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 March 31, 2006
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer ___ Accelerated Filer ___ Non-Accelerated Filer_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, May 10, 2006 was 33,103,829 shares of
Common Stock, $.001 par value.
FORM 10-Q
CRIMSON EXPLORATION INC.
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2006
Page of
Form 10-Q
---------
Part I: Financial Statements
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2006
and December 31, 2005 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2006 and 2005 5
Consolidated Statement of Stockholders' Equity for
the Three Months Ended March 31, 2006 6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2006 and 2005 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 16
Item 4. Controls and Procedures 17
Part II: Other Information
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 17
Item 6. Exhibits 17
Signatures 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CRIMSON EXPLORATION INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, December 31,
2006 2005
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 274,516 $ 474,393
Accounts receivable - trade, net of allowance for
doubtful accounts of $30,674 in 2006 and 2005 2,642,366 3,498,488
Prepaid expenses 540,307 249,424
Deferred tax asset, net 663,556 1,602,773
------------ ------------
Total current assets 4,120,745 5,825,078
------------ ------------
PROPERTY AND EQUIPMENT
Oil and gas properties, using the successful
efforts method of accounting 74,393,424 65,598,691
Other property and equipment 1,611,731 1,560,464
Less: accumulated depreciation, depletion and
amortization (13,690,473) (12,936,096)
------------ ------------
Net oil and gas properties and other property and
equipment 62,314,682 54,223,059
------------ ------------
OTHER ASSETS
Deposits 49,502 49,502
Investments -- 225,689
Debt issuance cost, net 247,242 274,214
Deferred tax asset, net 1,218,666 2,517,407
------------ ------------
Total other assets 1,515,410 3,066,812
------------ ------------
TOTAL ASSETS $ 67,950,837 $ 63,114,949
============ ============
The Notes to Consolidated Financial Statements are an integral
part of these statements.
3
CRIMSON EXPLORATION INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2006 2005
------------ ------------
CURRENT LIABILITIES
Notes payable $ 40,300 $ 40,300
Current portion of long-term debt 80,781 80,883
Accounts payable - trade 4,337,930 4,107,441
Accrued expenses 211,812 487,453
Income taxes payable 133,560 31,075
Derivative instruments 1,297,640 2,108,583
------------ ------------
Total current liabilities 6,102,023 6,855,735
------------ ------------
NONCURRENT LIABILITIES
Long-term debt, net of current portion 2,100,158 1,103,232
Asset retirement obligations 1,332,127 1,311,133
Derivative instruments 742,250 1,039,587
------------ ------------
Total noncurrent liabilities 4,174,535 3,453,952
------------ ------------
Total Liabilities 10,276,558 10,309,687
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock 1,033 1,033
Common stock 33,041 28,991
Additional paid-in capital 76,383,684 72,851,626
Retained deficit (18,743,479) (20,076,388)
------------ ------------
Total stockholders' equity 57,674,279 52,805,262
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 67,950,837 $ 63,114,949
============ ============
The Notes to Consolidated Financial Statements are an integral
part of these statements.
4
CRIMSON EXPLORATION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2006 2005
------------ ------------
OPERATING REVENUES
Oil and gas sales $ 5,113,497 $ 3,634,160
Operating overhead and other income 26,152 30,173
------------ ------------
Total Operating Revenues 5,139,649 3,664,333
------------ ------------
OPERATING EXPENSES
Lease operating expenses 1,579,320 1,400,864
Geological and geophysical 8,777 --
Depreciation, depletion and amortization 754,376 655,778
Dry holes, abandoned property and impaired
assets 4,386 2,156
Asset retirement obligations 20,994 19,161
General and administrative 1,723,663 618,227
------------ ------------
Total Operating Expenses 4,091,516 2,696,186
------------ ------------
INCOME FROM OPERATIONS 1,048,133 968,147
------------ ------------
OTHER INCOME AND EXPENSE
Interest expense (9,922) (1,198,501)
Financing cost (45,117) (1,905,159)
Loss from equity in investments (1,843) --
Loss on sale of assets -- (13,022)
Unrealized gain (loss) on derivative
instruments 1,108,280 (2,013,481)
------------ ------------
Total Other Income and (Expense) 1,051,398 (5,130,163)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 2,099,531 (4,162,016)
INCOME TAX (EXPENSE) BENEFIT (726,722) 1,387,691
------------ ------------
NET INCOME (LOSS) 1,372,809 (2,774,325)
DIVIDENDS ON PREFERRED STOCK
(Paid 2006 -$39,900; Paid 2005 - $1,006,643) (896,578) (773,120)
------------ ------------
NET INCOME (LOSS) AVAILABE TO COMMON SHAREHOLDERS $ 476,231 $ (3,547,445)
============ ============
NET INCOME (LOSS) PER SHARE,
BASIC $ .02 $ (.17)
============ ============
DILUTED $ .02 $ (.17)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC 29,580,387 20,706,619
============ ============
DILUTED 89,426,504 20,706,619
============ ============
The Notes to Consolidated Financial Statements are an integral
part of these statements.
