FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ____ to ____
Commission file number 1-12108
CRIMSON EXPLORATION INC.
(Exact name of Registrant as specified in its charter)
Delaware 20-3037840
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
480 North Sam Houston Parkway East
Suite 300
Houston, Texas 77060
(Address of principal executive offices) (zip code)
(281) 820-1919
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(D) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date, November 14, 2005, was 28,938,144
shares of Class A Common Stock, $.001 par value.
CRIMSON EXPLORATION INC.
FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2005
Page of
Form 10-Q
---------
Part I: Financial Statements
Item 1. Financial Statements
Consolidated Balance Sheets, September 30, 2005
and December 31, 2004 3
Consolidated (unaudited) Statements of Operations-for the three
months and nine months ended September 30, 2005 and 2004 5
Consolidated (unaudited) Statements of Cash Flows-for the nine
months ended September 30, 2005 and 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
Part II: Other Information
Item 6. Exhibits 18
Signatures 19
2
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS.
------- ---------------------
CRIMSON EXPLORATION INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2005 2004
(Unaudited) (Audited)
--------------------- --------------------
CURRENT ASSETS
Cash and cash equivalents $ 356,008 $ 411,377
Accounts receivable - net of allowance
for doubtful accounts of $-0- in 2005 and 2004 3,410,791 1,674,448
Prepaid expenses 325,812 128,717
--------------------- --------------------
Total current assets 4,092,611 2,214,542
--------------------- --------------------
PROPERTY AND EQUIPMENT
Oil and gas properties, using the successful efforts
method of accounting 67,183,232 58,557,072
Other property and equipment 1,421,660 1,437,206
Less: accumulated depreciation, depletion and
amortization (12,158,881) (9,870,962)
--------------------- --------------------
Net property and equipment 56,446,011 50,123,316
--------------------- --------------------
OTHER ASSETS
Deposits 9,804 9,804
Investments 228,453 274,362
Debt issue cost, net 154,023 1,756,316
Deferred tax asset, net 4,920,385 3,322,551
Derivative instruments - 175,273
--------------------- --------------------
Total other assets 5,312,665 5,538,306
--------------------- --------------------
TOTAL ASSETS $ 65,851,287 $ 57,876,164
===================== ====================
The Notes to Consolidated Financial Statements are an integral part of these
statements.
3
CRIMSON EXPLORATION INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2005 2004
(Unaudited) (Audited)
-------------------- --------------------
CURRENT LIABILITIES
Notes payable $ 40,300 $ 4,916,568
Notes payable - related parties - 2,140,000
Current portion of long-term debt 81,181 22,686,254
Current portion of long-term debt - related parties - 112,192
Accounts payable - trade 4,452,176 4,654,561
Accrued expenses 301,698 940,587
Income taxes payable - 118,255
Derivative instruments 4,498,617 1,680,800
-------------------- --------------------
Total current liabilities 9,373,972 37,249,217
-------------------- --------------------
NONCURRENT LIABILITIES
Long-term debt, net of current portion 378,234 805,450
Asset retirement obligations 1,202,337 1,144,854
-------------------- --------------------
Total noncurrent liabilities 1,580,571 1,950,304
-------------------- --------------------
OTHER LIABILITIES
Derivative instruments 1,721,571 -
-------------------- --------------------
Total Liabilities 12,676,114 39,199,521
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock 1,033 253
Common stock 28,938 19,394
Additional paid-in capital 72,814,550 34,062,502
Retained deficit (19,669,348) (15,405,506)
-------------------- --------------------
Total stockholders' equity 53,175,173 18,676,643
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,851,287 $ 57,876,164
==================== ====================
The Notes to Consolidated Financial Statements are an integral part of these
statements.
4
CRIMSON EXPLORATION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
-------------- ---------------- -------------- ---------------
OPERATING REVENUES
Oil and gas sales $ 4,692,410 $ 2,816,386 $ 12,694,321 $ 7,811,373
Operating overhead and other income 43,887 (13,440) 99,349 65,568
-------------- -------------- -------------- ---------------
Total operating revenues 4,736,297 2,802,946 12,793,670 7,876,941
-------------- -------------- -------------- ---------------
OPERATING EXPENSES
Lease operating expenses 1,500,328 1,149,771 4,266,190 3,749,027
Depreciation, depletion and amortization 862,423 526,277 2,353,432 1,402,522
Dry holes, abandoned property and impaired assets - - 391,339 -
Accretion expense 19,161 16,287 57,483 57,003
General and administrative 973,062 568,439 2,526,191 1,442,072
-------------- -------------- -------------- ---------------
Total operating expenses 3,354,974 2,260,774 9,594,635 6,650,624
-------------- -------------- -------------- ---------------
INCOME FROM OPERATIONS 1,381,323 542,172 3,199,035 1,226,317
-------------- -------------- -------------- ---------------
OTHER INCOME AND EXPENSE
Interest expense (44,758) (1,036,591) (1,261,358) (2,971,368)
Other financing costs (11,825) (532,728) (1,921,984) (901,998)
Loss from equity in investments (32,756) - (68,915)
Gain (loss) on sale of assets 415 (1,891,707) (38,501) (2,118,516)
Unrealized gain (loss) on derivative instruments (3,319,955) (1,862,729) (4,714,661) (3,013,131)
Abandoned property - - - (326,512)
Forgiveness of debt - - - 12,475,612
-------------- -------------- -------------- ---------------
Total other income and expense (3,408,879) (5,323,755) (8,005,419) 3,144,087
-------------- -------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (2,027,556) (4,781,583) (4,806,384) 4,370,404
INCOME TAXES 773,133 - 1,622,935
-------------- -------------- -------------- ---------------
NET INCOME (LOSS) (1,254,423) (4,781,583) (3,183,449) 4,370,404
