As filed with the Securities and Exchange Commission on February 3, 2011

Registration Statement No. 333-      

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

1311

(Primary Standard Industrial Classification Code Number)

Mark C. Allen, Senior Vice President and Chief Financial Officer

Denbury Resources Inc.

5320 Legacy Drive

Plano, Texas 75024

(972) 673-2000

 

(Name, address and telephone number of Registrant’s executive offices and agent for service)

 

Copies to:

 

 

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 being offered pursuant to dividend or interest reinvestment plans, please check the following box.  o

 

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.  þ

 

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 earlier effective registration statement for the same offering.  o

 

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.  o

 

If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box.  þ

 

If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

Subject to Completion,

Preliminary Prospectus dated February 3, 2011

$350,000,000

 

Denbury Resources Inc.

     % Senior Subordinated Notes due 2021

 

 

We are offering $350,000,000 aggregate principal amount of     % Senior Subordinated Notes due 2021 (the “notes”). The notes will bear interest at     % per year and will mature on     , 2021. Interest will be payable on           and           of each year, beginning on          , 2011.

 

We may redeem the notes in whole or in part on and after          , 2016 at the redemption prices described herein. In addition, prior to          , 2016 we may redeem the notes in whole or in part at a price equal to 100% of the principal amount thereof plus a “make whole” premium and accrued and unpaid interest. We may also redeem up to 35% of the notes before          , 2014, with the proceeds of certain equity offerings. If we sell all or substantially all of our assets or experience specific kinds of changes in control, we must offer to repurchase the notes. There is no sinking fund for the notes.

 

The notes are being offered to partially fund the repurchase of $225 million of our 71/2% Senior Subordinated Notes due 2013 and $300 million of our 71/2% Senior Subordinated Notes due 2015.

 

The notes are our senior subordinated obligations. The notes will be unsecured and will rank equally with all of our existing and future unsecured senior subordinated debt, will be subordinated to all of our existing and future senior debt and will rank senior to all of our future subordinated debt. Our obligations under the notes will be guaranteed on a senior subordinated basis by most of our current and certain of our future domestic subsidiaries.

 

Investing in the notes involves substantial risk. See “Risk Factors” beginning on page 12.

 

 

 

The notes will not be listed on any securities exchange. Currently there is no public market for the notes.

 

Delivery of the notes, in book-entry form, will be made on or about          , 2011 through The Depository Trust Company.

 

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.

 

 

Joint Book-Running Managers

 

Co-Managers

 

 

 

 

February   , 2011

 

ABOUT THIS PROSPECTUS

 

This prospectus relates to the offer and sale by us of the notes. You should rely on the information contained or incorporated by reference into this prospectus. We have not, and the underwriters have not, authorized any person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters are not making an offer to sell the notes in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus and the documents incorporated by reference are accurate only as of their respective dates. Our business, results of operations, financial condition and prospects may have changed since those dates.

 

TABLE OF CONTENTS

 

 

Our principal executive office is located at 5320 Legacy Drive, Plano, Texas 75024 and our telephone number is (972) 673-2000.

CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS

 

This document and the documents incorporated by reference herein include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (which is referred to as the Securities Act in this prospectus), Section 21E of the Securities Exchange Act of 1934, as amended (which is referred to as the Exchange Act in this prospectus), and the Private Securities Litigation Reform Act of 1995, regarding the financial position, business strategy, production and reserve growth, possible or assumed future results of operations, and other plans and objectives for the future operations of Denbury and general economic conditions. See “Risk Factors.”

 

The events and circumstances referred to in forward-looking statements are subject to numerous risks and uncertainties. Although we believe that in making such statements our expectations are based on reasonable assumptions, the events and circumstances referred to may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

 

Except for our obligations to disclose material information under United States federal securities laws, Denbury does not undertake any obligation to release publicly any revision to any forward-looking statement, to report events or circumstances after the date of this document or to report the occurrence of unanticipated events.

 

Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “will,” “would,” “should,” “plans,” “likely,” “expects,” “anticipates,” “intends,” “believes,” “estimates,” “thinks,” “may” and similar expressions, are forward-looking statements. The following important factors, in addition to those discussed under “Risk factors” and elsewhere in this document, could affect the future results of the energy industry in general, and Denbury in particular, and could cause those results to differ materially from those expressed in or implied by such forward-looking statements:

 

 

All written and oral forward-looking statements attributable to Denbury or persons acting on behalf of Denbury are expressly qualified in their entirety by such factors. For additional information with respect to these factors, see “Where You Can Find More Information.”

WHERE YOU CAN FIND MORE INFORMATION

 

We are subject to the informational requirements of the Exchange Act, which requires us to file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. You may view our reports electronically at the SEC’s Internet site at www.sec.gov, or at our own website at www.denbury.com. Our website and the information contained on our website are not part of this Registration Statement, and you should rely only on the information contained in this Registration Statement and the documents incorporated by reference herein when making a decision about whether to invest in the notes.

 

This prospectus constitutes part of a Registration Statement on Form S-3 filed with the SEC under the Securities Act. It omits some of the information contained in the Registration Statement, and reference is made to the Registration Statement for further information with respect to us and the securities we are offering. Any statement contained in this prospectus concerning the provisions of any document filed as an exhibit to the Registration Statement or otherwise filed with the SEC is not necessarily complete, and in each instance reference is made to the filed document.

 

The SEC allows us to “incorporate by reference” the information we file with it, which means that we can disclose important information to you by referring you to that information. Any information referred to in this way is considered part of this prospectus from the date we file the document containing it. Any reports filed by us with the SEC after the date of this prospectus and before the date that the offering of the securities by means of this prospectus is terminated will automatically update and, when applicable, supersede any information contained in this prospectus or incorporated by reference in this prospectus. We incorporate by reference (excluding any information furnished pursuant to Item 2.02 or 7.01 of any report on Form 8-K) the documents listed below and any future filings made by us 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 securities covered by this prospectus:

 

Incorporated Documents

 

 

You may request a copy of these filings at no cost by writing or telephoning Laurie Burkes, Investor Relations at Denbury Resources Inc., 5320 Legacy Drive, Plano, Texas 75024, phone: (972) 673-2000.

 

SUMMARY

	•	remain focused in specific regions where Denbury either has, or believes it can create, a competitive advantage as a result of its ownership or use of CO2 reserves, oil fields and CO2 infrastructure;

	•	acquire properties where management believes additional value can be created through tertiary recovery operations and a combination of other exploitation, development, exploration and marketing techniques;
	•	acquire properties that give Denbury a majority working interest and operational control or where management believes Denbury can ultimately obtain them;
	•	maximize the value of Company properties by increasing production and reserves while controlling costs; and
	•	maintain a highly competitive team of experienced and incentivized personnel.

Issuer		Denbury Resources Inc.
Notes Offered		$350,000,000 aggregate principal amount of     % Senior Subordinated Notes due 2021.
Maturity		The notes will mature on          , 2021.
Interest		Interest on the notes will accrue from               , 2011 at a rate of     % per annum, payable semi-annually in arrears on           and           of each year, commencing          , 2011.
Optional Redemption		Except as set forth below, we cannot redeem the notes before          , 2016. On and after          , 2016, we can redeem some or all of the notes in cash at the redemption prices described in this prospectus, plus accrued and unpaid interest to the date of redemption.
		At any time prior to          , 2016, we may redeem the notes in whole or in part at a price equal to 100% of the principal amount of the notes to be redeemed plus a “make whole” premium and accrued and unpaid interest to the date of redemption. In addition, at any time and from time to time, on and before          , 2014, we may redeem up to 35% of the notes with the proceeds of certain equity offerings, in each case at the redemption prices set forth in this prospectus, plus accrued and unpaid interest to the date of redemption.
Change of Control		If a change of control occurs, subject to certain conditions, we must give holders of the notes an opportunity to sell the notes to us at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to the date of the purchase. See “Description of the Notes—Change of Control.”
Guarantees		The payment of the principal, premium and interest on the notes will be fully and unconditionally guaranteed on a senior subordinated basis by most of our current and certain of our future domestic subsidiaries. The subsidiary guarantees are subordinated to all existing and future senior indebtedness of our guarantor subsidiaries, including their guarantees of our obligations under our senior secured credit facilities. See “Description of the Notes—Guarantees.”
Ranking		The notes are our senior subordinated unsecured obligations. The notes and the guarantees rank:
		•    junior to all of our and the guarantors’ existing and future senior indebtedness, including our senior secured credit facilities;