5
CRIMSON EXPLORATION INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
NUMBER OF SHARES
---------------------- ADDITIONAL
PREFERRED COMMON PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT
--------- ----------- --------- --------- ------------- --------------
BALANCE DECEMBER 31, 2005 103,250 28,990,643 $ 1,033 $ 28,991 $ 72,851,626 $ (20,076,388)
Share Based Compensation - - - - 726,299 -
Dividends paid on Preferred H - 52,500 - 52 39,848 (39,900)
Stock options exercised - 38,000 - 38 17,062 -
Employee bonuses 262,334 262 16,134 -
Acquisition of oil and gas
leases - 3,697,855 - 3,698 2,732,715 -
Current period income - - - - - 1,372,809
--------- ------------ --------- --------- ------------- --------------
BALANCE MARCH 31, 2006 103,250 33,041,332 $ 1,033 $ 33,041 $ 76,383,684 $ (18,743,479)
========= ============ ========= ========= ============= ==============
The Notes to Consolidated Financial Statements are an integral
part of these statements.
6
CRIMSON EXPLORATION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,372,809 $ (2,774,325)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 754,376 655,778
Asset retirement obligations 20,994 19,161
Stock compensation 723,345 70,250
Debt issuance cost 26,972 1,779,596
Discount on note payable -- 502,120
Deferred tax expense (benefit) 593,237 (1,387,691)
Income tax payable 102,485 --
Loss on sale of assets -- 13,022
Loss from equity in investments 1,843 --
Dry holes, abandoned property, impaired assets 4,386 --
Unrealized (gain) loss on derivative
instruments (1,108,280) 2,013,482
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable-
trade, net 567,428 (949,222)
Increase in prepaid expenses (290,883) (174,068)
Decrease in accounts payable and accrued
expenses (25,802) (2,571,623)
------------ ------------
Net cash provided by (used in) operating
activities 2,742,910 (2,803,520)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment -- 41,175
Capital expenditures (3,955,811) (2,061,503)
------------ ------------
Net cash used in investing activities (3,955,811) (2,020,328)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net -- 38,345,646
Proceeds from common stock options and warrants
exercised 16,200 200
Payments on debt (6,397) (31,803,219)
Proceeds from debt issuance -- 820,000
Net draws (repayments) under revolver 1,003,221 --
Dividends paid -- (675,331)
------------ ------------
Net cash provided by financing activities 1,013,024 6,687,296
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (199,877) 1,863,448
CASH AND CASH EQUIVALENTS,
Beginning of year 474,393 411,377
------------ ------------
CASH AND CASH EQUIVALENTS,
End of year $ 274,516 $ 2,274,825
============ ============
CASH PAID FOR INTEREST $ 13,641 $ 1,906,616
============ ============
The Notes to Consolidated Financial Statements are an integral
part of these statements.
7
CRIMSON EXPLORATION INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 AND 2005
(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.
The accompanying financial statements include the Company and its
wholly-owned subsidiaries: Crimson Exploration Operating, Inc., formed
January 5, 2006, and LTW Pipeline Co., formed April 19, 1999. All material
intercompany transactions and balances are eliminated upon consolidation.