DIVIDENDS ON PREFERRED STOCK (934,499) (124,375) (2,632,280) 256,084
-------------- -------------- -------------- ---------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ (2,188,922) $ (4,905,958) $ (5,815,729) $ 4,114,320
============== ============== ============== ===============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ (.08) $ (.27) $ (.22) $ .22
============== ============== ============== ===============
DILUTED $ (.08) $ (.27) $ (.22) $ .14
============== ============== ============== ===============
The Notes to Consolidated Financial Statements are an integral part of these
statements
5
CRIMSON EXPLORATION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-----------------------------------------
2005 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,183,449) $ 4,370,404
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation, depletion and amortization 2,353,432 1,402,522
Accretion expense 57,483 57,003
Stock option expense 54,800 -
Stock compensation expense 29,999 -
Debt issue cost expense 1,791,422 859,498
Discount on note payable 502,120 261,238
Loss from equity in investments 68,915 -
Deferred tax benefit (1,597,834) -
Income tax payable (118,255)
Forgiveness of debt - (12,475,612)
Note payable issued and charged to interest - 61,046
Loss on sale of property and equipment 38,501 2,118,516
Dry holes, abandoned property and impaired assets - 326,512
Unrealized loss on derivative instruments 4,714,661 3,013,131
Increase in accounts receivable - trade, net (1,725,094) (46,077)
Increase in prepaid expenses (197,095) (85,415)
Decrease in accounts payable and accrued expenses (839,724) (597,162)
------------------ ------------------
Net cash provided by (used in) operating activities 1,949,882 (734,396)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 101,905 1,200,350
Capital expenditures (8,793,815) (3,272,059)
------------------ ------------------
Net cash used in investing activities (8,691,910) (2,071,709)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 38,197,242 3,363,745
Proceeds from common stock warrants exercised 45,200 -
Payments on debt (34,028,593) (17,806,173)
Proceeds from debt issuance 3,320,000 19,880,258
Debt issue cost (165,849) (2,123,788)
Dividends paid (681,341) -
------------------ ------------------
Net cash provided by financing activities 6,686,659 3,314,042
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (55,369) 507,937
CASH AND CASH EQUIVALENTS,
Beginning of period 411,377 483,618
------------------ ------------------
CASH AND CASH EQUIVALENTS,
End of period $ 356,008 $ 991,555
================== ==================
CASH PAID FOR INTEREST $ 1,964,031 $ 2,821,404
================== ==================
The Notes to Consolidated Financial Statements are an integral part of these
statements.
6
CRIMSON EXPLORATION INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
1. BASIS OF PRESENTATION
During interim periods, we follow the accounting policies set forth in our
Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Annual Report when
reviewing interim financial results.
On June 29, 2005, our predecessor, GulfWest Energy Inc., a Texas
corporation ("GulfWest"), merged with and into Crimson Exploration Inc., a
Delaware corporation ("Crimson"), for the purpose of changing our state of
incorporation from Texas to Delaware (the "Reincorporation"). The
Reincorporation was accomplished pursuant to an Agreement and Plan of
Merger, dated June 28, 2005, which was approved by GulfWest's shareholders
at the 2005 Annual Shareholders' Meeting held June 1, 2005.
The accompanying financial statements include the Company and its
wholly-owned subsidiaries: RigWest Well Service, Inc. formed September 5,
1996; GulfWest Texas Company formed September 23, 1996; DutchWest Oil
Company formed July 28, 1997; Southeast Texas Oil and Gas Company, L.L.C.
acquired September 1, 1998; SETEX Oil and Gas Company formed August 11,
1998; GulfWest Oil & Gas Company formed February 8, 1999; LTW Pipeline Co.
formed April 19, 1999; GulfWest Development Company formed November 9,
2000; GulfWest Oil & Gas Company (Louisiana) LLC formed July 31, 2001; and,
S.G.C. Transmission, LLC formed December 30, 1993. All material
intercompany transactions and balances are eliminated upon consolidation.
As a result of our April 27, 2004 refinancing, we recorded $11,884,145 in
forgiveness of debt and a hedging liability of $591,467 was eliminated. At
December 31, 2004, we reclassified the eliminated hedging liability to
forgiveness of debt. This reclassification is reflected in the nine months
ended September 30, 2004 period. Certain other prior period amounts have
also been reclassified to conform with current year presentations.
In management's opinion, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, the
results of operations, and the cash flows of Crimson Exploration Inc. for
the interim periods.
2. NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine month period ended September 30, 2005, we settled $399,053
in dividends by issuing 433,473 shares of common stock and we issued 29,100
shares of common stock to satisfy and record a $23,280 fee for a loan
extension prior to the sale of the Series G Preferred Stock. In addition we
recorded $29,999 in director fee expense associated with the issuance of
34,090 shares of common stock to directors under the new Director
Compensation Plan. Also, on March 30, 2005 one of our employees exercised
25,000 common stock options for $11,250 which is recorded as an account
receivable. Under our cashless exercise procedures, the stock has been
posted for sale by a broker and the receivable will be settled when the
stock is sold ($9,100 of the receivable was settled in the third quarter).
Also accrued compensation of $56,350 was converted to additional paid in
capital when 87,500 options, accounted for under variable option accounting
rules, were exercised. During the current year, we invested $23,006 in an
oil and gas partnership by contributing our cost basis in undrilled oil and
gas leases. In addition, we financed new field trucks for $45,724.