		•    equally with any of our and the guarantors’ existing and future senior subordinated indebtedness; and
		•    senior to any of our and the guarantors’ future subordinated indebtedness.
		The notes will be pari passu with our existing $2,176.4 million in aggregate principal amount of senior subordinated notes (which includes $525 million principal amount of senior subordinated notes for which we have commenced tender offers as described above for our 2013 Notes and our 2015 Notes) (the “Existing Notes”), and subordinate to our bank indebtedness, capital lease obligations for pipelines and other capital lease obligations, which totaled $617.4 million on an as-adjusted basis as of September 30, 2010. See “Description of the Notes—Ranking.” See also “Capitalization” for an as-adjusted presentation of the obligations of the company.
		The notes will be structurally subordinated to all of the liabilities and obligations of our subsidiaries that do not guarantee the notes. Currently, our non-guarantor subsidiaries have no material operations or income and no material assets.
Covenants		We will issue the notes under an indenture with Wells Fargo Bank, National Association, as trustee. The indenture governing the notes will contain covenants that will limit our ability and certain of our subsidiaries’ ability to:
		•    incur additional debt;
		•    pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated debt;
		•    make investments;
		•    create liens on our assets;
		•    create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
		•    engage in transactions with our affiliates;
		•    transfer or sell assets; and
		•    consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries.
		These covenants are subject to important exceptions and qualifications, which are described under the caption “Description of the Notes—Certain Covenants.”
Use of Proceeds		We estimate that the net proceeds from the offering, after deducting underwriters’ discounts and commissions and before

		deducting other estimated offering expenses payable by us, will be approximately $343.9 million. The net proceeds from this offering will be used to partially fund tender offers for our 2013 Notes and our 2015 Notes and related expenses. We expect, but are not obligated, to redeem, in accordance with the applicable indenture, any and all outstanding 2013 Notes and 2015 Notes that are not tendered in the tender offers using any remaining proceeds from this offering and cash on hand. See “Use of Proceeds.”
Risk Factors		Investing in the notes involves substantial risk. See “Risk Factors” beginning on page 11 of this prospectus for a discussion of certain factors that you should consider carefully before investing in the notes.
Conflicts of Interest		Simultaneously with this offering, we are making tender offers for $225 million aggregate principal amount of our 2013 Notes and $300 million aggregate principal amount of our 2015 Notes. We will use the net proceeds from the offering of the notes, together with cash on hand, to repurchase all of the notes tendered in the tender offers. Wells Fargo Securities, LLC, an underwriter in this offering, or its affiliates will receive more than 5% of the net proceeds of this offering in connection with the tender offers. See “Use of Proceeds”. Accordingly, this offering is being made in compliance with the requirements of the Financial Industry Regulatory Authority Rule 5121. In accordance with this rule, Merrill Lynch, Pierce, Fenner & Smith Incorporated has assumed the responsibilities of acting as a qualified independent underwriter. In its role as a qualified independent underwriter, Merrill Lynch, Pierce, Fenner & Smith Incorporated has participated in due diligence and the preparation of this prospectus and the Registration Statement of which this prospectus is a part. Merrill Lynch, Pierce, Fenner & Smith Incorporated will not receive any additional fees for serving as a qualified independent underwriter in connection with this offering. Wells Fargo Securities, LLC will not confirm sales of the debt securities to any account over which it exercises discretionary authority without the prior written approval of the customer.

		Unaudited
		Nine Months Ended
		September 30,								Year Ended December 31,
		2010				2009				2009				2008				2007
		(in thousands)
Consolidated statements of operations data:
Revenues and other income:
Oil, natural gas and related product sales (a)			$1,279,699				$600,942				$866,709				$1,347,010				$952,788
CO2 sales and transportation fees			13,840				9,708				13,422				13,858				13,630
Gain on sale of interests in Genesis (b)			101,537				—				—				—				—
Interest income and other			7,658				7,750				9,019				10,188				5,532
Total revenues			1,402,734				618,400				889,150				1,371,056				971,950
Expenses:
Lease operating expenses (a)			355,731				241,908				326,132				307,550				230,932
Production taxes and marketing expenses (a)			92,959				30,437				42,484				63,752				49,091
CO2 discovery and operating expenses			5,537				3,442				4,649				4,216				4,214
General and administrative (c)			101,016				79,828				116,095				60,374				48,972
Interest, net of amounts capitalized (d)			123,230				36,960				47,430				32,596				30,830
Depletion, depreciation and amortization			322,683				177,145				238,323				221,792				195,900
Derivatives expense (income)			(138,045	)			177,061				236,226				(200,053	)			18,597
Transaction costs and other related to the Encore Merger (e)			79,253				—				—				—				—
Abandoned acquisition cost			—				—				—				30,601				—
Write-down of oil and natural gas properties			—				—				—				226,000				—
Total expenses			942,364				746,781				1,011,339				746,828				578,536
Income (loss) before income taxes			460,370				(128,381	)			(122,189	)			624,228				393,414
Income tax provision (benefit):
Current income taxes			11,314				18,140				4,611				40,812				30,074
Deferred income taxes			167,289				(67,869	)			(51,644	)			195,020				110,193
Consolidated net income (loss)			281,767				(78,652	)			(75,156	)			388,396				253,147
Less: net income attributable to noncontrolling interest			(20,408	)			—				—				—				—
Consolidated net income (loss) attributable to
Denbury stockholders			$261,359				$(78,652	)			$(75,156	)			$388,396				$253,147
Consolidated statements of cash flows data:
Oil and natural gas capital expenditures			$500,062				$289,815				$343,351				$587,968				$621,187
Acquisitions of oil and natural gas properties			24,390				197,534				452,795				31,367				49,077
Cash paid in Encore Merger, net of cash acquired			813,894				—				—				—				—
CO2 capital expenditures, including pipelines			237,772				523,411				630,202				462,889				171,182
Cash provided by (used in):
Operating activities			592,775				406,434				530,599				774,519				570,214
Investing activities			(520,153	)			(736,390	)			(969,714	)			(994,659	)			(762,513	)
Financing activities			(6,868	)			334,576				442,637				177,102				198,533

		Unaudited
		As of September 30,								As of December 31,
		2010				2009				2009				2008				2007
		(in thousands)
Consolidated balance sheet data:
Oil and natural gas properties, net (f)		$	6,184,916			$	2,047,798			$	2,230,911			$	2,140,208			$	1,967,541
Total assets			9,843,203				3,903,260				4,269,978				3,589,674				2,771,077
Total long-term debt			2,778,247				1,196,061				1,301,068				852,767				680,330
Stockholders’ equity			4,863,918				1,790,659				1,972,237				1,840,068				1,404,378

(a)		On March 9, 2010, Denbury acquired Encore. As part of our strategic initiatives in merging with Encore, certain Encore oil and gas properties which were not deemed suitable for future tertiary production or strategic to us for expanded development were sold during 2010, including: oil and natural gas properties and related assets located primarily in the Permian Basin in West Texas and southeastern New Mexico, and in the Mid-continent area, which includes the Anadarko Basin in Oklahoma, Texas, and Kansas (collectively the “Southern Assets”) in May 2010; Haynesville and East Texas assets in December 2010; and Denbury’s investment in ENP during December 2010.
		The following table summarizes oil, natural gas and related product sale revenues, lease operating expense and production taxes and marketing expense included in Denbury’s Consolidated Statement of Operations for the nine months ended September 30, 2010 directly related to the acquisition of properties in the Encore Merger and the sale of certain of those properties described above:

		Retained Encore				Encore Properties
		Properties				Sold During 2010
		(in thousands)
Oil, natural gas and related product sales		$	272,034			$	173,954
Lease operating expenses			49,220				35,878
Production taxes and marketing expenses			42,557				12,687
Field operating income		$	180,257			$	125,389

(b)		In February 2010, Denbury sold its interest in the general partner of Genesis Energy, L.P. (“Genesis”) and in March 2010, Denbury sold all of its common units of Genesis in a secondary public offering. As a result, Denbury no longer holds any interests in Genesis.
(c)		General and administrative expenses have increased in 2010 and 2009 as compared to prior periods. General and administrative expenses were higher during the nine months ended September 30, 2010 primarily due to the additional expense associated with owning Encore. General and administrative expenses were higher in 2009 than in prior years primarily due to higher employee costs, non-recurring expense related to a compensation arrangement with certain members of Genesis Energy, L.P. management and a compensation charge related to the June 30, 2009 retirement of Denbury’s then-CEO and President and his retention in a non-officer role as Chief Strategist.
(d)		Denbury’s capitalized interest was $56.1 million and $48.7 million for the nine months ended September 30, 2010 and 2009, respectively, and $68.6 million, $29.2 million and $20.4 million for the years ended December 31, 2009, 2008 and 2007, respectively.
(e)		Transaction costs and other related to the Encore Merger primarily include third party fees and severance-related costs associated with our purchase of Encore.
(f)		Excludes net book value of CO2 related property and equipment.

