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 June 30, 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 000-21644
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, August 10, 2006 was 33,152,832 shares
of Common Stock, $.001 par value.
FORM 10-Q
CRIMSON EXPLORATION INC.
FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 2006
Page of
Form 10-Q
Part I: Financial Statements
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2006
and December 31, 2005 3
Consolidated Statements of Operations for the Three Months and
Six Months Ended June 30, 2006 and 2005 5
Consolidated Statement of Stockholders' Equity for the Six
Months Ended June 30, 2006 6
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2006 and 2005 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 22
Signatures 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CRIMSON EXPLORATION INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
2006 2005
------------ -----------
CURRENT ASSETS
Cash and cash equivalents $ 33,795 $ 474,393
Accounts receivable - trade, net of allowance
for doubtful accounts of $30,674 in 2006 and 2005 2,536,044 3,498,488
Prepaid expenses 377,578 249,424
Deferred tax asset, net 1,126,943 1,602,773
------------ ------------
Total current assets 4,074,360 5,825,078
------------ ------------
PROPERTY AND EQUIPMENT
Oil and gas properties, using the successful efforts
method of accounting 77,926,403 65,598,691
Other property and equipment 1,637,093 1,560,464
Less accumulated depreciation, depletion and
amortization (14,609,904) (12,936,096)
------------ ------------
Net oil and gas properties and other property and equipment 64,953,592 54,223,059
------------ ------------
OTHER ASSETS
Deposits 49,502 49,502
Investments -- 225,689
Debt issuance cost, net 220,271 274,214
Deferred tax asset, net 439,725 2,517,407
------------ ------------
Total other assets 709,498 3,066,812
------------ ------------
TOTAL ASSETS $ 69,737,450 $ 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
June 30, December 31,
2006 2005
------------ ------------
CURRENT LIABILITIES
Notes payable $ 40,300 $ 40,300
Current portion of long-term debt 81,892 80,883
Accounts payable - trade 4,591,369 4,107,441
Accrued expenses 330,999 487,453
Income taxes payable 18,919 31,075
Derivative instruments 1,295,877 2,108,583
------------ ------------
Total current liabilities 6,359,356 6,855,735
------------ ------------
NONCURRENT LIABILITIES
Long-term debt, net of current portion 2,512,197 1,103,232
Asset retirement obligations 1,353,121 1,311,133
Derivative instruments 575,346 1,039,587
------------ ------------
Total noncurrent liabilities 4,440,664 3,453,952
------------ ------------
Total liabilities 10,800,020 10,309,687
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock 1,033 1,033
Common stock 33,127 28,991
Additional paid-in capital 77,485,309 72,851,626
Retained deficit (18,582,039) (20,076,388)
------------ ------------
Total stockholders' equity 58,937,430 52,805,262
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 69,737,450 $ 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 Six Months
Ending June 30, Ending June 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
OPERATING REVENUES
Oil and gas sales $ 5,150,063 $ 4,367,751 $ 10,263,560 $ 8,001,911
Operating overhead and other income 30,130 25,289 56,282 55,462
------------ ------------ ------------ ------------
Total Operating Revenues 5,180,193 4,393,040 10,319,842 8,057,373
------------ ------------ ------------ ------------
OPERATING EXPENSES
Lease operating expenses 1,710,081 1,364,998 3,289,401 2,765,862
Geological and geophysical 47,141 -- 55,918 --
Depreciation, depletion and amortization 919,431 835,231 1,673,807 1,491,009
Dry holes, abandoned property and impaired assets 8,036 389,183 12,422 391,339
Asset retirement obligations 20,994 19,161 41,988 38,322
General and administrative 2,141,074 934,902 3,864,737 1,553,129
------------ ------------ ------------ ------------
Total Operating Expenses 4,846,757 3,543,475 8,938,273 6,239,661
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 333,436 849,565 1,381,569 1,817,712
------------ ------------ ------------ ------------
OTHER INCOME AND EXPENSE
Interest expense (55,878) (18,099) (65,800) (1,216,600)
Financing cost (43,447) (5,000) (88,564) (1,910,159)
