UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO.           )

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Encore Acquisition Company

 

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ENCORE ACQUISITION COMPANY

777 Main Street

Suite 1400

Fort Worth, Texas 76102

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To the Stockholders of Encore Acquisition Company:

 

Notice is hereby given that the Annual Meeting of Stockholders of Encore Acquisition Company will be held at The Petroleum Club of Fort Worth, 777 Main Street, 39th Floor, Wildcatter Room, Fort Worth, Texas 76102, on Tuesday, May 6, 2008, at 9:00 a.m., Central Time. The annual meeting is being held for the following purposes:

 

(1) to elect eight directors;

 

(2) to approve the 2008 Incentive Stock Plan;

 

(3) to ratify the appointment of the independent registered public accounting firm for 2008; and

 

(4) to transact such other business as may properly come before the meeting.

 

These proposals are described in the accompanying proxy materials. You will be able to vote at the annual meeting only if you were a stockholder of record at the close of business on March 14, 2008.

 

By Order of the Board of Directors,

 

I. Jon Brumley

Chairman

 

Fort Worth, Texas

April 7, 2008

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 6, 2008.

 

This proxy statement, our annual report to stockholders and other proxy materials are available at www.encoreacq.com/2008Proxy.cfm.

 

 

 

 

ENCORE ACQUISITION COMPANY
777 Main Street
Suite 1400
Fort Worth, Texas 76102

 

PROXY STATEMENT

 

2008 ANNUAL MEETING OF STOCKHOLDERS

May 6, 2008

 

The Board of Directors (the “Board”) of Encore Acquisition Company (“EAC”) is providing these proxy materials in connection with our annual meeting of stockholders that will be held at The Petroleum Club of Fort Worth, 777 Main Street, 39th Floor, Wildcatter Room, Fort Worth, Texas 76102, on Tuesday, May 6, 2008, at 9:00 a.m., Central Time. Stockholders of record as of March 14, 2008, which is the record date established for the annual meeting by the Board, are entitled and requested to vote on the items of business described in this proxy statement. Each stockholder of record is entitled to one vote for each share registered in the stockholder’s name. As of the record date, 53,181,112 shares of our common stock were entitled to be voted at the annual meeting.

 

This proxy statement and the accompanying notice of annual meeting and proxy will first be sent or given to stockholders on or about April 9, 2008.

 

Voting Procedures

 

You may vote your shares in person at the annual meeting, by Internet, by telephone or by mail.

 

Voting in Person.  Shares held in your name as the stockholder of record may be voted in person at the annual meeting. If your shares are held in the name of a broker, trustee or another nominee (“street name”), you may vote the shares in person at the annual meeting only if you obtain a legal proxy from the broker, trustee or nominee that holds your shares giving you the right to vote the shares. Even if you plan to attend the annual meeting, we recommend that you also submit your proxy or voting instructions as described below so that your vote will be counted if you later decide not to attend the meeting.

 

Voting by Internet.  Stockholders of record with Internet access may submit proxies by following the “Vote by Internet” instructions on their proxy card. Most stockholders who hold shares beneficially in street name may vote by accessing the website specified on the voting instruction card provided by their broker, trustee or nominee. Please check the voting instruction card for Internet voting availability.

 

Voting by Telephone.  Stockholders of record may submit proxies by following the “Vote by Telephone” instructions on their proxy card. Most stockholders who hold shares beneficially in street name may vote by telephone by calling the number specified on the voting instruction card provided by their broker, trustee or nominee. Please check the voting instruction card for telephone voting availability.

 

Voting by Mail.  Stockholders of record may submit proxies by completing, signing and dating their proxy card and mailing it in the accompanying pre-addressed envelope. Most stockholders who hold shares beneficially in street name may vote by mail by completing, signing and dating the voting instruction card provided by their broker, trustee or nominee and mailing it in the accompanying pre-addressed envelope.

 

Changing Your Vote

 

You may change your vote at any time prior to the vote at the annual meeting, except that votes submitted through the Internet or telephone must be received by 11:59 p.m., Eastern Time, on May 5, 2008. If you are the stockholder of record, you may change your vote by granting a new proxy bearing a later date (which automatically revokes the earlier proxy), by providing a written notice of revocation to our Corporate Secretary prior to your shares being voted, or by attending the annual meeting and voting in person. Attendance at the meeting will not cause your previously granted proxy to be revoked unless you specifically so request. For shares you hold beneficially in street name, you may change your vote by submitting new voting instructions to your broker, trustee

or nominee, or, if you have obtained a legal proxy from your broker, trustee or nominee giving you the right to vote your shares, by attending the meeting and voting in person.

 

Quorum and Adjournments

 

The presence, in person or by proxy, of the holders of a majority of the votes eligible to be cast at the annual meeting is necessary to constitute a quorum at the annual meeting. Both abstentions and broker non-votes (described below) are counted for the purpose of determining the presence of a quorum. If a quorum is not present, the stockholders entitled to vote who are present in person or by proxy at the annual meeting have the power to adjourn the annual meeting from time to time, without notice other than an announcement at the annual meeting, until a quorum is present. At any adjourned annual meeting at which a quorum is present, any business may be transacted that might have been transacted at the annual meeting as originally notified.

 

Required Vote; Effect of Broker Non-Votes and Abstentions

 

The nominees for election as directors at the annual meeting who receive the highest number of “FOR” votes will be elected as directors. This is called plurality voting. The approval of the 2008 Incentive Stock Plan requires the affirmative vote of a majority of the votes cast on the proposal, provided that the total votes cast on the proposal represent over 50% of all outstanding shares entitled to vote on the proposal. The ratification of the appointment of our independent registered public accounting firm for 2008 requires the affirmative vote of a majority of the votes cast at the annual meeting.

 

Our Corporate Governance Guidelines require any nominee for director who receives a greater number of votes “WITHHELD” from his election than votes “FOR” such election to promptly tender his resignation from the Board following certification of the stockholder vote. The Nominating and Corporate Governance Committee shall consider the resignation and recommend to the Board whether to accept it. The Board’s decision to accept or reject the resignation will be made within 90 days of the certification of the stockholder vote.

 

In the election of directors, you may vote “FOR” all or some of the nominees or your vote may be “WITHHELD” with respect to one or more of the nominees. For the other items of business, you may vote “FOR,” “AGAINST” or “ABSTAIN.” If you elect to “ABSTAIN,” the abstention has the same effect as a vote “AGAINST.” If you provide specific instructions with regard to certain items, your shares will be voted as you instruct on such items. If you sign your proxy card or voting instruction card without giving specific instructions, your shares will be voted in accordance with the recommendations of the Board set forth below under “Board Recommendation.”

 

Brokers holding shares must vote according to specific instructions they receive from the beneficial owners of those shares. If specific instructions are not received, brokers may generally vote the shares in their discretion. However, the New York Stock Exchange (the “NYSE”) precludes brokers from exercising voting discretion on certain proposals without specific instructions from the beneficial owner. Under the rules of the NYSE, brokers will have discretion to vote on the election of directors and the ratification of the appointment of our independent registered public accounting firm at the annual meeting.

 

A broker non-vote has the effect of a negative vote when a majority of the issued and outstanding shares is required for approval of a particular proposal and has no effect when a majority of the shares present in person or by proxy and entitled to vote or a plurality or majority of the votes cast is required for approval. Since directors are elected by a plurality and the ratification of the appointment of the independent registered public accounting firm for 2008 requires the affirmative vote of a majority of the votes cast, broker non-votes will not affect the outcome of voting on those proposals. However, with respect to the approval of the 2008 Incentive Stock Plan, since the total votes cast on the proposal must represent over 50% of all outstanding shares entitled to vote on the proposal, broker non-votes could effectively count as a vote against the proposal if the votes cast on the proposal do not represent over 50% of all outstanding shares entitled to vote on the proposal.

 

Because abstentions are considered votes “cast” on a proposal, abstentions will have the same effect as votes against both the approval of the 2008 Incentive Stock Plan and the ratification of the appointment of our independent registered public accounting firm for 2008.

Board Recommendation

 

The Board recommends that you vote:

 

 

Voting on Other Matters

 

If any other business properly comes before the stockholders for a vote at the annual meeting, your shares will be voted in accordance with the discretion of the proxy holders: I. Jon Brumley, Jon S. Brumley and Robert C. Reeves. The Board knows of no matters, other than those described above, to be presented for consideration at the annual meeting.

 

CORPORATE GOVERNANCE PRINCIPLES AND BOARD MATTERS

 

We have adopted a Code of Business Conduct and Ethics for directors, officers (including our principal executive officer, principal financial officer and principal accounting officer) and employees. We have also adopted Corporate Governance Guidelines, which, in conjunction with our certificate of incorporation, bylaws and Board committee charters, form the framework for our governance. Our Code of Business Conduct and Ethics and Corporate Governance Guidelines are available on the “Corporate Governance” section of our website at www.encoreacq.com. We will post on our website any amendments to the Code of Business Conduct and Ethics or waivers of the Code of Business Conduct and Ethics for directors and executive officers.