		December 31,
		2010				2009				2008
Summary oil and natural gas reserves data:
Estimated net proved reserves
Oil (MBbls)			338,276				192,879				179,126
Natural gas (MMcf)			357,893				87,975				427,955
Oil equivalent (MBOE)			397,925				207,542				250,452
Percentage of total MBOE:
Proved producing			51%				51%				47%
Proved non-producing			9%				11%				11%
Proved undeveloped			40%				38%				42%
Representative oil and natural gas prices (a):
Oil—NYMEX			$79.43				$61.18				$44.60
Natural gas—Henry Hub			4.40				3.87				5.71
Present values (in thousands):
Discounted estimated future net cash flow before income taxes (PV-10 Value) (b)			$7,292,557				$3,075,459				$1,926,855
Standardized measure of discounted future net cash flow after income taxes (c)			(d)				2,457,385				1,415,498
Estimated proved carbon dioxide reserves
Gulf Coast region (Mmcf) (e)			7,085,131				6,302,836				5,612,167
Rocky Mountain region (Mmcf) (f)			920,266				—				—

		Nine Months Ended
		September 30,								Year Ended December 31,
		2010				2009				2009				2008				2007
Summary operating data (g):
Production (average daily):
Oil (Bbls)			58,234				36,819				36,951				31,436				27,925
Natural gas (Mcf)			81,065				75,523				68,086				89,442				97,141
BOE (6:1)			71,745				49,406				48,299				46,343				44,115
Unit sales price (excluding impact of derivative settlements):
Oil (per Bbl)			$73.98				$52.68				$57.75				$92.73				$69.80
Natural gas (per Mcf)			4.68				3.46				3.54				8.56				6.81
Unit sales price (including impact of derivative settlements):
Oil (per Bbl)			$68.88				$67.25				$68.63				$90.04				$68.84
Natural gas (per Mcf)			6.22				3.46				3.54				7.74				7.66
Costs per BOE:
Lease operating expenses			$18.16				$17.94				$18.50				$18.13				$14.34
Production taxes and marketing expenses			4.75				2.26				2.41				3.76				3.05
Depletion, depreciation and amortization			16.48				13.13				13.52				13.08				12.17
General and administrative (h)			5.16				5.92				6.59				3.56				3.04
Transaction costs and other related to the Encore Merger (i)			4.05				—				—				—				—
Abandoned acquisition cost			—				—				—				1.80				—
Writedown of oil and natural gas properties			—				—				—				13.32				—

(a)		The reference prices for 2010 and 2009 were based on the average first day of the month prices for each month during 2010 and 2009. The reference prices for 2008 were based on year end prices. For all periods presented, these representative prices were adjusted for differentials by field to arrive at the applicable net price Denbury receives.
(b)		PV-10 Value is a non-GAAP measure and is different from the Standardized Measure in that PV-10 Value is a pre-tax number and the Standardized Measure is an after-tax number. The information used to calculate PV-10 Value is derived directly from data determined in accordance with the FASB “Extractive Industries—Oil and Gas” topic. Denbury believes that PV-10 Value is a useful supplemental disclosure to the Standardized Measure because the Standardized Measure can be impacted by a company’s unique tax situation, and it is not practical to calculate the Standardized Measure on a property-by-property basis. Because of this, PV-10 Value is a widely used measure within the industry and is commonly used by securities analysts, banks and credit rating agencies to evaluate the estimated future net cash flows from proved reserves on a comparative basis across companies or specific properties. PV-10 Value is commonly used by Denbury and others in the industry to evaluate properties that are bought and sold and to assess the potential return on investment in these oil and gas properties. PV-10 Value is not a measure of financial or operating performance under GAAP, nor should it be considered in isolation or as a substitute for the Standardized Measure. The PV-10 Value and the Standardized Measure do not purport to represent the fair value of oil and natural gas reserves.
(c)		Determined in accordance with the guidelines of the FASB “Extractive Industries—Oil and Gas” topic.
(d)		Information not yet available for year ended December 31, 2010.

(e)		Proved CO2 reserves in the Gulf Coast region consist of reserves from our reservoirs at Jackson Dome, are presented on a gross working interest basis and include reserves dedicated to volumetric production payments of 100.2 Bcf, 127.1 Bcf, and 153.8 Bcf, at December 31, 2010, 2009 and 2008, respectively.
(f)		Proved CO2 reserves in the Rocky Mountain region consist of our reserves at Riley Ridge and are net to our interest.
(g)		On March 9, 2010, Denbury acquired Encore. As part of our strategic initiatives in merging with Encore, certain Encore oil and natural gas properties which were not deemed suitable for future tertiary production or strategic to us for expanded development were sold during 2010, including the Southern Assets sold in May 2010, and Haynesville and East Texas assets and Denbury’s investment in ENP sold in December 2010. The following table summarizes average production quantities, which were included in Denbury’s operating results for the nine month period ending September 30, 2010 attributable to those Encore properties that Denbury has retained, including the Cedar Creek Anticline, Bakken and Other Rockies, and attributable to those Encore properties that Denbury sold during 2010, including the Southern Assets, Haynesville and ENP:

		Nine months ending
		September 30, 2010
		Retained Encore				Encore Properties
		Properties				Sold During 2010
Production (average daily) per BOE			17,538				16,359

(h)		General and administrative expenses have increased in 2010 and 2009 as compared to prior periods. General and administrative expenses were higher during the nine months ended September 30, 2010 primarily due to the additional expense associated with owning Encore. General and administrative expenses were higher in 2009 primarily due to higher employee costs, expense related to a compensation arrangement with certain members of Genesis Energy, L.P. management, and a compensation charge related to the retirement of Denbury’s then-CEO and President on June 30, 2009.
(i)		Transaction costs and other related to the Encore Merger primarily include third party fees and severance-related costs associated with our purchase of Encore.

 

Investing in the notes involves risks. Before purchasing any notes we offer, you should carefully consider the risk factors that are incorporated by reference herein from Item 1.A., captioned “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2009 and the Form 10-K of Encore for the year ended December 31, 2009. There are additional risk factors related to our indebtedness and notes, as described below.

 

Our level of indebtedness may adversely affect operations and limit our growth.

 

As of September 30, 2010, after giving effect to this offering and the use of the proceeds therefrom, assuming that all of the 2013 Notes and the 2015 Notes are tendered and accepted for purchase promptly following the deadline for consents to amend their indentures, we would have had $2.6 billion of long-term debt. This level of indebtedness could result in our having difficulty accessing capital markets or raising capital on favorable terms and our financial results could be negatively affected by our inability to raise capital or because of the cost of such capital.

 

Our substantial debt could have important consequences for us. For example, it could:

 

 

Realization of any of these factors could adversely affect our financial condition. In addition, although we have hedges in place for 2011 and the first and second quarters of 2012, these hedges have varying floors and ceilings and will only partially protect the company’s cash flow. A decline in commodity prices may require that we reduce our planned capital expenditures, which may have a corresponding negative effect on our anticipated production growth.

 

If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on our indebtedness or if we otherwise fail to comply with the various covenants in such indebtedness, including covenants in our senior secured credit facility, we would be in default. This default would permit the holders of such indebtedness to accelerate the maturity of such indebtedness and could cause defaults under other indebtedness, including the notes, or result in our bankruptcy. Such defaults, or any bankruptcy resulting therefrom, could result in a default on the notes and could delay or preclude payment of principal of, or interest on, the notes. Our ability to meet our obligations will depend upon our future performance, which will be subject to prevailing economic conditions, commodity prices, and to financial, business and other factors, including factors beyond our control.

 

We and all of our restricted subsidiaries must comply with various restrictive covenants contained in our revolving credit facility, the indentures related to our senior subordinated notes and any of our future debt

arrangements. These covenants will, among other things, limit our ability and the ability of all of our restricted subsidiaries to:

 

 

Your right to receive payments on the notes is junior to our existing senior indebtedness and the existing senior indebtedness of our subsidiary guarantors.

 

The indebtedness evidenced by the notes and the guarantees are our and our subsidiary guarantors’ senior subordinated obligations. The payment of the principal of, premium on, if any, and interest on the notes and the payment of the subsidiary guarantees are each subordinate in right of payment, as set forth in the indenture, to the prior payment in full of all senior indebtedness of Denbury or the senior indebtedness of our subsidiary guarantors, as the case may be, including the obligations of Denbury under, and the obligations of our subsidiary guarantors with respect to, our senior secured credit facility. Any future subsidiary guarantee will be similarly subordinated to senior indebtedness of such subsidiary guarantor.