On January 5, 2006 we formed Crimson Exploration Operating, Inc., a
Delaware corporation, as our wholly owned subsidiary through which all oil
and gas operations will be conducted. Effective March 2, 2006, we merged
all our subsidiaries, with the exception of LTW Pipeline Co., into this
newly formed corporation. LTW Pipeline Co. remains an inactive subsidiary
of Crimson Exploration Inc.
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. STOCKHOLDERS' EQUITY
On March 20, 2006, the Company issued a total of 3,235,624 shares of
unregistered common stock as partial consideration for the acquisition, by
merger, of Core Natural Resources, Inc., and an additional 462,231 shares
to a Core shareholder for a 2% overriding royalty interest owned by him in
the Core leasehold interests. The stock was valued at $0.74 per share, the
closing market price of the stock on the day preceding the closing of the
merger. The stock issued is restricted stock subject to resale limitations
under Rule 144 of the Securities Act of 1933. Holders of the restricted
stock were also granted limited piggyback registration rights that expire
one year after the closing of the merger.
Effective March 1, 2006, the Company issued 262,334 shares of unregistered,
restricted common stock to members of Company management in lieu of cash
performance bonuses for calendar year 2005. The restricted stock vests one
year after the date of grant, and should a recipient's employment with the
Company terminate prior to that date, entitlement to the stock is
forfeited. The stock was valued at $0.75 per share on the grant date, the
closing market price of the stock on the date of grant. Upon vesting, this
restricted stock will also be subject to resale limitations under Rule
144 of the Securities Act of 1933.
3. NON-CASH INVESTING AND FINANCING ACTIVITIES
During the three month period ended March 31, 2006 we issued 3,235,624
shares of common stock, valued at $2,394,362, as partial consideration for
the acquisition of oil and gas leases via merger with Core Natural
Resources, Inc. As a result of this transaction we also increased the book
value of oil and gas leases by recording a $1,644,721 deferred tax
liability related to the difference in the fair market value of the assets
acquired and their underlying tax basis. Related to this transaction, we
also acquired a 2% overiding royalty interest in that leasehold acreage by
issuing 462,231 shares of common stock valued at $342,051. In a separate
transaction in the first quarter of 2006, we recorded an increase in oil
and gas leases of $513,440 through the exchange of a $289,594 account
receivable and through the reclassification of a $223,846 investment in a
partnership upon distribution of assets by that partnership. During the
period we recorded $16,396 in employee compensation by issuing 262,334
shares of common stock. We also paid $39,900 in dividends to the holders of
Series H Preferred Stock by issuing 52,500 shares of common stock. Also,
one of our employees exercised 2,000 common stock options for $900 which
was recorded as an account receivable. Under our cashless exercise
procedures, the stock was posted for sale by a broker and the receivable
was subsequently settled.
8
During the three month period ended March 31, 2005, we paid $331,313 in
dividends by issuing 356,250 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. Also, on March 30, 2005 one of our employees exercised 25,000
common stock options for $11,250, which was reflected as an account
receivable. Under our cashless exercise procedures, the stock was posted
for sale by a broker and the receivable was settled when the stock was
sold. During the period 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 the $45,724 cost.
4. 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. 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 March 31, 2006.
Fair Value
Crude Oil Volume/ Month Average Price/ Unit Liability
--------- ------------- ------------------- -------------------
Apr 2006 - Dec 2006 Collar 9,000 Bbls Floor $50.00-$59.00 Ceiling $ 863,748
Jan 2007 - Dec 2007 Collar 3,000 Bbls Floor $45.00-$59.45 Ceiling 444,867
-------------------
$ 1,308,615
===================
Fair Value
Natural Gas Volume/ Month Average Price/ Unit Asset (Liability)
----------- ------------- ------------------- ------------------
Jan 2006 - Dec 2006 Collar 70,000 MMBTU Floor $6.00-$8.25 Ceiling $ 220,647
Jan 2007 - Dec 2007 Collar 20,000 MMBTU Floor $6.00-$6.95 Ceiling
510,628
-------------------
$ 731,275
===================
Total fair value $ 2,039,890
Current portion
1,297,640
-------------------
Noncurrent portion $ 742,250
===================
9
We also had the following put options in place at March 31, 2006,
for the months reflected.