Loss from equity in investments -- (36,159) (1,843) (36,159)
Loss on sale of assets -- (25,894) -- (38,916)
Unrealized gain (loss) on derivative instruments 168,667 618,775 1,276,947 (1,394,706)
------------ ------------ ------------ ------------
Total Other Income and (Expense) 69,342 533,623 1,120,740 (4,596,540)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 402,778 1,383,188 2,502,309 (2,778,828)
INCOME TAX (EXPENSE) BENEFIT (200,913) (537,889) (927,635) 849,802
------------ ------------ ------------ ------------
NET INCOME (LOSS) 201,865 845,299 1,574,674 (1,929,026)
DIVIDENDS ON PREFERRED STOCK
(Paid 2006 -$80,325; 2005 - $1,031,504 ) (915,695) (924,661) (1,812,273) (1,697,781)
------------ ------------ ------------ ------------
NET LOSS AVAILABE TO COMMON SHAREHOLDERS
$ (713,830) $ (79,362) $ (237,599) $ (3,626,807)
============ ============ ============ ============
NET LOSS PER SHARE,
BASIC $ (0.02) $ (0.00) $ (0.01) $ (0.15)
============ ============ ============ ============
DILUTED $ (0.02) $ (0.00) $ (0.01) $ (0.15)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC 33,096,508 28,605,014 31,348,217 24,513,945
============ ============ ============ ============
DILUTED 33,096,508 28,605,014 31,348,217 24,513,945
============ ============ ============ ============
The Notes to Consolidated Financial Statements are
an integral part of these statements
5
CRIMSON EXPLORATION INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 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 -- 262,334 -- 262 1,788,869 --
Dividends paid on
Preferred H -- 105,000 -- 105 80,220 (80,325)
Stock options exercised -- 71,000 -- 71 31,879 --
Acquisition of oil and
gas leases -- 3,697,855 -- 3,698 2,732,715 --
Current period income -- -- -- -- -- 1,574,674
------------ ------------ ------------ ------------ ------------ -------------
BALANCE JUNE 30, 2006 103,250 33,126,832 1,033 $ 33,127 $ 77,485,309 $ (18,582,039)
============ ============ ============ ============ ============ =============
The Notes to Consolidated Financial Statements are an
integral part of these statements.
6
CRIMSON EXPLORATION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-----------------------------
2006 2005
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,574,674 $ (1,929,026)
Adjustments to reconcile net income (loss) to
net cash provided by (used
in) operating activities:
Depreciation, depletion and amortization 1,673,807 1,491,009
Asset retirement obligations 41,988 38,322
Stock compensation 1,744,261 49,669
Debt issuance cost 53,943 1,779,596
Discount on note payable -- 502,120
Deferred tax expense (benefit) 908,791 (849,802)
Income tax payable (12,156) --
Loss on sale of assets -- 38,915
Loss from equity in investments 1,843 36,159
Dry holes, abandoned property, impaired assets 4,386 --
Unrealized (gain) loss on derivative instruments (1,276,947) 1,394,706
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable- trade, net 672,850 (1,010,646)
Increase in prepaid expenses (128,154) (92,212)
Increase (decrease) in accounts payable
and accrued expenses 372,344 (1,979,197)
------------ ------------
Net cash provided by (used in)
operating activities 5,631,630 (530,387)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment -- 101,491
Capital expenditures (7,514,152) (6,431,925)
------------ ------------
Net cash used in investing activities (7,514,152) (6,330,434)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net -- 38,212,517
Proceeds from common stock options and warrants exercised 31,950 200
Payments on debt (15,134) (31,815,988)
Proceeds from debt issuance -- 1,820,000
Net draws under revolver 1,425,108 --
Debt Issuance cost -- (2,640)
Dividends paid -- (681,341)
------------ ------------
Net cash provided by financing activities 1,441,924 7,532,748
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (440,598) 671,927
CASH AND CASH EQUIVALENTS,
Beginning of year 474,393 411,377
------------ ------------
CASH AND CASH EQUIVALENTS,
End of year $ 33,795 $ 1,083,304
============ ============
CASH PAID FOR INTEREST $ 50,728 $ 1,917,269
============ ============
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
JUNE 30, 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. Certain reclassifications were made with previously
reported amounts to make them consistent with the current presentation
format.