 

Stockholders may request free printed copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines from:

Encore Acquisition Company

Attention: Corporate Secretary

777 Main Street, Suite 1400

Fort Worth, Texas 76102

(817) 877-9955

 

Director Independence

 

The Board has determined that each director nominee is independent, as defined for purposes of the listing standards of the NYSE, other than Mr. I. Jon Brumley, who is Chairman of the Board, and Mr. Jon S. Brumley, who is Chief Executive Officer and President. In making this determination, the Board affirmatively determined that each independent director nominee had no material relationship with EAC (either directly or as a partner, stockholder or officer of an organization that has a relationship with EAC), and that none of the express disqualifications contained in the NYSE rules applied to any of them.

 

As contemplated by NYSE rules, the Board has adopted categorical standards to assist it in making independence determinations, under which relationships that fall within the categorical standards are not required to be disclosed in the proxy statement and their impact on independence need not be separately discussed. The Board, however, considers all material relationships with each director in making its independence determinations. A relationship falls within the categorical standards if it:

 

 

 

None of the independent director nominees had relationships relevant to an independence determination that were outside the scope of the Board’s categorical standards.

 

Board Structure and Committee Composition

 

As of the date of this proxy statement, the Board has eight directors and the following four committees: (1) Audit, (2) Compensation, (3) Nominating and Corporate Governance and (4) Special Stock Award. The following table sets forth the membership on each committee:

 

Composition of Board Committees

 

 

In 2007, the Board held nine meetings; the Audit Committee held eight meetings; the Compensation Committee held two meetings; and the Nominating and Corporate Governance Committee held one meeting. The Nominating and Corporate Governance Committee met in February 2008 in connection with matters related to the 2008 annual meeting of stockholders.

 

Each director attended at least 75% of all Board and applicable committee meetings in 2007. Directors are encouraged to attend annual stockholder meetings. All of our directors attended the 2007 annual meeting of stockholders.

 

Audit Committee.  The Audit Committee’s purpose is, among other things, to assist the Board in overseeing:

 

 

The Board has determined that all three members of the Audit Committee are independent under the listing standards of the NYSE and the rules of the Securities and Exchange Commission (the “SEC”). In addition, the Board has determined that Mr. Gardner is an “audit committee financial expert” as such term is defined in Item 401(h) of Regulation S-K.

 

The report of the Audit Committee is included in this proxy statement beginning on page 43. The charter of the Audit Committee is available on the “Corporate Governance” section of our website at www.encoreacq.com. A free printed copy also is available to any stockholder who requests it from our address on page 3.

 

Compensation Committee.  The Compensation Committee’s functions include the following:

 

 

 

The Board has determined that all members of the Compensation Committee are independent under the listing standards of the NYSE.

 

The Compensation Committee has retained Towers Perrin as an independent consultant with respect to executive compensation matters. The consultant reports to and acts at the direction of the Compensation Committee. Our management does not direct or oversee the activities of Towers Perrin with respect to our executive compensation program and has not engaged Towers Perrin for any other matter. Towers Perrin prepares compensation surveys for review by the Compensation Committee in advance of the annual executive officer compensation review. Towers Perrin works with our human resources function to compare compensation paid to our executive officers with compensation paid for comparable positions at companies included in the surveys.

 

The compensation payable to our Chairman of the Board and Chief Executive Officer is reviewed and approved by the Compensation Committee in executive session. The compensation payable to our other executive officers is recommended by the Chairman of the Board and Chief Executive Officer and reviewed and approved by the Compensation Committee.

 

The report of the Compensation Committee is included in this proxy statement on page 33. The charter of the Compensation Committee is available on the “Corporate Governance” section of our website at www.encoreacq.com. A free printed copy also is available to any stockholder who requests it from our address on page 3.

 

Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee’s functions include the following:

 

 

The Board has determined that both members of the Nominating and Corporate Governance Committee are independent under the listing standards of the NYSE.

 

The charter of the Nominating and Corporate Governance Committee is available on the “Corporate Governance” section of our website at www.encoreacq.com. A free printed copy also is available to any stockholder who requests it from our address on page 3.

Special Stock Award Committee.  The Special Stock Award Committee may exercise all powers and authority of the Board (concurrently with the Compensation Committee) to award restricted shares (or units representing restricted shares) of our common stock, or restricted stock, to eligible employees under EAC’s equity-based incentive plan, subject to the following limitations:

 

 

If our stockholders approve the 2008 Incentive Stock Plan, the Special Stock Award Committee may exercise the powers described above to award restricted shares (or units representing restricted shares) of our common stock, or restricted stock, to eligible employees under the 2008 Incentive Stock Plan.

 

Compensation Committee Interlocks and Insider Participation

 

During 2007 or as of the date of this proxy statement, no member of the Compensation Committee is or has been an officer or employee of EAC and no executive officer of EAC served on the compensation committee or board of any company that employed any member of EAC’s Compensation Committee or Board.

 

Policies and Procedures for Approval of Related Person Transactions

 

The Board has adopted a policy with respect to related person transactions to document procedures pursuant to which such transactions are reviewed, approved or ratified. The policy applies to any transaction in which:

 

 

Selection of Nominees for the Board

 

Identifying Candidates

 

The Nominating and Corporate Governance Committee solicits ideas for potential Board candidates from a number of sources, including members of the Board, stockholders, our executive officers and research. The Nominating and Corporate Governance Committee also has sole authority to select and compensate a third-party executive search firm to help identify candidates. In addition, the Nominating and Corporate Governance Committee will consider candidates for the Board submitted by stockholders. Any stockholder submission should include the candidate’s name and qualifications for Board membership and should be directed to our address on page 3.

 

Although the Nominating and Corporate Governance Committee does not require the stockholder to submit any particular information regarding the qualifications of the stockholder’s candidate, the level of consideration that the Nominating and Corporate Governance Committee will give to the stockholder’s candidate will be commensurate with the quality and quantity of information about the candidate that the nominating stockholder makes available to the committee. The Nominating and Corporate Governance Committee will consider all candidates identified through the processes described above, and will evaluate each of them on the same basis.

In addition, our bylaws permit stockholders to nominate directors for election at an annual meeting of stockholders whether or not such nominee is submitted to and evaluated by the Nominating and Corporate Governance Committee. To nominate a director using this process, the stockholder must follow the procedures described under “Stockholder Proposals” on page 46.

 

Evaluating Candidates

 

Each director candidate must meet certain minimum qualifications, including:

 

 

In addition, the Nominating and Corporate Governance Committee considers other qualities that it may deem to be desirable from time to time, such as the extent to which the candidate contributes to the diversity of the Board — with diversity being construed broadly to include a variety of perspectives, opinions, experiences and backgrounds. The Nominating and Corporate Governance Committee may also consider the ability of the candidate to work with the then-existing interpersonal dynamics of the Board and his or her ability to contribute to the collaborative culture among Board members.

 

Based on this initial evaluation, the Chairman of the Nominating and Corporate Governance Committee may interview the candidate, and if warranted, recommend that one or more members of the committee, other members of the Board and executives, as appropriate, interview the candidate in person or by telephone. After completing this evaluation and interview process, the committee will make a recommendation to the full Board as to the persons who should be nominated by the Board, and the Board will determine the nominees after considering the recommendation of the Nominating and Corporate Governance Committee.

 

Executive Sessions

 

Our non-management directors include all directors other than I. Jon Brumley and Jon S. Brumley. Each of the non-management directors is also “independent” under the listing standards of the NYSE. The non-management directors meet in executive session without management participation at least three times per year. These meetings are chaired on a rotating basis by the chairmen of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.

 

Stockholder Communications

 

Individuals may communicate with the entire Board or with our non-management directors. Any such communication should be sent via letter addressed to the member or members of the Board to whom the communication is directed to our address on page 3. All such communications, other than unsolicited commercial solicitations or communications, will be forwarded to the appropriate director or directors for review.

PROPOSALS TO BE VOTED ON

 

PROPOSAL NO. 1

 

ELECTION OF DIRECTORS

 

There are eight nominees for election to our Board this year. All of the nominees have served as directors since the last annual meeting. Information regarding the business experience of each nominee is provided below. Each director is elected annually to serve until the next annual meeting or until his successor is elected.

 

If you sign your proxy or voting instruction card but do not give instructions with respect to voting for directors, your shares will be voted for the eight persons recommended by the Board. If you wish to give specific instructions with respect to voting for directors, you may do so by indicating your instructions on your proxy or voting instruction card.