 

As of September 30, 2010, our senior debt included $120.0 million borrowed under our credit facility, $240.0 million borrowed under ENP’s credit facility, $249.9 million of pipeline capital lease obligations and approximately $7.5 million of other capital lease obligations. As of December 31, 2010, we had no obligation under ENP’s credit facility due to the sale of our interest in ENP to Vanguard. See “Capitalization.” As of September 30, 2010, we had approximately $1.5 billion additional borrowing capacity under our credit facility. Any additional bank borrowings would also be senior indebtedness when incurred. Although the indenture contains limitations on the amount of additional indebtedness that we may incur, under certain circumstances the amount of such indebtedness could be substantial and, in any case, such indebtedness may be senior indebtedness. See “Description of the Notes—Certain Covenants—Limitations on Indebtedness.”

 

Because the notes are unsecured and because of the subordination provisions of the notes, in the event of the bankruptcy, liquidation or dissolution of any subsidiary guarantor, our assets and the assets of the subsidiary guarantors would be available to pay obligations under the notes only after all payments had been made on our and the subsidiary guarantors’ senior indebtedness, including under our senior secured credit facility. We cannot assure you that sufficient assets would remain after we make all these payments to make any payments on the notes, including payments of interest when due. Also, because of these subordination provisions, you may recover less ratably than our other creditors in a bankruptcy, liquidation or dissolution. In addition, all payments on the notes and the guarantees will be prohibited in the event of a payment default on senior indebtedness, including borrowings under our senior secured credit facility, and may be prohibited for up to 180 days in the event of non-payment defaults on certain of our senior indebtedness, including our senior secured credit facility. See “Description of the Notes—Ranking.”

 

The notes will be structurally subordinated to all obligations of our existing and future subsidiaries that are not and do not become guarantors of the notes.

 

The notes will be guaranteed by each of our current and future domestic restricted subsidiaries that represents at least 10% of the book assets of, or 10% of the adjusted consolidated net tangible assets of, the

Company and its restricted subsidiaries, taken as a whole, and that has an aggregate of $15 million or more of indebtedness or preferred stock outstanding at any time. See “Description of the Notes—Future Subsidiary Guarantors.”

 

Our subsidiaries that do not guarantee the notes, including all of our non-domestic subsidiaries, will have no obligation, contingent or otherwise, to pay amounts due under the notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. The notes will be structurally subordinated to all indebtedness and other obligations of any non-guarantor subsidiary such that in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any subsidiary that is not a guarantor, all of that subsidiary’s creditors (including trade creditors) would be entitled to payment in full out of that subsidiary’s assets before we would be entitled to any payment. Currently, our non-guarantor subsidiaries have no material operations or income and no material assets.

 

In addition, the indenture governing the notes will, subject to some limitations, permit these subsidiaries to incur additional indebtedness and will not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.

 

In addition, our subsidiaries that provide, or will provide, guarantees of the notes will be automatically released from those guarantees upon the occurrence of certain events, including the following:

 

 

If any subsidiary guarantee is released, no holder of the notes will have a claim as a creditor against that subsidiary, and the indebtedness and other liabilities, including trade payables and preferred stock, if any, whether secured or unsecured, of that subsidiary will be effectively senior to the claim of any holders of the notes. See “Description of Notes—Guarantees.”

 

The notes are not secured by our assets or those of our subsidiary guarantors.

 

The notes are our general unsecured obligations and are effectively subordinated in right of payment to all of our secured indebtedness. If we become insolvent or are liquidated, our assets which serve as collateral under our secured indebtedness would be made available to satisfy our obligations under any secured debt before any payments are made on the notes. Our obligations under our senior secured credit facility are secured by substantially all of our producing oil and gas properties.

 

If we undergo a change of control, we may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture governing the notes, which would violate the terms of the notes.

 

Upon the occurrence of a change of control, holders of the notes will have the right to require us to purchase all or any part of such holders’ notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The events that constitute a change of control under the indenture would constitute a default under our senior secured credit facility, which prohibits the purchase of the notes by us in the event of certain change of control events, unless, and until, such time as our indebtedness under the senior secured credit facility is repaid in full. There can be no assurance that either we or our subsidiary guarantors would have sufficient financial resources available to satisfy all of our or their obligations under the senior secured credit facility and these notes in the event of a change in control. Our failure to purchase the notes as required under the indenture would result in a default under the indenture, the indentures governing our Existing Notes and under the senior secured credit facility, each of which could have

material adverse consequences for us and the holders of the notes. See “Description of the Notes—Change of Control.”

 

In addition, recent case law suggests that, in the event that incumbent directors are replaced as a result of a contested election, issuers may nevertheless avoid triggering a change of control under a clause similar to clause (2) of the definition of “Change of Control” under the caption “Description of the Notes—Change of Control,” if the outgoing directors were to approve the new directors for the purpose of such change of control clause.

 

A subsidiary guarantee could be voided if it constitutes a fraudulent transfer under U.S. bankruptcy or similar state law, which would prevent the holders of the notes from relying on that subsidiary to satisfy claims.

 

Under U.S. bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee can be voided, or claims under the guarantee may be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee or, in some states, when payments become due under the guarantee, received less than reasonably equivalent value or fair consideration for the incurrence of the guarantee and:

 

 

A guarantee may also be voided, without regard to the above factors, if a court found that the guarantor entered into the guarantee with the actual intent to hinder, delay or defraud its creditors.

 

A court would likely find that a guarantor did not receive reasonably equivalent value or fair consideration for its guarantee if the guarantor did not substantially benefit directly or indirectly from the issuance of the notes. If a court were to void a guarantee, you would no longer have a claim against the guarantor. Sufficient funds to repay the notes may not be available from other sources, including the remaining guarantors, if any. In addition, the court might direct you to repay any amounts that you had already received from the subsidiary guarantor.

 

The measures of insolvency for purposes of fraudulent transfer laws vary depending upon the governing law. Generally, a guarantor would be considered insolvent if:

 

 

Each subsidiary guarantee contains a provision intended to limit the guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its subsidiary guarantee to be a fraudulent transfer. This provision may not be effective to protect the subsidiary guarantees from being voided under fraudulent transfer law.

 

Original issue discount

 

The notes may be issued at a discount from their stated principal amount for U.S. federal income tax purposes. Consequently, original issue discount may be included in the gross income of a U.S. holder of the notes for U.S. federal income tax purposes in advance of the receipt of cash payments on such notes. For more information, see “Material U.S. Federal Income Tax Considerations.”

 

If a bankruptcy petition were filed by or against us, holders of the notes may receive a lesser amount for their claim than they would have been entitled to receive under the indenture governing the notes.

 

If a bankruptcy petition were filed by or against us under the United States Bankruptcy Code after the issuance of the notes, the claim by any holder of the notes for the principal amount of the notes may be limited to an amount equal to the sum of:

 

 

Any original issue discount that was not amortized as of the date of the bankruptcy filing would constitute unmatured interest. Accordingly, holders of the notes under these circumstances may receive a lesser amount than they would be entitled to under the terms of the indenture governing the notes, even if sufficient funds are available.

 

You cannot be sure that there will be an active trading market for the notes.

 

We do not intend to list the notes on any national securities exchange. The underwriters intend to make a market for the notes, but they are not obligated to do so and may cease their market-making activities at any time. In addition, the liquidity of the trading market in the notes, and the market price quoted for the notes, may be adversely affected by changes in the overall market for high yield securities and by changes in our financial performance or prospects or in the financial performance or prospects of companies in our industry generally. As a result, we cannot assure you that an active trading market will develop or be maintained for the notes offered hereby. If an active market does not develop or is not maintained, the market price and liquidity of the notes may be adversely affected.

 

The following table sets forth our ratio of earnings to fixed charges:

 

 

 

 

For purposes of computing the ratio of earnings to fixed charges, earnings are defined as:

 

 

Fixed charges are defined as the sum of the following:

 

 

The net proceeds from the sale of the notes offered hereby, after deducting underwriters’ discounts and commissions and before deducting other offering expenses payable by us, are estimated to be approximately $343.9 million. Simultaneously with this offering, we are making tender offers for $225 million aggregate principal amount of our 2013 Notes and $300 million aggregate principal amount of our 2015 Notes. The tender offers are contingent on the closing of this offering. We will use the net proceeds from the offering of the notes, together with cash on hand, to repurchase all of the notes tendered in the tender offers. If this notes offering is completed, to the extent less than 100% of either of the outstanding 2013 Notes or outstanding 2015 Notes is tendered, we expect, but are not obligated, to redeem the 2013 Notes and the 2015 Notes. Beginning April 1, 2011, the 2013 Notes will be redeemable at 100% of principal amount. The 2015 Notes are currently redeemable at 103.75% of principal amount. The 2013 Notes accrue interest at a rate of 7.5% per year and mature April 1, 2013. The 2015 Notes accrue interest at a rate of 7.5% per year and mature December 15, 2015.

