Note 3 - Voluntary Reorganization under Chapter 11

Unanticipated events outside of our control forced us over the last three years to borrow funds at a high cost of capital and divert cash from our businesses to satisfy ongoing obligations. During 2012 to 2014, the Company was heavily involved in the development of the oil and gas fields Bacchus and Rochelle, and also experienced less-than-expected operating performance at the Alba field. These events, combined with unfavorable changes in the economic and political climate for the oil and gas industry, natural disasters, volatile commodity prices and unexpected delays in new oil and gas production due to operating difficulties in the U.K. North Sea all contributed to our thin liquidity and the swift increase of our debt.

Our management has spent over a year exploring restructuring alternatives. We conducted a strategic review, implemented cost-cutting initiatives, restructured its organization, explored the potential sale of some or all of our assets to a third-party and attempted to negotiate an out-of-court restructuring with our creditors. None of these options materialized as a remedy capable of addressing the breadth of our financial troubles.

In late June 2014, the Company and its advisors began to engage with its major creditors in an attempt to arrive at a restructuring transaction that would significantly deleverage the Company and reduce its debt obligations. Discussions continued for months, but the parties failed to reach agreement on several key issues that would serves as a foundation of a restructuring transaction.

On September 2, 2014, the Company announced that it had decided not to pay approximately $33.5 million in interest due on September 2, 2014 on its 12% First Priority Notes due March 2018 (“First Priority Notes”), 12% Second Priority Notes due June 2018 (“Second Priority Notes”) and 6.5% Convertible Senior Notes due November 2017 (“6.5% Convertible Senior Notes”). Under the term of the indentures for the First Priority Notes, Second Priority Notes and 6.5% Convertible Senior Notes, there was a 30-day grace period during which the Company could elect to make the interest payment and cure any potential event of default for non-payment.

On September 30, 2014, the Company entered into forbearance agreements (the “Forbearance Agreements”) with holders of a majority of its debt as to which the interest payment was not made. Under the terms of the Forbearance Agreements, the holders agreed to forbear from exercising remedies against the Company arising from the failure by the Company to pay (following the passing of the 30-day grace period that ended on October 1, 2014) the September 2, 2014 interest payments due. The forbearance period, initially scheduled to expire on October 7, 2014, was subsequently extended to October 10, 2014.

On October 10, 2014, the Company announced that it reached agreements with holders of more than two-thirds of its First Priority Notes, Second Priority Notes and 7.5% Convertible Bonds (see Note 12 – Debt Obligations) and its 6.5% Convertible Senior Notes and 5.5% Convertible Senior Notes (see Note 12 – Debt Obligations and collectively, “Consenting Debt Holders”), in the form of a consensual Restructuring Support Agreement (“RSA”) that, if implemented as proposed, would significantly reduce the Company’s outstanding debt. The RSA contemplated that the recapitalization of the Company would occur pursuant to a pre-arranged plan of reorganization. On the Petition Date, the Debtors filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 cases are being jointly administered by the Bankruptcy Court as Case No. 14-12308 (the “Bankruptcy Cases”).

Since the Petition Date, the Debtors have operated their business as “debtors-in-possession" pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code, which will allow the Company to continue operations and carry on the business in the ordinary course of business during the reorganization proceedings. Each Debtor will remain in possession of its assets and properties, and its business and affairs will continue to be managed by its directors and officers, subject in each case to the supervision of the Bankruptcy Court.

None of our subsidiaries incorporated in the U.K. has filed under Chapter 11. Such non-filing subsidiaries are referred to herein as “non-Debtors.”

On November 17, 2014, we filed with the Bankruptcy Court a plan of reorganization (the “RSA Plan”) and related disclosure statement (the “Disclosure Statement”) to implement the terms of the RSA. The RSA Plan, if implemented as proposed, would significantly reduce our outstanding debt and recapitalize Endeavour.

The RSA provides for milestones for consummation and implementation of the consensual restructuring including:

confirmation of the restructuring plan no later than 170 days after the Petition Date (or Friday, March 27, 2015 as calculated under the Federal Rules of Bankruptcy Procedure or the “Bankruptcy Rules”); and

consummation of the confirmed plan no later than 200 days after the Petition Date (or Tuesday, April 28, 2015, as calculated under the Bankruptcy Rules).

The RSA Plan provides that the Company’s existing debt and accrued interest will be reduced by approximately $568 million, including the cancellation of all of the Company’s First Priority Notes, Second Priority Notes, 7.5% Convertible Bonds, 5.5% Convertible Senior Notes and 6.5% Convertible Senior Notes. As consideration for such cancellation, the reorganized Company would issue:

$262.5 million of new notes to the holders of its First Priority Notes;

an aggregate of approximately $237.5 million of new convertible preferred shares to holders of its First Priority Notes and Second Priority Notes; and

new common shares to holders of its Second Priority Notes, 6.5% Convertible Senior Notes, 7.5% Convertible Bonds and 5.5% Convertible Senior Notes.

All of the our existing equity securities, including our shares of common stock and preferred stock and warrants, would be cancelled without receiving any distribution.

On the Petition Date, the Company sought, and thereafter obtained, authority to take a broad range of actions, including, among others, authority to pay royalty interests and joint interest billings, certain employee obligations and pre-Petition contractor claims and taxes. Additionally, other orders were obtained, including adequate assurance of payment to utility companies as well as continued use of cash management systems.

Notice of Adjournment

As a result of the recent decline in oil and gas prices and the implications on our liquidity and results of operations, we have had discussions with certain of our creditors and/or their advisors. Following these discussions, on February 3, 2015, we filed a Notice of Adjournment of Confirmation Hearing with the Bankruptcy Court. That notice discloses the delay of the Bankruptcy Court’s review and confirmation hearing regarding the RSA Plan. A new date for the confirmation hearing has not yet been determined. Subsequent to filing the notice, we continued to have discussions with certain of our creditors and their advisors and the advisors to the Official Committee of Unsecured Creditors appointed by the Bankruptcy Court concerning the impact of such price declines on the RSA Plan and potential amendments thereto and to the RSA.

We have determined that as a result of this decline in commodity prices, the RSA Plan is not feasible and, accordingly, we will not continue to seek its confirmation. If oil and gas prices remain at their depressed levels, we currently anticipate a breach of our leverage covenant under our Amended Term Loan Facility applicable to our U.K. subsidiary in or about the third quarter of 2015, which will result in a default under the terms of the Amended Term Loan Facility and a liquidity shortfall at the end of the fourth quarter of 2015.

We have and continue to engage in discussions with certain of our U.S. and U.K. creditors regarding the possibility of raising new capital to reduce the principal amount of outstanding indebtedness under the Amended Term Loan Facility in an amount adequate to avoid a potential default of the leverage covenant, refinancing all or a portion of the Amended Term Loan Facility, or obtaining a waiver or amendment from the lenders under the Amended Term Loan Facility prior to any default thereunder, or other agreed terms to sustain a restructuring and avoid default.

There can be no assurance that a reduction, refinancing, waiver or amendment of the Amended Term Loan Facility could be accomplished. If we are not able to reach a satisfactory agreement with certain of our U.S. and U.K. creditors and are unable to refinance the Amended Term Loan Facility, which is not possible without financial support from certain of our U.S. or U.K. creditors, we may be compelled, either voluntarily or involuntarily, into liquidation of our U.K. operations through an administration proceeding in the U.K., in addition to any Chapter 11 or Chapter 7 liquidation proceeding in the U.S.