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 of our previous 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, we 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. ("Core"), 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, we issued 262,334 shares of unregistered,
restricted common stock to members of our 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 us 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 six month period ended June 30, 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, 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. We also
paid dividends to the holders of Series H Preferred Stock by issuing
105,000 shares of common stock valued at $80,325, based on the closing
market price on the date of the grants.
8
During the six month period ended June 30, 2005, we settled $350,163 in
dividends by issuing 377,917 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 paid directors fees by issuing 34,090 shares of common
stock valued at $29,999, based on the closing market price on the date
of the grants. Also, on March 30, 2005 one of our employees exercised
25,000 common stock options for $11,250 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 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 June 30, 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 $ 888,975
Jan 2007 - Dec 2007 Collar 3,000 Bbls Floor $45.00-$59.45 Ceiling 618,672
------------------
$ 1,507,647
==================
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 $ (77,322)
Jan 2007 - Dec 2007 Collar 20,000 MMBTU Floor $6.00-$6.95 Ceiling 440,898
------------------
$ 363,576
==================
Total fair value liability $ 1,871,223
Current portion 1,295,877
------------------
Noncurrent portion $ 575,346
==================
9
We also had the following put options in place at June 30, 2006, for
the months reflected.
Crude Oil Monthly Volume Price per Bbl
--------- -------------- -------------
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 June 30, 2006 and December 31, 2005 of $1,871,223 and
$3,148,170, respectively. As a result of these agreements, we recorded
a non-cash increase in earnings, for unsettled contracts, of $1,276,947
for the six month period ended June 30, 2006 and a non-cash charge of
$1,394,706 for the six month period ended June 30, 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 $462,028 and $1,469,718 for the six month
periods ended June 30, 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 are no longer an alternative to
financial statement recognition.
We 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 of our unvested options
are held by our executive officers. One of our executive officers
forfeited his unvested options during the quarter upon his resignation
from the company. This was not anticipated as we had no prior history
of an executive officer forfeiting options. We do not anticipate that
there will be any further forfeitures of unvested options by our
executive officers.
10
For options issued under our 2005 plan we recorded $997,248 and
$1,723,547 in expense (included in general and administrative expense
on the Statement of Operations) for the three month and six month
period, ending June 30, 2006, respectively, and estimate $12,326,087
will be expensed over the remaining vesting period of thirty three
months. We assumed a 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.
The following table summarizes stock option activity for the six months
ended June 30, 2006:
Number of Weighted
Shares Average
Underlying Exercise
Options Price
----------------- ---------------
Outstanding at December 31, 2005 24,110,000 $ 1.36
Granted -- --
Exercised (71,000) $ (0.45)
Expired (65,000) $ (0.83)
Forfeited (880,000) $ (1.48)
-----------------
Outstanding at June 30, 2006 23,094,000 $ 1.36
=================
Exercisable at June 30, 2006 4,904,000 $ 1.15
=================
The following table summarizes information about stock options
outstanding at June 30, 2006:
Weighted
Average
Exercise Number Remaining Number
Prices Outstanding Life (Years) Exercisable
------ ----------- ------------ -----------
$ 0.45 1,199,000 2.6 1,199,000
$ 0.75 285,000 1.9 285,000
$ 0.97 3,600,000 8.7 540,000
$ 1.16 1,783,000 8.8 309,950
$ 1.25 5,400,000 8.7 810,000
$ 1.70 10,767,000 8.7 1,700,050
$ 1.81 60,000 1.8 60,000
------------ -----------
23,094,000 8.3 4,904,000
============ ===========
The following table reflects the impact of adopting SFAS No. 123R:
Three Months Six Months
Ended Ended
June 30, June 30,
2006 2006
-------------- ---------------
Compensation expense related to stock options, net
of tax of $378,954 and $654,948 respectively $ 618,294 $ 1,068,559
Basic earnings per share impact (0.02) (0.04)
Diluted earnings per share impact (0.02) (0.04)
11
The following table illustrates the effect on net income after tax and
net income per common share as if we had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation for
the periods shown below:
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------- -------------
Net income (loss), as reported $ (79,362) $ (3,626,807)
Add: Stock-based employee compensation (income)
expense previously included in reported net income, net
of related tax benefits (19,220) 7,475
Deduct: Stock-based employee compensation expense under
fair value-based method for all awards, net of related
tax effects (387,006) (474,752)
--------- -------------
Pro forma net income (loss) $(485,589) $ (4,094,084)
========= =============
Basic earning per common share:
As reported $ (.00) $ (.15)
Pro forma $ (.02) $ (.17)
Diluted earnings per common share:
As reported $ (.00) $ (.15)
Pro forma $ (.02) $ (.17)
We also have issued 262,334 restricted shares of our common stock to
members of our management in lieu of cash bonuses. The stock vests on
February 28, 2007. We expensed $49,188 and $65,584 during the three
month and six month periods ended June 30, 2006, and will expense
$131,166 over the remaining vesting period.
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.
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.
12
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 June 30, 2006 was the prime rate of 8.25%.
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
13
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 June 30, 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., 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 our common stock, par value $.001
per share, (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, we also issued an
additional 462,231 shares of our common stock 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 $2.6 million during
the six month period. Major components of the change were decreases of
$1.6 million related to the Core merger, $1.1 million from expensing
intangible drilling costs, $ 0.5 million from the change in fair value
of derivatives and an increase of $ 0.7 million from stock based
compensation.
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, relating to periods prior to the February
2005 sale of the Series G Preferred Stock, due to the limitations of
Internal Revenue Code Section 382.
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.
14
The following table sets forth the accumulated value of undeclared
dividends of our preferred stock at June 30, 2006.
Series E Preferred Stock $ 360,986
Series G Preferred Stock 4,331,836
Series H Preferred Stock 42,173
-----------
$ 4,734,995
===========
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.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No.48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in a
company's financial statements in accordance with FASB Statement No.
109, Accounting for Income Taxes. It prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006 and the Company is evaluating its requirements. We
intend to adopt FIN 48 in the first quarter of 2007 and do not believe
it will have a material impact on our consolidated balance sheet,
statement of operations or statement of cash flows.
Texas Margin Tax
Texas House Bill 3 ("HB3"), which was signed into law in May, 2006,
provides a comprehensive change in the method of business taxation in
Texas. HB3 eliminates the taxable capital and earned surplus components
of the existing Texas franchise tax and replaces these components with
a taxable margin tax. This change is effective for tax reports filed on
or after January 1, 2008 (which are based upon 2007 business activity)
and results in no impact on our current Texas income tax.
We are required to include, in income, the impact of HB3 on deferred
state income taxes during the period which includes the date of
enactment. Based upon the available information regarding the proposed
implementation of this new tax, we have determined that no change in
the amount of net deferred state income taxes is needed.
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:
15
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 June 30, 2006 compared to Three- Month Period
Ended June 30, 2005.
Revenues
Oil and Gas Sales. During the 2006 second quarter, revenues from the
sale of crude oil and natural gas, net of realized losses from our
hedging instruments, were $5,150,000, up 18% from $4,368,000 in 2005.
We realized a loss of $316,000 on our oil hedges and a gain of $18,000
on our gas hedges in the 2006 quarter compared to losses of $610,000
for oil and $204,000 for gas in the 2005 quarter. The increase in
revenues was due to higher realized crude oil and natural gas prices
which offset production declines.
Our second quarter 2006 sales volumes were 45,187 barrels of crude oil
and 365,846 mcf of natural gas, or 636,968 natural gas equivalents
(mcfe), compared to 47,771 barrels of crude oil and 420,638 mcf of
natural gas, or 707,264 mcfe in the second quarter of 2005. On a daily
basis we produced an average of 7,000 mcfe in the second quarter of
2006 compared to a daily average of 7,800 mcfe in the 2005 quarter.
Lower volumes in the 2006 quarter, compared to the 2005 quarter,
resulted from the continued restriction on production (approximately
600 mcfepd) at our Lacassine field in Cameron Parish where we were
finishing repairs related to Hurricane Rita and installing production
equipment to treat our high btu gas to meet more stringent pipeline
requirements, in addition, we had a decline in production of 600 mcfepd
from our horizontal wells in Iola field in east Texas, which provided
early life, flush production in the second quarter 2005. These
production declines were partially offset by a 200 mcfepd average
increase in production in our Madisonville and Colorado fields where we
implemented workover and drilling projects during the quarter.
Oil and gas prices are reported net of the realized effect of our
hedging agreements. Prices realized in the second quarter of 2006 were
$60.48 per bbl of oil and $6.61 per mcf of natural gas compared to
$37.26 per bbl and $6.15 per mcf in the second quarter of 2005. Prices
before the effects of the hedging agreements were $67.47 per bbl and
$6.56 per mcf in the second quarter of 2006 compared to $50.02 per bbl
and $6.64 per mcf in the second quarter of 2005.
16
Costs and Expenses
Lease Operating Expenses. Lease operating expenses for the second
quarter of 2006 were $1,710,000 an increase of 25% from $1,365,000 in
2005. The increase was due to higher expenses related to workovers on
producing wells and increases in salt-water disposal costs in the
Cameron Parish fields.
On a per unit basis, expenses increased from $1.93 per mcfe in 2005 to
$2.68 per mcfe in 2006, due to the higher costs and lower production on
existing properties.
Depreciation, Depletion and Amortization (DD&A). DD&A expense for the
second quarter of 2006 was $919,000 compared to expense of $835,000 for
the prior year quarter, due to the increase in the DD&A rate per unit
from $1.18 per mcfe in 2005 to $1.44 per mcfe in 2006.
General and Administrative (G&A) Expenses. Our G&A expenses were
$2,141,000 in the 2006 quarter compared to $935,000 in 2005. Included
in G&A expense for the 2006 quarter is a non-cash stock option expense
of $997,000 ($1.57 per mcfe) related to our adoption of SFAS 123R on
January 1, 2006. On a per unit basis, expenses increased from $1.32 per
mcfe in 2005 to $3.36 per mcfe in 2006 on lower production.
Interest Expense. Interest expense was $56,000 in the 2006 quarter, up
from $18,000 in 2005, primarily due to the increase in debt related to
the acquisition of leasehold acreage for future development.
Geological and Geophysical Expense (G&G). G&G expense was $47,000 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 $8,000 in the 2006 quarter compared to
$389,000 in 2005. The 2005 expense was the result of our participation
in an unsuccessful exploratory well.
Debt Issuance Costs. Debt issuance costs were $56,000 in the 2006
quarter compared with $5,000 in 2005. The expense in 2006 was comprised
primarily of the amortization of capitalized costs associated with the
revolving credit facility entered into in July 2005 and fees related to
the unused portion of the credit facility.
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 $169,000 compared with
$619,000 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 Taxes. Our net income before taxes was $403,000 in 2006 compared
with $1,383,000 in 2005. After adjusting for permanent tax differences,
we recorded income tax expense of $201,000 in 2006 and $538,000 in
2005.
Dividends on Preferred Stock. Dividends on preferred stock were
$916,000 in the 2006 quarter compared with $925,000 in 2005. Dividends
in 2006 included $808,000 on the Series G Preferred Stock, $41,000 on
the Series H Preferred Stock and $67,000 on the Series E Preferred
Stock. Dividends on preferred stock for 2005 included $808,000 on the
Series G Preferred Stock, $50,000 on the Series H Preferred Stock,
$67,000 on the Series E Preferred Stock.
17
Six-Month Period Ended June 30, 2006 compared to Six- Month Period
Ended June 30, 2005.
Revenues
Oil and Gas Sales. During the 2006 six month period, revenues from the
sale of crude oil and natural gas, net of realized losses from our
hedging instruments, were $10,264,000, up 28% from $8,002,000 in 2005.
We realized losses of $450,000 on our oil hedges and $12,000 on our gas
hedges in the 2006 period compared to losses of $1,145,000 for oil and
$325,000 for gas in the 2005 period. The increase in revenues was due
to higher realized crude oil and natural gas prices which offset
production declines.
For the six month period of 2006 sales volumes were 91,033 barrels of
crude oil and 683,452 mcf of natural gas, or 1,229,650 natural gas
equivalents (mcfe) compared to 92,479 barrels of crude oil and 764,653
mcf of natural gas, or 1,319,527 mcfe in the 2005 period. On a daily
basis we produced an average of 6,800 mcfe in the six months of 2006
compared to a daily average of 7,300 mcfe in the 2005 period. The lower
volumes resulted primarily from the restriction of production, by about
1,000 mcfepd for four and a half months, at our Cameron Parish fields
related to operational difficulties following Hurricane Rita. These
repairs were completed in May 2006. Our largest well in our Nelsonville
field (approximately 400 mcfepd) was also lower during that period due
to collapsed casing; it also returned to production at a lower, but
increasing, rate in May.
Oil and gas prices are reported net of the realized effects of our
hedging agreements. Prices realized in the six month period of 2006
were $59.29 per bbl and $7.12 per mcf compared to $36.57 per bbl and
$6.04 per mcf in the 2005 period. Prices before the effects of the
hedging agreements were $64.23 per bbl and $7.14 per mcf in the six
month of 2006 compared to $48.95 per bbl and $6.47 per mcf in the 2005
period.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses for the six month
period of 2006 were $3,289,000 an increase of 19% from $2,766,000 in
2005. The increase was due to higher production taxes from higher
revenues, higher saltwater disposal costs and higher cost of goods and
services prevalent in the industry.
On a per unit basis, expenses increased from $2.10 per mcfe in 2005 to
$2.68 per mcfe in 2006 on lower production.
Depreciation, Depletion and Amortization (DD&A). DD&A expense for the
six month period of 2006 was $1,674,000 compared to expense of
$1,491,000 for the prior year period, due to the increase in the DD&A
rate per unit from $1.13 per mcfe in 2005 to $1.36 per mcfe in 2006.
General and Administrative (G&A) Expenses. Our G&A expenses were
$3,865,000 in the 2006 period compared to $1,553,000 in 2005 due
primarily to additions to our management team to carry out our post
recapitalization growth strategy, and due to the non-cash stock option
expense of $1,724,000 ($1.40 per mcfe) related to our adoption of SFAS
123R on January 1, 2006. On a per unit basis, expenses increased from
$1.18 per mcfe in 2005 to $3.14 per mcfe in 2006 on lower production.
Interest Expense. Interest expense decreased to $66,000 in the 2006
period, compared to $1,217,000 in 2005, primarily due to the retirement
of debt in our February 2005 recapitalization.
Geological and Geophysical Expense (G&G). G&G expense was $56,000 in
2006. No G&G costs were incurred in 2005 as we focused our capital
program on the development of our proved reserves.
18
Dry Holes, Abandonment Costs and Impaired Assets. Dry hole, abandonment
and impairment expense was $12,000 in 2006 compared to $391,000 in
2005. The 2005 expense was the result of our participation in an
unsuccessful exploratory well.
Debt Issuance Costs. Debt issuance costs were $89,000 in 2006 compared
with $1,910,000 in 2005. The expense in 2006 was comprised primarily of
the amortization of capitalized costs associated with the revolving
credit facility entered into in July 2005 and fees related to the
unused portion of the credit facility. Costs in 2005 included the
writeoff of 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.
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 $1,277,000 compared
with a non-cash expense of $1,395,000 for the 2005 period. 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 Taxes. Our net income before taxes was $2,502,000 for the 2006
period. After adjusting for permanent tax differences, we recorded
$928,000 in income tax expense. We reported a net loss before taxes of
$2,779,000 in the 2005 period resulting in an income tax benefit of
$850,000.
Dividends on Preferred Stock. Dividends on preferred stock were
$1,812,000 in 2006 compared with $1,698,000 in 2005. Dividends in 2006
included $1,607,000 on the Series G Preferred Stock, $71,000 on the
Series H Preferred Stock and $134,000 on the Series E Preferred Stock.
Dividends on preferred stock for 2005 included $1,092,000 on the Series
G Preferred Stock, $76,000 on the Series H Preferred Stock, $91,000 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 June 30, 2006, our current liabilities exceeded our current assets
by $2,284,996, while at December 31, 2005 our current liabilities
exceeded our current assets by $1,030,657. At June 30, 2006 we had
$17,538,609 available on our revolving line of credit. During the six
month period, we generated $5,631,630 in cash flow from operations
compared to the utilization of $530,387 for operations in the prior
year period. We believe cash flow, along with available 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.
19
Interest Rate Risk
We are exposed to interest rate risk on debt with variable interest
rates. At June 30, 2006, we carried variable rate debt of $2,461,391.
Assuming a one percentage point change in interest rates on variable
rate debt outstanding at June 30, 2006, the annual pretax results of
operations would change by $24,614.
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 June 30, 2006, these derivative
instruments had an estimated fair value liability of $1,871,223. 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
Our president and chief executive officer and our chief financial
officer have concluded, based on their evaluation as of the end of the
period covered by this Form 10-Q, that our disclosure controls and
procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended, are effective to ensure
that information we are required to disclose in the reports we file or
submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
forms, and that our disclosure controls and procedures are effective to
ensure that information we are required to disclose in such reports is
accumulated and communicated to management, including our president and
chief executive officer and our chief financial officer, as appropriate
to allow timely decisions regarding required disclosure.
During the period covered by this report, there has been no change in
our internal controls over financial reporting that materially
affected, or is reasonably likely to material affect, these controls.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 12, 2006
(the "Annual Meeting"). The close of business on April 3, 2006 was
fixed as the record date for determining shareholders entitled to
notice of the Annual Meeting and the right to vote at the meeting or
for any adjournments or postponement thereof. As of April 3, 2006,
32,776,995 shares of our Class A Common Stock, par value $.001 per
share ("Common Stock), were outstanding and entitled to vote. Shares of
our Series G Convertible Preferred Stock, par value $0.01 per share
(the "Series G Preferred Stock "), and shares of our Series H
Convertible Preferred Stock, par value $.01 per share (the "Series H
Preferred Stock"), were entitled to vote on an as converted basis with
the Common Stock with respect to the approval of Grant Thorton LP as
our independent financial auditors. However, with respect to the
election of directors, the Series G Preferred Stock shareholders are
entitled to elect a majority of our directors, but not the remaining
directors, which the holders of the Common Stock and Series H Preferred
Stock were entitled to elect. Allan D. Keel, B. James Ford and Skardon
F. Baker, who were elected by the holders of the Series G Perferred
Stock (with 47,977,433 shares voting for reelection and 957,930 shares
abstaining), continued their term of office after the meeting. On the
record date, 81,000 shares of Series G Preferred Stock, representing
the voting power of 48,935,363 shares, and 5,250 shares of Series H
Preferred Stock, representing the voting power of 7,500,001 shares of
Common Stock, in each case with respect to those matters which such
shares vote on an as-converted basis with the Common Stock, were
outstanding. Each of the following matters was approved by shareholders
by the following votes:
20
Proposal 1 - To elect two directors to hold office until the next
annual meeting of shareholders and until their successors are duly
elected and qualified. Each of the director nominees were elected by a
majority of votes cast by holders of the Common Stock and Series H
Preferred Stock entitled to vote at the Annual Meeting.
Lee B. Backsen
For Against Withheld
--- ------- --------
Common Stock 25,830,026 0 118,786
Series H 7,357,143 0 0
---------- ------- --------
Total 33,187,169 0 118,786
========== ======= ========
Lon McCain
For Against Withheld
--- ------- --------
Common Stock 25,830,126 0 118,686
Series H 7,357,143 0 0
---------- ------- --------
Total 33,187,269 0 118,686
========== ======= ========
Proposal 2 - To approve the appointment of Grant Thornton LLP as the
Company's independent financial auditors.
For Against Withheld
--- ------- --------
Common Stock 25,908,812 0 57,000
Series G 47,977,433 0 0
Series H 7,357,143 0 0
---------- ------- --------
Total 81,243,388 0 57,000
========== ======= ========
21
ITEM 6. EXHIBITS.
Number Description
------ -----------
*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.
22
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: August 14, 2006
By: /s/ Allan D. Keel
---------------------
Allan D. Keel
President and Chief Executive Officer
Date: August 14, 2006
By: /s/ E. Joseph Grady
-----------------------
E. Joseph Grady
Senior Vice President and Chief Financial Officer
23