 

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2010 on an actual basis and on an “as-adjusted” basis to give effect to this offering and the application of the net proceeds of this offering. The “as-adjusted” presentation assumes that promptly following the deadline for consents to amend the applicable indentures, we will purchase all $225 million of the 2013 Notes and all $300 million of the 2015 Notes pursuant to the tender offers, which cannot be assured. A portion of the Company’s cash on hand (approximately $460.0 million as of January 31, 2011) will be used, together with the net proceeds of this offering, to fund the tender offers even though the Company’s cash and cash equivalents as of September 30, 2010 would have been insufficient for this purpose. This table should be read in conjunction with our Form 10-K for the year ended December 31, 2009 and our Form 10-Q for the quarter ended September 30, 2010.

 

 

 

 

Certain terms used in this description are defined under the subheading “—Certain Definitions.” As used in this section, the terms “Company,” “we,” “us” and “our” refer only to Denbury Resources Inc., the issuer of the senior subordinated notes, and not to any of its subsidiaries.

 

General

 

The Company will issue $350 million of     % Senior Subordinated Notes due 2021 (the “Notes”) under an indenture dated on or about          , 2011 (the “Indenture”), among the Company, its subsidiary guarantors and Wells Fargo Bank, National Association, as Trustee.

 

The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the “Trust Indenture Act”). The following description is only a summary of the material provisions of the Indenture and the escrow agreement. We urge you to read the Indenture because it, not this description, defines your rights as holders of the Notes. You may request copies of the Indenture at our address set forth under the heading “Where You Can Find More Information.”

 

Principal of and interest on the Notes will be payable, and the Notes may be exchanged or transferred, at our office or agency in the Borough of Manhattan, The City of New York (which initially shall be the corporate trust office of the Trustee), except that, at our option, payment of interest may be made by check mailed to the address of the Holders as such address appears in the note register.

 

The Notes will be issued only in fully registered form, without coupons, in denominations of $2,000 and any integral multiple of $1,000 in excess thereof. No service charge shall be made for any registration of transfer or exchange of Notes, but we may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith.

 

The Company will issue Notes with an initial aggregate principal amount of $350 million. Subject to the covenants described below under “Certain Covenants” and applicable law, the Company may issue additional     % Senior Subordinated Notes due 2021 under the Indenture in an unlimited principal amount (the “Additional Notes”). The Notes of a series and any Additional Notes subsequently issued under the Indenture would be treated as a single class for all purposes under the Indenture, in each case including, without limitation, waivers, amendments, redemptions and offers to purchase. Unless the context otherwise requires, for all purposes of the Indenture and this “Description of the Notes,” references to the Notes include any Additional Notes actually issued.

 

Terms of the Notes

 

The $350 million aggregate principal amount of Notes offered hereby will be unsecured senior subordinated obligations of the Company. The Notes will mature on          , 2021 and bear interest at the rate per annum shown on the cover page hereof from the date of original issuance, or from the most recent date to which interest has been paid or provided for, payable semiannually to Holders (as defined in the Indenture) of record at the close of business (whether or not a Business Day) on the           or           immediately preceding the interest payment date on           and          of each year, beginning          , 2011. Interest on overdue principal and (to the extent permitted by law) on overdue installments of interest will accrue at 1% per annum in excess of such rate. Interest on the Notes will be computed on the basis of a 360-day year of twelve 30-day months.

 

Optional Redemption

 

Except as set forth in the following two paragraphs, the Notes will not be redeemable at the option of the Company prior to          , 2016. Thereafter, the Notes will be redeemable, at our option, in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail to each Holder’s registered address, at the following redemption prices (expressed in percentages of principal amount), plus accrued and unpaid interest to the redemption date (subject to the rights 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          , of the years set forth below:

 

 

Prior to          , 2014, we may at our option on one or more occasions redeem the Notes (which includes Additional Notes, if any) in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes (which includes Additional Notes, if any) originally issued at a redemption price (expressed as a percentage of principal amount) of     %, plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more Stock Offerings; provided that at least 65% of such aggregate principal amount of Notes (which includes Additional Notes, if any) remains outstanding immediately after the occurrence of each such redemption (excluding Notes held, directly or indirectly, by the Company or its Affiliates) and each such redemption occurs within 60 days after the date of consummation of the related Stock Offering.

 

In addition, at any time prior to          , 2016, upon not less than 30 nor more than 60 days’ prior notice mailed by first-class mail to each Holder’s registered address, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium, plus accrued and unpaid interest, if any, 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).

 

Selection

 

In the case of any partial redemption, selection of the Notes for redemption will be made by the Trustee 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, although no Note of $2,000 in original principal amount or less shall be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof 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.

 

Guarantees

 

The Subsidiary Guarantors, jointly and severally, as primary obligors and not merely as sureties, will irrevocably, fully and unconditionally guarantee (each, a “Subsidiary Guarantee”) on a senior subordinated basis the performance and the punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all the obligations of the Company under the Indenture and the Notes (all such obligations guaranteed by the Subsidiary Guarantors being herein called the “Guaranteed Obligations”). The Company

derives a substantial portion of its operating income and cash flow from its subsidiaries, including the Subsidiary Guarantors, the common stock of which may be pledged to secure the Company’s indebtedness outstanding under the Credit Facility. Each Subsidiary Guarantor will agree to pay, in addition to the amount stated above, any and all expenses (including reasonable counsel fees and expenses) incurred by the Trustee and the Holders in enforcing any rights under the Subsidiary Guarantee with respect to the Subsidiary Guarantor. Each Subsidiary Guarantee will be limited to an amount not to exceed the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor without rendering the Subsidiary Guarantee, as it relates to such Subsidiary Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. If a Subsidiary Guarantee were to be 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 Guarantee could be reduced to zero. See “Risk Factors—A Subsidiary Guarantee Could Be Voided If It Constitutes a Fraudulent Transfer Under U.S. Bankruptcy or Similar State Law, Which Would Prevent the Holders of the Notes From Relying on That Subsidiary to Satisfy Claims.”

 

Each Subsidiary Guarantor that makes a payment under its Subsidiary Guarantee will be entitled 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.

 

Each Subsidiary Guarantee is a continuing guarantee and shall:

 

 

Pursuant to the Indenture, a Subsidiary Guarantor may consolidate with, merge with or into, or transfer all or substantially all its assets to any other Person to the extent described below under “—Certain Covenants—Merger and Consolidation”; provided, however, that if such Person is not the Company, the Subsidiary Guarantor’s obligations under the Indenture and its Subsidiary Guarantee must be expressly assumed by such other Person. However, upon the sale or other disposition (including by way of consolidation or merger) of a Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of a Subsidiary Guarantor (in each case other than to the Company or an Affiliate of the Company), such Subsidiary Guarantor will be released and relieved from all its obligations under its Subsidiary Guarantee. See “—Certain Covenants—Merger and Consolidation.”

 

Ranking

 

Senior Indebtedness Versus Notes

 

The indebtedness evidenced by the Notes and the Subsidiary Guarantees will be unsecured, general obligations of the Company and the relevant Subsidiary Guarantor, as the case may be, subordinated in right of payment, as set forth in the Indenture, to the prior payment of all Senior Indebtedness of the Company or the relevant Subsidiary Guarantor, as the case may be, whether outstanding on the Issue Date or thereafter incurred, including the obligations of the Company under, and such Subsidiary Guarantor’s guarantee, if any, of the Company’s obligations with respect to, the Credit Facility.

 

On an as-adjusted basis, as of September 30, 2010, the Senior Indebtedness of the Company and each Subsidiary Guarantor would have been approximately $617.4 million, including $120.0 million representing either a primary obligation for, or guarantee of, secured debt under the Credit Agreement, $240.0 million representing borrowings under ENP’s credit facility, approximately $249.9 million of pipeline capital lease obligations and $7.5 million of other capital lease obligations. As of December 31, 2010, Denbury has no obligation under ENP’s credit facility due to the sale of our interest in ENP to Vanguard. The Indenture limits the amount of Senior Indebtedness we may Incur. Availability under the Credit Facility is subject to a borrowing base, which is redetermined semi-annually on or prior to May 1 and November 1, and upon requested special redeterminations. The Credit Facility currently provides for a borrowing base of $1.6 billion, which was reaffirmed on November 1, 2010. Any subsequent borrowings under the Credit Facility will increase the Senior Indebtedness of the Company.

 

Although the Indenture contains limitations on the amount of additional Indebtedness that the Company and the Subsidiary Guarantors may incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be Senior Indebtedness. See “—Certain Covenants—Limitation on Indebtedness.”