During the nine month period ended September 30, 2004, we issued a note
payable for $600,000 in exchange for an account payable for $538,954 and
$61,046 in related interest expense was recorded. Also, in conjunction with
the refinancing of debt in April 2004, we issued common stock warrants
7
valued at $916,029 which were recorded as a note discount; we issued
$500,000 of preferred stock of a wholly owned subsidiary as a commission to
a financial advisor; we recorded a $360,000 payable for a loan termination
fee and we obtained and recorded $12,475,612 in debt forgiveness. We also
financed field trucks for $78,036 in 2004.
3. DERIVATIVE INSTRUMENTS
In the past we have entered into, and may in the future enter into, certain
derivative arrangements with respect to portions of our oil and natural gas
production to reduce our sensitivity to volatile commodity prices. During
2005 and 2004, we entered into price swaps and put agreements with
financial institutions. We believe that these derivative arrangements,
although not free of risk, allow us to achieve a more predictable cash flow
and to reduce exposure to price fluctuations. However, derivative
arrangements limit the benefit to us of increases in the prices of crude
oil and natural gas sales. Moreover, our derivative arrangements apply only
to a portion of our production and provide only partial price protection
against declines in price. Such arrangements may expose us to risk of
financial loss in certain circumstances. We expect that the monthly volume
of derivative arrangements will vary from time to time. We continuously
reevaluate our price hedging program in light of increases in production,
market conditions, commodity price forecasts, capital spending and debt
service requirements. The following derivatives were in place at September
30, 2005.
Crude Oil Volume/ Month Average Price/ Unit Fair Value Asset
--------- ------------- ------------------- ----------------
(Liability)
-----------
May 2004 thru October 2005 Swap 10,000 Bbls $32.00 $ (340,973)
July 2005 thru October 2005 Swap 1,000 Bbls $56.50 $ (9,697)
November 2005 thru December 2005 Swap 11,000 Bbls $56.50 $ (217,352)
January 2006 thru March 2006 Collar 10,000 Bbls Floor $50.00-$59.00 Ceiling $ (291,090)
April 2006 thru December 2006 Collar 9,000 Bbls Floor $50.00-$59.00 Ceiling $ (795,708)
January 2007 thru December 2007 Collar 3,000 Bbls Floor $45.00-$59.45 Ceiling $ (336,240)
Natural Gas Volume/ Month Average Price/ Unit Fair Value Asset
----------- ------------- ------------------- ----------------
(Liability)
-----------
June 2004 thru October 2005 Swap 60,000 MMBTU $5.15 $ (330,030)
July 2005 thru October 2005 Swap 10,000 MMBTU $7.45 $ (32,032)
November 2005 thru December 2005 Swap 70,000 MMBTU $7.45 $ (680,267)
January 2006 thru December 2006 Collar 70,000 MMBTU Floor $6.00-$8.25 Ceiling $ (2,589,531)
January 2007 thru December 2007 Collar 20,000 MMBTU Floor $6.00-$6.95 Ceiling $ (597,268)
We also had the following put options in place at September 30, 2005, for
the months reflected.
Crude Oil Monthly Volume Price per Bbl
--------- -------------- -------------
November 2005 thru April 2006 7,000 Bbls $25.75 put
May 2006 thru October 2006 6,000 Bbls $25.75 put
November 2006 thru April 2007 5,000 Bbls $25.75 put
The value of these put options was minimal.
The following puts on natural gas were terminated effective April 1, 2005.
Natural Gas Monthly Volume Price per MMBTU
----------- -------------- ---------------
November 2005 thru April 2006 50,000 MMBTU $4.50 put
May 2006 thru October 2006 40,000 MMBTU $4.50 put
November 2006 thru April 2007 30,000 MMBTU $4.50 put
8
At the end of each reporting period we are required by SFAS 133 "Accounting
for Derivative Instruments and Hedging Activities," to record on our
balance sheet the marked to market valuation of our derivative instruments.
As a result of these agreements, we recorded a non-cash charge to earnings,
for unsettled contracts, of $4,714,661 for the nine month period ended
September 30, 2005 and a charge of $3,013,131 for the nine month period
ended September 30, 2004. The estimated change in fair value of the
derivatives is reported in Other Income and Expense as unrealized (gain)
loss on derivative instruments.
For settled contracts, we had a realized loss of $2,959,850 for the nine
month period ended September 30, 2005 and a realized loss of $1,154,349 for
the nine month period ended September 30, 2004.These losses are reflected
in our oil and gas sales in the Consolidated Statements of Operations.
4. STOCK BASED COMPENSATION
In October 1995, SFAS No. 123, "Stock Based Compensation," (SFAS 123) was
issued. This statement requires that we choose between two different
methods of accounting for stock options and warrants issued to employees.
The statement defines a fair-value-based method of accounting for stock
options and warrants but allows an entity to continue to measure
compensation cost for stock options and warrants using the accounting
prescribed by APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." Use of the APB 25 accounting method results in no compensation
cost being recognized if options are granted at an exercise price at the
current market value of the stock on the date of grant or higher. We will
continue to use the intrinsic value method under APB 25 but are required by
SFAS 123 to make pro forma disclosures of net income (loss) and earnings
(loss) per share as if the fair value method had been applied in our 2005
and 2004 financial statements.