 

All of the nominees have indicated that they will be available to serve as directors. In the event that any nominee should become unavailable, however, the proxy holders, I. Jon Brumley, Jon S. Brumley and Robert C. Reeves, will vote for a nominee or nominees designated by the Board, unless the Board chooses to reduce the number of directors serving on the Board.

 

Required Vote

 

The eight nominees for director who receive the highest number of “FOR” votes cast in person or by proxy at the annual meeting will be elected as directors. Our Corporate Governance Guidelines require any nominee for director who receives a greater number of votes “WITHHELD” from his election than votes “FOR” such election to promptly tender his resignation from the Board following certification of the stockholder vote. The Nominating and Corporate Governance Committee shall consider the resignation and recommend to the Board whether to accept it. The Board’s decision to accept or reject the resignation will be made within 90 days of the certification of the stockholder vote.

 

Board Recommendation

 

The Board recommends a vote FOR the election of each of the following nominees:

 

 

PROPOSAL NO. 2

 

APPROVAL OF THE 2008 INCENTIVE STOCK PLAN

 

Introduction

 

The Board has unanimously approved the 2008 Incentive Stock Plan (the “Plan”), subject to stockholder approval at the annual meeting, and recommends that EAC’s stockholders approve and adopt the Plan. The Board has elected to propose this new incentive compensation plan in order to:

 

 

We consider the Plan an essential element of total compensation and believe the Plan promotes our interests and those of our stockholders by:

 

 

As of April 3, 2008, 4,045,279 shares have been issued pursuant to awards under our existing equity-based incentive compensation plan (the “2000 Incentive Stock Plan”), and 454,721 shares remain available for issuance under that plan. Please read “— Equity Compensation Plans” below.

 

If the stockholders approve the Plan, then no additional awards will be granted under the 2000 Incentive Stock Plan from and after the date of the annual meeting, and 2,400,000 shares will be reserved for issuance under the Plan. Any previously granted awards currently outstanding under the 2000 Incentive Stock Plan will remain outstanding in accordance with their terms.

 

Summary of the 2008 Incentive Stock Plan

 

A description of the Plan appears below. Because the description of the Plan in this proxy statement is a summary, it may not contain all the information that may be important to you. The summary is qualified by reference to the Plan. You should read carefully the entire copy of the Plan attached as Annex A to this proxy statement.

 

Eligibility

 

All directors and full time regular employees are eligible to participate in the Plan. As of the date of this proxy statement, we currently have six non-employee directors and [364] employees eligible for participation in the Plan. If the director nominees are elected at the annual meeting, we will again have six non-employee directors eligible to participate in the Plan.

 

Shares Available for Awards

 

Up to 2,400,000 shares of our common stock may be issued under the Plan, all of which may be issued as incentive stock options under Section 422 of the Code. As of April 1, 2008, the closing price of our common stock on the NYSE was $39.15 per share.

 

Additionally, the number of shares of our common stock that are the subject of awards under the Plan, that are cancelled, forfeited, terminated or expire unexercised, shall again immediately become available for awards under the Plan. The number of shares reserved for issuance under the Plan shall be reduced only to the extent that shares of our common stock are actually issued in connection with the exercise or settlement of an award; provided, however,

that the number of shares reserved for issuance shall be reduced by the total number of options or stock appreciation rights exercised. The number of shares reserved for issuance under the Plan shall not be increased by (i) any shares tendered or awards surrendered in connection with the purchase of shares upon the exercise of an option or (ii) any shares deducted from an award payment in connection with our tax withholding obligations. Shares delivered in settlement, assumption or substitution of awards granted by another entity as a result of an acquisition or under an acquired entity’s plan will not reduce the number of shares available under the Plan to the extent allowed under the rules of the NYSE.

 

Aggregate Limitation on Stock Awards

 

No more than 1,600,000 shares of our common stock will be available for grants of “full value” stock awards, such as restricted stock or stock units.

 

Administration

 

The Plan will be administered by the Compensation Committee of the Board. The Compensation Committee interprets and administers the Plan and determines the participants to be granted awards, the types of awards granted to the participants and the terms of each award. Subject to certain restrictions contained in the Plan, the Compensation Committee has the discretion to extend the exercisability of an award, accelerate the vesting or exercisability of an award or otherwise amend the award in a manner that is not adverse to, or is consented to by, the recipient of the award; provided that in no event may an option or stock appreciation right be re-priced by any method, directly or indirectly.

 

To the extent allowed by applicable law, the Compensation Committee may delegate to our Chief Executive Officer or another executive officer the authority to grant awards out of a specified pool of cash or shares under the Plan. The Board has established a Special Stock Award Committee and appointed Jon S. Brumley as its sole member. The Special Stock Award Committee may exercise all powers and authority of the Board (concurrently with the Compensation Committee) to award restricted shares (or units representing restricted shares) of our common stock, or restricted stock, to eligible employees under the Plan, subject to the following limitations:

 

 

Options

 

The term of each option granted under the Plan is fixed by the Compensation Committee, but may not be longer than ten years from the date of grant. Options may be either incentive stock options authorized under Section 422 of the Code or non-qualified options which do not qualify as incentive stock options. No person may be issued incentive stock options covering shares with a fair market value at the date of grant in excess of $100,000 and exercisable in any calendar year. The exercise price of each option is determined by the Compensation Committee, but may not be less than the fair market value of the common stock on the date of grant. Each option is exercisable at the times and subject to any conditions established by the Compensation Committee. The Compensation Committee may provide the option holder with the right to satisfy any minimum withholding tax obligation by delivery of previously owned shares or withholding shares otherwise issuable upon exercise of the option. The exercise price will be paid in cash or, if permitted by the Compensation Committee, in common stock previously owned by the option holder. Outstanding options may not be repriced without stockholder approval.

Stock Appreciation Rights

 

The Plan also provides for the granting of stock appreciation rights, or SARs, to employees. A SAR is a right to receive a payment, in cash or common stock, equal to the excess of the fair market value of a specified number of shares of the common stock over a specified grant price. All SARs granted under the Plan must have a grant price per share that is not less than the fair market value of a share of common stock on the date of grant and a term of no more than ten years.

 

Stock Awards

 

The Plan also provides for the granting of stock awards, restricted stock and stock units to employees that consist of grants of common stock or units denominated in common stock. The terms, conditions and limitations applicable to any stock award will be decided by the Compensation Committee. At the discretion of the Compensation Committee, the terms of a stock award may include rights to receive dividends or dividend equivalents. Unless granted in lieu of previously earned salary or bonus, stock awards that are not performance awards will vest no sooner than ratably over a minimum three-year period, subject to earlier vesting on death, disability, retirement or change-in-control. Stock awards that are performance awards will have a minimum vesting period of one year, subject to earlier vesting on death, disability, retirement or change-in-control.

 

Cash Awards

 

The Plan also provides for the granting of cash awards to employees. The terms, conditions and limitations applicable to any cash awards granted pursuant to the Plan will be determined by the Compensation Committee.

 

Performance Awards

 

At the discretion of the Compensation Committee, any of the above-described employee awards may be made in the form of a performance award. A performance award is an award that is subject to the attainment of one or more future performance goals. Performance goals need not be based upon an increase or positive result under a particular business criterion and could include, for example, maintaining the status quo or limiting economic losses. Performance goals may also be based on performance relative to a peer group of companies. The terms, conditions and limitations applicable to any performance award will be decided by the Compensation Committee.

 

At the discretion of the Compensation Committee, certain awards under the Plan will be intended to qualify as performance-based compensation under Section 162(m) of the Code. Section 162(m) generally disallows deductions for compensation in excess of $1,000,000 for some executive officers unless the compensation qualifies as performance-based compensation. The Plan contains provisions consistent with the Section 162(m) requirements for performance-based compensation.

 

In making qualified awards, the Compensation Committee may base a performance goal on one or more of the following business criteria that may be applied to the employee, one or more of our business units or geographic regions, or to EAC as a whole:

 

 

 

Employee Award Limits

 

No employee may be granted in any calendar year awards covering more than 300,000 shares of common stock, and no employee may be granted cash awards in any calendar year in excess of $5,000,000.

 

Director Awards

 

The Plan allows for the grant of stock awards, options, SARs and cash awards to our non-employee directors in the same manner as described above, except that directors may not be awarded incentive stock options. However, no non-employee director may be granted awards covering more than 20,000 shares in any calendar year.

 

Adjustment

 

In the event of a stock dividend, stock split, consolidation, recapitalization, reorganization, merger or other similar capital or corporate structure change, the Board will adjust, in the manner it deems appropriate in its discretion, the terms of outstanding options, the number of shares available under the Plan, the maximum number of shares issuable to one person and other provisions of the Plan.