 

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 Guarantee in accordance with the Indenture. The Notes and each Subsidiary Guarantee will in all respects rank pari passu with all other Senior Subordinated Indebtedness of the Company and the relevant Subsidiary Guarantor, respectively, including the obligations of the Company and such Subsidiary Guarantor with respect to the Company’s 71/2% Senior Subordinated Notes due 2013 (the “2013 Notes”), 71/2% Senior Subordinated Notes due 2015 (the “2015 Notes”), 9.75% Senior Subordinated Notes due 2016, 6.25% Senior Subordinated Notes due 2014, 6.0% Senior Subordinated Notes due 2015, 9.5% Senior Subordinated Notes due 2016, 7.25% Senior Subordinated Notes due 2017 and 81/4% Senior Subordinated Notes due 2020 (collectively, the “Existing Notes”). The Company is making a tender offer to repurchase the 2013 Notes and the 2015 Notes, and expects, but is not obligated, to redeem any 2013 Notes and 2015 Notes not tendered in the tender offer. See “Use of Proceeds.”

 

The Company and each Subsidiary Guarantor will agree in the Indenture that they will not Incur, directly or indirectly, any Indebtedness that is subordinate or junior in ranking in right of payment to its Senior Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated in right of payment to Senior Subordinated Indebtedness. The Indenture does not treat (i) unsecured Indebtedness as subordinated or junior to Secured Indebtedness merely because it is unsecured or (ii) Senior Indebtedness as subordinated or junior to any other Senior Indebtedness merely because it has a junior priority with respect to the same collateral.

 

Liabilities of Non-Guarantor Subsidiaries Versus Notes

 

Substantial portions of the operations of the Company are currently conducted through its Subsidiaries. Our Unrestricted Subsidiaries and certain of our Restricted Subsidiaries are not, and certain future Subsidiaries of the Company may not be, required to guarantee the Notes. Specifically, only our current and future domestic Restricted Subsidiaries that represent at least 10% of the book assets of, or 10% of the ACNTA of, the Company and its Restricted Subsidiaries, taken as a whole, and that have an aggregate of $15.0 million or more of Indebtedness or Preferred Stock outstanding at any time, will be required to guarantee the notes. See “—Certain Covenants—Future Subsidiary Guarantors.” Currently, our non-guarantor subsidiaries have no material operations or income and no material assets. Claims of creditors of any non-guarantor Subsidiaries, including trade creditors, secured creditors and creditors holding guarantees issued by such non-guarantor Subsidiaries, and claims of preferred stockholders (if any) of such non-guarantor Subsidiaries generally would have priority with respect to the assets and earnings of such non-guarantor Subsidiaries over the claims of creditors of the Company, including holders of the Notes, even though such obligations would

not constitute Senior Indebtedness of the Company. The Notes, therefore, would be effectively subordinated to creditors (including trade creditors) and preferred stockholders (if any) of such non-guarantor Subsidiaries of the Company. Although the Indenture limits the incurrence of Indebtedness and the issuance of preferred stock of certain of the Company’s Subsidiaries, such limitation is subject to a number of significant qualifications. Moreover, the Indenture does not impose any limitation on the incurrence by such Subsidiaries of liabilities that are not considered Indebtedness under the Indenture. See “—Certain Covenants—Limitation on Indebtedness.”

 

Payment of Notes

 

The Company may not pay principal of, premium (if any) or interest on, the Notes or make any deposit pursuant to the provisions described under “Defeasance” below and may not repurchase, redeem or otherwise retire any Notes (collectively, “pay the Notes”) if:

 

 

unless, in either case, the default has been cured or waived and any such acceleration has been rescinded or such Designated Senior Indebtedness has been paid in full. However, the Company may pay the Notes without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of the applicable Designated Senior Indebtedness with respect to which either of the events set forth in clause (1) or (2) of the immediately preceding sentence has occurred and is continuing. During the continuance of any default (other than a default described in clause (1) or (2) of the second immediately preceding sentence) with respect to any Designated Senior Indebtedness of the Company pursuant to which the maturity thereof may be accelerated immediately without further notice (except such notice as may be required to effect such acceleration) or the expiration of any applicable grace periods, the Company may not pay the Notes for a period (a “Payment Blockage Period”) commencing upon the receipt by the Trustee (with a copy to the Company) of written notice (a “Blockage Notice”) of such default from the Representative of the holders of such Designated Senior Indebtedness specifying an election to effect a Payment Blockage Period and ending 179 days thereafter (or earlier if such Payment Blockage Period is terminated:

 

 

Notwithstanding the provisions described in the immediately preceding sentence, unless the holders of such Designated Senior Indebtedness or the Representative of such holders have accelerated the maturity of such Designated Senior Indebtedness, the Company must resume payments on 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 period of 360 consecutive days irrespective of the number of defaults with respect to Designated Senior Indebtedness of the Company during such period.

 

Upon any payment or distribution of the assets of the Company upon a total or partial liquidation or dissolution or reorganization or similar proceeding relating to the Company or its property:

 

 

 

If payment of the Notes is accelerated because of an Event of Default, the Company or the Trustee shall promptly notify the holders of Designated Senior Indebtedness of the Company or the Representative of such holders of the acceleration.

 

The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee are unsecured senior subordinated obligations. As such, the rights of Noteholders to receive payment by a Subsidiary Guarantor pursuant to its Subsidiary Guarantee 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 each Subsidiary Guarantor and the obligations of each such Subsidiary Guarantor under its respective Subsidiary Guarantee.

 

By reason of the subordination provisions contained in the Indenture, in the event of insolvency, creditors of the Company or a Subsidiary Guarantor who are holders of Senior Indebtedness of the Company or such Subsidiary Guarantor, as the case may be, may recover more, ratably, than the Noteholders, and creditors of the Company or a Subsidiary Guarantor who are not holders of Senior Indebtedness of the Company or such Subsidiary Guarantor may recover less, ratably, than holders of Senior Indebtedness of the Company or such Subsidiary Guarantor, as the case may be, and may recover more, ratably, than the Noteholders.

 

Notwithstanding the foregoing, payment from the money or the proceeds of U.S. Government Obligations held in any defeasance trust described under “—Defeasance” below will not be contractually subordinated in right of payment to any Senior Indebtedness of the Company or subject to the restrictions described herein.

 

Book-Entry, Delivery and Form

 

The Notes will be represented by one or more global notes in registered, global form without interest coupons (collectively, the “Global Notes”). The Global Notes initially will be deposited upon issuance with the Trustee as custodian for DTC in New York, New York, and registered in the name of DTC or its nominee, in each case for credit to an account of a direct or indirect participant as described below.

 

Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Notes may not be exchanged for Notes in certificated form except in the limited circumstances described below. See “—Exchange of Global Notes for Certificated Notes.” In addition, transfers of beneficial interests in the Global Notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants, which may change from time to time.

 

The Notes may be presented for registration of transfer and exchange at the offices of the registrar.

 

Depository Procedures

 

The following description of the operations and procedures of DTC is provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them. We take no responsibility for these operations and procedures and urge investors to contact the system or their participants directly to discuss these matters.

 

DTC has advised us that DTC is a limited-purpose trust company organized under the laws of the State of New York, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participating organizations (collectively, the “participants”) and to facilitate the clearance and settlement of transactions in those securities between participants through electronic book-entry changes in accounts of its participants. The participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Access to DTC’s system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly (collectively, the “indirect participants”). Persons who are not participants may beneficially own securities held by or on behalf of DTC only through the participants or the indirect participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the participants and indirect participants.

 

DTC has also advised us that, pursuant to procedures established by it:

 

 

Investors in the Global Notes who are participants in DTC’s system may hold their interests therein directly through DTC. Investors in the Global Notes who are not participants may hold their interests therein indirectly through organizations which are participants in such system. All interests in a Global Note may be subject to the procedures and requirements of DTC. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such persons will be limited to that extent. Because DTC can act only on behalf of participants, which in turn act on behalf of indirect participants, the ability of a person having beneficial interests in a Global Note to pledge such interests to persons that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests.

 

Except as described below, owners of an interest in the Global Notes will not have notes registered in their names, will not receive physical delivery of Notes in certificated form and will not be considered the registered owners or “holders” thereof under the Indenture for any purpose.

 

Payments in respect of the principal of, and interest and premium, if any, on a Global Note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, we and the Trustee will treat the Persons in whose names the Notes, including the Global Notes, are registered as the owners of the Notes for the purpose of receiving

payments and for all other purposes. Consequently, neither we, the Trustee nor any agent of us or the Trustee has or will have any responsibility or liability for:

 

 

DTC has advised us that its current practice, upon receipt of any payment in respect of securities such as the Notes (including principal and interest), is to credit the accounts of the relevant participants with the payment on the payment date unless DTC has reason to believe it will not receive payment on such payment date. Each relevant participant is credited with an amount proportionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on the records of DTC. Payments by the participants and the indirect participants to the beneficial owners of Notes will be governed by standing instructions and customary practices and will be the responsibility of the participants or the indirect participants and will not be the responsibility of DTC, the Trustee or us. Neither we nor the Trustee will be liable for any delay by DTC or any of its participants in identifying the beneficial owners of the Notes, and we and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes.