We use the Black Sholes option pricing model to estimate the fair value of
the options. If we had used the fair value method required by SFAS 123, our
net loss and per share information would approximate the following amounts
for the periods ended September 30:
Three Months 2005 2004
------------------------ ------------------------------- -------------------------------
As Reported Proforma As Reported Proforma
SFAS 123
compensation cost $ - $ 622,199 $ - $ 420,520
APB 25
compensation cost $ 35,130 $ (35,130) $ - $ -
Net income (loss) $ (2,188,872) $ (2,775,941) $ (4,905,958) $ (5,326,208)
Income (loss) per
common share, - - -
Basic $ (.08) $ (.10) $ (.27) $ (.29)
Diluted $ (.08) $ (.10) $ (.27) $ (.29)
--------------------------------------------------------------------------------------------
Nine Months 2005 2004
------------------------ ------------------------------- -------------------------------
As Reported Proforma As Reported Proforma
SFAS 123
compensation cost $ - $ 1,385,924 $ - $ 425,500
APB 25
compensation cost $ 54,800 $ (54,800) $ - $ -
Net income (loss) $ (5,815,729) $ (7,146,853) $ 4,114,320 $ 3,688,820
Income (loss) per
common share,
Basic $ (.22) $ (.28) $ .22 $ .20
Diluted $ (.22) $ (.28) $ .14 $ .12
--------------------------------------------------------------------------------------------
9
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), Share-Based Payments which is
a revision of FASB No. 123, Accounting for Stock-Based Compensation.
Statement 123 (R) supercedes APB opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123 (R) is similar to the
approach described in Statement 123. However, Statement 123 (R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values. Pro forma disclosure will no longer be an alternative. The
effective date of this statement will be our first quarter of 2006.
5. FINANCING ACTIVITY
On April 27, 2004, we completed an $18,000,000 financing package with new
energy lenders. We used $15,700,000 in net proceeds from the financing to
retire existing debt of $27,584,145, resulting in forgiveness of debt of
$12,475,612, the elimination of a hedging liability and the return to the
Company of Series F Preferred Stock with an aggregate liquidation
preference of $1,000,000 (this preferred stock, at the request of the
Company, was transferred by the previous lender to a financial advisor to
the Company and to two affiliated companies). The taxable gain resulting
from these transactions will be completely offset by available net
operating loss carryforwards for income tax purposes. The term of the note
was eighteen months and it bore interest at the prime rate plus 11%. The
rate increased by .75% per month beginning in month ten. We paid the new
lenders $1,180,000 in cash fees and also issued them warrants to purchase
2,035,621 shares of our common stock at an exercise price of $.01 per
share, expiring in five years (exercised in April, 2005). The warrants were
subject to anti-dilution provisions. In connection with the February 2005
transactions described below, the anti-dilution provisions were amended
such that additional issuances of stock (other than issuances to all
holders) would not trigger an adjustment to the number of shares issuable
upon exercise of the warrants.
On January 7, 2005, we amended our April 2004 credit agreement to extend
the target date for repayment to February 28, 2005. We exercised this
option on January 26, 2005 and issued 29,100 shares of our common stock in
connection with this amendment.
On February 28, 2005, we sold in a private placement, 81,000 shares of our
Series G Preferred Stock to OCM GW Holdings, LLC ("OCMGW") for an aggregate
offering price of $40.5 million. GulfWest Oil and Gas Company ("GWOG"), a
subsidiary of the Company, issued, in a private placement, 2,000 shares of
our Series A Preferred Stock, having a liquidation preference of $1.0
million, to OCMGW for $1.5 million. Net proceeds of the offerings of
approximately $38.2 million after expenses were used for the repayment of
substantially all of our outstanding debt and other past due liabilities
and for general corporate purposes.
The Series G Preferred Stock bears a coupon of 8% per year, has an
aggregate liquidation preference of $40.5 million (excluding accumulated
undeclared dividends), is convertible into common stock at $0.90 per share
and is senior to all of our capital stock. For the first four years after
issuance, we may defer the payment of dividends on the Series G Preferred
Stock and these deferred dividends will also be convertible into our common
stock at $0.90 per share. In addition, the Series G Preferred Stock is
entitled to nominate and elect a majority of the members of our Board of
Directors.
In connection with these recapitalization transactions, the terms of the
Series A Preferred Stock were amended such that by March 15, 2005, all such
stock would either convert into a newly created Series H Preferred Stock on
a one for one basis or into common stock at a conversion price of $0.35 per
share. The Series H Preferred Stock is required to be paid a dividend of 40
shares of common stock per share of Series H Preferred Stock per year. At
March 15, 2005, holders of 6,700 shares of Series A Preferred Stock
converted to Series H Preferred Stock and holders of 3,250 shares of Series
A Preferred Stock converted to an aggregate 4,642,859 shares of common
stock. One Series H Preferred Stock holder converted its shares of Series H
Preferred Stock into 285,715 shares of common stock. In April, 2005, an
additional 1,250 shares converted into 1,785,714 of common stock. The
outstanding Series H Preferred Stock has an aggregate liquidation
preference of $2.625 million. The Series H Preferred Stock is senior to all
of our capital stock other than Series G Preferred Stock.
10
In addition, we amended the terms of our 9,000 shares of Series E Preferred
Stock such that the coupon of 6% per year may be deferred for the next four
years and these deferred dividends will be convertible into common stock at
conversion price of $0.90 per share. The original liquidation preference of
the Series E Preferred Stock of $500 per share remains convertible into
common stock at $2.00 per share. The Series E Preferred Stock has an
aggregate liquidation preference of $4.5 million (excluding accumulated
undeclared dividends), and is senior to all of our common stock, of equal
preference with our Series D Preferred Stock as to liquidation and junior
to our Series G and Series H Preferred Stock.