 

Acceleration on Change-in-Control

 

Upon a change-in-control, as defined in the Plan, unless otherwise determined by the Compensation Committee, all options and SARs will vest and become exercisable and all transfer restrictions and vesting requirements on stock awards will lapse.

 

Amendment; Termination

 

The Board may suspend, revise, terminate or amend the Plan at any time. However, no such amendment may be made without stockholder approval if such approval is required under applicable law or the rules of the applicable securities exchange on which the shares of common stock are listed, or if such amendment would either decrease the grant or exercise price of any stock option to less than the minimum price set forth in the Plan on the date of grant or increase the total number of shares of common stock that may be distributed under the Plan. The Plan is scheduled to terminate on the date 10 years following its approval by stockholders.

 

New Plan Benefits

 

Except for annual grants of restricted stock made to our directors in accordance with our director compensation policy, no determination has yet been made as to the amount or terms of any stock-based incentives or any future

cash awards under the Plan. For more information concerning our director compensation, please read “Director Compensation” on page 43.

 

Future grants of stock-based incentives or any future awards under the Plan will be made to our named executive officers and other participants as determined by the Compensation Committee or Special Stock Award Committee, as described in “Summary of the 2008 Incentive Stock Plan — Administration” above. For more information concerning equity awards granted to our named executive officers, please read “Executive Compensation — Compensation Discussion and Analysis” beginning on page 24.

 

Certain Federal Income Tax Consequences

 

The following is a brief summary of the federal income tax aspects of awards that may be made under the Plan based on existing U.S. federal income tax laws. This summary is general in nature and does not address issues related to the tax circumstances of any particular participant. This summary is not complete and does not attempt to describe any state, local or non-U.S. tax consequences.

 

Stock Options and SARs.  Participants will not realize taxable income upon the grant of a non-qualified stock option or SAR. Upon the exercise of a non-qualified stock option or SAR, the participant will recognize ordinary income (subject, in the case of employees, to withholding) in an amount equal to the excess of: the amount of cash and the fair market value on the date of exercise of the common stock received over the exercise price (if any) paid for the non-qualified stock option or SAR. The participant will generally have a tax basis in any shares of common stock received on the exercise of a SAR, or on the cash exercise of a non-qualified stock option, that equals the fair market value of such shares on the date of exercise. Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, we will be entitled to a deduction for U.S. federal income tax purposes that corresponds as to timing and amount with the compensation income recognized by the participant.

 

Employees will not have taxable income upon the grant of an incentive stock option. Upon the exercise of an incentive stock option, the employee will not have taxable income, although the excess of the fair market value of the shares of common stock received upon exercise of the incentive stock option over the exercise price will increase the alternative minimum taxable income of the employee, which may cause such employee to incur alternative minimum tax. The payment of any alternative minimum tax attributable to the exercise of an incentive stock option would be allowed as a credit against the employee’s regular tax liability in a later year to the extent the employee’s regular tax liability is in excess of the alternative minimum tax for that year.

 

Upon the disposition of stock received in connection with the exercise of an incentive stock option that has been held for the requisite holding period (generally, at least two years from the date of grant and one year from the date of exercise of the incentive stock option), the employee will generally recognize capital gain or loss equal to the difference between the amount received in the disposition and the exercise price paid by the employee for the stock. However, if an employee disposes of stock that has not been held for the requisite holding period, the employee will recognize ordinary income in the year of the disqualifying disposition to the extent that the fair market value of the stock at the time of exercise of the incentive stock option (or, if less, the amount realized in the case of an arm’s-length disqualifying disposition to an unrelated party) exceeds the exercise price paid by the employee for such stock. The employee would also recognize capital gain (or, depending on the holding period, additional ordinary income) to the extent the amount realized in the disqualifying disposition exceeds the fair market value of the stock on the exercise date. If the exercise price paid for the stock exceeds the amount realized in the disqualifying disposition (in the case of an arm’s-length disposition to an unrelated party), such excess would ordinarily constitute a capital loss.

 

EAC will generally not be entitled to any federal income tax deduction upon the grant or exercise of an incentive stock option, unless the employee makes a disqualifying disposition of the stock. If an employee makes such a disqualifying disposition, EAC will then, subject to the discussion below under “Certain Tax Code Limitations on Deductibility,” be entitled to a tax deduction that corresponds as to timing and amount with the compensation income recognized by the employee under the rules described in the preceding paragraph.

 

Cash Awards; Stock Unit Awards; Stock Awards.  A participant will recognize ordinary compensation income upon receipt of cash pursuant to a cash award or, if earlier, at the time such cash is otherwise made available for the

participant to draw upon it. A participant will not have taxable income upon the grant of a stock award in the form of units denominated in common stock but rather will generally recognize ordinary compensation income at the time the participant receives common stock or cash in satisfaction of such stock unit award in an amount equal to the fair market value of the common stock or cash received. In general, a participant will recognize ordinary compensation income as a result of the receipt of common stock pursuant to a stock award in an amount equal to the fair market value of the common stock when such stock is received; provided, however, that if the stock is not transferable and is subject to a substantial risk of forfeiture when received, the participant will recognize ordinary compensation income in an amount equal to the fair market value of the common stock when it first becomes transferable or is no longer subject to a substantial risk of forfeiture, unless the participant makes an election to be taxed on the fair market value of the common stock when such stock is received.

 

An employee will be subject to withholding for federal, and generally for state and local, income taxes at the time the employee recognizes income under the rules described above with respect to common stock or cash received pursuant to a cash award, performance award, stock award or stock unit award. Dividends that are received by a participant prior to the time that the common stock is taxed to the participant under the rules described in the preceding paragraph are taxed as additional compensation, not as dividend income. The tax basis of a participant in the common stock received will equal the amount recognized by the participant as compensation income under the rules described in the preceding paragraph, and the participant’s holding period in such shares will commence on the date income is so recognized.

 

Subject to the discussion under “Certain Tax Code Limitations on Deductibility” below, we will be entitled to a deduction for U.S. federal income tax purposes that corresponds as to timing and amount with the compensation income recognized by the participant under the foregoing rules.

 

Certain Tax Code Limitations on Deductibility.  Section 162(m) of the Code provides that certain compensation received in any year by a “covered employee” in excess of $1,000,000 is non-deductible by EAC for federal income tax purposes. Section 162(m) provides an exception, however, for “performance-based compensation.” The Plan permits the Compensation Committee to structure grants and awards made under the Plan to “covered employees” as performance-based compensation that is exempt from the limitations of Section 162(m). However, the Compensation Committee may award compensation that is or may become non-deductible, and expects to consider whether it believes such grants are in the best interest of EAC, balancing tax efficiency with long-term strategic objectives.

 

Section 409A.  Section 409A of the Code generally provides that any deferred compensation arrangement which does not meet specific requirements regarding (i) timing of payouts, (ii) advance election of deferrals and (iii) restrictions on acceleration of payouts will result in immediate taxation of any amounts deferred to the extent not subject to a substantial risk of forfeiture. In addition, tax on the amounts included in income as a result of not complying with the new Section 409A will be increased by an interest component as specified by statute, and the amount included in income will also be subject to a 20% excise tax. In general, to avoid a Section 409A violation, amounts deferred may only be paid out on separation from service, disability, death, a specified time, a change-in-control (as defined by the Treasury Department) or an unforeseen emergency. Furthermore, the election to defer generally must be made in the calendar year prior to performance of services, and any provision for accelerated payout other than for reasons specified by the Treasury Department may cause the amounts deferred to be subject to early taxation and to the imposition of the excise tax.

 

Section 409A is broadly applicable to any form of deferred compensation other than tax-qualified retirement plans and bona fide vacation, sick leave, compensatory time, disability pay or death benefits, and may apply to certain awards under the Plan. For example, restricted stock units and stock options may be classified as deferred compensation for this purpose.

 

The Treasury Department and Internal Revenue Service have issued final regulations implementing Section 409A which are generally effective January 1, 2008. Based on these regulations, it is expected that awards under the Plan may be structured in a manner that complies with or is exempt from Section 409A.

 

Equity Compensation Plans

 

The following table sets forth information about our common stock that may be issued under all of our existing equity compensation plans as of December 31, 2007:

 

 

 

 

Required Vote

 

Approval of the Plan requires the affirmative vote of a majority of the votes cast on the proposal, provided that the total votes cast on the proposal represents over 50% of all outstanding shares entitled to vote on the proposal.

 

Board Recommendation

 

Our Board recommends a vote FOR the approval of the Plan.