 

Transfers between participants in DTC will be effected in accordance with DTC’s procedures, and will be settled in same-day funds.

 

DTC has advised us that it will take any action permitted to be taken by a holder of Notes only at the direction of one or more participants to whose account DTC has credited the interests in the Global Notes and only in respect of such portion of the aggregate principal amount of the Notes as to which such participant or participants has or have given such direction. However, if there is an event of default under the Notes, DTC reserves the right to exchange the Global Notes for Legend Notes in certificated form, and to distribute such Notes to its participants.

 

Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Notes among participants, it is under no obligation to perform such procedures, and such procedures may be discontinued or changed at any time. Neither we, the Trustee nor any agent of us or the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

 

Exchange of Global Notes For Certificated Notes

 

A Global Note is exchangeable for definitive Notes in registered certificated form (“Certificated Notes”) if:

 

 

In addition, beneficial interests in a Global Note may be exchanged for Certificated Notes upon prior written notice given to the Trustee by or on behalf of DTC in accordance with the Indenture. In all cases, Certificated Notes delivered in exchange for any Global Note or beneficial interests in Global Notes will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures).

 

Exchange of Certificated Notes For Global Notes

 

Certificated Notes may not be exchanged for beneficial interests in any Global Note unless the transferor first delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer will comply with the appropriate transfer restrictions applicable to such Notes.

 

Same-Day Settlement and Payment

 

We will make payments in respect of the Notes represented by the Global Notes (including principal, premium, if any, and interest, if any) by wire transfer of immediately available funds to the accounts specified by the Global Note holder. We will make all payments of principal, interest and premium, if any, with respect to Certificated Notes by wire transfer of immediately available funds to the accounts specified by the holders of the Certificated Notes or, if no such account is specified, by mailing a check to each such holder’s registered address. The Notes represented by the Global Notes are expected to be eligible to trade in DTC’s Same-Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. We expect that secondary trading in any Certificated Notes will also be settled in immediately available funds.

 

Change of Control

 

 

 

 

In the event that at the time of such Change of Control the terms of the Indebtedness under the Credit Agreement restrict or prohibit the repurchase of Notes pursuant to this covenant, then prior to the mailing of the notice to Holders provided for in paragraph (b) below, but in any event within 30 days following any Change of Control, the Company shall:

 

 

 

 

The Change of Control purchase feature of the Notes may in certain circumstances make more difficult or discourage a sale or takeover of the Company and, thus, the removal of incumbent management. The Change of Control purchase feature is a result of negotiations between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions,

including acquisitions, refinancing 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 the Company’s capital structure or credit ratings. Restrictions on the ability of the Company to Incur additional Indebtedness are contained in the covenants described under “—Certain Covenants—Limitation on Indebtedness” and “—Certain Covenants—Limitation on Liens.” 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 Credit Agreement prohibits the Company from purchasing any Notes and also provides that the occurrence of certain change of control events with respect to the Company would constitute a default thereunder. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing Notes, the Company could seek the consent of its lenders to the purchase of Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from purchasing Notes. In such case, the Company’s failure to purchase tendered Notes would constitute 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 of the Company may contain prohibitions on the occurrence of certain events that would constitute a Change of Control or require such indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the Holders of their right to require the Company 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 the Company. Finally, the Company’s ability to pay cash to the holders of Notes following the occurrence of a Change of Control may be limited by the Company’s then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases.

 

The provisions under the Indenture relating to the Company’s 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 outstanding principal amount of the Notes.

 

The Company will not be required to make an offer to purchase the Notes as a result of a Change of Control if a third party:

 

 

Certain Covenants

 

The Indenture contains covenants including, among others, the following:

 

Limitation on Indebtedness

 

 

 

 

 

 

 

 

Incurrence of Layered Indebtedness

 

Notwithstanding paragraphs (a) and (b) of the covenant described above under “—Limitation on Indebtedness,” the Company shall not, and the Company shall not permit any Subsidiary Guarantor to, Incur any Indebtedness if such Indebtedness is subordinate or junior in ranking in any respect to any Senior

Indebtedness of the Company or such Subsidiary Guarantor, 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 shall not, and shall 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:

 

 

 

 

 

 

At December 31, 2010, the Company would have been able to make approximately $950.0 million of Restricted Payments under the foregoing calculation specified in this paragraph (a)(3).

 

 

Limitation on Restrictions on Distributions From Restricted Subsidiaries

 

The Company shall not, and shall 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 (A) to pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness owed to the Company or a Restricted Subsidiary, (B) to make any loans or advances to the Company or a Restricted Subsidiary or (C) to transfer any of its property or assets to the Company or a Restricted Subsidiary, except:

 

 

Limitation on Sales of Assets and Subsidiary Stock

 

 

 

 

 

 

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.

 

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 $40.0 million during any calendar year.

 

For the purposes of this covenant, the following are deemed to be cash or cash equivalents:

 

 

 

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.

 

 

 

Limitation on Affiliate Transactions

 

 

 

 

 

Limitation on Liens

 

The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, enter into, create, incur, assume or suffer to exist any Lien on or with respect to any property of the Company or such Restricted Subsidiary, whether owned on the Issue Date or acquired after the Issue Date, or any interest therein or any income or profits therefrom, unless the Notes or any Subsidiary Guarantee of such Restricted Subsidiary, as applicable, are secured equally and ratably with (or prior to) any and all other Indebtedness secured by such Lien, except that the Company and its Restricted Subsidiaries may enter into, create, incur, assume or suffer to exist Permitted Liens and Liens securing Senior Indebtedness.

 

Merger and Consolidation

 

The Company shall not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all the assets of the Company and its Restricted Subsidiaries, taken as a whole, to, any Person, unless:

 

 

provided, however, that clauses (3) and (4) shall not be applicable to any such transaction solely between the Company and any Restricted Subsidiary.

 

The Successor Company shall 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:

 

 

The provisions of clauses (1) and (2) above shall not apply to any one or more transactions which constitute an Asset Disposition if the Company has complied with the applicable provisions of the covenant described under “—Limitation on Sales of Assets and Subsidiary Stock” above.

 

SEC Reports

 

Notwithstanding that the Company may not at any time be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the SEC 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, such information, documents and other reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections.

 

Future Subsidiary Guarantors

 

The Company shall cause each Restricted Subsidiary that represents at least 10% of the book assets of, or 10% of the ACNTA of, the Company and its Restricted Subsidiaries, taken as a whole, and that has an aggregate of $15.0 million or more of Indebtedness and Preferred Stock outstanding at any time to promptly Guarantee the Notes pursuant to a Subsidiary Guarantee on the terms and conditions set forth in the Indenture.

 

Defaults

 

An Event of Default is defined in the Indenture as:

 

 

 

However, a default under clauses (4), (5), (8) and (9) will not constitute an Event of Default until the Trustee or the holders of 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 furnished to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no holder of a Note may pursue any remedy with respect to the Indenture or the Notes unless:

 

 

 

Subject to certain restrictions, the holders of a majority in principal amount of the outstanding Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder of a Note or that would involve the Trustee in personal liability.

 

The Indenture provides that if a Default occurs and 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, the Company is 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. The Company also is 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 the Company is taking or proposes to take in respect thereof.

 

Amendments and Waivers

 

Subject to certain exceptions, the Indenture may be amended with the consent of the holders of a majority in principal amount of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange for the Notes) and any past default or compliance with any provisions may also be waived with the consent of the holders of a majority in principal amount of the Notes then outstanding. However, without the consent of each holder of an outstanding Note affected thereby, an amendment or waiver may not, among other things:

 

 

 

Without the consent of any holder of the Notes, the Company, the Subsidiary Guarantors and the Trustee may amend the Indenture to:

 

 

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 the holders of such Senior Indebtedness (or their Representative) consent to such change.

 

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, the Company is 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. The Company 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

 

The Company at any time may terminate all its 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. The Company at any time may terminate its obligations under “Change of Control” and under the covenants described under “—Certain Covenants” (other than the covenant described under “—Merger and Consolidation”), the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries, the judgment default provision and the guarantee default provision described under “—Defaults” above and the limitations contained in clauses (3) and (4) under the first and third paragraphs of “—Certain Covenants—Merger and Consolidation” above (“covenant defeasance”).

 

The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its 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) or (8) under “—Defaults” above or because of the failure of the Company to comply with clause (3) or (4) under the first or third paragraph of “—Certain Covenants—Merger and Consolidation” above. If the Company exercises its legal defeasance option or its covenant defeasance option, each Subsidiary Guarantor will be released from all its obligations with respect to its Subsidiary Guarantee.

 

In order to exercise either defeasance option, the Company 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 and has been appointed by the Company 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 will be 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 will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that if an Event of Default occurs (and is not cured), the Trustee will be 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 will be 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 shall

have furnished 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.