On May 17, 2005, we executed a promissory note for the benefit of OCM GW
Holdings, in the principal amount of $1 million, payable on the earlier of
July 17, 2005 or the day on which we are able to make draws under a credit
facility under which greater than $1 million may be borrowed. Interest on
the unpaid principal accrued at 4.59% per annum. We repaid the note in full
on July 19, 2005 from borrowings under our new $100 million senior secured
revolving credit facility.
On July 15, 2005, we entered into a $100 million senior secured revolving
credit facility with Wells Fargo Bank, National Association. Borrowings
under the new credit facility will be subject to a borrowing base
limitation based on our current proved oil and gas reserves. The initial
borrowing base is set at $20 million and will be subject to semi-annual
redeterminations, with the first redetermination to be December 1, 2005.
The facility will be secured by a lien on all our assets, and the assets of
our subsidiaries, as well as a security interest in the stock of all our
subsidiaries. The credit facility has a term of three years, and all
principal amounts, together with all accrued and unpaid interest, will be
due and payable in full on June 30, 2008. Proceeds from extensions of
credit under the facility will be for acquisitions of oil and gas
properties and for general corporate purposes. The facility also provides
for the issuance of letters-of-credit up to a $3 million sub-limit. On
September 30, 2005, the outstanding balance under our facility was
$301,351. We incurred $165,388 in costs associated with the credit facility
which are being amoritized over its life.
Advances under the facility will be in the form of either base rate loans
or Eurodollar loans. The interest rate on the base rate loans fluctuates
based upon the higher of (1) the lender's "prime rate" and (2) the Federal
Funds rate, plus a margin of 0.50%, plus a margin of between 0.0% and 0.5%
depending on the percent of the borrowing base utilized at the time of the
credit extension. The interest rate on the Eurodollar loans fluctuates
based upon the rate at which Eurodollar deposits in the London Interbank
market ("Libor") are quoted for the maturity selected, plus a margin of
1.25% to 2.00% depending on the percent of the borrowing base utilized at
the time of the credit extension. Eurodollar loans of one, three and nine
months may be selected by us. A commitment fee of 0.375% on the unused
portion of the borrowing base will accrue, and be payable quarterly in
arrears.
The credit agreement includes usual and customary affirmative covenants for
credit facilities of this type and size, as well as customary negative
covenants, including, among others, limitation on liens, hedging, mergers,
asset sales or dispositions, payments of dividends, incurrence of
additional indebtedness, certain leases and investments outside of the
ordinary course of business. The credit agreement also requires us to
maintain a ratio of current assets to current liabilities, except that any
availability under the borrowing base will be considered as an addition to
current assets, and any current assets or liabilities resulting from
hedging agreements will be excluded, of at least 1.0 to 1.0, an interest
coverage ratio of EBITDAX (earnings before interest, taxes, depreciation
and amortization and exploration expense) to cash interest expense of 3.0
to 1.0 and a tangible net worth of at least $45 million, subject to
adjustment based on future results of operations and any sales of equity
securities. EBITDAX and tangible net worth are calculated without
consideration of unrealized gains and losses related to stock derivatives
accounted for under variable accounting rules for commodity hedges. At
September 30, 2005 we were in compliance with the aforementioned financial
covenants.
11
During the nine month period ending September 30, 2005 we recorded
$1,921,984 in expenses, other than interest, related to these financing
activities. Expenses related to the April 27, 2004 financing, retired on
February 28, 2005, included the remaining amortization of $1,780,159 in
debt issue costs, $100,000 for an extension of time and $25,000 in lender
administrative fees. Expenses recorded in association with the Wells Fargo
debt facility were $16,825 in debt issue costs.
6. OIL AND GAS PROPERTIES
During the second quarter, Crimson participated for a non-operated 25%
working interest in the drilling of a development well within the Mustang
Island 749 Field. The Mustang Island 749-L #2 was drilled to a total
measured depth of 10,600' and a completion attempt was made in the
pre-drill objective. The completion is still underway, but has been
interrupted due to limited equipment availability resulting from Hurricane
Rita. Results to date are not encouraging as water has possibly encroached
the objective reservoir from the field's previous downdip completions. An
additional shallower zone may warrant testing pending the final results of
the current zone. Recommencement of the completion operations and
determination of final results are expected in the fourth quarter of 2005.
Crimson's total net exposure in this well is approximately $2.9 million and
will likely be reflected in the fourth quarter financial results.
7. TAXES
For the nine month period ended September 30, 2005 we created taxable
income of approximately $.6 million. Adjusting for future tax benefits of
approximately $4.9 million, and applying a statutory rate of 38%, our
deferred tax asset increased approximately $1.6 million. We expect to fully
utilize this increase in deferred tax assets in the future. Deferred tax
assets are shown net of a $2.5 million valuation allowance. The valuation
allowance was recorded because we expect we will not be able to use net
operating loss carryforwards of approximately $6.6 million due to the
limitations of Internal Revenue Code Section 382.