 

The approval of the Plan requires the affirmative vote of a majority of the votes cast on the proposal; provided that the total vote cast on the proposal represents over 50% of all outstanding shares entitled to vote on the proposal. Since the total vote cast on the proposal must represent over 50% of all outstanding shares entitled to vote on the proposal, abstentions and broker non-votes could effectively count as a vote against the proposal if the votes actually cast on the proposal do not represent over 50% of all outstanding shares entitled to vote on the proposal.

 

PROPOSAL NO. 3

 

RATIFICATION OF THE APPOINTMENT OF
THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2008

 

The Audit Committee of the Board has appointed Ernst & Young LLP as the independent registered public accounting firm to audit our consolidated financial statements as of and for the year ending December 31, 2008 and our internal control over financial reporting for the same period. During 2007, Ernst & Young LLP served as our independent registered public accounting firm and also provided certain other services. Please read “Principal Accountant Fees and Services” on page 45. Representatives of Ernst & Young LLP are expected to attend the annual meeting, where they will be available to respond to appropriate questions and, if they desire, to make a statement.

 

Required Vote

 

Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2008 requires the affirmative vote of a majority of the votes cast on the proposal at the annual meeting. If the appointment is not ratified, the Board will consider whether it should select another independent registered public accounting firm.

 

Board Recommendation

 

Our Board recommends a vote FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for 2008.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information as of March 14, 2008, regarding the ownership of our common stock by:

 

 

Unless otherwise noted, the persons named below have sole voting and investment power with respect to such shares.

 

 

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires our directors, executive officers and holders of more than 10% of our common stock to file reports with the SEC regarding their ownership and changes in ownership of our securities. We believe that, during 2007, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements, except that a Form 4 was filed late to report the acquisition of shares by Ted Collins, Jr. and a Form 4 was filed late for each of Messrs. I. Jon Brumley, John W. Arms, Thomas H. Olle, Robert C. Reeves and Kevin Treadway to report the delivery of shares to satisfy tax withholding obligations upon the vesting of restricted stock. In making these statements, we have relied upon examination of the copies of Forms 3 and 4, and amendments thereto, provided to us and the written representations of our directors and executive officers.

 

EXECUTIVE OFFICERS

 

Our executive officers serve at the discretion of the Board. Information regarding the business experience of each of our executive officers is provided below.

 

I. Jon Brumley, age 69, Chairman of the Board

 

Please read page 8 for information regarding Mr. I. Jon Brumley’s business experience.

 

Jon S. Brumley, age 37, Chief Executive Officer and President

 

Please read page 9 for information regarding Mr. Jon S. Brumley’s business experience.

 

Robert C. Reeves, age 38, Senior Vice President, Chief Financial Officer and Treasurer

 

Mr. Reeves has served as Senior Vice President, Chief Financial Officer and Treasurer of EAC since November 2006. Mr. Reeves has also served as Senior Vice President, Chief Financial Officer and Treasurer of Encore Energy Partners GP LLC since its inception in February 2007. From November 2006 until January 2007, Mr. Reeves also

served as EAC’s Corporate Secretary. Mr. Reeves served as EAC’s Senior Vice President, Chief Accounting Officer, Controller and Assistant Corporate Secretary from November 2005 until November 2006. He served as EAC’s Vice President, Controller and Assistant Corporate Secretary from August 2000 until October 2005. He served as EAC’s Assistant Controller from April 1999 until August 2000. Prior to joining EAC, Mr. Reeves was Assistant Controller for Bristol Resources Corporation from 1998 until 1999. Prior to 1998, Mr. Reeves served as Assistant Controller for Hugoton Energy Corporation. Mr. Reeves received his Bachelor of Science degree in Accounting from the University of Kansas. He is a Certified Public Accountant.

 

L. Ben Nivens, age 47, Senior Vice President and Chief Operating Officer

 

Mr. Nivens has been Senior Vice President and Chief Operating Officer of EAC since November 2006. Mr. Nivens has also served as Senior Vice President and Chief Operating Officer of Encore Energy Partners GP LLC since its inception in February 2007. From November 2005 until November 2006, Mr. Nivens served as EAC’s Senior Vice President, Chief Financial Officer, Treasurer and Corporate Secretary. Mr. Nivens served as EAC’s Vice President of Corporate Strategy and Treasurer from June 2005 until October 2005. From April 2002 to June 2005, Mr. Nivens served as EAC’s Engineering Manager. Prior to joining EAC, he worked as a reservoir engineer for Prize Energy from 1999 to 2002. From 1990 to 1999, Mr. Nivens worked in the corporate planning group at Union Pacific Resources and also served as a reservoir engineer. In addition, he worked as a reservoir engineer for Compass Bank in 1999. Mr. Nivens received a Bachelor of Science in Petroleum Engineering from Texas Tech University and a Masters of Business Administration from Southern Methodist University.

 

John W. Arms, age 40, Senior Vice President, Acquisitions

 

Mr. Arms has served as Senior Vice President, Acquisitions since February 2007. Mr. Arms has also served as Senior Vice President, Acquisitions of Encore Energy Partners GP LLC since its inception in February 2007. Mr. Arms served as EAC’s Vice President of Business Development from September 2001 until February 2007. From November 1998 until September 2001, Mr. Arms served as EAC’s Manager of Acquisitions and in various petroleum engineering positions for EAC. Prior to joining EAC in November 1998, Mr. Arms was a Senior Reservoir Engineer for Union Pacific Resources and an Engineer at XTO Energy, Inc. Mr. Arms received a Bachelor of Science in Petroleum Engineering from the Colorado School of Mines.

 

Kevin Treadway, age 42, Senior Vice President, Land

 

Mr. Treadway has served as Senior Vice President, Land since February 2008. From April 2003 to February 2008, Mr. Treadway served as Vice President, Land. Mr. Treadway has also served as Senior Vice President, Land of Encore Energy Partners GP LLC since February 2008 and served as its Vice President, Land from February 2007 to February 2008. From 2002 until April 2003, Mr. Treadway was EAC’s Land Manager. Mr. Treadway joined EAC in 2000 as a staff landman. Prior to joining EAC, Mr. Treadway served as a Landman at Coho Resources. Mr. Treadway received a Bachelor of Science degree in Petroleum Land Management from the University of Southwestern Louisiana.

 

Philip D. Devlin, age 63, Senior Vice President, General Counsel and Corporate Secretary

 

Mr. Devlin has served as Senior Vice President, General Counsel and Corporate Secretary since January 2007. Mr. Devlin has also served as Senior Vice President, General Counsel and Secretary of Encore Energy Partners GP LLC since its inception in February 2007. From March 1997 until January 2007, Mr. Devlin served as Vice President, General Counsel and Secretary of National Energy Group, Inc. From October 1994 through February 1997, he served as President and Chief Executive Officer of Sunrise Energy Services, Inc. From September 1984 through October 1994, he served as Executive Vice President, General Counsel and Secretary of Sunrise Energy Services, Inc. He is licensed by the State Bar of Texas, admitted to practice before the Supreme Court of the United States and is a past president and director of the Natural Gas and Electric Power Association of North Texas. Mr. Devlin earned a Bachelor of Arts degree and a Master of Arts degree from the University of California, and a Juris Doctor degree with honors from California Western School of Law, San Diego, California.

Andrea Hunter, age 33, Vice President, Controller and Principal Accounting Officer

 

Ms. Hunter has been Vice President, Controller and Principal Accounting Officer of EAC since February 2008. Ms. Hunter has also served as Vice President, Controller and Principal Accounting Officer of Encore Energy Partners GP LLC since February 2008. Prior to her promotion, Ms. Hunter had served as Controller of EAC and Encore Energy Partners GP LLC since September 2007. From July 2003 to September 2007, Ms. Hunter held positions of increasing responsibility at EAC, including financial reporting senior manager. Prior to joining EAC in July 2003, Ms. Hunter worked in public accounting, first in the Assurance and Business Advisory Services of PricewaterhouseCoopers LLP and later as an editor at Thomson Publishing’s Practitioners Publishing Company. Ms. Hunter received a Master of Science and Bachelor of Business Administration, both in Accounting, from the University of Texas at Arlington. She is a Certified Public Accountant.

 

Thomas H. Olle, age 53, Vice President, Strategic Solutions

 

Mr. Olle has served as our Vice President, Strategic Solutions since February 2008. From November 2006 to February 2008, Mr. Olle served as Vice President, Mid-Continent Region. Mr. Olle has also served as a Vice President of Encore Energy Partners GP LLC since February 2007. From February 2005 until November 2006, Mr. Olle was EAC’s Senior Vice President — Asset Management. Mr. Olle served as EAC’s Senior Vice President, Asset Management of the Cedar Creek Anticline from April 2003 to February 2005. Mr. Olle joined EAC in March 2002 as Vice President of Engineering. Prior to joining EAC, Mr. Olle served as Senior Engineering Advisor of Burlington Resources, Inc. (an independent oil and gas company) from September 1999 to March 2002. From July 1986 to September 1999, he served as a Regional Engineer of Burlington Resources. Mr. Olle received a Bachelor of Science degree with Highest Honors in Mechanical Engineering from the University of Texas at Austin.