 

Governing Law

 

The Indenture will provide that it and the Notes will be governed by, and construed in accordance with, the laws of the State of New York.

 

Certain Definitions

 

“Additional Assets” means:

 

 

provided, however, that any such Restricted Subsidiary described in clauses (2) or (3) above is primarily engaged in the Oil and Gas Business.

 

“Adjusted Consolidated Net Tangible Assets” or “ACNTA” means (without duplication), as of the date of determination:

 

 

 

 

 

 

“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 provisions 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.

 

“Applicable Premium” means, with respect to a Note on any date of redemption, the greater of:

 

 

“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, 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:

 

 

Notwithstanding the foregoing, none of the following shall be deemed to be an Asset Disposition:

 

 

 

in each case in the ordinary course of business.

 

“Attributable Debt” in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate implicit in the Sale/Leaseback Transaction, compounded annually) 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).

 

“Average Life” means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing

 

 

“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 (as defined in the applicable Indenture).

 

“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, interests, rights to purchase, warrants, options, participations or other equivalents of or interests (however designated) in equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity.

 

“Code” means the Internal Revenue Code of 1986, as amended.

 

“Consolidated Coverage Ratio” as of any date of determination means the ratio of

 

 

 

 

For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months).

 

“Consolidated Current Liabilities” as of the date of determination means the aggregate amount of liabilities of the Company and its consolidated Restricted Subsidiaries which would properly be classified as current liabilities (including taxes accrued as estimated), on a consolidated balance sheet of the Company and its Restricted Subsidiaries at such date, after eliminating:

 

 

“Consolidated Interest Expense” means, for any period, the total interest expense of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, 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:

 

 

“Consolidated Net Income” means, for any period, the net income of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP; provided, however, that there shall not be included in such Consolidated Net Income:

 

 

 

 

 

 

 

 

 

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 dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a)(3)(E) thereof.

 

“Consolidated Net Tangible Assets,” as of any date of determination, means the total amount of assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) which would appear on a balance sheet of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, and after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of:

 

 

“Consolidated Net Worth” means the total of the amounts shown on the balance sheet of the Company and its 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:

 

 

less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock.

 

“Credit Agreement” means the Credit Agreement among the Company as Borrower and JPMorgan Chase Bank, N.A. as Administrative Agent and certain other financial institutions, dated March 9, 2010, as amended (or any successor thereto or replacement thereof), including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, restated, modified, renewed, refunded, replaced, refinanced or increased in whole or in part from time to time.

 

“Credit Facilities” means, with respect to the Company or any Restricted Subsidiary, one or more debt facilities (including the Credit Agreement) or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, production payments, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such 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 to which such Person is a party or a beneficiary.

 

“Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.

 

“Designated Senior Indebtedness” in respect of a Person means:

 

 

“Disqualified Stock” means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event,

 

 

in each case described in the immediately preceding clauses (1), (2) or (3), on or prior to 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” occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Stock if:

 

 

 

The amount of any Disqualified Stock that does not have a fixed redemption, repayment or repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or repurchased on any date on which the amount of such Disqualified Stock is to be determined pursuant to the Indenture; provided, however, that if such Disqualified Stock could not be required to be redeemed, repaid or repurchased at the time of such determination, the redemption, repayment or repurchase price will be the book value of such Disqualified Stock as reflected in the most recent financial statements of such Person.

 

“Dollar-Denominated Production Payments” means production payment obligations recorded as liabilities in accordance with GAAP, together with all undertakings and obligations in connection therewith.

 

“EBITDA” for any period means the sum of Consolidated Net Income, plus Consolidated Interest Expense plus the following to the extent deducted in calculating such Consolidated Net Income:

 

 

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:

 

 

Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depletion, depreciation, amortization and exploration and other 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) 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.

 

“Encore” means Encore Acquisition Company, a Delaware corporation.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“FASC” means Financial Accounting Standards Codification Issued by the Financial Accounting Standards Board.

 

“GAAP” means generally accepted accounting principles in the United States of America as in effect on the Issue Date, including those set forth in:

 

 

“Government Securities” means securities that are:

 

 

which, in either case, are not callable or redeemable at the option of the issuers thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such Government Securities or a specific payment of principal of or interest on any such Government Securities held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Securities or the specific payment of principal of or interest on the Government Securities evidenced by such depository receipt.

 

“Guarantee” means, without duplication, 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:

 

 

 

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 obligation.

 

“Guarantee Agreement” means a supplemental indenture, in a form satisfactory to the Trustee, pursuant to which a Subsidiary Guarantor or any other Person becomes subject to the applicable terms and conditions of the Indenture.

 

“Hedging Obligations” of any Person means the obligations of such Person pursuant to any Oil and 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 Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. The term “Incurrence” when used as a noun shall have a correlative meaning. The accretion of principal of a non-interest bearing or other discount security shall not be deemed the Incurrence of Indebtedness.

 

“Indebtedness” means, with respect to any Person on any date of determination (without duplication):

 

 

 

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, assuming the contingency giving rise to the obligation were to have occurred on such date, of any Guarantees outstanding at such date.

 

None of the following shall constitute Indebtedness:

 

 

“Interest Rate Agreement” means any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect the Company or any Restricted Subsidiary against fluctuations in interest rates.

 

“Investment” in any Person means any direct or indirect advance, loan (other than advances to customers or joint interest partners or drilling partnerships sponsored by the Company or any Restricted Subsidiary in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit (including by way of Guarantee or similar arrangement) 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 of Capital Stock, Indebtedness or other similar instruments issued by such Person. Except as otherwise provided for herein, the amount of an Investment shall be its fair value at the time the Investment is made and without giving effect to subsequent changes in value.

 

For purposes of the definition of “Unrestricted Subsidiary,” the definition of “Restricted Payment” and the covenant described under “—Certain Covenants—Limitation on Restricted Payments”:

 

 

“Issue Date” means the date on which the Notes are originally issued.

 

“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).

 

“Limited Recourse Production Payments” means, with respect to any Production Payments, Indebtedness, the terms of which limit the liability of the Company and its Restricted Subsidiaries solely to the hydrocarbons covered by such Production Payments; provided, however, that no default with respect to such Indebtedness would permit any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity.

 

“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 future development costs) of more than 25% during a fiscal quarter in the discounted future net revenues from proved crude oil and natural gas reserves of the Company and its Restricted Subsidiaries, calculated in accordance with clause (a)(1) of the definition of Adjusted Consolidated Net Tangible Assets; provided, however, that the following will be excluded from the calculation of Material Change:

 

 

 

“Moody’s” means Moody’s Investor’s Service, Inc. and its successors.

 

“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, but only as and when received, 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 noncash form), in each case net of:

 

 

“Net Cash Proceeds,” with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys’ fees, accountants’ fees, underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof.

 

“Net Present Value” means, with respect to any proved hydrocarbon reserves, the discounted future net cash flows associated with such reserves, determined in accordance with the rules and regulations (including interpretations thereof) of the SEC in effect on the Issue Date.

 

“Net Working Capital” means:

 

 

determined in accordance with GAAP.

 

“Non-recourse Purchase Money Indebtedness” means Indebtedness (other than Capital Lease Obligations) of the Company or any Subsidiary Guarantor incurred in connection with the acquisition by the Company or such Subsidiary Guarantor in the ordinary course of business of fixed assets used in the Oil and

Gas Business (including office buildings and other real property used by the Company or such Subsidiary Guarantor in conducting its operations) with respect to which:

 

 

“Officer” means the Chairman of the Board, the President, any Vice Chairman of the Board, Vice President, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary of a Person.

 

“Oil and Gas Business” means the business of the exploration for, and exploitation, development, acquisition, production, processing (but not refining), marketing, storage and transportation of, hydrocarbons, and other related energy and natural resource businesses (including oil and gas services businesses related to the foregoing).

 

“Oil and Gas Hedging Contract” means any oil and gas purchase or hedging agreement, and other agreement or arrangement, in each case, that is designed to provide protection against oil and gas price fluctuations.

 

“Oil and Gas Liens” means:

 

 

 

“Permitted Business Investment” means any investment made in the ordinary course of, and of a nature that is or shall have become customary in, the Oil and Gas Business including investments or expenditures for actively exploiting, exploring for, acquiring, developing, producing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit one to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of Oil and Gas Business jointly with third parties, including:

 

 

“Permitted Investment” means an Investment by the Company or any Restricted Subsidiary in:

 

 

 

“Permitted Liens” means, with respect to any Person:

 

 

 

Notwithstanding anything in this definition to the contrary, the term “Permitted Liens” shall not include Liens resulting from the creation, incurrence, issuance, assumption or Guarantee of any Production Payments other than: