more firms acting as underwriters.
Unless we inform you otherwise in the prospectus supplement, the obligations of
the underwriters to purchase the 8 3/8% notes will be subject to several
conditions, and the underwriters will be obligated to purchase all the 8 3/8%
notes if they purchase any of them. The underwriters may change from time to
time any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers.
If we use underwriters in the sale of the 8 3/8% notes , rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase our securities until the distribution of the 8 3/8% notes
is completed. As an exception to these rules, the underwriters are permitted to
engage in certain transactions that stabilize, maintain or otherwise affect the
price of the 8 3/8% notes.
In connection with an underwritten offering, the underwriters may make
short sales of the 8 3/8% notes and may purchase our 8 3/8% notes on the open
market to cover positions created by short sales. Short sales involve the sale
by the underwriters of a greater number of 8 3/8% notes than they are required
to purchase in the offering. "Covered" short sales are made in an amount not
greater than the over-allotment option we may grant to the underwriters in
connection with the offering. The underwriters may close out any covered short
position by either exercising the over-allotment option or purchasing our 8 3/8%
notes in the open market. In determining the source of 8 3/8% notes to close out
the covered short position, the underwriters will consider, among other things,
the price of 8 3/8% notes available for purchase in the open market as compared
to the price at which they may purchase 8 3/8% notes through the over-allotment
option. "Naked" short sales are sales in excess of the over-allotment option.
The underwriters must close out any naked short position by purchasing our
8 3/8% notes in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure on
the price of the 8 3/8% notes in the open market after pricing that could
adversely affect investors who purchase in the offering.
The underwriters may also impose a penalty bid on certain selling group
members. This means that if the underwriters purchase our 8 3/8% notes in the
open market to reduce the selling group members' short position
59
or to stabilize the price of the 8 3/8% notes, they may reclaim the amount of
the selling concession from the selling group members who sold those 8 3/8%
notes as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases or those purchases could prevent
or retard a decline in the price of the security. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither we nor the underwriters will make any representation or prediction
as to the direction or magnitude of any effect that the transactions we describe
above may have on the price of the 8 3/8% notes . In addition, neither we nor
the underwriters will make any representation that the underwriters will engage
in these transactions or that these transactions, once commenced, will not be
discontinued without notice.
If we use dealers in the sale of 8 3/8% notes , we will sell the 8 3/8%
notes to them as principals. They may then resell those 8 3/8% notes to the
public at varying prices determined by the dealers at the time of resale. We
will include in the prospectus supplement the names of the dealers and the terms
of the transaction.
DIRECT SALES AND SALES THROUGH AGENTS
We may sell the 8 3/8% notes directly. In that event, no underwriters or
agents would be involved. We may also sell the 8 3/8% notes through agents we
designate from time to time. In the prospectus supplement, we will name any
agent involved in the offer or sale of the 8 3/8% notes , and we will describe
any commissions payable by us to the agent. Unless we inform you otherwise in
the prospectus supplement, any agent will agree to use its reasonable best
efforts to solicit purchases for the period of its appointment.
We may sell the 8 3/8% notes directly to institutional investors or others
who may be deemed to be underwriters within the meaning of the Securities Act of
1933 with respect to any sale of those 8 3/8% notes . We will describe the terms
of any such sales in the prospectus supplement.
DELAYED DELIVERY CONTRACTS
If we so indicate in the prospectus supplement, we may authorize agents,
underwriters or dealers to solicit offers from selected types of institutions to
purchase 8 3/8% notes from us at the public offering price under delayed
delivery contracts. These contracts would provide for payment and delivery on a
specified date in the future. The contracts would be subject only to those
conditions described in the prospectus supplement. The prospectus supplement
will describe the commission payable for solicitation of those contracts.
GENERAL INFORMATION
We may have agreements with the agents, dealers and underwriters to
indemnify them against civil liabilities, including liabilities under the
Securities Act of 1933, or to contribute with respect to payments that the
agents, dealers or underwriters may be required to make. Agents, dealers and
underwriters may be customers of, engage in transactions with or perform
services for us in the ordinary course of their businesses.