Crude Oil Monthly Volume Price per Bbl
--------- -------------- -------------
Jan 2006 - Apr 2006 7,000 Bbls $25.75
May 2006 - Oct 2006 6,000 Bbls $25.75
Nov 2006 - Apr 2007 5,000 Bbls $25.75
The value of these put options was minimal.
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. We recorded a net liability for derivative
instruments at March 31, 2006 and December 31, 2005 of $2,039,890 and
$3,148,170 respectively. As a result of these agreements, we recorded
a non-cash increase in earnings, for unsettled contracts, of
$1,108,280 for the three month period ended March 31, 2006 and a
non-cash charge of $2,013,481 for the three month period ended March
31, 2005. 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 realized losses, reflected as reductions in
oil and gas revenues, of $164,400 and $656,550 for the three month
periods ended March 31, 2006, and 2005, respectively.
5. STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123
(revised 2004) "Share-Based Payment" ("SFAS No. 123R"), which replaces
SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes
APB Opinion 25. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on the fair values
beginning with the first interim period in fiscal year 2006. The pro
forma disclosures previously permitted under SFAS No. 123 no longer
will be an alternative to financial statement recognition.
The Company adopted SFAS No. 123R on January 1, 2006 using the
modified prospective method in which compensation cost is recognized
beginning with the effective date based: (a) on the requirements of
SFAS No. 123R for all share-based payments granted after January 1,
2006; and (b) on the requirements of SFAS No. 123 for all awards
granted to employees prior to January 1, 2006 that remain unvested on
January 1, 2006. Under our 2005 Stock Incentive Plan we had 22,400,000
unvested options outstanding at January 1, 2006 with authorization to
issue an additional 4,600,000 under that plan. It is our policy to
issue new shares for any options exercised. We use the Black-Scholes
option pricing model to measure the fair value of stock options. For
the unvested options the previously measured but unrecognized
compensation expense, based on the fair value at the original grant
date, will be recognized in our financial statements over the
remaining vesting period. Prior to the adoption of SFAS No. 123R, we
followed the intrinsic value method in accordance with APB 25 to
account for employee stock-based compensation. Prior period financial
statements have not been restated.
The modified prospective method requires us to estimate forfeitures in
calculating the expense related to stock-based compensation as opposed
to recognizing forfeitures as they occur. All our unvested options at
January 1, 2006 were held by our executive officers. As we have no
prior history of executive officers forfeiting options, we do not
believe any of these options will be forfeited prior to vesting.
For options issued under our 2005 plan we recorded $726,299 in expense
(included in general and administrative expense on the Statement of
Operations) in the first quarter and estimate $14,054,333 will be
expensed over the remaining vesting period of thirty six months. We
assumed weighted average risk free interest rate of 4%, weighted
average expected life of 6 years, weighted average expected volatility
of 92.70% and no expected dividends.
10
The following table summarizes stock option activity for the three
months ended March 31, 2006:
Number of Weighted
Shares Average
Underlying Exercise
Options Price
---------------- -------------
Outstanding at December 31, 2005 24,110,000 $ 1.36
Granted - -
Exercised
(38,000) $ (0.45)
Expired - -
Forfeited - -
-
----------------
Outstanding at March 31, 2006 24,072,000 $ 1.36
================
Exercisable at March 31,2006 3,867,000 $ 1.09
================
The following table summarizes information about stock options
outstanding at March 31, 2006:
Weighted
Average
Exercise Number Remaining Number
Prices Outstanding Life (Years) Exercisable
------ ----------- ------------ -----------
$ 0.45 1,262,000 2.9 1,027,000
$ 0.75 285,000 2.1 285,000
$ 0.83 65,000 0.1 65,000
$ 0.97 3,600,000 8.9 540,000
$ 1.16 2,066,333 9.0 -
$ 1.25 5,400,000 8.9 810,000
$ 1.70 11,333,667 8.9 1,080,000
$ 1.81 60,000 2.0 60,000
----------- -----------
24,072,000 8.5 3,867,000
=========== ===========
The following table reflects the impact of adopting SFAS No. 123R:
Three Months
Ended
March 31, 2006
--------------
Compensation expense related to stock options, net
of tax of $275,994 and $54,549 respectively $ 450,305
Basic earnings per share impact 0.01
Diluted earnings per share impact 0.00
6. FINANCING ACTIVITY
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 then 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 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.