8. STOCKHOLDERS' EQUITY
NUMBER OF SHARES
------------------------
PREFERRED COMMON COMMON PREFERRED ADDITIONAL RETAINED
STOCK STOCK STOCK STOCK PAID-IN CAPITAL DEFICIT
---------------------------------------------------------------------------------
BALANCE DECEMBER 31, 2004 25,290 19,393,969 $ 19,394 $ 253 $ 34,062,502 $ (15,405,506)
Common stock issued for services and fees 63,190 63 53,216
Preferred stock issued
Series A 2,000 20 1,499,980
Series G 81,000 810 36,696,431
Preferred stock conversions
Series A to common stock (3,250) 4,642,859 4,643 (33) (4,610)
Series F to common stock (340) 170,000 170 (3) (167)
Series H to common stock (1,450) 2,071,429 2,071 (14) (2,057)
Common stock dividends paid
Series A Preferred 356,250 357 330,957
Series H Preferred 77,223 77 67,661
Options and warrants exercised 2,163,224 2,163 110,637
Current year loss (3,183,449)
Dividends paid on preferred stock (1,080,393)
---------------------------------------------------------------- ---------------
BALANCE SEPTEMBER 30, 2005 103,250 28,938,144 $ 28,938 $ 1,033 $ 72,814,550 $ (19,669,348)
=================================================================================
Dividends on all classes of our preferred stock are cumulative until
declared as payable by our Board of Directors. Our Series E Preferred Stock
accumulates at 6% per annum payable in cash, Series G Preferred Stock
accumulates at 8% per annum payable in cash and Series H Preferred Stock
accumulates at 40 shares of our common stock per share of the Series H
Preferred Stock per annum. Our Series D Preferred Stock bears no dividends.
12
The following table sets forth the accumulated value of undeclared dividends of
our preferred stock at September 30, 2005.
Series E Preferred Stock $ 159,041
Series G Preferred Stock 1,908,493
Series H Preferred Stock 57,397
-----------------
$ 2,124,931
=================
The Series E and Series G dividends are convertible to our common stock at
$.90 per common share. The Series H Preferred Stock has no conversion
feature for unpaid dividends. These dividends call for payment of 10 common
shares per quarter for each preferred share. Payments are current.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Overview.
---------
We are primarily engaged in the acquisition, development, exploitation and
production of crude oil and natural gas, primarily in the onshore producing
regions of the United States. Our focus is on increasing production from
our existing properties through further exploitation, development and
exploration, and on acquiring additional interests in undeveloped crude oil
and natural gas properties. Our gross revenues are derived from the
following sources:
1. Oil and gas sales that are proceeds from the sale of crude oil and
natural gas production to midstream purchasers. This represents over
98% of our gross revenues.
2. Operating overhead and other income that consists of administrative
fees received for operating crude oil and natural gas properties for
other working interest owners, and for marketing and transporting
natural gas for those owners. This also includes earnings from other
miscellaneous activities.
The following is a discussion of our consolidated results of operations,
financial condition and capital resources. You should read this discussion
in conjunction with our Consolidated Financial Statements and the Notes
thereto contained elsewhere herein.
Results of Operations.
----------------------
The factors which most significantly affect our results of operations are
(1) the sales price of crude oil and natural gas, (2) oil and gas hedging
agreements, (3) the level of total sales volumes of crude oil and natural
gas, (4) the cost and efficiency of operating our own properties, (5)
depletion and depreciation of oil and gas property costs and related
equipment, (6) the level of and interest rates on borrowings, and (7) the
level and success of acquiring or finding new reserves, and the
acquisition, finding and development costs incurred in adding these
reserves.
We consider depletion and depreciation of oil and gas properties and
related support equipment to be critical accounting estimates, based upon
estimates of total recoverable oil and gas reserves.
The estimates of oil and gas reserves utilized in the calculation of
depletion and depreciation are estimated in accordance with guidelines
established by the Securities and Exchange Commission and the Financial
Accounting Standards Board, which require that reserve estimates be
prepared under existing economic and operating conditions with no provision
for price and cost escalations over prices and costs existing at period
end, except by contractual arrangements.
We emphasize that reserve estimates are inherently imprecise. Accordingly,
the estimates are expected to change as more current information becomes
available. Our policy is to amortize capitalized oil and gas costs on the
13
unit of production method, based upon these reserve estimates. It is
reasonably possible that the estimates of future cash inflows, future gross
revenues, the amount of oil and gas reserves, the remaining estimated lives
of the oil and gas properties, or any combination of the above will change
in the future.
Comparative results of operations for the periods indicated are discussed
below.
Three-Month Period Ended September 30, 2005 compared to Three Month Period
Ended September 30, 2004.
Revenues
Oil and Gas Sales. During the third quarter, revenues from the sale of
crude oil and natural gas, net of realized losses from our hedging
instruments, increased 67% from $2,816,400 in 2004 to $4,692,400 in 2005.
Losses realized on our hedges during the 2005 quarter were $961,500 for oil
and $528,600 for gas, compared to $356,300 for oil and $95,400 for gas in
the 2004 quarter. The significant increase in revenues was due to higher
oil and gas sales volumes and higher crude oil and natural gas prices, as
further described below.
In the third quarter of 2005, our sales volumes were 46,034 barrels of
crude oil and 390,890 Mcf of natural gas, or 667,094 natural gas
equivalents (mcfe) compared to 40,733 barrels of crude oil and 272,611 Mcf
of natural gas, or 517,009 Mcfe in the third quarter of 2004. On a daily
basis we produced an average of 7,251 Mcfe in the third quarter of 2005
compared to a daily average of 5,620 Mcfe in the 2004 quarter. Higher
natural gas and crude oil sales volumes were a direct result of the
development program we began in late 2004, and continued in 2005. The
development program included our drilling and completing 2 new gas wells in
east Texas in early 2005, the completion of workover and facility projects
at our Grand Lake and Lacassine fields in southwest Louisiana, and the
workover of wells in east and south Texas. These successful new oil and gas
well completions not only offset the loss of production from property sales
in 2004, but also allowed us to achieve the 29% increase in production
despite the shut-in of approximately 4,500 Mcfepd from the effects of
Hurricane Rita, for the last eleven days of September 2005.