 

Diane K. Weaver, age 54, Vice President, Investor Relations

 

Ms. Weaver has been Vice President, Investor Relations of EAC since August 2007. Ms. Weaver has also served as Vice President, Investor Relations of Encore Energy Partners GP LLC since February 2008. Prior to joining EAC, Ms. Weaver served as Director of Investor Relations for Quicksilver Resources Inc. from December 2003 to August 2007. From January 2001 to December 2003, Ms. Weaver served as Senior Financial Reporting Accountant for XTO Energy, Inc. Prior to January 2001, Ms. Weaver was employed at Union Pacific Resources Company and Sohio Petroleum Company.

 

Andy R. Lowe, age 56, Vice President, Marketing

 

Mr. Lowe has served as Vice President, Marketing since February 2007. Mr. Lowe has also served as Vice President, Marketing of Encore Energy Partners GP LLC since February 2008. From May 2006 until February 2007, Mr. Lowe was EAC’s Director of Marketing. Prior to joining EAC, Mr. Lowe was Vice President — Marketing for Vintage Petroleum, Inc. from December 1997 until December 2005. Mr. Lowe served as General Manager — Marketing for Vintage Petroleum, Inc. from 1992 until December 1997. Mr. Lowe served as president of Quasar Energy, Inc. from 1990 until 1992, and Manager — Marketing, as well as various other management capacities, for Maxus Energy Corporation, formerly Diamond Shamrock Exploration Company, from 1983 until 1990. Mr. Lowe received a Bachelor of Science degree in Education from Texas Tech University.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This Compensation Discussion and Analysis is intended to provide investors with an understanding of our compensation policies and decisions regarding our named executive officers for 2007. Our named executive officers are our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers for 2007.

 

Executive Compensation Philosophy

 

In establishing executive compensation, we believe that:

 

 

Purpose of the Executive Compensation Program

 

Our executive compensation program has been designed to accomplish the following long-term objectives:

 

 

Role of the Compensation Committee

 

Responsibilities and Authority

 

The Compensation Committee has overall responsibility for the compensation of our named executive officers. The specific duties and responsibilities of the Compensation Committee are described above under “Corporate Governance Principles and Board Matters — Board Structure and Committee Composition — Compensation Committee” and in the charter of the Compensation Committee, which is available on the “Corporate Governance” section of our website at www.encoreacq.com.

 

The compensation of our Chairman of the Board and Chief Executive Officer is approved by the Compensation Committee in executive session. The compensation of our other named executive officers is recommended by the Chairman of the Board and Chief Executive Officer and reviewed and approved by the Compensation Committee.

 

Timing of Decisions

 

The Compensation Committee meets each February to establish base salaries for the then-current year, to approve cash bonuses and award equity-based compensation in respect of corporate and executive performance during the preceding year and to review and, as appropriate, make changes to our executive compensation program. At this meeting, the Compensation Committee establishes the performance goals and objectives for the then-current year. The Compensation Committee also meets at other times during the year and acts by written consent when

necessary and appropriate. The Chairman of the Compensation Committee also met with members of our management team and representatives of Towers Perrin on several occasions during 2007 to discuss our executive compensation policies and programs.

 

The February meeting of the Compensation Committee is typically set at least a year in advance to coincide with the regularly scheduled Board meeting. The timing of Board and committee meetings is determined by the Chairman of the Board in consultation with the other Board and committee members. We do not time the release of material non-public information for the purpose of affecting the values of executive compensation. At the time of making equity-based compensation decisions, the Compensation Committee is aware of the earnings results and takes them into account, but it does not adjust the size of grants to reflect possible market reaction. Generally, grants of equity-based compensation are made at the February meeting of the Compensation Committee, although specific grants may be made at other times to recognize the promotion of an employee, a change in responsibility or a specific achievement.

 

Use of Compensation Consultant

 

The Compensation Committee considered advice and information from Towers Perrin in determining the amount and form of compensation for named executive officers and other employees with respect to 2007. This work included establishing an updated comparison group of companies, providing relevant market data and information on trends in executive officer compensation. Management has not engaged Towers Perrin for any purpose.

 

Compensation Program

 

Elements of Compensation

 

Our executive compensation program consists of the following elements:

 

 

These compensation elements are designed to reward corporate and individual performance.

 

 

For our named executive officers, 50% of the annual incentive bonus is based on the achievement of corporate objectives and 50% is based the individual’s performance.

 

When determining compensation adjustments and awards, in addition to considering peer group comparisons and the satisfaction of performance objectives as described below, the Compensation Committee also considers internal pay equity within EAC.

 

Peer Group Comparisons

 

The Compensation Committee evaluates the executive compensation programs and practices for our executive officers against an industry peer group in order to achieve a competitive level of compensation. The peer group consists of oil and natural gas companies that compete with us for business opportunities and executive talent. The Compensation Committee compares the companies’ executive compensation programs as a whole, and also

compares the pay of individual executives if the jobs are sufficiently similar to make a comparison meaningful. The Compensation Committee uses the peer group data to ensure that named executive officer compensation as a whole is appropriately competitive, given our performance.

 

For 2007, the industry peer group consisted of the following companies:

 

 

The composition of the peer group is subject to change from time to time based on a review by the Compensation Committee to reflect, among other things, best practices in executive compensation, changes in our business or the business of other companies and changes in the competitive marketplace resulting from mergers and acquisitions or other activity.

 

In general, we target total direct compensation (base salary, annual cash bonus and long-term equity-based incentives) for executive officers at between the 50th and 75th percentiles of total direct compensation for similar positions in the peer group, although actual total compensation may be lower than the 50th percentile or higher than the 75th percentile based on corporate performance, individual performance and experience and other factors. We believe that targeting total direct compensation at between the 50th and 75th percentiles is necessary in order for us to attract, retain and motivate executive talent in a very competitive energy marketplace.

 

In addition, the Compensation Committee also considered data collected from executive compensation surveys by nationally recognized compensation consultants. The data was for comparable positions at exploration and production companies with revenues comparable to ours, except for Mr. I. Jon Brumley for whom other companies did not have comparable positions.

 

Performance Objectives

 

The Compensation Committee evaluates our financial condition and results of operations, our performance in light of oil and natural gas industry fundamentals and how effectively management adapts to changing industry conditions and opportunities during the year in preparing itself to capitalize on opportunities in the future. In addition, in February 2007, the Compensation Committee established the following five objectives to measure our performance during 2007:

 

 

During 2007, we were able to achieve the first four objectives. We also believe that we achieved the F&D cost objective but were unable to verify the achievement as of February 11, 2008, the date of the Compensation Committee meeting, due to incomplete information from companies in our peer group. However, our F&D costs for 2007 were lower than 2006 F&D costs for 50% of the companies in the peer group. We believe that peer group F&D costs increased in 2007 and, therefore, believe we have met the F&D cost objective as well.

 

We had a terrific year in 2007. In addition to achieving the objectives set forth above, we also accomplished the following in 2007:

 

 

 

Base Salaries

 

We attempt to provide named executive officers with a base salary that is within range when compared to the peer group. The base salary for each named executive officer reflects his position, responsibilities and contributions relative to other executives and applicable peer group data provided by an outside consultant. Salaries are typically reviewed each February as part of our performance and compensation review process, as well as at other times to recognize a promotion or change in job responsibilities or market positioning.

 

During 2007, our named executive officers received the following base salaries (effective March 1, 2007):

 

 

In evaluating the adequacy of the base salaries of our named executive officers for 2008, the Compensation Committee considered the historical and expected future performance of each such executive and competitive market data. In general, the Compensation Committee targets base salaries for our named executive officers between the 50th and 75th percentiles of base salaries for similar positions in the peer group (except for Mr. I. Jon Brumley for whom other companies did not have comparable positions), although base salaries may be lower than the 50th percentile or higher than the 75th percentile based on individual performance and experience, corporate performance and other factors. Based on a review of base salaries for the peer group and after considering the individual performance of each executive, the Compensation Committee increased the base salaries of our named executive officers as follows (effective as of March 1, 2008):

 

 

Annual Incentive Compensation

 

General

 

In general, an executive’s annual incentive compensation consists of the following:

 

 

We believe that making at least 75% of an executive’s annual incentive compensation contingent on long-term stock price performance more closely aligns the executive’s interests with those of our stockholders.