11
The Series G Preferred Stock bears a coupon of 8% per year, has an
aggregate liquidation preference of $40.5 million, 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 the Board of
Directors of Crimson.
In connection with these 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. In addition, the Series H Preferred Stock is
convertible into Common Stock at a conversion price of $0.35 per
share. 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. Subsequently in 2005, holders of
Series H Preferred Stock converted 1,450 of their shares into
2,071,429 shares 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.
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 a 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, 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 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 current borrowing base is set at $20 million and will be
subject to semi-annual redeterminations. The facility is 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. We
incurred $323,662 in issuance costs associated with the credit
facility which are being amortized 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.
Our interest rate at March 31, 2006 was the prime rate of 7.75%.
12
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 or mark to
market adjustments for commodity hedges. At March 31, 2006 we were in
compliance with the aforementioned financial covenants.
7. OIL AND GAS PROPERTIES
On March 20, 2006 we purchased a 100% working interest (75% net
revenue interest) in leases on approximately 22,000 undeveloped acres
in Culberson County Texas. The acreage, believed to contain producible
reserves in the Barnett Shale and Atoka formations, was acquired
through our acquisition, by merger, of Core Natural Resources, Inc.
("Core"), a privately-held entity that was incorporated solely to hold
the leases acquired by us. Pursuant to the merger agreement, each
issued and outstanding share of common stock of Core was converted
into the right to receive (i) 5.39270725 shares of the common stock,
par value $.001 per share, of the Company (the "Stock Consideration")
and (ii) cash in an amount determined by dividing $706,123.25 by
600,000 (the "Cash Consideration," and, together with the Stock
Consideration, the "Merger Consideration"). Pursuant to the merger
agreement, we assumed $2,045,258 of Core indebtedness that was paid
off at the closing of the merger. The cash paid at closing was funded
from cash on hand and temporary borrowings under our credit facility.
At closing of the merger agreement, 600,000 shares of Core Common
Stock were issued and outstanding. We issued 3,235,624 shares of our
common stock as the Stock Consideration. In a separate transaction,
the Company also issued an additional 462,231 shares of common stock
of the Company to a Core stockholder as consideration for the
assignment of a 2% overriding royalty interest owned by that
stockholder in the oil and gas leases of Core (giving us a total 77%
net revenue interest). All stock issued in conjunction with these
transactions is restricted stock subject to resale limitations under
Rule 144 of the Securities Act of 1933. Core stockholders were also
granted certain limited piggyback registration rights that will expire
one year from the closing.
As a result of this transaction we recorded a $1,644,721 deferred tax
liability related to the difference in the fair market value of the
assets acquired and their underlying tax basis.
8. DEFERRED TAXES
Our deferred tax asset decreased by approximately $2.2 million during
the quarter. The major components of the decrease were $.5 million
from the utilization of net operating loss carryforwards and the
recording of the $1.6 million deferred tax liability related to the
Core merger.
Deferred tax assets are shown net of a $3.1 million valuation
allowance. The valuation allowance was recorded because we expect we
will not be able to use net operating loss carryforwards of
approximately $9.1 million due to the limitations of Internal Revenue
Code Section 382.
13
9. PREFERRED STOCK
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, payable quarterly as
declared. Our Series D Preferred Stock bears no dividends.
The following table sets forth the accumulated value of undeclared
dividends of our preferred stock at March 31, 2006.
Series E Preferred Stock $ 293,671
Series G Preferred Stock 3,524,055
Series H Preferred Stock 41,998
-----------------
$ 3,859,724
=================
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 on the Series H 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 99% 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 discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included in
this quarterly report on Form 10-Q and with the consolidated financial
statements, notes and management's discussion and analysis reported on
our 2005 Form 10-K. Statements in this discussion may be
forward-looking. These forward-looking statements involve risks and
uncertainties. We caution that a number of factors could cause future
production, revenues and expenses to differ materially from our
expectations. For a discussion on risk factors affecting our business,
see the information in ITEM 1. A in our 2005 Annual Report on From
10-K.
Comparative results of operations for the periods indicated are
discussed below.
Three-Month Period Ended March 31, 2006 compared to Three Month Period
Ended March 31, 2005.
14
Revenues
Oil and Gas Sales. During the 2006 first quarter, revenues from the
sale of crude oil and natural gas, net of realized losses from our
hedging instruments, were $5,113,000, up 41% from $3,634,000 in 2005.
Losses realized on our hedges during the 2006 quarter were $134,000
for oil and $30,000 for gas, compared to $535,000 for oil and $121,000
for gas in the 2005 quarter. The significant increase in revenues was
due to higher crude oil and natural gas prices.
Our first quarter 2006 sales volumes were 45,846 barrels of crude oil
and 317,606 mcf of natural gas, or 592,682 natural gas equivalents
(mcfe) compared to 44,708 barrels of crude oil and 344,015 mcf of
natural gas, or 612,263 mcfe in the first quarter of 2005. On a daily
basis we produced an average of 6,600 mcfe in the first quarter of
2006 compared to a daily average of 6,800 mcfe in the 2005 quarter.
The lower volumes were primarily due to curtailed production of 1,000
mcfepd at our Cameron Parish fields as we worked to finish repairs
from the effects of Hurricane Rita. These repairs were completed at
the end of April.
Oil and gas prices are reported net of the realized effect of our
hedging agreements. Prices realized in the first quarter of 2006 were
$58.11 per bbl and $7.71 per mcf compared to $35.84 per bbl and $5.91
per mcf in the first quarter of 2005. Prices before the effects of the
hedging agreements were $61.04 per bbl and $7.81 per Mcf in the first
quarter of 2006 compared to $47.82 per bbl and $6.26 per mcf in the
first quarter of 2005.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses for the first
quarter of 2006 were $1,579,000, an increase of 13% from $1,401,000 in
2005. The increase was due to higher production taxes from higher
revenues and general increases in the price of industry services.
On a per unit basis, expenses increased from $ 2.29 per mcfe in 2005
to $2.66 per mcfe in 2006, due primarily to the higher rental costs
and water disposal costs and the production shut-in due to the
hurricane.
Depreciation, Depletion and Amortization (DD&A). DD&A expense for the
first quarter of 2006 was $754,000 compared to expense of $656,000 for
the prior year quarter, due to the increase in the DD&A rate per unit
from $1.07 per mcfe in 2005 to $1.27 per mcfe in 2006.
General and Administrative (G&A) Expenses. Our G&A expenses were
$1,724,000 in the 2006 quarter compared to $618,000 in 2005 due to
additions to our management team to carry out our post
recapitalization growth strategy and stock option expense of $726,000
related to our adoption of SFAS 123R. On a per unit basis, and
exclusive of the non-cash SFAS 123R expense, and the employee bonuses,
expenses increased from $1.01 per mcfe in 2005 to $1.64 per mcfe in
2006.
Interest Expense. Interest expense decreased 99% from $1,199,000 in
2005 to $10,000 in 2006, primarily due to the retirement of debt
associated with our February 2005 recapitalization.
Geological and Geophysical Expense (G&G). G&G expense was $9,000 in
2006. No G&G costs were incurred in 2005 as we focused our capital
program on the development of our proved reserves.
Dry Holes, Abandonment Costs and Impaired Assets. Dry hole,
abandonment and impairment expense was minimal in the 2006 and 2005
quarters.
Debt Issuance Costs. Debt issuance costs were $45,000 in 2006 compared
with $1,905,000 in 2005. The expense in 2006 was comprised primarily
of the amortization of capitalized costs associated with the revolving
credit facility we entered into in July 2005 and fees related to the
unused portion of the borrowing base of the credit facility. Costs in
2005 included the writeoff of previously capitalized debt issuance
costs associated with previous financings that were repaid with
proceeds from the sale of the Series G Preferred Stock in February
2005.
15
Unrealized (Gain)/Loss on Derivative Instruments. Unrealized gain or
loss on derivative instruments is the change during the quarter in the
mark-to-market exposure under our commodity price hedging instruments.
This non-cash increase in earnings for 2006 was $1,108,000 compared
with a non-cash expense of $2,013,000 for the 2005 quarter. This
expense will vary period to period, and will be a function of the
hedges in place, and the strike prices of those hedges, at each
balance sheet date.
Income Tax. Our net income before taxes was $2,100,000 for the 2006
quarter. After adjusting for permanent tax differences, we recorded
$727,000 in income tax expense. We reported a net loss before taxes of
$4,162,000 for the 2005 quarter resulting in an income tax benefit of
$1,388,000.
Dividends on Preferred Stock. Dividends on preferred stock were
$897,000 in 2006 compared with $773,000 in 2005. Dividends in 2006
included $799,000 on the Series G Preferred Stock, $31,000 on the
Series H Preferred Stock and $67,000 on the Series E Preferred Stock.
Dividends on preferred stock for 2005 included $284,000 on the Series
G Preferred Stock, $26,000 on the Series H Preferred Stock, $24,000 on
the Series E Preferred Stock and $439,000 for the other series of
preferred stock previously issued by the Company and/or its
subsidiaries and retired as part of the February 28, 2005
recapitalization.
Financial Condition and Capital Resources
At March 31, 2006, our current liabilities exceeded our current assets
by $1,981,278, while at December 31, 2005 our current liabilities
exceeded our current assets by $1,030,657. At March 31, 2006 we had
$17,960,497 available on our revolving line of credit. During the
quarter, we generated $2,742,910 in cash flow from operations. We
believe cash flow, along with temporary borrowings under our revolver,
will be sufficient to fund our daily operations, debt service and
planned capital development program in 2006.
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
2005 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 March 31, 2006, we carried variable rate debt of $2,039,503.
Assuming a one percentage point change in interest rates on variable
rate debt outstanding at March 31, 2006, the annual pretax results of
operations would change by $20,395.
16
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 March 31,2006, these derivative
instruments had an estimated fair value liability of $2,039,890. 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. Considering the highly volatile nature of
energy commodity prices in the near and long term consideration of
attributes impacting them, it is not practicable to estimate the
resultant change.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2006, our President and Chief Executive Officer and
our 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 President and 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 March
31, 2006.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 28, 2006, our board of directors approved restricted stock
awards representing 262,334 shares of our Common Stock to our
executive officers for services performed during fiscal year 2005. We
believe that the issuances described in this Item would be private
placements exempt under Section 4(2) of the Securities Act of 1933 due
to the nature of each transaction, the relationship of such investors
with us and their knowledge of the company.
ITEM 6. EXHIBITS.
Number Description
------ -----------
2.1 Agreement and Plan of Merger, dated March 14, 2006, among Crimson
Exploration Inc., Exploration Operating, Inc., Core Natural Resources,
Inc. and its stockholders. (Previously filed with our Annual Report on
Form 10-K for the year ended December 31, 2005, File No. 000-21644
filed with the Commission on March 31, 2006.)
17
4.1 Registration Rights Agreement, dated March 20, 2006, among Crimson
Exploration Inc. and the stockholders of Core Natural Resources, Inc.
(Previously filed with our Annual Report on Form 10-K, as amended, for
the year ended December 31, 2005, File No. 000-21644 initially filed
with the Commission on March 31, 2006.)
*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. *Filed herewith.
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: May 15, 2006
By: /s/ Allan D. Keel
-------------------------------------------------
Allan D. Keel
President and Chief Executive Officer
Date: May 15, 2006
By: /s/ E. Joseph Grady
-------------------------------------------------
E. Joseph Grady
Senior Vice President and Chief Financial Officer
19