Oil and gas prices are reported net of the realized effect of our hedging
agreements. Prices realized were $38.58 per Bbl and $7.46 per Mcf in the
third quarter of 2005 compared to $32.72 per Bbl and $5.44 per Mcf in the
third quarter of 2004. Prices before the effects of the hedging agreements
were $59.47per Bbl and $8.81 per Mcf in the third quarter of 2005 compared
to $41.47 per Bbl and $5.79 per Mcf in the third quarter of 2004.
Costs and Expenses
Lease Operating Expenses. Overall, lease operating expenses increased 30%
from $1,149,800 in 2004 to $1,500,300 in 2005. The increase was due to
higher production taxes from higher revenues, increased expenses related to
well repairs, equipment rentals and salt water disposal and higher vendor
prices.
On a per unit basis, expenses increased from $ 2.22 per Mcfe in 2004, to
$2.25 per Mcfe in 2005. This increase in per unit lifting cost was due to
the higher aforementioned costs and the production shut-in due to the
hurricane.
Depreciation, Depletion and Amortization (DD&A). DD&A increased 64% from
$526,300 in 2004 to $862,400 in 2005 due to higher production volumes, and
from an increase in the DD&A rate per unit from $1.02 per Mcfe in 2004 to
$1.29 per Mcfe in 2005.
14
General and Administrative (G&A) Expenses. Our G&A expenses increased 71%
from $568,400 in 2004 to $973,100 in 2005 due to the recent additions to
our management team to carry out our growth plan. On a per unit basis,
expenses increased from $1.10 per Mcfe in 2004 to $1.48 per Mcfe in 2005.
Interest Expense. Interest expense decreased 96% from $1,036,600 in 2004 to
$44,800 in 2005, primarily due to the retirement of debt associated with
our February 2005 recapitalization.
Nine-Month Period Ended September 30, 2005 compared to Nine- Month Period
Ended September 30, 2004.
Revenues
Oil and Gas Sales. During the nine month period ended September 2005,
revenues from the sale of crude oil and natural gas, net of realized losses
from our hedging instruments, increased 63% from $7,811,400 in 2004 to
$12,694,300 in 2005. Losses realized on our hedges during 2005 were
$2,106,400 for oil and $853,400 for gas, compared to $762,700 for oil and
$391,600 for gas in 2004. The significant increase in revenues was due to
higher oil and gas sales volumes and higher crude oil and natural gas
prices, as further described below.
For the period in 2005, our sales volumes were 138,513 barrels of crude oil
and 1,155,562 Mcf of natural gas, or 1,986,640 natural gas equivalents
(mcfe) compared to 127,530 barrels of crude oil and 758,614 Mcf of natural
gas, or 1,521,794 Mcfe in the 2004 period. On a daily basis we produced an
average of 7,277 Mcfe in the nine month period of 2005 compared to a daily
average of 5,574 Mcfe in the 2004 period. Higher natural gas and crude oil
sales volumes were a direct result of the development program we began in
late 2004, and expanded in 2005. The development program included our
drilling and completing 2 new gas wells in east Texas in early 2005, the
completion of workover and facility projects at our Grand Lake and
Lacassine fields in southwest Louisiana, and the workover of gas wells in
east and south Texas. These successful new oil and gas well completions not
only offset the loss of production from property sales in 2004 and the loss
of approximately 4,500 Mcfepd from the effects of Hurricane Rita for the
last eleven days of September 2005, and still allowed us to achieve the 31%
increase in production.
Oil and gas prices are reported net of the realized effect of our hedging
agreements. Prices realized were $37.24 per Bbl and $6.52 per Mcf for the
nine month period of 2005 compared to $30.28 per Bbl and $5.22 per Mcf in
the 2004 period. Prices before the effects of the hedging agreements were
$52.45 per Bbl and $7.26 per Mcf for the nine month period of 2005 compared
to $36.26 per Bbl and $5.74 per Mcf in the 2004 period.
Costs and Expenses
Lease Operating Expenses. Overall, operating expenses increased 14% from
$3,749,000 in 2004 to $4,266,200 in 2005. The increase was primarily due to
higher production taxes as a result of increased sales volumes and
commodity prices.
On a per unit basis, expenses decreased from $2.46 per Mcfe in 2004, to
$2.15 per Mcfe in 2005. This decrease in lifting cost was due to the higher
sales volumes.
Depreciation, Depletion and Amortization (DD&A). DD&A increased 68% from
$1,402,500 in 2004 to $2,353,400 in 2005 due to higher production volumes,
and from an increase in the DD&A rate per unit from $.92 per Mcfe in 2004
to $1.18 per Mcfe in 2005.
General and Administrative (G&A) Expenses. Our G&A expenses increased 75%
from $1,442,100 in 2004 to $2,526,200 in 2005 due to the recent additions
to our management team to carry out our growth plan. On a per unit basis,
expenses increased from $.95 per Mcfe in 2004 to $1.27 per Mcfe in 2005.
15
Interest Expense. Interest expense decreased 58% from $2,971,400 in 2004 to
$1,261,400 in 2005, primarily due to the retirement of debt associated with
our February 2005 recapitalization.
Financial Condition and Capital Resources
-----------------------------------------
At September 30, 2005, our current liabilities exceeded our current assets
by $5,281,361, while at December 31, 2004 our current liabilities exceeded
our current assets by $35,034,675. Current liabilities include non-cash
marked to market balances of $4,498,617 for the 2005 period and $1,680,800
for the 2004 period. The improvement was attributable to repayment of debt
with proceeds from the February 2005 sale of the Series G and Series A
Preferred Stock. For the third quarter of 2005 we had a loss of $2,188,872
compared to a loss of $4,905,958 for the same period in 2004. The net
income generated in 2004 was primarily attributed to $12.5 million in
forgiveness of debt income associated with our April 2004 refinancing.
On July 15, 2005, we entered into a $100 million senior secured revolving
credit facility with Wells Fargo Bank, National Association. Borrowings
under the new credit facility will be subject to a borrowing base
limitation based on our current proved oil and gas reserves. The initial
borrowing base is set at $20 million and will be subject to semi-annual
redeterminations, with the first redetermination to be December 1, 2005.
The facility will be secured by a lien on all our assets, and the assets of
our subsidiaries, as well as a security interest in the stock of all our
subsidiaries. The credit facility has a term of three years, and all
principal amounts, together with all accrued and unpaid interest, will be
due and payable in full on June 30, 2008. Proceeds from extensions of
credit under the facility will be for acquisitions of oil and gas
properties and for general corporate purposes. The facility also provides
for the issuance of letters-of-credit up to a $3 million sub-limit. On
September 30, 2005, the outstanding balance under our facility was
$301,351.
We anticipate that our cash flow from operations and temporary borrowings
under our senior credit facility will provide sufficient cash resources to
meet our requirements for our operations, maintenance capital expenditures,
debt service and working capital requirements for at least the next twelve
months.
Risks Regarding Forward Looking Statements
------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by us or on our behalf. This report
includes such forward-looking statements. Such statements include those
concerning our strategic plans, expectations and objectives for future
operations. All statements included in this report that address activities,
events or developments that we expect, believe or anticipate will or may
occur in the future are forward-looking statements. These statements are
based on certain assumptions we have made based on its experience and
perception of historical trends, current conditions, expected future
developments and other factors we believe are appropriate under the
circumstances. Such statements are subject to a number of assumptions,
risks and uncertainties, many of which are beyond our control. Statements
regarding future production are subject to all of the risks and
uncertainties normally incident to the exploration for and development and
production of oil and gas. These risks include, but are not limited to,
inflation or lack of availability of goods and services, environmental
risks, drilling risks and regulatory changes, the ability of the purchasers
of our production to take deliveries and the potential lack of capital
resources. Investors are cautioned that any such statements are not
guarantees of future performance and that actual results or developments
may differ materially from those projected in the forward-looking
statements. Please refer to our annual report on Form 10-K for the year
ended December 31, 2004 for a further discussion of these risks.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
The following market rate disclosures should be read in conjunction with
the quantitative disclosures about market risk contained in our 2004 Annual
Report on Form 10-K, as well as with the consolidated financial statements
and notes thereto included in this quarterly report on Form 10-Q.
All of our financial instruments are for purposes other than trading. We
only enter into derivative financial instruments in conjunction with our
oil and gas hedging activities.
Hypothetical changes in interest rates and prices chosen for the following
stimulated sensitivity effects are considered to be reasonably possible
near-term changes generally based on consideration of past fluctuations for
each risk category. It is not possible to accurately predict future changes
in interest rates and product prices. Accordingly, these hypothetical
changes may not be an indicator of probable future fluctuations.
Interest Rate Risk
We are exposed to interest rate risk on debt with variable interest rates.
At September 30, 2005 we carried variable rate debt of $301,351 Assuming a
one percentage point change at September 30, 2005 on our Company's variable
rate debt, the annual pretax income would change by $3,014.
Commodity Price Risk
We hedge a portion of price risk associated with our oil and natural gas
sales through contractual arrangements which are classified as derivative
instruments. As of September 30, 2005, these derivative instruments had an
estimated fair value liability of $6,220,108. A hypothetical change in oil
and gas prices could have an effect on oil and gas futures prices, which
are used to estimate the fair value of our derivative instruments. However,
it is not practicable to estimate the resultant change, if any, in the fair
value of our derivative instruments.
ITEM 4. CONTROLS AND PROCEDURES
------- -----------------------
As of September 30, 2005, our President, Chief Executive Officer and our
Senior Vice President, Chief Financial Officer evaluated the effectiveness
of the design and operation of our disclosure controls and procedures
pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended ("the Exchange Act"). Based upon this evaluation, they concluded
that, subject to the limitations described below, the Company's disclosure
controls and procedures offer reasonable assurance that the information
required to be disclosed by the Company in the reports it files under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the rules and forms adopted by the Securities and
Exchange Commission.
During the period covered by this report, there has been no change in the
Company's internal controls over financial reporting that materially
affected, or is reasonably likely to materially affect, these controls.
Limitations on the Effectiveness of Controls. Our management, including the
Chief Executive Officer and the Chief Financial Officer, does not expect
that the Company's disclosure controls and procedures will prevent all
error and all fraud. A well conceived and operated control system is based
in part upon certain assumptions about the likelihood of future events and
can provide only reasonable, not absolute, assurance that the objectives of
the control systems are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to September 30, 2005.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS.
------- ---------
31.1 Certification of Chief Executive Officer pursuant to Exchange
Rule 13a-14 (a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Exchange
Rule 13a-14 (a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350 pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
18
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRIMSON EXPLORATION INC.
(Registrant)
Date: November 14, 2005 By: /s/ Allan D. Keel
------------------------------------
Allan D. Keel
President and Chief Executive Officer
Date: November 14, 2005 By: /s/ E. Joseph Grady
------------------------------------
E. Joseph Grady
Senior Vice President and Chief Financial Officer
19