LEGAL OPINIONS
Baker Botts L.L.P., Houston, Texas, our counsel, will issue an opinion
about the legality of any 8 3/8% notes we offer through this prospectus. Any
underwriters will be advised about issues relating to any offering by their own
legal counsel.
INDEPENDENT AUDITORS
The consolidated financial statements of Encore Acquisition Company at
December 31, 2002, and for the year then ended, appearing in Encore Acquisition
Company 's Annual Report (Form 10-K) for the year ended December 31, 2002, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements
60
are incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
Our consolidated financial statements as of and for the years ended
December 31, 2001 and 2000 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 LLP'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 LLP'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 LLP has not
consented to the incorporation by reference of their report in this prospectus,
you will not be able to recover against Arthur Andersen LLP under Section 11 of
the Securities Act for any untrue statements of a material fact contained in the
consolidated financial statements audited by Arthur Andersen LLP 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.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You can read and copy any materials we file with the
SEC at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can obtain information about the operation of the SEC's public
reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
Web site that contains information we file electronically with the SEC, which
you can access over the Internet at http://www.sec.gov. You can also obtain
information about us at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
This prospectus is part of a registration statement we have filed with the
SEC relating to the securities. This prospectus does not contain all the
information the registration statement sets forth or includes in its exhibits
and schedules, in accordance with the rules and regulations of the SEC, and we
refer you to that omitted information. The statements this prospectus makes
pertaining to the content of any contract, agreement or other document that is
an exhibit to the registration statement necessarily are summaries of their
material provisions, and we qualify them in their entirety by reference to those
exhibits for complete statements of their provisions. The registration statement
and its exhibits and schedules are available at the SEC's public reference room
or through its Web site.
The SEC allows us to "incorporate by reference" the information we file
with it, which means we can disclose important information to you by referring
you to those documents. The information we incorporate by reference is an
important part of this prospectus, and later information we file with the SEC
will automatically update and supersede that information. We incorporate by
reference the documents listed below, and any future filings we make with the
SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934 until we sell all the offered securities. The documents we incorporate by
reference are:
- our annual report on Form 10-K for the year ended December 31, 2002;
- our quarterly reports on Form 10-Q for the quarters ended March 31, 2003
and June 30, 2003;
- our current reports on Form 8-K filed with the SEC on February 3, 2003,
February 13, 2003, March 27, 2003, and July 10, 2003; and
61
- the description of our common stock in our registration statement on Form
8-A filed with the SEC on December 21, 2000.
We will provide without charge to each person, including any beneficial
owner, to whom a copy of this prospectus has been delivered, upon written or
oral request, a copy of any or all the documents we incorporate by reference in
this prospectus, other than any exhibit to any of those documents, unless we
have specifically incorporated that exhibit by reference into the information
this prospectus incorporates. You may request copies by writing or telephoning
us at the following address:
Encore Acquisition Company
777 Main Street, Suite 1400
Fort Worth, Texas 76102
Attention: Corporate Secretary
Telephone: (817) 877-9955
You should rely only on the information we have provided or incorporated by
reference in this prospectus or any prospectus supplement. We have not
authorized any person to provide information other than that provided in this
prospectus or any prospectus supplement. We have not authorized anyone to
provide you with different information. We are not making an offer of the
securities in any jurisdiction where the offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on its cover page or that any
information contained in any document we have incorporated by reference is
accurate as of any date other than the date of the document incorporated by
reference. Accordingly, we urge you to review each document we subsequently file
with the SEC and incorporate by reference as we describe above for updated
information.
62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth expenses payable by Encore Acquisition
Company ("Encore") in connection with the issuance and distribution of the
securities being registered. All the amounts shown are estimates, except the SEC
registration fee.
<Table>
SEC registration fee........................................ $ 32,360
NASD fee.................................................... 30,500
Printing expenses........................................... 50,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 100,000
Fees and expenses of trustee and counsel.................... 15,000
Rating agency fees.......................................... 75,000
Miscellaneous expenses...................................... 27,140
--------
Total............................................. $480,000
========
</Table>
ITEM 15. 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 by-laws 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 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) 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, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful;
provided, however, 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 by-laws, 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,
II-1
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 by-laws, 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
by-laws 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.
ITEM 16. EXHIBITS*
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
*1.1 Form of Underwriting Agreement.
**4.1 Second Amended and Restated Certificate of Incorporation of
Encore Acquisition Company (incorporated by reference to
Exhibit 3.1 to Encore's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001, filed with the SEC on
November 7, 2001).
**4.2 Second Amended and Restated By-laws of Encore Acquisition
Company (incorporated by reference to Exhibit 3.2 to
Encore's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, filed with the SEC on November 7, 2001).
**4.3 Specimen common stock certificate of Encore Acquisition
Company (incorporated by reference to Exhibit 4.1 to
Encore's Registration Statement on Form S-1, Registration
No. 333-47540, filed with the SEC on December 15, 2000).
**4.4 8 3/8% Senior Subordinated Notes Indenture, dated as of June
25, 2002, among Encore Acquisition Company, subsidiary
guarantors party thereto and Wells Fargo Bank, N.A., as
Trustee (incorporated by reference to Exhibit 4.1 to
Encore's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, filed with the SEC on August 9, 2002).
**4.5 Form of 8 3/8% Note (contained in the Indenture filed as
Exhibit 4.2 to this Registration Statement).
+4.6 Form of Indenture relating to the Senior Debt Securities.
+4.7 Form of Indenture relating to the Subordinated Debt
Securities.
+*5.1 Opinion of Baker Botts L.L.P.
12.1 Statement showing computation of ratios of earnings to fixed
charges.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Baker Botts L.L.P. (included in Exhibit 5.1).
23.3 Consent of Miller and Lents, Ltd.
+24.1 Powers of Attorney (included on signature page).
*25.1 Statement of Eligibility of Trustee on Form T-1.
**25.2 Statement of Eligibility of Trustee on Form T-1 with respect
to the 8 3/8% Senior Subordinated Notes Due 2012
(incorporated by reference to Exhibit 25.1 to Registrant's
Registration Statement on Form S-4, Registration No.
333-99557, filed with the SEC on September 13, 2002).
</Table>
- ---------------
* The Company will file as an exhibit to a current report on Form 8-K (i) any
underwriting agreement relating to securities offered hereby, (ii) the
instruments setting forth the terms of any debt securities,
II-2
preferred stock or warrants, (iii) any additional required opinion of counsel
to the Company as to the legality of the securities offered hereby, (iv) any
required opinion of counsel to the Company as to certain tax matters relative
to securities offered hereby or (v) any Statement of Eligibility and
Qualification under the Trust Indenture Act of 1939 of the applicable
trustee.
** Incorporated by reference to the filing indicated.
+Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(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, as amended (the "Securities Act");
(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; 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;
provided, however, that the undertakings set forth in paragraphs (a)(1)(i)
and (a)(1)(ii) above do not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, 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 registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
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 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(e) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee under any indenture
relating to the debt securities to act under subsection (a) of Section 310 of
the Trust Indenture Act of 1939 (the "Act") in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
Registrants certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fort Worth, the State of Texas, on August 21,
2003.
ENCORE ACQUISITION COMPANY
By: /s/ I. JON BRUMLEY
------------------------------------
I. Jon Brumley
Chairman of the Board and Chief
Executive Officer
EAP ENERGY, INC.
By: /s/ I. JON BRUMLEY
------------------------------------
I. Jon Brumley
Chief Executive Officer
EAP OPERATING, INC.
By: /s/ I. JON BRUMLEY
------------------------------------
I. Jon Brumley
Chief Executive Officer
EAP PROPERTIES, INC.
By: /s/ SUZANNE M. HAY
------------------------------------
Suzanne M. Hay
Assistant Corporate Secretary and
Director
II-5
ENCORE OPERATING, L.P.
By: EAP Operating, Inc., general
partner
By: /s/ I. JON BRUMLEY
------------------------------------
I. Jon Brumley
Chief Executive Officer
EAP ENERGY SERVICES, L.P.
By: EAP Energy, Inc., general partner
By: /s/ I. JON BRUMLEY
------------------------------------
I. Jon Brumley
Chief Executive Officer
II-6
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 August 21, 2003.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Chairman of the Board and Director of Encore
- -------------------------------------- Acquisition Company and Chief Executive Officer of
I. Jon Brumley Encore Acquisition Company, EAP Energy, Inc., EAP
Properties, Inc. and EAP Operating, Inc.
(Principal Executive Officer of each Registrant)
* President and Director of Encore Acquisition
- -------------------------------------- Company
Jon S. Brumley
/s/ MORRIS B. SMITH Executive Vice President, Chief Financial Officer,
- -------------------------------------- Treasurer and Corporate Secretary of Encore
Morris B. Smith Acquisition Company, EAP Energy, Inc., EAP
Properties, Inc. and EAP Operating, Inc.
(Principal Financial Officer of each Registrant);
sole director of EAP Energy, Inc. and EAP
Operating, Inc.; director of EAP Properties, Inc.
* Vice President and Controller of Encore
- -------------------------------------- Acquisition Company, EAP Energy, Inc., EAP
Robert C. Reeves Properties, Inc. and EAP Operating, Inc.
(Principal Accounting Officer of each Registrant)
* Director of Encore Acquisition Company
- --------------------------------------
Arnold L. Chavkin
* Director of Encore Acquisition Company
- --------------------------------------
Howard H. Newman
* Director of Encore Acquisition Company
- --------------------------------------
Ted A. Gardner
* Director of Encore Acquisition Company
- --------------------------------------
Ted Collins, Jr.
* Director of Encore Acquisition Company
- --------------------------------------
James A. Winne III
* Director of EAP Properties, Inc.
- --------------------------------------
Suzanne M. Hay
By: /s/ MORRIS B. SMITH
------------------------------
Morris B. Smith
Attorney-in-Fact
</Table>
II-7
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
*1.1 Form of Underwriting Agreement.
**4.1 Second Amended and Restated Certificate of Incorporation of
Encore Acquisition Company (incorporated by reference to
Exhibit 3.1 to Encore's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001, filed with the SEC on
November 7, 2001).
**4.2 Second Amended and Restated By-laws of Encore Acquisition
Company (incorporated by reference to Exhibit 3.2 to
Encore's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, filed with the SEC on November 7, 2001).
**4.3 Specimen common stock certificate of Encore Acquisition
Company (incorporated by reference to Exhibit 4.1 to
Encore's Registration Statement on Form S-1, Registration
No. 333-47540, filed with the SEC on December 15, 2000).
**4.4 8 3/8% Senior Subordinated Notes Indenture, dated as of June
25, 2002, among Encore Acquisition Company, subsidiary
guarantors party thereto and Wells Fargo Bank, N.A., as
Trustee (incorporated by reference to Exhibit 4.1 to
Encore's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002, filed with the SEC on August 9, 2002).
**4.5 Form of 8 3/8% Note (contained in the Indenture filed as
Exhibit 4.2 to this Registration Statement).
+4.6 Form of Indenture relating to the Senior Debt Securities.
+4.7 Form of Indenture relating to the Subordinated Debt
Securities.
+*5.1 Opinion of Baker Botts L.L.P.
12.1 Statement showing computation of ratios of earnings to fixed
charges.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Baker Botts L.L.P. (included in Exhibit 5.1).
23.3 Consent of Miller and Lents, Ltd.
+24.1 Powers of Attorney (included on signature page).
*25.1 Statement of Eligibility of Trustee on Form T-1.
**25.2 Statement of Eligibility of Trustee on Form T-1 with respect
to the 8 3/8% Senior Subordinated Notes Due 2012
(incorporated by reference to Exhibit 25.1 to Registrant's
Registration Statement on Form S-4, Registration No.
333-99557, filed with the SEC on September 13, 2002).
</Table>
- ---------------
* The Company will file as an exhibit to a current report on Form 8-K (i) any
underwriting agreement relating to securities offered hereby, (ii) the
instruments setting forth the terms of any debt securities, preferred stock
or warrants, (iii) any additional required opinion of counsel to the Company
as to the legality of the securities offered hereby, (iv) any required
opinion of counsel to the Company as to certain tax matters relative to
securities offered hereby or (v) any Statement of Eligibility and
Qualification under the Trust Indenture Act of 1939 of the applicable
trustee.
** Incorporated by reference to the filing indicated.
+ Previously filed.
II-8