Annual Cash Bonuses

 

An executive’s annual cash bonus is generally set at a level intended to result in 25% of the executive’s total annual incentive compensation being paid in cash. The amount of the annual cash bonus is not subject to any maximum or minimum thresholds; instead, it is determined annually by the Compensation Committee after considering corporate performance, individual performance and peer group comparisons. In general, 50% of an executive’s annual cash bonus is based on corporate performance and 50% is based on individual performance.

 

We had an outstanding year in 2007. As a result, annual cash bonuses were significantly higher than for 2006, which was a difficult year. The following table sets forth the amount of each named executive officer’s annual cash bonus for 2007 and 2006 and the change in 2007 as compared to 2006:

 

 

On November 26, 2007, the Compensation Committee approved a cash bonus to each employee of EAC, which was paid in December 2007 as a holiday bonus and treated as an advance of such employee’s annual cash bonus for 2007 which was paid in February 2008. The Compensation Committee believed that the holiday bonus would improve employee morale and reward employees for superior results in 2007 through that date. The November 2007 advance was equal to 10% of each employee’s base salary for 2007.

 

Stock Options and Restricted Stock Awards

 

In general, the Compensation Committee grants stock options and restricted stock awards in amounts intended to result in approximately 75% of the executive’s total annual incentive compensation being equity based. Like cash bonuses, stock options and restricted stock awards reflect progress toward our corporate goals and individual performance. However, when the annual cash bonus is not as large (as in 2006), the total amount of annual incentive compensation for executives is decreased because of the multiplier effect relating to equity-based compensation.

 

Although the equity component of annual incentive compensation typically consists (in value) of 50% restricted stock and 25% stock options, the mix of restricted stock and stock options may vary, however, depending on the individual circumstances of the named executive officer. For example, named executive officers that are at or near retirement age may be awarded restricted stock instead of stock options because restricted stock continues to vest after retirement, subject to the achievement of performance and time-based vesting conditions that were applicable prior to retirement.

 

The following table sets forth awards of EAC’s stock options and restricted stock during February 2008 with respect to each named executive officer’s performance in 2007:

 

 

In February 2008, our named executive officers did not receive any grants of restricted stock or stock options with respect to performance in 2007 because, as named executive officers of ENP’s general partner, they received a

grant of management incentive units from ENP in May 2007. Management incentive units are intended to align the economic interests of the executives of ENP’s general partner with the interests of ENP’s unitholders (including EAC, which owns approximately 67% of ENP’s outstanding common units). Given EAC’s significant investment in ENP, the Compensation Committee believed it was in the long-term interest of EAC’s stockholders to provide equity-based compensation that more closely aligned the interests of the named executive officers with the performance of ENP.

 

Management Incentive Units

 

General

 

To incentivize management to increase per unit distributions of ENP, in May 2007 the board of directors of Encore Energy Partners GP LLC, the general partner of ENP, granted management incentive units to its named executive officers, who also serve in the same capacities for us. In addition to approval by the board of directors of Encore Energy Partners GP LLC, the grants of management incentive units were approved by our Board based on the recommendation of our Compensation Committee.

 

The following table sets forth the recipients of the management incentive units and the grant date fair value of such awards:

 

 

The named executive officers set forth above will not receive options, restricted units, phantom units, bonuses or salaries from ENP while the management incentive units are outstanding. During this period, the only form of compensation from ENP for these named executive officers will be the management incentive units.

 

A management incentive unit is a limited partner interest in ENP that entitles the holder to quarterly distributions to the extent paid to ENP’s common unitholders and to increasing distributions upon the achievement of 10% compounding increases in ENP’s distribution rate to common unitholders. A management incentive unit is also convertible into common units of ENP under certain circumstances. The management incentive units are intended to align the economic interests of our executives with those of ENP’s unitholders, including EAC (which owns approximately 67% of the outstanding common units of ENP). The management incentive units were issued to our named executive officers in lieu of payment of any salaries or bonuses, or grant of any awards under ENP’s long-term incentive plan, as long as such units are outstanding.

 

In making its decision to approve the grant of management incentive units, our Board and Compensation Committee relied on, among other things, the advice of an independent compensation consultant retained by the Compensation Committee, as well as analyses of equity compensation and ownership by other executives of other master limited partnerships, including Breitburn Energy Partners L.P., EV Energy Partners, L.P., Linn Energy, LLC, Legacy Reserves LP, DCP Midstream Partners, LP, Targa Resources Partners, L.P., Boardwalk Pipeline Partners, L.P., Enterprise Products Partners L.P., Cheniere Energy Partners, L.P., MarkWest Energy Partners, L.P., Williams Partners L.P. and Holly Energy Partners, L.P.

 

Maximum Limit on Distribution and Conversion Rates

 

As of March 14, 2008, the management incentive units represented an approximately 2.1% interest in ENP (assuming conversion of the management incentive units based on the then-current distribution rate) and were entitled to approximately 2.1% of ENP’s aggregate annual distributions (or approximately $1.1 million in the

aggregate). The management incentive units are subject to a maximum limit on the aggregate number of common units issuable to, and the aggregate distributions payable to, holders of management incentive units as follows:

 

 

If the 5.1% maximum limit on aggregate distributions to the holders of ENP’s management incentive units is reached, then any available cash that would have been distributed to such holders will be available for distribution to ENP’s unitholders.

 

Vesting

 

Management incentive units vest in three equal installments on September 17, 2007, 2008 and 2009. If a holder ceases to be employed by EAC or its affiliates other than by reason of death, disability or a change-in-control, then the holder will continue to own the management incentive units to the extent vested, which will be subject to the same terms and conditions as if such employment had not ceased. After a holder ceases to be employed by EAC or its affiliates, ENP has the right, in its sole discretion, to convert the management incentive units to common units.

 

Distributions

 

In order for distributions payable to the holders of the management incentive units to increase, the distributions payable to ENP’s public unitholders must increase by 10% on a compounded basis. After distributions payable to ENP’s public unitholders have increased by 10% on a compounded basis, the holders of management incentive units are entitled to the 10% compounded increase in distributions plus an additional 25% on any outstanding management incentive units. Aggregate distributions on all management incentive units are subject to a maximum limit of 5.1% of all distributions to ENP’s unitholders.

 

Conversion

 

Management incentive units are convertible into ENP’s common units upon (1) a change-in-control, (2) at the option of the holder, when ENP’s aggregate quarterly distributions to common unitholders over four consecutive quarters are at least $2.05 per unit or (3) the holder’s death or disability. The conversion rate per management incentive unit is equal to (x) the annualized distribution rate per management incentive unit immediately prior to conversion divided by (y) the annualized distribution rate per common unit. The actual number of common units issued to a holder of management incentive units upon conversion is designed to achieve “distribution parity” between the management incentive units being converted and the common units being received. Upon conversion, the holders of management incentive units will not be entitled to receive, in the aggregate, common units in excess of 5.1% of all of ENP’s outstanding units on a fully diluted basis. For one year after the conversion date, the holders of such units may receive additional common units upon the issuance of additional ENP securities on a pro rata basis up to the maximum limit of 5.1% of all then outstanding units on a fully diluted basis.

 

Perquisites and Other Benefits

 

Perquisites

 

Our named executive officers generally do not receive benefits that are not available to all employees. For example, we provide all employees with health club membership options. The aggregate value of all perquisites did not exceed $10,000 for any named executive officer during 2007.

 

In February 2008, the Compensation Committee approved personal use of EAC’s aircraft for Mr. I. Jon Brumley and Mr. Jon S. Brumley. Both executives are allowed personal use of EAC’s aircraft without charge for up to a maximum of 15 hours per year. For any personal use in excess of 15 hours a year, the executive will be required

to reimburse us for variable costs related to such use, such as jet fuel, variable crew costs, flight insurance, landing fees, flight planning fees and airport taxes. The executive will also be required to pay us an additional amount equal to 10% of jet fuel relating to personal use in excess of 15 hours per year.

 

Other Benefits

 

We seek to provide benefit plans, such as medical, life and disability insurance, in line with market conditions. Executive officers are eligible for the same benefit plans provided to other exempt employees, including insurance plans and supplemental plans chosen and paid for by employees who wish additional coverage. We do not have any special insurance plans for executive officers.

 

Post-Employment Benefits

 

On February 11, 2003, the Board adopted the Employee Severance Protection Plan, which provides all full-time employees with severance payments and benefits upon certain terminations of employment occurring from 90 days prior to until two years following a Change-in-control (as defined in the plan). If during such time period, a named executive officer is involuntarily terminated by us other than for cause or he resigns for Good Reason (as defined in the plan), the officer will receive the following:

 

 

On February 18, 2008, the Compensation Committee authorized an increase in the multiple of annual salary and bonus payable to Mr. Jon S. Brumley, our Chief Executive Officer and President, from 2.0 times annual salary and bonus to 2.5 times annual salary and bonus. Based on discussions with its independent compensation consultant, the Compensation Committee believed that an increased multiple was warranted for the Chief Executive Officer in light of existing industry severance practices. For more information regarding the Employee Severance Protection Plan, including potential payments, please read “Potential Payments Upon Termination or Change-in-control — Change-in-Control” beginning on page 39.

 

Stock Ownership Guidelines

 

In February 2005, the Compensation Committee adopted stock ownership guidelines that require each named executive officer (and certain other members of management) to own shares of our common stock with a value at least equal to such person’s base salary. Until this guideline is achieved, the named executive officer (or other member of management) will be required to retain at least 25% of his or her restricted stock for a period of two years after vesting. Our stock ownership guidelines are designed to increase executives’ equity stakes in us and to align executives’ interests more closely with those of our stockholders.

 

Impact of Tax and Accounting Treatment

 

Accounting Treatment

 

We utilize a standard option pricing model (i.e., Black-Scholes) to estimate the grant date fair value of stock options to be recorded in the financial statements over the applicable service period.

Tax Treatment

 

Incentive Stock Options

 

Some of the options issued to our officers under the Plan are intended to constitute “incentive stock options” within the meaning of Section 422 of the Code, while other options granted under the Plan are non-qualified stock options. Under rules applicable to U.S. corporations such as us, no deduction is available to the employer corporation upon the grant or exercise of an incentive stock option (although a deduction may be available if the employee sells the shares so purchased before the applicable holding period — generally one year from the date of exercise — expires), whereas, upon exercise of a non-qualified stock option, the employer corporation is entitled to a deduction in an amount equal to the income recognized by the employee. The tax treatment of stock options qualifying as incentive stock options is generally more favorable to employees than the tax treatment accorded non-qualified stock options, in that the gain on the difference between the fair market value of our stock and the exercise price is not taxed until ultimate disposition of our shares rather than at the time the option is exercised. This gain is permanently excluded from social security and Medicare taxes and, if the applicable holding period is met, this gain will be taxed at more favorable capital gains rates.

 

Corporate Tax Deduction on Compensation in Excess of $1,000,000 a Year

 

Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation in excess of $1,000,000 paid to the Chief Executive Officer or any of the four other most highly compensated officers. Performance-based compensation arrangements may qualify for an exemption from the deduction limit if they satisfy various requirements under Section 162(m). Although we consider the impact of this rule when developing and implementing our executive compensation program, we believe that it is important to preserve flexibility in designing compensation programs. Accordingly, we have not adopted a policy that all compensation must qualify as deductible under Section 162(m). While our performance-based restricted stock and stock option awards are intended to meet the requirements for “qualified performance-based compensation” (as defined in the Code), amounts paid under our other compensation programs may not qualify for this exemption.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee of the Board has reviewed and discussed with our management the Compensation Discussion and Analysis included in this proxy statement. Based on that review and discussion, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that EAC specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Exchange Act.

 

Compensation Committee of the Board

 

James A. Winne III, Chairman

Martin C. Bowen

Ted Collins, Jr.

 

Summary Compensation Table

 

The following table summarizes the total compensation awarded to, earned by, or paid to our named executive officers with respect to 2007 and 2006:

 

 

 

 

 

Grants of Plan-Based Awards for 2007

 

The following table contains information with respect to EAC’s grant of plan-based awards to the named executive officers in 2007 with respect to performance during 2006, and ENP’s issuance of management incentive units to the named executive officers in May 2007.

 

 

 

 

 

EAC

 

Restricted stock awards granted to our named executive officers (and certain other members of management) during 2007 have time-based and performance-based vesting components, as follows:

 

 

 

 

Restricted stock awards may also vest earlier in the event of a change-in-control or the termination of employment due to death or disability.

 

On February 13, 2008, the Compensation Committee determined that we had satisfied at least one of the performance-based conditions with respect to the restricted stock awards granted during 2007 and, therefore, such awards are now subject only to the time-based vesting component. If as of December 31, 2008, we had not achieved one of the performance-based conditions set forth above, then all shares of restricted stock subject to those awards would have been immediately forfeited.

 

ENP

 

Management incentive units vest in three equal installments on September 17, 2007, 2008 and 2009. If a holder ceases to be employed by EAC or its affiliates other than by reason of death, disability or a change-in-control, then the holder will continue to own the management incentive units to the extent vested, which will be subject to the same terms and conditions as if such employment had not ceased. After a holder ceases to be employed by EAC or its affiliates, ENP has the right, in its sole discretion, to convert the management incentive units to common units.

Outstanding Equity Awards at December 31, 2007

 

The following table sets forth information concerning the outstanding equity awards of each named executive officer as of December 31, 2007.

 

 

 

 

 

Option Exercises and Stock Vested

 

The following table summarizes the option and stock award activity during 2007 for each named executive officer.

 

 

 

 

Pension Benefits

 

We do not maintain any plans that provide for payments or other benefits at, following or in connection with retirement.

 

Non-Qualified Deferred Compensation

 

We do not maintain any defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified under the Code.

Potential Payments Upon Termination or Change-in-control

 

Cash Severance

 

Except as described below under “Change-in-Control,” our employees do not receive any cash severance payments in connection with a termination of employment. In the past, we have paid certain executive officers a cash severance on a case-by-case basis in exchange for a release and agreement to certain post-employment covenants.

 

EAC Stock Options and Restricted Stock Awards

 

All salaried employees who receive stock options or restricted stock awards are subject to the same terms and conditions in the event of a termination or change-in-control.

 

Termination other than upon Normal Retirement, Change-in-control, Death or Disability

 

Upon termination other than upon normal retirement, change-in-control, death or disability, options may be exercised to the extent exercisable at termination for a period of three months and any unvested restricted stock is forfeited.

 

Termination upon Normal Retirement

 

All salaried employees who receive restricted stock awards continue to vest upon normal retirement as if they were still employed by us. There are no special provisions related to retirement under our stock option agreements. Upon termination for any reason other than death, disability or in connection with a change-in-control, options may be exercised to the extent exercisable at termination for a period of three months.

 

Termination upon Change-in-control

 

Upon a change-in-control (as described below under “Change-in-Control”), unless otherwise determined by the Compensation Committee, all options and restricted stock awards will vest and become exercisable and all transfer restrictions and vesting requirements on options and restricted stock awards will lapse. In such event, all awards will be cashed out based on the highest price per share paid in connection with the change-in-control transaction.

 

Termination upon Death or Disability

 

Upon death or disability, all stock options become fully exercisable and remain exercisable for two years (or the full term, if less). Upon death, all restricted stock awards become vested as to service-based vesting conditions but remain subject to the performance-based vesting conditions. Upon disability, all restricted stock awards continue to vest as if the participant remained employed for 18 months, but remain subject to the performance-based vesting conditions.

 

Change-in-Control

 

Employee Severance Protection Plan

 

On February 11, 2003, the Board adopted the Employee Severance Protection Plan, which provides our employees with severance payments and benefits upon certain terminations of employment occurring from 90 days prior to until two years following a change-in-control (as described below). Our plan is considered a “double-trigger” plan that requires not only a change-in-control but also a termination of employment. If during the applicable time period, a named executive officer is involuntarily terminated by us or our successor other than for cause or he resigns for good reason (as described below), the officer will receive the following:

 

 

 

The Employee Severance Protection Plan also obligates us to maintain minimum level of director and officer liability insurance for a period of three years following the date any officer is entitled to benefits under the plan.

 

Generally, a change-in-control occurs upon (1) the acquisition by a party of 40% or more of the voting securities of EAC unless the party owned 20% prior to February 11, 2003; (2) a majority of the Board no longer consists of persons who were Board members on February 11, 2002 or persons appointed to the Board by those members (“Incumbent Directors”); (3) approval by EAC’s stockholders of a complete liquidation or dissolution; or (4) approval by EAC’s stockholders of a reorganization, merger, share exchange, consolidation or a sale of all or substantially all of EAC’s assets, unless (a) more than 60% of the voting securities of the new entity are held by persons who were EAC stockholders immediately prior to the transaction, (b) no person holds more than 40% of the new entity, unless such person held 40% of the voting securities immediately prior to the transaction and (c) a majority of the board of the new entity are Incumbent Directors. A resignation for good reason occurs when an officer resigns as a result of a reduction in his titles, duties, responsibilities, compensation level or the relocation of his place of employment.

 

Management Incentive Units

 

For purposes of the management incentive units, a change-in-control is defined as the occurrence of one or more of the following events:

 

 

Potential Payments

 

Change-in-Control

 

The following table shows the potential payments to our named executive officers under the Employee Severance Protection Plan and pursuant to the terms of the management incentive units, assuming that the employee was involuntarily terminated or resigned for good reason in connection with a change-in-control on December 31, 2007: