Index to Financial Statements
As filed with the Securities and Exchange Commission on November 22, 2006
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2004
REGISTRATION NO. 333-113583
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
TREMISIS
RAM ENERGY ACQUISITION CORPORATION
(ExactRESOURCES, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 1311 | 20-700684 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
5100 East Skelly Drive, Suite 650
Tulsa, Oklahoma 74135
(918) 663-2800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
John M. Longmire
Senior Vice President and Chief Financial Officer
5100 East Skelly Drive, Suite 650
Tulsa, Oklahoma 74135
(918) 663-2800
(Name, address, including zip code, and telephone number, including area code, of agent for service)
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Copies to:
COPIES TO:
| Theodore M. Elam, Esq. | Charles L. Strauss, Esq. | |
McAfee & Taft A Professional Corporation 211 North Robinson, Suite 1000 Oklahoma City, Oklahoma 73102 (405) 235-9621 | Fulbright & Jaworski L.L.P. Fulbright Tower 1301 McKinney Street, Suite 5100 Houston, Texas 77010 (713) 651-5151 |
Approximate date of commencement of proposed sale of the securities to the public:
As soon as practicable on or after the effective date of this registration statement.
Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 underof the Securities Act of 1933, check the following box. [X]
¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Title of Each Class of Securities to be Registered | Proposed Maximum Aggregate Offering Price (1)(2) | Amount of Registration Fee(1)(2) | ||
Common Stock, par value $.0001 per share | $65,000,000 | $6,955 |
| (1) | Estimated solely for the purpose of |
| (2) | Includes amounts attributable to shares which the |
The Registrant hereby amends this Registration Statement on such Units which may be issued on exercise of a
45-day option granted to the Underwriters to cover over-allotments, if
any.
(3) No fee pursuant to Rule 457(g).
(4) Pursuant to Rule 416, there are also being registered such indeterminable
additional securitiesdate or dates as may be issued asnecessary to delay its effective date until the Registrant shall file a resultfurther amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the anti-dilution
provisionsSecurities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
Index to Financial Statements
The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the Warrants.
(5) $9,842.06 ofregistration statement filed with the fee has been previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
THE INFORMATION IN THIS Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer, solicitation or sale is not permitted.
Subject to completion, dated November 22, 2006
PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, APRIL 27, 2004
PROSPECTUS
$33,000,000
TREMISIS ENERGY ACQUISITION CORPORATION
5,500,000 UNITS
Tremisis
11,970,534 Shares
RAM Energy Acquisition Corporation is a blank check company recently
formed for the purpose of effecting a merger, capital stock exchange, asset
acquisition or other similar business combination with an operating business.
Our objective is to acquire an operating business in either the energy or
environmental industry and their related infrastructures.
This is an initial publicResources, Inc.
Common Stock
We are offering of our securities. Each unit consists
of:
o one share of our common stock; and
o two warrants.
Each warrant entitles the holder to purchase one share9,208,103 shares of our common stock at aand 2,762,431 shares are being offered by the selling stockholder identified in this prospectus. We will not receive any proceeds from the sale of the shares by the selling stockholder.
Our shares of common stock are quoted on the Nasdaq Capital Market under the symbol “RAME”. On November 21, 2006, the last reported sale price of $5.00. Each warrant will become exercisableour common stock was $5.43 per share.
You should read therisk factors beginning on the laterpage 11 of this prospectus to learn about certain factors you should consider before buying shares of our completion of a business combination or , 2005 [ONE YEAR FROM THE DATE
OF THIS PROSPECTUS], and will expire on , 2008 [FOUR YEARS FROM THE
DATE OF THIS PROSPECTUS], or earlier upon redemption.
common stock.
PRICE $ PER SHARE
| Per Share | Total | |||||
Public Offering Price | $ | $ | ||||
Underwriting Discount | $ | $ | ||||
Net proceeds to RAM Energy Resources, Inc. | $ | $ | ||||
Proceeds to the selling stockholder (1) | $ | $ | ||||
| (1) | We will pay all expenses, other than underwriting discounts payable by the selling stockholder, associated with the offering. |
We have granted the underwriters a 45-dayan over-allotment option to purchase up to 825,000
additional units solely to cover over-allotments, if any (over and above the 5,500,000 units referred to above). The over-allotment will be used only to
coverunderwriter. Under this option, the net syndicate short position resulting from the initial distribution.
We have also agreed to sell to the representative of the underwriters, for
$100, an optionunderwriter may elect to purchase up to a totalmaximum of 275,000 units1,795,580 additional shares from us at a per-unitthe public offering price of $9.90. The units issuable upon exercise of this option are
identical to those offered by this prospectus except that the warrants included
in the option have an exercise price of $6.25 (125% of the exercise price of
the warrants included in the units sold in the offering). The purchase option
and its underlying securities have been registered under the registration
statement of which this prospectus forms a part.
There is presently no public market for our units, common stock or
warrants. We anticipate that the units will be quoted on the OTC Bulletin Board
under the symbol on or promptly afterless underwriting discount within 30 days following the date of this prospectus. Once the
securities comprising the units begin separate trading, the common stock and
warrants will be traded on the OTC Bulletin Board under the symbols and
, respectively.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF INFORMATION
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN OUR SECURITIES.
prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthfulaccurate or complete. Any representation to the contrary is a criminal offense.
UNDERWRITING
PUBLIC DISCOUNT PROCEEDS, BEFORE
OFFERING PRICE AND COMMISSIONS(1) EXPENSES, TO US
---------------- -------------------- -----------------
Per unit ......... $ 6.00 $ 0.54 $ 5.46
Total ............ $33,000,000 $2,970,000 $30,030,000
(1) Includes a non-accountable expense allowance in the amount of 3% of the
gross proceeds, or $0.18 per unit ($990,000 in total) payable to
EarlyBirdCapital, Inc.
Of the net proceeds we receive from this offering, $28,490,000 ($5.18 per
unit) will be deposited into trust with Continental Stock Transfer & Trust
Company acting as trustee.
We are offering the units for sale on a firm-commitment basis.
EarlyBirdCapital, Inc., acting as representative of the underwriters,
The underwriter expects to deliver our securitiesthe shares of common stock to investors in the offering on or about , 2004.
EARLYBIRDCAPITAL, INC.200 .
RBC CAPITAL MARKETS
The date of this prospectus is , 2004
Index to Financial Statements
RAM Energy Resources, Inc. — Principal Properties
[Map of Areas of Operation]
Index to Financial Statements
| Page | ||
| i | ||
| 1 | ||
Risk Factors | 11 | |
Use of Proceeds | 15 | |
| 15 | ||
| 16 | ||
| 17 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
| 34 | ||
Business | 35 | |
| 51 |
ABOUT THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER IS NOT PERMITTED.
---------------------
2
SUMMARY
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.
Index to Financial Statements
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This summary highlights certain information appearingprospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact included in this prospectus, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this prospectus, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.
Forward-looking statements may include statements about our:
| Ÿ | business strategy; |
| Ÿ | reserves; |
| Ÿ | technology; |
| Ÿ | financial strategy; |
| Ÿ | oil and natural gas realized prices; |
| Ÿ | timing and amount of future production of oil and natural gas; |
| Ÿ | the amount, nature and timing of capital expenditures; |
| Ÿ | drilling of wells; |
| Ÿ | competition and government regulations; |
| Ÿ | marketing of oil and natural gas; |
| Ÿ | property acquisitions; |
| Ÿ | costs of developing our properties and conducting other operations; |
| Ÿ | general economic conditions; |
| Ÿ | uncertainty regarding our future operating results; and |
| Ÿ | plans, objectives, expectations and intentions contained in this prospectus that are not historical. |
All forward-looking statements speak only as of the date of this prospectus, and we do not intend to update any of these forward-looking statements to reflect changes in events or circumstances that arise after the date of this prospectus. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this prospectus are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. We disclose important factors that could cause our actual results to differ materially from our expectations under“Risk Factors” and“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. ForThese cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data are also based on our good faith estimates. Although we believe these third-party sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness.
i
Index to Financial Statements
This summary highlights information contained in other parts of our prospectus. Because it is a more complete understanding of this offering,summary, it does not contain all information that you should consider before investing in our shares. You should read the entire prospectus carefully, including the risk factors“Risk Factors,” our financial statements and the financial
statements. notes thereto. We have included definitions of technical terms important to an understanding of our business under “Glossary of Oil and Natural Gas Terms.”
Unless the context otherwise statedrequires, all references in this prospectus references to "we," "us"
or "our company"“RAM Energy Resources,” “our,” “us,” and “we” refer to RAM Energy Resources, Inc. (formerly known as Tremisis Energy Acquisition Corporation.Corporation) and its subsidiaries, as a combined entity. All references in this prospectus to “RAM Energy” refer to RAM Energy, Inc., our wholly owned subsidiary. Unless the context otherwise requires, the information contained in this prospectus gives effect to the May 8, 2006 consummation of the merger of RAM Energy Acquisition, Inc., our wholly owned subsidiary, with and into RAM Energy, and the change of our name from Tremisis Energy Acquisition Corporation to RAM Energy Resources, Inc., which transactions are collectively called the “merger.” See “Prospectus Summary—Recent Events” for a discussion of the merger. As used in this prospectus, EBITDA refers to net income before interest expense, amortization, depreciation, accretion, income taxes, gain on early extinguishment of debt, gain on sale of oil and natural gas properties, share-based compensation, extraordinary gains or losses, the cumulative effects of changes in accounting principles and unrealized gains or losses on derivatives.
RAM Energy Resources, Inc.
We are an independent oil and natural gas company engaged in the acquisition, development, exploitation, exploration and production of oil and natural gas properties, primarily in Texas, Louisiana and Oklahoma. Our producing properties are located in highly prolific basins with long histories of oil and natural gas operations. We have been active in these core areas since our inception in 1987 and have grown through a balanced strategy of acquisitions and development and exploratory drilling. We have completed over 20 acquisitions of producing oil and natural gas properties and related assets for an aggregate purchase price approximating $400 million. We have drilled or participated in the drilling of540 oil and natural gas wells, 93% of whichwere successfully completed and produced hydrocarbons in commercial quantities. Our management team has extensive technical and operating expertise in all areas of our geographic focus.
Our oil and natural gas assets are characterized by a combination of conventional and unconventional reserves and prospects. We have conventional reserves and production in four main onshore locations:
| Ÿ | Electra/Burkburnett, Wichita and Wilbarger Counties, Texas; |
| Ÿ | Boonsville, Jack and Wise Counties, Texas; |
| Ÿ | Vinegarone, Val Verde County, Texas; and |
| Ÿ | Egan, Acadia Parish, Louisiana. |
We have unconventional reserves and production in our Barnett Shale play located in Jack and Wise Counties, Texas, where we tell you otherwise,own interests in approximately 27,700 gross (6,800 net) acres.
In addition, we have positioned ourselves for participation in two emerging resource plays in southwest Texas. We have an exploratory play targeting the Barnett and Woodford Shale formations where we own interests in approximately 84,000 gross (6,600 net) acres. We also have an exploratory play targeting the Wolfcamp formation where we are actively acquiring acreage and have accumulated leases and options covering over 15,000 gross and net acres.
Index to Financial Statements
At December 31, 2005, our estimated net proved reserves were 18.8 MMBoe, of which approximately 60% were crude oil, 30% were natural gas, and 10% were natural gas liquids, or NGLs. The PV-10 Value of our proved reserves was approximately $345.5 million based on prices we were receiving as of December 31, 2005, which were $58.63 per Bbl of oil, $35.89 per Bbl of NGLs and $9.14 per Mcf of natural gas. At December 31, 2005, our proved developed reserves comprised 70% of our total proved reserves, and the estimated reserve life for our total proved reserves was approximately 15 years.
We own interests in approximately 2,900 wells and are the operator of leases upon which approximately 1,900 of these wells are located. The PV-10 Value attributable to our interests in the properties we operate represented approximately 86% of our aggregate PV-10 Value as of December 31, 2005. We also own a drilling rig, various gathering systems, a natural gas processing plant, service rigs and a supply company that service our properties.
From January 1, 1997 through December 31, 2005, our reserve replacement percentage, through discoveries, extensions, revisions and acquisitions, but excluding divestitures, was 344%. Since January 1, 1997, our historical average finding cost from all sources, exclusive of divestitures, has been $6.27 per Boe. During the nine months ended September 30, 2006, we drilled or participated in the drilling of 71 wells on our oil and natural gas properties, 61 of which were successfully completed as producing wells and seven of which were either drilling or waiting to be completed at September 30, 2006. For the twelve months ended September 30, 2006 we generated EBITDA of $33.5 million from production averaging 3,740 Boe per day. For more information regarding our EBITDA, including a reconciliation to our net income (loss), see“Selected Consolidated Financial Data.”
Our Business Strategy and Strengths
Our primary objective is to enhance stockholder value by increasing our net asset value, net reserves and cash flow per share through acquisitions, development, exploitation, exploration and divestiture of oil and natural gas properties. We intend to follow a balanced risk strategy by allocating capital expenditures in a combination of lower risk development and exploitation activities and higher potential exploration prospects. We intend to pursue acquisitions during periods of attractive acquisition values and emphasize development of our reserves during periods of higher acquisition values. Key elements of our business strategy include the following:
| Ÿ | Concentrate on Our Existing Core Areas. We intend to focus a significant portion of our growth efforts in our existing core areas. Our oil and natural gas properties in our core areas are characterized by long reserve lives and production histories in multiple oil and natural gas horizons. We believe our focus on and experience in our core areas may expose us to acquisition opportunities which may not be available to the entire industry. |
| Ÿ | Accelerate Our North Texas Barnett Shale Development.Due to the high degree of commercial success in the north Texas Barnett Shale by the oil and natural gas industry, we plan to use proceeds of this offering to significantly accelerate drilling in our north Texas Barnett Shale properties. We have over 325 potential horizontal well locations on our properties. We have drilled nine gross (3.4 net) wells to date with a 100% success rate on our north Texas Barnett Shale properties and plan on drilling a minimum of four gross (2.1 net) wells to a maximum of seven gross (2.8 net) wells during 2007. |
| Ÿ | Complete Selective Acquisitions and Divestitures. We seek to acquire producing oil and natural gas properties, primarily in our core areas. Our experienced senior management team has developed our acquisition criteria designed to increase reserves, production and cash flow per share on an accretive basis. We will seek acquisitions of producing properties that will provide us with opportunities for |
Index to Financial Statements
reserve additions and increased cash flow through operating improvements, production enhancement and additional development and exploratory prospect generation opportunities. In addition, from time to time, we may engage in strategic divestitures when we believe our capital may be redeployed to higher return projects. |
| Ÿ | Develop and Exploit Existing Oil and Natural Gas Properties. We have historically increased stockholder value by fully developing or exploiting our acquired and discovered properties until we determine that it is no longer economically attractive to do so. We have identified 178 proved development and extension drilling projects and 174 recompletion/workover projects on our existing properties and wells. Of these, we plan to drill 18 development and extension drilling projects, and perform five recompletions and workovers during the fourth quarter of 2006. |
| Ÿ | Increase Emphasis on Exploration Activity. We are committed to increasing our emphasis on exploration activities within the context of our balanced risk objectives. We will continue to acquire, review and analyze 3-D seismic data to generate exploratory prospects. Our exploration efforts utilize available geological and geophysical technologies to reduce our exploration and drilling risks and, therefore, maximize our probability of success. |
We believe that the following strengths complement our business strategy:
| Ÿ | Inventory of Growth Opportunities in the North Texas Barnett Shale.We believe we have a significant inventory of growth opportunities beyond our proved reserve base. We have over 325 potential drilling locations within the north Texas Barnett Shale. We believe that our inventory of potential drilling locations should provide us the opportunity to grow organically for the foreseeable future without having to depend upon acquisitions of properties. Based on current cost estimates, we have approximately $250 million of potential future capital expenditures for the full development of our north Texas Barnett Shale acreage. |
| Ÿ | Management Experience and Technical Expertise. Our key management and technical staff possess an average of 26 years of experience in the oil and natural gas industry, a substantial portion of which has been focused on operations in our core areas. We believe that the knowledge, experience and expertise of our staff will continue to support our efforts to enhance stockholder value. |
| Ÿ | Balanced Oil and Natural Gas Production.At year-end 2005, approximately 60% of our estimated proved reserves were oil, 30% were natural gas and 10% were NGLs. We believe this balanced commodity mix, combined with our prudent use of derivative contracts, will provide sufficient diversification of sources of cash flow and will lessen the risk of significant and sudden decreases in revenue from localized or short-term commodity price movements. |
| Ÿ | Operating Efficiency and Control. We currently operate wells that represent 86% of our aggregate PV-10 Value at December 31, 2005. Our high degree of operating control allows us to control capital allocation and expenses and the timing of additional development and exploitation of our producing properties. |
| Ÿ | Drilling Expertise and Success. Our management and technical staff have a long history of successfully drilling oil and natural gas wells. We have drilled or participated in the drilling of540 oil and natural gas wells with a93% success rate. We expect to continue to grow by utilizing our drilling expertise and developing and finding additional reserves, although our success rate may decline as we drill more exploratory wells. |
| Ÿ | Ownership and Control of Service and Supply Assets. We own and control service and supply assets, including a drilling rig, service rigs, a supply company, gathering systems and other related assets. We believe that ownership and use of these assets for our own account provides us with a significant |
Index to Financial Statements
competitive advantage with respect to availability, lead-time and cost of these services. For calendar year 2007, approximately 75% of our projected capital expenditures will be in areas serviced by these assets. |
| Ÿ | Insider Ownership. After giving effect to the completion of this offering, management and insiders will own approximately 53% of our outstanding shares, providing a strong alignment of interest between management, the board of directors and our outside stockholders. |
| Ÿ | Balance Sheet Flexibility. After giving effect to the completion of this offering and application of the net proceeds as described in this prospectus, we will have significant liquidity for pursuing acquisitions, accelerating our development and exploratory activities and taking advantage of opportunities as they arise. |
Index to Financial Statements
Principal Producing Properties
The following is a summary of our oil and natural gas reserve information with respect to our principal properties as of December 31, 2005 and with respect to our producing wells, drilling locations and net acreage as of September 30, 2006:
Electra/ Burkburnett | Boonsville | Egan | Barnett Shale | Vinegarone | ||||||||||||||||
Proved reserves (Mboe) | 9,802 | 3,011 | 1,651 | 408 | 1,110 | |||||||||||||||
Percent proved developed | 61 | % | 69 | % | 100 | % | 83 | % | 42 | % | ||||||||||
Percent oil | 97 | % | 6 | % | 11 | % | 2 | % | — | |||||||||||
PV-10 Value (in thousands) (1) | $ | 182,920 | $ | 43,403 | $ | 38,424 | $ | 10,410 | $ | 10,808 | ||||||||||
Gross producing wells: | ||||||||||||||||||||
Operated by RAM Energy | 503 | 87 | 10 | 2 | — | |||||||||||||||
Operated by others | — | 1 | — | 7 | 7 | |||||||||||||||
Proved drilling locations | 151 | 20 | — | 4 | 3 | |||||||||||||||
Potential unproven drilling locations | — | — | — | 325 | — | |||||||||||||||
Total net acres | 12,190 | 7,313 | 3,740 | 6,800 | 1,830 | |||||||||||||||
| (1) | The PV-10 Value of our proved reserves as of December 31, 2005 was calculated using unescalated prices of $58.63 per Bbl of oil, $35.89 per Bbl of NGLs, and $9.14 per Mcf of natural gas, which were the prices we were receiving as of December 31, 2005. The prices at which we sell natural gas are determined on the first day of each month for the entire month. |
Principal Exploration Projects
The following is a summary of our principal exploration projects as of September 30, 2006, both of which are located in southwest Texas:
Name | Objective | Net Acres | ||
Wolfcamp | Shale Gas | 15,000 | ||
| Canyon Sands | ||||
Barnett/Woodford | Shale Gas | 6,800 | ||
Index to Financial Statements
Recent Events
Tremisis Merger. Prior to May 8, 2006, our corporate name was Tremisis Energy Acquisition Corporation, or Tremisis. On May 8, 2006, Tremisis acquired RAM Energy, Inc. through the merger of its recently formed, wholly owned subsidiary into RAM Energy, Inc. The merger was accomplished pursuant to the terms of an Agreement and Plan of Merger dated October 20, 2005, as amended, which is referred to as the merger agreement, among Tremisis, its acquisition subsidiary, RAM Energy, Inc. and the stockholders of RAM Energy, Inc. Upon completion of the merger, RAM Energy, Inc. became Tremisis’ wholly owned subsidiary and Tremisis changed its name from Tremisis Energy Acquisition Corporation to RAM Energy Resources, Inc.
Upon consummation of the merger, the stockholders of RAM Energy, Inc. received an aggregate of 25,600,000 shares of Tremisis’ common stock and $30.0 million of cash. Prior to consummation of the merger, and as permitted by the merger agreement, on April 6, 2006, RAM Energy, Inc. redeemed a portion of its outstanding stock for an aggregate consideration of $10.0 million.
The merger was accounted for as a reverse acquisition. RAM Energy, Inc. has been treated as the acquiring company and the continuing reporting entity for accounting purposes. Upon completion of the merger, the assets and liabilities of Tremisis were recorded at their fair value, which is considered to approximate historical cost, and added to those of RAM Energy, Inc. Because Tremisis had no active business operations prior to consummation of the merger, the merger was accounted for as a recapitalization of RAM Energy, Inc.
Acquisition of Properties. Effective September 1, 2006, we acquired 447,000 Boe of proved reserves and associated gathering assets in a field located in close proximity to our existing north Texas properties. Current production from the acquired properties is from the Bend Conglomerate. The acquired properties also included undeveloped deep rights, including the Barnett Shale formation. The purchase price was $4.4 million, or $9.84 per Boe of estimated proved reserves. The proved reserve mix in the acquired properties is 72% natural gas and 28% oil.
Stock Repurchase. On September 22, 2006, we repurchased 739,175 shares of our common stock from an unaffiliated party in a negotiated transaction at a purchase price of $4.295 per share.
Risks Related to Our Strategy
Prospective investors should carefully consider the matters we discuss under the caption“Risk Factors,” as well as the other information in this prospectus, assumesincluding that the underwritersmarket for attractive opportunities to acquire properties with proved undeveloped reserves may not be available; our reserve estimates may not be accurate; our results will not exercise their over-allotment option. Additionally, unless
we tell you otherwise,be affected by the information in this prospectus has been adjusted to
give retroactive effect to a 1.1666666-to-one forward stock split effected on
March 10, 2004, a 1.1428571-to-one forward stock split on April 16, 2004volatile nature of oil and a
1.375-to-one forward stock split on April 23, 2004.
We are a blank check company organized under the laws of the State of
Delaware on February 5, 2004. We were formed to effect a merger, capital stock
exchange, asset acquisition or other similar business combination with an
operating business in either the energy or the environmental industrynatural gas prices and their
related infrastructures. To date, our efforts have been limited to
organizational activities.
ENERGY INDUSTRY AND ITS RELATED INFRASTRUCTURE
The energy industry and its related infrastructure generally includes the
production, generation, transmission and distribution of electricity, heat,
fuel and other consumable forms of energy and the infrastructure needed to
maintain and operate the facilities, services and installations used in the
foregoing areas.
Although we may consider a target businessexperience delays in any segmentobtaining drilling rigs and shortages of the energy
industry, we currently intend to concentrateequipment. One or more of these matters could negatively affect our search for an acquisition
candidate on companies in the following segments:
o Electricity generation, distribution and transmission;
o Natural gas production, distribution and transmission;
o Energy related services including conservation, metering, operations and
maintenance;
o Steam generation and distribution;
o Alternative and renewable energy technologies; and
o The infrastructure necessary to operate in the energy industry including
but not limited to areas such as the production, transportation or
distribution of towers, power lines, scaffolding products and other
equipment or supplies incidental to the energy industry.
ENVIRONMENTAL INDUSTRY AND ITS RELATED INFRASTRUCTURE
The environmental industry and its related infrastructure generally
includes the technologies and services that protect the natural and human
environment from destruction and pollution, and the infrastructure needed to
maintain and operate the facilities, services and installations used in the
foregoing areas. The environmental industry also seeks to ameliorate the
negative effects of industrial production and unhealthy practices and materials
on our population as a whole.
Although we may consider a target business in any segment of the
environmental industry, we currently intend to concentrate our search for an
acquisition candidate on companies in the following segments:
o Waste management and disposal, including wastewater treatment and
management and sewage control;
3
o Air treatment and ionization, pollution and emission control;
o Medical waste disposal;
o Radon and site cleanup services;
o Other energy/environmental related technologies; and
o The infrastructure necessary to operate in the environmental industry
including but not limited to areas such as the operation of water supply
facilities, waste and wastewater treatment facilities, pollution control
facilities and transportation facilities and the production,
transportation or distribution of the equipment and products incidental to
such operations.
Although we believe there are many positive trends that make acquisition
candidates in both the energy and environmental industries attractive, there
are various risks of acquiring a business in such industries, including
substantial government regulation. Depending on the industry segment we
ultimately operate in, we may be required to spend substantial amounts of time
and money in complying with such governmental regulations. For a more complete
discussion of the risks relating to operations in the energy and environmental
industries, see the section below entitled "Risk Factors."
While we may seek to effect business combinations with more than one
target business, our initial business combination must be with a target
business whose fair market value is at least equal to 80% of our net assets at
the time of such acquisition. Consequently, it is likely that we will have the ability to effect only a singlesuccessfully implement our business combination.
strategy.
Our Executive Offices
Our principal executive offices are located at 1775 Broadway,5100 East Skelly Drive, Suite 604, New York, New York
10019 and our650, Tulsa, Oklahoma 74135. Our telephone number is (212) 397-1464.
4
THE OFFERING
Securities offered:........... 5,500,000 units, at $6.00 per unit, each unit
consisting of:
o one share of common stock; and
o two warrants.
(918) 663-2800.
Index to Financial Statements
The units will begin trading on or promptly
after the date of this prospectus. Each of the
common stock and warrants may trade separately
on the 90th day after the date of this
prospectus unless EarlyBirdCapital determines
that an earlier date is acceptable. In no
event will EarlyBirdCapital allow separate
trading of the common stock and warrants until
we file an audited balance sheet reflecting
our receipt of the gross proceeds of this
offering. We will file a Current Report on
Form 8-K, including an audited balance sheet,
upon the consummation of this offering, which
is anticipated to take place three business
days from the date of this prospectus. The
audited balance sheetOffering
Common stock offered by us | 9,208,103 Shares |
Common stock offered by selling stockholder (1) | 2,762,431 Shares |
Option | We have granted the underwriter a 30-day option to purchase up to an aggregate of 1,795,580 additional shares of common stock. |
Common stock outstanding after the offering (2) | 42,647,633 Shares |
Use of Proceeds | We intend to use the net proceeds from this offering primarily to repay indebtedness outstanding under our 11 1/2% senior notes and our senior credit facility and to provide additional working capital for general corporate purposes, including acquisition, development, exploitation and exploration of oil and natural gas properties. |
Nasdaq Capital Market symbol | RAME |
| (1) | The selling stockholder is Danish Knights, A Limited Partnership, which is a family limited partnership formed by Dr. William W. Talley II, a founder and former chairman of RAM Energy, Inc. Dr. Talley passed away in 2005. No partner of Danish Knights is a director or officer of RAM Energy Resources, Inc. |
| (2) | The shares of common stock outstanding after this offering do not include approximately 12,650,000 shares issuable upon the exercise of outstanding warrants at an exercise price of $5.00 per share and 825,000 shares of our common stock issuable upon the exercise of currently exercisable options to purchase 275,000 units at an exercise price of $9.90 per unit, each unit consisting of one share of our common stock and two warrants, each warrant to purchase one share of our common stock at an exercise price of $6.25 per share. Such warrants, when issued, will be immediately exercisable. The shares of common stock to be outstanding after this offering do not include shares of our common stock that we will issue upon the exercise of options or other awards that may be granted under our 2006 Long-Term Incentive Plan. We have remaining a maximum of 1,423,195 shares of common stock reserved for issuance upon the exercise of options that may be granted and pursuant to awards that may be made under our 2006 Long-Term Incentive Plan. In addition, the shares of common stock to be outstanding after this offering do not includeIndex to Financial StatementsSUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA We are providing the following summary consolidated financial information and other data to assist you in your analysis of our financial condition and results of operations. We acquired RAM Energy effective May 8, 2006, by the merger of our recently formed, wholly owned subsidiary with and into RAM Energy, which transaction we refer to as the merger. See“Prospectus Summary—Recent Events” for a discussion of the merger. For accounting and financial reporting purposes, the merger was accounted for under the purchase method of accounting as a reverse acquisition and, in substance, as a capital transaction, because Tremisis had no active business operations prior to consummation of the merger. Accordingly, for accounting and financial reporting purposes, the merger was treated as the equivalent of RAM Energy issuing stock for the net monetary assets of Tremisis, accompanied by a recapitalization. The The consolidated balance sheet data as of December 31, 2004 and 2005 and the The summary consolidated financial information and other data presented below is only a summary and should be Index to Financial StatementsSummary Consolidated Financial Information (in thousands)
Index to Financial StatementsSummary Reserve Data
Summary Operating Data The following tables present certain information with respect to oil and natural gas production, prices and costs attributable to our
Index to | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ÿ | worldwide and domestic supplies of oil and natural gas; |
| Ÿ | weather conditions; |
| Ÿ | the level of consumer demand; |
| Ÿ | the price and availability of alternative fuels; |
| Ÿ | the availability of drilling rigs and completion equipment; |
| Ÿ | the availability of pipeline capacity; |
| Ÿ | the price and volume of foreign imports; |
| Ÿ | domestic and foreign governmental regulations and taxes; |
| Ÿ | the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; |
| Ÿ | political instability or armed conflict in oil-producing regions; and |
| Ÿ | the overall economic environment. |
These factors and the volatility of the energy or
environmental industriesmarkets make it extremely difficult to predict future oil and their related infrastructures. We have not
conducted any discussions and we have no plans, arrangements or understandingsnatural gas price movements with any prospective acquisition candidates. We willcertainty. Declines in oil and natural gas prices would not generate any revenues
(other than interest income ononly reduce revenue, but could reduce the proceedsamount of this offering) until, at the
earliest, after the consummation of a business combination. We currently have a
working capital deficit whereby our current liabilities exceed our current
assets (cash). The report of our independent certified public accountants on
our financial statements includes an explanatory paragraph, statingoil and natural gas that our
ability to continuewe can produce economically and, as a going concern, is dependent on the consummation of
this offering. The financial statements do not include any adjustments that
might result, from the outcome of this uncertainty.
IF WE ARE FORCED TO LIQUIDATE BEFORE A BUSINESS COMBINATION, OUR PUBLIC
STOCKHOLDERS WILL RECEIVE LESS THAN $6.00 PER SHARE UPON DISTRIBUTION OF THE
TRUST FUND AND OUR WARRANTS WILL EXPIRE WORTHLESS.
If we are unable to complete a business combination and are forced to
liquidate our assets, the per-share liquidation distribution will be less than
$6.00 because of the expenses of this offering, our general and administrative
expenses and the anticipated costs of seeking a business combination.
Furthermore, there will be no distribution with respect to our outstanding
warrants and, accordingly, the warrants will expire worthless if we liquidate
before the completion of a business combination. For a more complete discussion
of the effects on our stockholders if we are unable to complete a business
combination, see the section below entitled "Effecting a business
combination--Liquidation if no business combination."
YOU WILL NOT BE ENTITLED TO PROTECTIONS NORMALLY AFFORDED TO INVESTORS OF BLANK
CHECK COMPANIES.
Since the net proceeds of this offering are intended to be used to
complete a business combination with a target business that has not been
identified, we may be deemed to be a "blank check" company under the United
States securities laws. However, since we will have net tangible assets in
excess of $5,000,000 upon the successful consummation of this offering and our
units are being offered at an initial price of $6.00 per unit, we are exempt
from rules promulgated by the SEC to protect investors of blank check companies
such as Rule 419. Accordingly, investors will not be afforded the benefits or
protections of those rules. Because we are not subject to Rule 419, our units
will be immediately tradable and we have a longer period of time to complete a
business combination in certain circumstances. For a more detailed comparison
of our offering to offerings under Rule 419, see the section entitled
"Comparison to offerings of blank check companies" below.
IF THIRD PARTIES BRING CLAIMS AGAINST US, THE PROCEEDS HELD IN TRUST COULD BE
REDUCED AND THE PER-SHARE LIQUIDATION PRICE RECEIVED BY STOCKHOLDERS WILL BE
LESS THAN $5.18 PER SHARE.
Our placing of funds in trust may not protect those funds from third party
claims against us. The proceeds held in trust could be subject to claims which
could take priority over the claims of our public stockholders. We cannot
assure you that the per-share liquidation price will not be less than
9
$5.18, plus interest, due to claims of creditors. If we liquidate before the
completion of a business combination, Lawrence S. Coben, our chairman of the
board and chief executive officer, will be personally liable under certain
circumstances to ensure that the proceeds in the trust fund are not reduced by
the claims of various vendors or other entities that are owed money by us for
services rendered or products sold to us. However, we cannot assure you that
Mr. Coben will be able to satisfy those obligations.
SINCE WE HAVE NOT CURRENTLY SELECTED ANY TARGET BUSINESS WITH WHICH TO COMPLETE
A BUSINESS COMBINATION, WE ARE UNABLE TO CURRENTLY ASCERTAIN THE MERITS OR
RISKS OF THE BUSINESS' OPERATIONS.
Since we have not yet identified a prospective target business, investors
in this offering have no current basis to evaluate the possible merits or risks
of the target business' operations. To the extent we complete a business
combination with a financially unstable company or an entity in its development
stage, we may be affected by numerous risks inherent in the business operations
of those entities. Although our management will endeavor to evaluate the risks
inherent in a particular target business, we cannot assure you that we will
properly ascertain or assess all of the significant risk factors. We also
cannot assure you that an investment in our units will not ultimately prove to
be less favorable to investors in this offering than a direct investment, if an
opportunity were available, in a target business. For a more complete
discussion of our selection of a target business, see the section below
entitled "Effecting a business combination--We have not identified a target
business."
WE MAY ISSUE SHARES OF OUR CAPITAL STOCK OR DEBT SECURITIES TO COMPLETE A
BUSINESS COMBINATION, WHICH WOULD REDUCE THE EQUITY INTEREST OF OUR
STOCKHOLDERS AND LIKELY CAUSE A CHANGE IN CONTROL OF OUR OWNERSHIP.
Our certificate of incorporation authorizes the issuance of up to
30,000,000 shares of common stock, par value $.0001 per share, and 1,000,000
shares of preferred stock, par value $.0001 per share. Immediately after this
offering (assuming no exercise of the underwriters' over-allotment option),
there will be 11,300,000 authorized but unissued shares of our common stock
available for issuance (after appropriate reservation for the issuance of
shares upon full exercise of our outstanding warrants and the purchase option
granted to EarlyBirdCapital, the representative of the underwriters) and all of
the 1,000,000 shares of preferred stock available for issuance. Although we
have no commitments as of the date of this offering to issue our securities, we
will, in all likelihood, issue a substantial number of additional shares of our
common stock or preferred stock, or a combination of common and preferred
stock, to complete a business combination. The issuance of additional shares of
our common stock or any number of shares of our preferred stock:
o may significantly reduce the equity interest of investors in this
offering;
o will likely cause a change in control if a substantial number of our
shares of common stock are issued, which may affect, among other
things, our ability to use our net operating loss carry forwards, if
any, and most likely also result in the resignation or removal of our
present officers and directors; and
o may adversely affect prevailing market prices for our common stock.
Similarly, if we issued debt securities, it could result in:
o default and foreclosure on our assets if our operating revenues after
a business combination were insufficient to pay our debt obligations;
o acceleration of our obligations to repay the indebtedness even if we
have made all principal and interest payments when due if the debt
security contained covenants that required the maintenance of certain
financial ratios or reserves and any such covenant were breached
without a waiver or renegotiation of that covenant;
o our immediate payment of all principal and accrued interest, if any,
if the debt security was payable on demand; and
o our inability to obtain additional financing, if necessary, if the
debt security contained covenants restricting our ability to obtain
additional financing while such security was outstanding.
10
For a more complete discussion of the possible structure of a business
combination, see the section below entitled "Effecting a business
combination--Selection of a target business and structuring of a business
combination."
IT IS LIKELY THAT OUR CURRENT OFFICERS AND DIRECTORS WILL RESIGN UPON
CONSUMMATION OF A BUSINESS COMBINATION AND WE WILL HAVE ONLY LIMITED ABILITY TO
EVALUATE THE MANAGEMENT OF THE TARGET BUSINESS.
Our ability to successfully effect a business combination will be totally
dependent upon the efforts of our key personnel. The future role of our key
personnel in the target business, however, cannot presently be ascertained.
Although it is possible that some of our key personnel will remain associated
in various capacities with the target business following a business
combination, it is likely that the management of the target business at the
time of the business combination will remain in place. Although we intend to
closely scrutinize the management of a prospective target business in
connection with evaluating the desirability of effecting a business
combination, we cannot assure you that our assessment of management will prove
to be correct.
OUR OFFICERS AND DIRECTORS MAY ALLOCATE THEIR TIME TO OTHER BUSINESSES WHICH
COULD CAUSE A CONFLICT OF INTEREST AS TO WHICH BUSINESS THEY PRESENT A VIABLE
ACQUISITION OPPORTUNITY TO.
Our officers and directors are not required to commit their full time to
our affairs, which may result in a conflict of interest in allocating their
time between our operations and other businesses. Some of these persons may in
the future become affiliated with entities, including other "blank check"
companies, engaged in business activities similar to those intended to be
conducted by us. Our officers and directors may become aware of business
opportunities which may be appropriate for presentation to us as well as the
other entities with which they are or may be affiliated. Accordingly, they may
have conflicts of interest in determining to which entity a particular business
opportunity should be presented. For a complete discussion of the potential
conflicts of interest that you should be aware of, see the section below
entitled "Management--Conflicts of Interest." We cannot assure you that these
conflicts will be resolved in our favor.
ALL OF OUR OFFICERS AND DIRECTORS OWN SHARES OF OUR SECURITIES WHICH WILL NOT
PARTICIPATE IN LIQUIDATION DISTRIBUTIONS AND THEREFORE THEY MAY HAVE A CONFLICT
OF INTEREST IN DETERMINING WHETHER A PARTICULAR TARGET BUSINESS IS APPROPRIATE
FOR A BUSINESS COMBINATION.
All of our officers and directors own stock in our company, but have
waived their right to receive distributions upon liquidation. Additionally,
Lawrence S. Coben has agreed with the representative of the underwriters that
he and certain of his affiliates or designees will purchase warrants in the
open market following this offering. The shares and warrants owned by our
directors and officers will be worthless if we do not consummate a business
combination. The personal and financial interests of our directors and officers
may influence their motivation in identifying and selecting a target business
and completing a business combination timely. Consequently, our directors' and
officers' discretion in identifying and selecting a suitable target business
may result in a conflict of interest when determining whether the terms,
conditions and timing of a particular business combination are appropriate and
in our stockholders' best interest.
IF OUR COMMON STOCK BECOMES SUBJECT TO THE SEC'S PENNY STOCK RULES,
BROKER-DEALERS MAY EXPERIENCE DIFFICULTY IN COMPLETING CUSTOMER TRANSACTIONS
AND TRADING ACTIVITY IN OUR SECURITIES MAY BE ADVERSELY AFFECTED.
If at any time we have net tangible assets of $5,000,000 or less and our
common stock has a market price per share of less than $5.00, transactions in
our common stock may be subject to the "penny stock" rules promulgated under
the Securities Exchange Act of 1934. Under these rules, broker-dealers who
recommend such securities to persons other than institutional accredited
investors must:
o make a special written suitability determination for the purchaser;
11
o receive the purchaser's written agreement to a transaction prior to
sale;
o provide the purchaser with risk disclosure documents which identify
certain risks associated with investing in "penny stocks" and which
describe the market for these "penny stocks" as well as a purchaser's
legal remedies; and
o obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required
risk disclosure document before a transaction in a "penny stock" can
be completed.
If our common stock becomes subject to these rules, broker-dealers may
find it difficult to effectuate customer transactions and trading activity in
our securities may be adversely affected. As a result, the market price of our
securities may be depressed, and you may find it more difficult to sell our
securities.
IT IS PROBABLE THAT WE WILL ONLY BE ABLE TO COMPLETE ONE BUSINESS COMBINATION,
WHICH WILL CAUSE US TO BE SOLELY DEPENDENT ON A SINGLE BUSINESS AND A LIMITED
NUMBER OF PRODUCTS OR SERVICES.
The net proceeds from this offering will provide us with only
approximately $29,480,000 which we may use to complete a business combination.
Our initial business combination must be with a business with a fair market
value of at least 80% of our net assets at the time of such acquisition.
Consequently, it is probable that we will have the ability to complete only a
single business combination. Accordingly, the prospects for our success may be:
o solely dependent upon the performance of a single business, or
o dependent upon the development or market acceptance of a single or
limited number of products, processes or services.
In this case, we will not be able to diversify our operations or benefit from
the possible spreading of risks or offsetting of losses, unlike other entities
which may have the resources to complete several business combinations in
different industries or different areas of a single industry.
BECAUSE OF OUR LIMITED RESOURCES AND THE SIGNIFICANT COMPETITION FOR BUSINESS
COMBINATION OPPORTUNITIES, WE MAY NOT BE ABLE TO CONSUMMATE AN ATTRACTIVE
BUSINESS COMBINATION.
We expect to encounter intense competition from other entities having a
business objective similar to ours, including venture capital funds, leveraged
buyout funds and operating businesses competing for acquisitions in the energy
or environmental industry and their related infrastructures. Many of these
entities are well established and have extensive experience in identifying and
effecting business combinations directly or through affiliates. Many of these
competitors possess greater technical, human and other resources than we do and
our financial resources will be relatively limited when contrasted with those
of many of these competitors. While we believe that there are numerous
potential target businesses that we could acquire with the net proceeds of this
offering, our ability to compete in acquiring certain sizable target businesses
will be limited by our available financial resources. This inherent competitive
limitation gives others an advantage in pursuing the acquisition of certain
target businesses. Further, the obligation we have to seek stockholder approval
of a business combination may delay the consummation of a transaction, and our
obligation to convert into cash the shares of common stock held by public
stockholders in certain instances may reduce the resources available for a
business combination. Additionally, our outstanding warrants, and the future
dilution they potentially represent, may not be viewed favorably by certain
target businesses. Any of these obligations may place us at a competitive
disadvantage in successfully negotiating a business combination.
WE MAY BE UNABLE TO OBTAIN ADDITIONAL FINANCING, IF REQUIRED, TO COMPLETE A
BUSINESS COMBINATION OR TO FUND THE OPERATIONS AND GROWTH OF THE TARGET
BUSINESS, WHICH COULD COMPEL US TO RESTRUCTURE THE TRANSACTION OR ABANDON A
PARTICULAR BUSINESS COMBINATION.
Although we believe that the net proceeds of this offering will be
sufficient to allow us to consummate a business combination, in as much as we
have not yet identified any prospective target
12
business, we cannot ascertain the capital requirements for any particular
transaction. If the net proceeds of this offering prove to be insufficient,
either because of the size of the business combination or the depletion of the
available net proceeds in search of a target business, or because we become
obligated to convert into cash a significant number of shares from dissenting
stockholders, we will be required to seek additional financing. We cannot
assure you that such financing would be available on acceptable terms, if at
all. To the extent that additional financing proves to be unavailable when
needed to consummate a particular business combination, we would be compelled
to restructure the transaction or abandon that particular business combination
and seek an alternative target business candidate. In addition, if we
consummate a business combination, we may require additional financing to fund
the operations or growth of the target business. The failure to secure
additional financing could have a material adverse effect on our financial condition, results of operations and reserves.
Our success depends on acquiring or finding additional reserves.
Our future success depends upon our ability to find, develop or acquire additional oil and natural gas reserves that are economically recoverable. Our proved reserves will generally decline as reserves are produced, except to the extent that we conduct successful exploration or development activities or acquire
Index to Financial Statements
properties containing proved reserves, or both. To increase reserves and production, we must commence exploratory drilling, undertake other replacement activities or utilize third parties to accomplish these activities. There can be no assurance, however, that we will have sufficient resources to undertake these actions, that our exploratory projects or other replacement activities will result in significant additional reserves or that we will succeed in drilling productive wells at low finding and development costs. Furthermore, although our revenues may increase if prevailing oil and natural gas prices increase significantly, our finding costs for additional reserves could also increase.
In accordance with customary industry practice, we rely in part on independent third party service providers to provide most of the services necessary to drill new wells, including drilling rigs and related equipment and services, horizontal drilling equipment and services, trucking services, tubular goods, fracing and completion services and production equipment. The oil and natural gas industry has experienced significant volatility in cost for these services in recent years and this trend is expected to continue into the future. Any future cost increases could significantly increase our development costs and decrease the return possible from drilling and development activities, and possibly render the development of certain proved undeveloped reserves uneconomical.
Estimates of oil and natural gas reserves are uncertain and may vary substantially from actual production.
There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures, including many factors beyond our control. Petroleum engineering is not an exact science. Information relating to our proved oil and natural gas reserves is based upon engineering estimates. Estimates of economically recoverable oil and natural gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, future site restoration and abandonment costs, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and natural gas prices, future operating costs, severance and excise taxes, capital expenditures and workover and remedial costs, all of which may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers at different times may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.
Operating hazards and uninsured risks may result in substantial losses.
Our operations are subject to all of the hazards and operating risks inherent in drilling for, and the production of, oil and natural gas, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. In accordance with customary industry practice, we maintain insurance against some, but not all, of these risks. There can be no assurance that any insurance will be adequate to cover any losses or liabilities. We cannot predict the continued developmentavailability of insurance, or growthits availability at premium levels that justify its purchase. In addition, we may be liable for environmental damage caused by previous owners of properties purchased by us, which liabilities would not be covered by our insurance.
Index to Financial Statements
Our operations are subject to various governmental regulations that require compliance that can be burdensome and expensive.
Our operations are subject to various federal, state and local governmental regulations that may be changed from time to time in response to economic and political conditions. Matters subject to regulation include discharge from drilling operations, drilling bonds, reports concerning operations, the target business. Nonespacing of our officers, directorswells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity to conserve supplies of oil and natural gas. In addition, the production, handling, storage, transportation and disposal of oil and natural gas, by-products thereof and other substances and materials produced or stockholders is required to provide any financing to usused in connection with or after a business combination.
OUR EXISTING STOCKHOLDERS, INCLUDING OUR OFFICERS AND DIRECTORS, CONTROL A
SUBSTANTIAL INTEREST IN US AND THUS MAY INFLUENCE CERTAIN ACTIONS REQUIRING
STOCKHOLDER VOTE.
Upon consummationoil and natural gas operations are subject to regulation under federal, state and local laws and regulations primarily relating to protection of human health and the environment. These laws and regulations have continually imposed increasingly strict requirements for water and air pollution control and solid waste management, and compliance with these laws may cause delays in the additional drilling and development of our offering, our existing stockholders (including
allproperties. Significant expenditures may be required to comply with governmental laws and regulations applicable to us. We believe the trend of our officersmore expansive and directors)stricter environmental legislation and regulations will collectively own 20% of our issued and
outstanding shares of common stock (assuming they docontinue. While historically we have not purchase units in this
offering). Isaac Kier, our secretary and treasurer and a member of our board of
directors, has indicatedexperienced any material adverse effect from regulatory delays, there can be no assurance that he plans on purchasing unitssuch delays will not occur in the offering.
However, he is not obligated to do sofuture.
Our method of accounting for investments in oil and we do not have any agreementnatural gas properties may result in impairment of asset value, which could affect our stockholder equity and net profit or arrangement with him requiring him to purchase securitiesloss.
We use the full cost method of accounting for our investment in oil and natural gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves are capitalized into a “full cost pool.” Capitalized costs in the offering. Nonepool are amortized and charged to operations using the units-of-production method based on the ratio of our other existing shareholders, officerscurrent production to total proved oil and directors have indicated to us
that they intend to purchase our securities in the offering.
Our board of directors is divided into three classes, each of which will
generally serve for a term of two years with only one class of directors being
elected in each year. It is unlikely that there will be an annual meeting of
stockholders to elect new directors prior to the consummation of a business
combination, in which case all of the current directors will continue in office
at least until the consummation of the business combination. If there is an
annual meeting, as a consequence of our "staggered" board of directors, only a
minority of the board of directors will be considered for election and our
existing stockholders, because of their ownership position, will have
considerable influence regarding the outcome. Accordingly, our existing
stockholders will continue to exert control at least until the consummation of
a business combination. In addition, our existing stockholders and their
affiliates and relatives are not prohibited from purchasing units in this
offering or shares in the aftermarket. If they do, we cannot assure you that
our existing stockholders will not have considerable influence upon the vote in
connection with a business combination.
OUR EXISTING STOCKHOLDERS PAID AN AGGREGATE OF $25,000, OR AN AVERAGE OF
APPROXIMATELY $0.018 PER SHARE, FOR THEIR SHARES AND, ACCORDINGLY, YOU WILL
EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION FROM THE PURCHASE OF OUR COMMON
STOCK.
The difference between the public offering price per share of our common
stock and the pro forma net tangible book value per share of our common stock
after this offering constitutes the dilution to you and the other investors in
this offering. The fact that our existing stockholders acquired their shares of
common stock at a nominal price has significantly contributed to this dilution.
Assuming the offering is completed, you and the other new investors will incur
an immediate and substantial dilution of approximately 31% or $1.87 per share
(the difference between the pro forma net tangible book value per share of
$4.13, and the initial offering price of $6.00 per unit).
OUR OUTSTANDING WARRANTS MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF
COMMON STOCK AND MAKE IT MORE DIFFICULT TO EFFECT A BUSINESS COMBINATION.
In connection with this offering, as part of the units, we will be issuing
warrants to purchase 11,000,000 shares of common stock. We will also issue an
option to purchase 275,000 units to the representative of the underwriters
which, if exercised, will result in the issuance of an additional
13
550,000 warrants.natural gas reserves. To the extent that such capitalized costs, net of amortization, exceed the present value of our proved oil and natural gas reserves (using a 10% discount rate) at any reporting date, such excess costs are charged to operations. Although we issue shareshave never incurred a write down of common stockthe value of oil and natural gas properties, if a writedown is incurred, it is not reversible at a later date, even if the present value of our proved oil and natural gas reserves increases as a result of an increase in oil or natural gas prices.
Properties that we acquire may not produce as projected, and we may be unable to effect aidentify liabilities associated with the properties or obtain protection from sellers against them.
As part of our business combination,strategy, we continually seek acquisitions of oil and natural gas properties. Our most recent significant acquisition, which closed in December 2004, was our purchase of WG Energy Holdings, Inc. The successful acquisition of oil and natural gas properties requires assessment of many factors, which are inherently inexact and may be inaccurate, including the following:
| Ÿ | future oil and natural gas prices; |
| Ÿ | the amount of recoverable reserves; |
| Ÿ | future operating costs; |
| Ÿ | future development costs; |
| Ÿ | failure of titles to properties; |
| Ÿ | costs and timing of plugging and abandoning wells; and |
| Ÿ | potential environmental and other liabilities. |
Index to Financial Statements
Our assessment will not necessarily reveal all existing or potential forproblems, nor will it permit us to become familiar enough with the issuance of substantial numbers of
additional shares upon exercise of these warrantsproperties to assess fully their capabilities and options could make us a
less attractive acquisition vehicledeficiencies. With respect to properties on which there is current production, we may not inspect every well location, every potential well location, or pipeline in the eyescourse of a target businessour due diligence. Inspections may not reveal structural and environmental problems such as such
securities, when exercised, will increasepipeline corrosion or groundwater contamination. We may not be able to obtain or recover on contractual indemnities from the seller for liabilities that it created. We may be required to assume the risk of the physical condition of the properties in addition to the risk that the properties may not perform in accordance with our expectations.
A substantial number of issued and outstanding shares of our common stock and reducewill be available for sale in the value of the shares issued to
complete the business combination. Accordingly, our warrants and optionsfuture, which may
make it more difficult to effectuate a business combination or increase the costvolume of common stock available for sale in the target business. Additionally, the sale, or even the possibility of
sale, of the shares underlying the warrantsopen market and options could have an adverse
effect onmay cause a decline in the market price forof our securities or on our ability to obtain
future public financing. If and to the extent these warrants and options are
exercised, you may experience dilution to your holdings.
IF OUR EXISTING STOCKHOLDERS EXERCISE THEIR REGISTRATION RIGHTS, IT MAY HAVE AN
ADVERSE EFFECT ON THE MARKET PRICE OUR COMMON STOCK AND THE EXISTENCE OF THESE
RIGHTS MAY MAKE IT MORE DIFFICULT TO EFFECT A BUSINESS COMBINATION.
Our existing stockholders are entitled to demand that we register the
resale of theircommon stock.
We issued 25,600,000 shares of our common stock at any time afterin connection with our acquisition of RAM Energy. These shares were not registered under the date on whichSecurities Act of 1933, and their resale is restricted. All of such shares are released from escrow. If our existing stockholders exercise theirsubject to a lock-up agreement and cannot be sold publicly until the expiration of the restricted periods set out in the lock-up agreement (a maximum of one year after May 8, 2006) and under Rule 144 promulgated under the Securities Act of 1933. However, the holders of such shares have certain registration rights with respect to all of their shares of common stock, then
thereand will be an additional 1,375,000able to sell their shares of common stock eligible for
trading in the public market.market prior to such times if registration is effected. The presence of this additional number of shares of common stock eligible for trading in the public market may have an adverse effect on the market price of our common stock. In addition,
Our outstanding warrants may be exercised in the existence of
these rights may make it more difficult to effectuate a business combination orfuture, which would increase the costnumber of shares eligible for future resale in the target business, as the stockholderspublic market and result in dilution to our stockholders.
We have issued and there are outstanding redeemable warrants to purchase an aggregate of the target
business may be discouraged from entering into a business combination with us or
will request a higher price for their securities as a result12,650,000 shares of these
registration rights and the potential future effect their exercise may have on
the trading market for our common stock.
IF YOU ARE NOT AN INSTITUTIONAL INVESTOR, YOU MAY PURCHASE OUR SECURITIES IN
THIS OFFERING ONLY IF YOU RESIDE WITHIN CERTAIN STATES AND MAY ENGAGE IN RESALE
TRANSACTIONS ONLY IN THOSE STATES AND A LIMITED NUMBER OF OTHER JURISDICTIONS.
We have applied to registerstock which are currently exercisable at an exercise price of $5.00 per share and 825,000 shares of our securities, or have obtained or will seek
to obtain an exemption from registration, in Delaware,common stock issuable upon the Districtexercise of Columbia, Florida, Hawaii, Illinois, Maryland, New York and Rhode Island. If
you are not an "institutional investor," you must be a resident of these
jurisdictionscurrently exercisable options to purchase 275,000 units at an exercise price of $9.90 per unit, each unit consisting of one share of our securitiescommon stock and two warrants, each warrant to purchase one share of our common stock at an exercise price of $6.25 per share. Such warrants, when issued, will be immediately exercisable. To the extent the options and warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the offering. The definitionpublic market. Sales of an
"institutional investor" varies from state to state but generally includes
financial institutions, broker-dealers, banks, insurance companiessubstantial numbers of such shares in the public market could adversely affect the market price of such shares.
Voting control by our executive officers, directors and other qualified entities. In order to prevent resale transactions in violation of
states' securities laws, you may engage in resale transactions only in these
states and in a limited number of other jurisdictions in which an applicable
exemption is available or a Blue Sky application has been filed and accepted.
This restriction on resaleaffiliates may limit your ability to resellinfluence the securities
purchased inoutcome of director elections and other matters requiring stockholder approval.
Persons who beneficially own approximately 80% (56% after giving effect to the completion of this offering and may impact the priceoffering) of our securities. Foroutstanding common stock are parties to a more complete discussion of the Blue Sky state securities laws and
registrations affecting this offering, please see the section entitled "State
Blue Sky Information" below.
WE INTEND TO HAVE OUR SECURITIES QUOTED ON THE OTC BULLETIN BOARD, WHICH WILL
LIMIT THE LIQUIDITY AND PRICE OF OUR SECURITIES MORE THAN IF OUR SECURITIES
WERE QUOTED OR LISTED ON THE NASDAQ STOCK MARKET OR A NATIONAL EXCHANGE.
Our securities will be traded in the over-the-counter market. It is
anticipated that they will be quoted on the OTC Bulletin Board, an
NASD-sponsored and operated inter-dealer automated quotation systemvoting agreement. These persons have agreed to vote for equity
securities not included in the Nasdaq Stock Market. Quotation of our securities
on the OTC Bulletin Board will limit the liquidity and price of our securities
more than if our securities were quoted or listed on The Nasdaq Stock Market or
a national exchange.
THE REPRESENTATIVE OF THE UNDERWRITERS IN THE OFFERING WILL NOT MAKE A MARKET
FOR OUR SECURITIES WHICH COULD ADVERSELY AFFECT THE LIQUIDITY AND PRICE OF OUR
SECURITIES.
EarlyBirdCapital, the representative of the underwriters in this offering,
does not make markets in securities and will not be making a market in our
securities. However, we believe certain
14
broker-dealers other than EarlyBirdCapital will be making a market in our
securities. EarlyBirdCapital not acting as a market maker for our securities
may adversely impact the liquidity of our securities.
IF WE ARE DEEMED TO BE AN INVESTMENT COMPANY, WE MAY BE REQUIRED TO INSTITUTE
BURDENSOME COMPLIANCE REQUIREMENTS AND OUR ACTIVITIES MAY BE RESTRICTED, WHICH
MAY MAKE IT DIFFICULT FOR US TO COMPLETE A BUSINESS COMBINATION.
If we are deemedeach other’s designees to be an investment company under the Investment Company
Act of 1940, our activities may be restricted, including:
o restrictions on the nature of our investments; and
o restrictions on the issuance of securities,
which may make it difficult for us to complete a business combination.
In addition, we may have imposed upon us burdensome requirements,
including:
o registration as an investment company;
o adoption of a specific form of corporate structure; and
o reporting, record keeping, voting, proxy and disclosure requirements
and other rules and regulations.
We do not believe that our anticipated principal activities will subject us to
the Investment Company Act of 1940. To this end, the proceeds held in trust may
only be invested by the trust agent in "government securities" with specific
maturity dates. By restricting the investment of the proceeds to these
instruments, we intend to meet the requirements for the exemption provided in
Rule 3a-1 promulgated under the Investment Company Act of 1940. If we were
deemed to be subject to the act, compliance with these additional regulatory
burdens would require additional expense that we have not allotted for.
BECAUSE WE MAY BE DEEMED TO HAVE NO "INDEPENDENT" DIRECTORS, ACTIONS TAKEN AND
EXPENSES INCURRED BY OUR OFFICERS AND DIRECTORS ON OUR BEHALF WILL GENERALLY
NOT BE SUBJECT TO "INDEPENDENT" REVIEW.
Each of our directors own shares of our securities and, although no
compensation will be paid to them for services rendered prior to or in
connection with a business combination, they may receive reimbursement for
out-of-pocket expenses incurred by them in connection with activities on our
behalf such as identifying potential target businesses and performing due
diligence on suitable business combinations. There is no limit on the amount of
these out-of-pocket expenses and there will be no review of the reasonableness
of the expenses by anyone other than our board of directors which includes
persons who may seek reimbursement, or a court of competent jurisdiction if
such reimbursement is challenged. Because none of our directorsthrough director elections in 2008. Accordingly, they will be deemed
"independent," we will generally notable to control the election of directors and, therefore, our policies and direction during the term of the voting agreement. This concentration of voting power could have the benefiteffect of independent directors
examining the propriety of expenses incurred on our behalf and subject to
reimbursement. Although we believe that all actions taken by our directors on
our behalf will bedelaying or preventing a change in our best interests, we cannot assure you that this will
actually be the case. If actions are taken,control or expenses are incurred that are
actually notdiscouraging a potential acquirer from attempting to obtain control of us, which in our best interests, itturn could have a material adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the market price for their shares of common stock.
Index to Financial Statements
We estimate that our net proceeds from the sale of the shares of common stock that we are offering will be approximately $46.0 million. If the underwriters fully exercise the over-allotment option, the net proceeds of the shares we sell will be approximately $55.1 million. Net proceeds are what we expect to receive after paying the underwriting discounts and the other estimated expenses of this offering. For the purpose of estimating net proceeds, we are assuming that the offering price will be $5.43 per share, which is the closing price of our common stock on the Nasdaq Capital Market on November 21, 2006. We will not receive any proceeds from the sale of shares by the selling stockholder.
We intend to use the net proceeds of this offering to repurchase all of our outstanding 11 1/2% senior notes ($28.4 million principal amount plus a $1.1 million charge related to a prepayment premium) and to reduce the outstanding balance under our revolving credit facility ($13.0 million outstanding at October 31, 2006). The remainder of the net proceeds of this offering will be used for working capital and other corporate purposes. We expect to repurchase our 11 1/2% senior notes on or after February 15, 2007 at 103.84% of the stated principal amount.
Our revolving credit facility matures in 2010 and our term facility matures in 2011. At October 31, 2006, the interest rate on borrowings outstanding under our revolving credit facility was 7.4% per annum and under our term facility was 11.1% per annum. Borrowings under our credit facility have been used primarily for acquisition and development of our oil and natural gas properties, working capital and general corporate purposes. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for additional information about our credit facility and our 11 1/2% senior notes.
Until we use the proceeds from this offering, we will invest the funds in short-term, investment grade, interest-bearing securities.
Prior to the consummation of the merger, RAM Energy regularly paid cash dividends to its stockholders. We have paid no dividends since the date of the merger. We currently intend to retain all of our earnings to finance our operations, repay indebtedness and fund our future growth. We do not expect to pay any dividends on our common stock for the foreseeable future. In addition, covenants contained in the instruments governing our credit facility limit our ability to pay dividends on our common stock. See“Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Capital Resources.”
Index to Financial Statements
The following table shows our capitalization on September 30, 2006 and our capitalization on September 30, 2006, as adjusted to give effect to the completion of this offering at an assumed offering price of $5.43 per share and the use of the net proceeds as described under “Use of Proceeds.”
| Actual | As Adjusted | |||||||
| (in thousands) | ||||||||
Cash and cash equivalents | $ | 7,592 | $ | 11,101 | ||||
Current portion of long-term debt | $ | 194 | $ | 194 | ||||
Long-term debt, less current portion | $ | 131,502 | $ | 90,102 | ||||
Stockholders’ equity (deficit): | ||||||||
Preferred stock, $0.0001 par value, 1,000,000 shares authorized; no shares issued or outstanding | $ | — | $ | — | ||||
Common stock, $0.0001 par value, 100,000,000 shares authorized; 32,792,725 shares issued and outstanding, actual; 42,647,633 shares issued and outstanding, as adjusted | 3 | 4 | ||||||
Additional paid-in capital | 2,218 | 48,217 | ||||||
Treasury stock | (3,768 | ) | (3,768 | ) | ||||
Accumulated deficit | (27,496 | ) | (28,531 | ) | ||||
Total stockholders’ equity (deficit) | $ | (29,043 | ) | $ | 15,922 | |||
Total capitalization | $ | 102,459 | $ | 106,024 | ||||
The shares of common stock issued and outstanding do not include approximately 12,650,000 shares reserved for issuance upon the exercise of outstanding warrants and 825,000 shares of our common stock issuable upon the exercise of currently exercisable options to purchase 275,000 units, each unit consisting of one share of our common stock and warrants to purchase two shares of our common stock; an aggregate of1,423,195 shares remaining reserved for issuance upon the exercise of options that may be granted by us or awards that may be made under our 2006 Long-Term Incentive Plan; and a maximum of 1,795,580 shares issuable to the underwriters upon exercise of their over-allotment option.
Index to Financial Statements
SELECTED CONSOLIDATED FINANCIAL DATA
We are providing the following selected financial information to assist you in your analysis of our financial condition and results of operations. We acquired RAM Energy effective May 8, 2006, by the merger of our recently formed, wholly owned subsidiary with and into RAM Energy. See “Prospectus Summary—Recent Events” for a description of the merger. For accounting and financial reporting purposes, the merger was accounted for under the purchase method of accounting as a reverse acquisition and, in substance, as a capital transaction, because Tremisis had no active business operations prior to consummation of the merger. Accordingly, for accounting and financial reporting purposes, the merger was treated as the equivalent of RAM Energy issuing stock for the net monetary assets of Tremisis accompanied by a recapitalization. The net monetary assets of Tremisis have been stated at their fair value, essentially equivalent to historical costs, with no goodwill or other intangible assets recorded. The accumulated deficit of RAM Energy has been carried forward. Operations prior to the merger are those of RAM Energy.
Our consolidated balance sheet data as of December 31, 2004 and 2005 and our consolidated statement of operations data for the years ended December 31, 2003, 2004 and 2005 are derived from RAM Energy’s consolidated financial statements audited by UHY Mann Frankfort Stein & Lipp CPAs, LLP, independent registered public accountants, and are included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2003 and the consolidated statement of operations data for the year ended December 31, 2002 are derived from RAM Energy’s consolidated financial statements audited by UHY Mann Frankfort Stein & Lipp CPAs, LLP, independent registered public accountants, which are not included in this prospectus. The consolidated balance sheet data of RAM Energy as of December 31, 2001 and 2002 and the consolidated statement of operations data for the year ended December 31, 2001 are derived from RAM Energy’s unaudited consolidated financial statements, which are not included in this prospectus.
The selected consolidated financial information presented below should be read in conjunction with the historical consolidated financial statements of each of RAM Energy and Tremisis and the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. The historical results included below and elsewhere in this prospectus may not be indicative of our future performance. RAM Energy’s financial position and results of operations for 2003, 2004 and 2005 may not be comparative to other periods as a result of certain divestitures and acquisitions, as more fully described in RAM Energy’s financial statements included elsewhere in this prospectus.
Index to Financial Statements
Selected Consolidated Financial Data
(in thousands, except share data)
| Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2004 | 2005 (1) | 2005 | 2006 | ||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||||
Revenues and Other Operating Income: | ||||||||||||||||||||||||||||
Oil and natural gas sales | $ | 25,404 | $ | 10,166 | $ | 20,053 | $ | 17,975 | $ | 66,243 | $ | 48,140 | $ | 53,050 | ||||||||||||||
Pipeline system | 15,602 | — | — | — | — | — | — | |||||||||||||||||||||
Gain on sale of subsidiary | — | — | — | 12,139 | — | — | — | |||||||||||||||||||||
Other | 210 | 163 | 170 | 338 | 851 | 983 | 466 | |||||||||||||||||||||
Realized and unrealized gains (losses) from derivatives | — | (146 | ) | (203 | ) | (793 | ) | (11,695 | ) | (16,613 | ) | 1,108 | ||||||||||||||||
Total revenues and other operating income | 41,216 | 10,183 | 20,020 | 29,659 | 55,399 | 32,510 | 54,624 | |||||||||||||||||||||
Operating Expenses: | ||||||||||||||||||||||||||||
Oil and natural gas production taxes | 2,755 | 1,044 | 1,408 | 1,263 | 3,320 | 2,460 | 2,527 | |||||||||||||||||||||
Oil and natural gas production expenses | 5,975 | 3,023 | 3,527 | 3,600 | 16,099 | 11,453 | 13,222 | |||||||||||||||||||||
Pipeline purchases | 12,227 | — | — | — | — | — | — | |||||||||||||||||||||
Pipeline operations | 489 | — | — | — | — | — | — | |||||||||||||||||||||
Depreciation and amortization | 9,766 | 2,947 | 4,098 | 3,273 | 12,972 | 9,213 | 10,019 | |||||||||||||||||||||
Accretion expense | — | — | 48 | 78 | 510 | 217 | 398 | |||||||||||||||||||||
Contract termination and severance payments | 1,104 | — | — | — | — | — | — | |||||||||||||||||||||
Share-based compensation | — | — | — | — | — | — | 2,218 | |||||||||||||||||||||
General and administrative, net of operator’s overhead fees | 4,061 | 5,858 | 6,331 | 6,601 | 8,610 | 6,285 | 6,351 | |||||||||||||||||||||
Total operating expenses | 36,377 | 12,872 | 15,412 | 14,815 | 41,511 | 29,628 | 34,735 | |||||||||||||||||||||
Operating income (loss) | 4,839 | (2,689 | ) | 4,608 | 14,844 | 13,888 | 2,882 | 19,889 | ||||||||||||||||||||
Other Income (Expense): | ||||||||||||||||||||||||||||
Gain on early extinguishment of debt | — | 32,883 | — | — | — | — | — | |||||||||||||||||||||
Gain on sale of oil and natural gas properties | 17,320 | — | — | — | — | — | — | |||||||||||||||||||||
Interest expense | (14,514 | ) | (9,240 | ) | (4,912 | ) | (5,070 | ) | (12,614 | ) | (8,769 | ) | (13,213 | ) | ||||||||||||||
Interest income | 104 | 277 | 41 | 35 | 75 | 41 | 238 | |||||||||||||||||||||
Income (Loss) from Continuing Operations Before Income Taxes and Extraordinary Item | 7,749 | 21,231 | (263 | ) | 9,809 | 1,349 | (5,846 | ) | 6,914 | |||||||||||||||||||
Income Tax Provision (Benefit) | 2,900 | 7,975 | 228 | 3,733 | 806 | (2,222 | ) | 2,924 | ||||||||||||||||||||
Income (Loss) from Continuing Operations Before Extraordinary Item | 4,849 | 13,256 | (491 | ) | 6,076 | 543 | (3,624 | ) | 3,990 | |||||||||||||||||||
Extraordinary loss on acquisition of debt, net of income tax benefit of $674 | (1,098 | ) | — | — | — | — | — | — | ||||||||||||||||||||
Income (Loss) from Continuing Operations | 3,751 | 13,256 | (491 | ) | 6,076 | 543 | (3,624 | ) | 3,990 | |||||||||||||||||||
Index to Financial Statements
Selected Consolidated Financial Data (continued)
(in thousands, except share data)
| Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2004 | 2005 (1) | 2005 | 2006 | ||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||||
Discontinued operations: | ||||||||||||||||||||||||||||
Loss from discontinued operations | — | (18,016 | ) | (1,723 | ) | — | — | — | — | |||||||||||||||||||
Income tax benefit | — | (6,846 | ) | (655 | ) | — | — | — | — | |||||||||||||||||||
Loss from discontinued operations | — | (11,170 | ) | (1,068 | ) | — | — | — | — | |||||||||||||||||||
Income (loss) before cumulative effect of change in accounting principle | 3,751 | 2,086 | (1,559 | ) | 6,076 | 543 | (3,624 | ) | 3,990 | |||||||||||||||||||
Cumulative effect of change in accounting principle (net of tax benefit of $275) | — | — | (448 | ) | — | — | — | — | ||||||||||||||||||||
Net income (loss) | $ | 3,751 | $ | 2,086 | $ | (2,007 | ) | $ | 6,076 | $ | 543 | $ | (3,624 | ) | $ | 3,990 | ||||||||||||
Net income (loss) per share attributable to common stockholders — basic | ||||||||||||||||||||||||||||
Income (loss) from continuing operations before extraordinary item | $ | 1.78 | $ | 4,861.01 | $ | (180.05 | ) | $ | 2,383.67 | $ | 238.94 | $ | (0.47 | ) | $ | 0.19 | ||||||||||||
Extraordinary loss | (0.40 | ) | — | — | — | — | — | — | ||||||||||||||||||||
Loss from discontinued operations | — | (4,096.08 | ) | (391.64 | ) | — | — | — | — | |||||||||||||||||||
Cumulative effect of change in accounting principle | — | — | (164.28 | ) | — | — | — | — | ||||||||||||||||||||
Net income (loss) per share | $ | 1.38 | $ | 764.93 | $ | (735.97 | ) | $ | 2,383.67 | $ | 238.94 | $ | (0.47 | ) | $ | 0.19 | ||||||||||||
Cash dividends per share | $ | — | $ | — | $ | 294.68 | $ | 470.77 | $ | 615.93 | $ | 0.12 | $ | 0.02 | ||||||||||||||
Earnings (loss) per share: | ||||||||||||||||||||||||||||
Basic | $ | 1.38 | $ | 764.93 | $ | (735.97 | ) | $ | 2,383.67 | $ | 238.94 | $ | (0.47 | ) | $ | 0.19 | ||||||||||||
Diluted | 1.38 | 764.93 | (735.97 | ) | 2,299.77 | 230.72 | (0.47 | ) | 0.18 | |||||||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||||||
Basic | 2,727,000 | 2,727 | 2,727 | 2,549 | 2,273 | 7,700,000 | 21,501,633 | |||||||||||||||||||||
Diluted | 2,727,000 | 2,727 | 2,727 | 2,642 | 2,354 | 7,700,000 | 21,105,987 | |||||||||||||||||||||
Statement of Cash Flow Data | ||||||||||||||||||||||||||||
Cash provided by (used in): | ||||||||||||||||||||||||||||
Operating activities | $ | 2,240 | $ | (14,842 | ) | $ | 5,774 | $ | 1,793 | $ | 18,359 | $ | 10,616 | $ | 25,294 | |||||||||||||
Investing activities | 44,520 | (46 | ) | 7,422 | (64,852 | ) | (12,554 | ) | (9,877 | ) | (18,710 | ) | ||||||||||||||||
Financing activities | (27,803 | ) | (3,731 | ) | (12,333 | ) | 62,116 | (6,910 | ) | (161 | ) | 938 | ||||||||||||||||
Other Data | ||||||||||||||||||||||||||||
Capital expenditures (2) | $ | 11,349 | $ | 6,700 | $ | 5,258 | $ | 102,719 | $ | 13,526 | $ | 11,078 | $ | 21,529 | ||||||||||||||
EBITDA | 14,709 | 473 | 8,670 | 18,153 | 33,747 | 27,208 | 26,888 | |||||||||||||||||||||
| As of December 31, | As of September 30, 2006 | |||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2004 | 2005 | ||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||
Total assets | $ | 98,322 | $ | 62,192 | $ | 45,908 | $ | 140,324 | $ | 143,276 | $ | 158,157 | ||||||||||||
Long-term debt, including current portion | 91,400 | 56,267 | 46,057 | 117,344 | 112,846 | 131,696 | ||||||||||||||||||
Stockholders’ deficit | (20,347 | ) | (16,842 | ) | (19,653 | ) | (19,912 | ) | (20,769 | ) | (29,043 | ) | ||||||||||||
| (1) | Our results for 2005 include income and expense related to WG Energy Holdings, Inc., which we acquired in December 2004. |
| (2) | Includes costs of acquisitions. |
Index to Financial Statements
Our EBITDA is determined by adding the following to net income (loss): interest expense, amortization, depreciation, accretion, income taxes, gain on early extinguishment of debt, gain on sale of oil and natural gas properties, share-based compensation, extraordinary gains (losses), the cumulative effect of changes in accounting principles and unrealized gains (losses) on derivatives. The table below reconciles EBITDA to net income (loss).
We present EBITDA because we believe that it provides useful information regarding our continuing operating results. We rely on EBITDA as a primary measure to review and assess our operating performance with corresponding periods, and as an assessment of our overall liquidity and our ability to meet our debt service obligations.
We believe that EBITDA is useful to investors to provide disclosure of our operating results on the same basis as that used by our management. We also believe that this measure can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items that do not directly affect our ongoing operating performance or cash flows. EBITDA, which is not a financial measure under generally accepted accounting principles, or GAAP, has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flows statement data prepared in accordance with GAAP. Because of these limitations, EBITDA should neither be considered as a measure of discretionary cash available to us to invest in the growth of our business, nor as a replacement for net income. We compensate for these limitations by relying primarily on our GAAP results and operations.
IF WE COMPLETE A BUSINESS COMBINATION WITH A TARGET BUSINESS LOCATED OUTSIDEusing EBITDA as supplemental information.
| Year ended December 31, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2001 | 2002 | 2003 | 2004 | 2005 | 2005 | 2006 | |||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||
Reconciliation of EBITDA to net income (loss): | |||||||||||||||||||||||||||
Net income (loss) | $ | 3,751 | $ | 2,086 | $ | (2,007 | ) | $ | 6,076 | $ | 543 | $ | (3,624 | ) | $ | 3,990 | |||||||||||
Plus: Interest expense | 14,514 | 9,240 | 4,912 | 5,070 | 12,614 | 8,769 | �� | 13,213 | |||||||||||||||||||
Plus: Amortization and depreciation expense | 9,766 | 2,947 | 4,098 | 3,273 | 12,972 | 9,213 | 10,019 | ||||||||||||||||||||
Plus: Accretion expense | — | — | 48 | 78 | 510 | 217 | 398 | ||||||||||||||||||||
Plus: Income tax expense (benefit) | 2,900 | 7,975 | 228 | 3,733 | 806 | (2,222 | ) | 2,924 | |||||||||||||||||||
Less: Gain on early extinguishment of debt | — | (32,883 | ) | — | — | — | — | — | |||||||||||||||||||
Less: Gain on sale of oil and natural gas properties | (17,320 | ) | — | — | — | — | — | — | |||||||||||||||||||
Plus: Share-based compensation | — | — | — | — | — | — | 2,218 | ||||||||||||||||||||
Plus: Extraordinary (gain) loss | 1,098 | — | — | — | — | — | — | ||||||||||||||||||||
Plus: Loss from discontinued operations, net of tax | — | 11,170 | 1,068 | — | — | — | — | ||||||||||||||||||||
Less: Cumulative effect of change in accounting principle | — | — | 448 | — | — | — | — | ||||||||||||||||||||
Plus: Unrealized (gain) loss on derivatives | — | (62 | ) | (125 | ) | (77 | ) | 6,302 | 14,855 | (5,874 | ) | ||||||||||||||||
EBITDA | $ | 14,709 | $ | 473 | $ | 8,670 | $ | 18,153 | $ | 33,747 | $ | 27,208 | $ | 26,888 | |||||||||||||
Index to Financial Statements
MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE UNITED STATES, WE WOULD BE SUBJECT TO THE RISKS INHERENT WITH DOING BUSINESS
IN THAT COUNTRY WHICH COULD ADVERSELY AFFECT OUR PROFITABILITYFINANCIAL
CONDITION AND OPERATIONS.
AlthoughRESULTS OF OPERATIONS
General
We are an independent oil and natural gas company engaged in the acquisition, development, exploitation, exploration and production of oil and natural gas properties, primarily in Texas, Louisiana and Oklahoma. Through our RAM Energy subsidiary, we intendhave been active in these core areas since 1987. Our management team has extensive technical and operating expertise in all areas of our geographic focus.
Prior to focusMay 8, 2006, our searchcorporate name was Tremisis Energy Acquisition Corporation. On May 8, 2006, we acquired RAM Energy through the merger of our recently formed, wholly owned subsidiary into RAM Energy. The merger was accomplished pursuant to the terms of an Agreement and Plan of Merger dated October 20, 2005, as amended, which we refer to as the merger agreement, among us, our acquisition subsidiary, RAM Energy and the stockholders of RAM Energy. Upon completion of the merger, RAM Energy became our wholly owned subsidiary and we changed our name from Tremisis Energy Acquisition Corporation to RAM Energy Resources, Inc.
Upon consummation of the merger, the stockholders of RAM Energy received an aggregate of 25,600,000 shares of our common stock and $30.0 million of cash. Prior to consummation of the merger, and as permitted by the merger agreement, on target businessesApril 6, 2006, RAM Energy redeemed a portion of its outstanding stock for an aggregate consideration of $10.0 million.
The merger is accounted for as a reverse acquisition. RAM Energy has been treated as the acquiring company and the continuing reporting entity for accounting purposes. Upon completion of the merger, the assets and liabilities of Tremisis were recorded at their fair value, which is considered to approximate historical cost, and added to those of RAM Energy. Because Tremisis had no active business operations prior to consummation of the merger, the merger was accounted for as a recapitalization of RAM Energy.
In December 2004, RAM Energy acquired WG Energy Holdings, Inc. for $82.6 million, which we refer to as the WG Energy Acquisition. Upon consummation of the WG Energy Acquisition, we changed WG Energy Holdings, Inc.’s name to RWG Energy, Inc.
Critical Accounting Policies
The preparation of our financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect our reported assets, liabilities and contingencies as of the date of the financial statements and our reported revenues and expenses during the related reporting period. Our actual results could differ from those estimates.
We use the full cost method of accounting for our investment in oil and natural gas properties. Under the full cost method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves are capitalized into a “full cost pool” as incurred, and costs included in the pool are amortized and charged to operations using the future recoverable units of production method based on the ratio of current production to total proved reserves, computed based on current prices and costs. Significant downward revisions of quantity estimates or declines in oil and natural gas prices that are not offset by other factors could result in a write-down for impairment of the carrying value of our oil and natural gas properties. Once incurred, a write-down of the value of oil and gas properties is not reversible at a later date, even if quantity estimates or oil or natural gas prices subsequently increase.
Under Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”), “Accounting for Income Taxes,” deferred income taxes are recognized at each year end for the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts based on tax
Index to Financial Statements
laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable
income. We routinely assess the realizability of our deferred tax assets. We consider future taxable income in making such assessments. If we conclude that it is more likely than not that some portion or all of the deferred tax assets will not be realized under accounting standards, it is reduced by a valuation allowance. However, despite our attempt to make an accurate estimate, the ultimate utilization of our deferred tax assets is highly dependent upon our actual production and the realization of taxable income in future periods.
Results of Operations
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
Revenues and Other Operating Income. Our revenues and other operating income increased by $22.1 million, or 68%, for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005. The following table summarizes our oil and natural gas sales, production volumes, average sales prices and period-to-period comparisons for the periods indicated (dollars in thousands, except average sales prices):
| Nine months ended September 30, | Increase (Decrease) | ||||||||
| 2005 | 2006 | ||||||||
Oil and natural gas sales: | |||||||||
RAM Energy | $ | 11,393 | $ | 10,916 | (4.2 | )% | |||
RWG (WG Energy Acquisition) | 36,747 | 42,134 | 14.7 | % | |||||
Total | $ | 48,140 | $ | 53,050 | 10.2 | % | |||
Production volumes: | |||||||||
Oil (MBbls): | |||||||||
RAM Energy | 69 | 64 | (7.7 | )% | |||||
RWG (WG Energy Acquisition) | 525 | 528 | 0.6 | % | |||||
Total | 594 | 592 | (0.3 | )% | |||||
NGL (MBbls): | |||||||||
RAM Energy | 4 | 3 | (25.1 | )% | |||||
RWG (WG Energy Acquisition) | 126 | 100 | (21.0 | )% | |||||
Total | 130 | 103 | (21.1 | )% | |||||
Natural gas (MMcf): | |||||||||
RAM Energy | 1,163 | 993 | (14.6 | )% | |||||
RWG (WG Energy Acquisition) | 666 | 769 | 15.4 | % | |||||
Total | 1,828 | 1,761 | (3.6 | )% | |||||
Average sale prices: | |||||||||
Oil (per Bbl) | $ | 53.22 | $ | 63.80 | 19.9 | % | |||
NGL (per Bbl) | 35.28 | 41.89 | 18.7 | % | |||||
Natural gas (per Mcf) | 6.52 | 6.22 | (4.5 | )% | |||||
Per Boe | 46.77 | 53.66 | 14.7 | % | |||||
Oil and Natural Gas Sales. Our oil and natural gas revenues increased by $4.9 million, or 10.2%, for the nine months ended September 30, 2006, as compared to the nine months ended September 30, 2005, due primarily to a 15% increase in average product prices.
Index to Financial Statements
Before giving effect to an outstanding reversionary interest in our Boonsville shallow gas area, our daily average production in the first nine months of 2006 would have been 3,803 Boe per day versus 3,770 Boe per day for the nine months ended September 30, 2005, an increase of 1%. The outstanding reversionary interest, which vested in September 2005, impacted daily production for the first three quarters of 2006 production by 5%, resulting in actual average daily production being 3,621 Boe per day versus 3,770 Boe per day for the nine months ended September 30, 2005.
For the nine months ended September 30, 2006, our oil production decreased less than 1%, NGL production decreased 21%, and natural gas production decreased 4%, compared to the first nine months of the previous year. Our average realized sales price for oil was $63.80 per Bbl for the nine months ended September 30, 2006, an increase of 20% compared to $53.22 per Bbl for the nine months ended September 30, 2005. Our average realized NGL price for the nine months ended September 30, 2006 was $41.89 per Bbl, a 19% increase compared to $35.28 per Bbl for the nine months ended September 30, 2005. Our average realized natural gas price was $6.22 per Mcf for the nine months ended September 30, 2006, a decrease of 5% compared to $6.52 per Mcf for the comparable nine months of 2005.
Other Revenues. Other revenues for the nine months ended September 30, 2006 decreased by 53% to $466,000, compared to the nine months ended September 30, 2005 other revenues and operating income of $983,000.
Realized and Unrealized Gain (Loss) from Derivatives. For the nine months ended September 30, 2006, our gain from derivatives was $1.1 million, compared to a loss of $16.6 million for the first nine months of 2005. Our gains and losses during these periods were the net result of recording actual contract settlements, the premium costs paid for various derivative contracts, and unrealized mark-to-market values of our derivative contracts as shown in the following table (in thousands):
| Nine months ended September 30, | ||||||||
| 2005 | 2006 | |||||||
Contract settlements and premium costs: | ||||||||
Oil | $ | (1,820 | ) | $ | (4,328 | ) | ||
Natural gas | (280 | ) | (438 | ) | ||||
Realized (losses) | (2,100 | ) | (4,766 | ) | ||||
Mark-to-market gains (losses): | ||||||||
Oil | (4,957 | ) | 1,676 | |||||
Natural gas | (9,556 | ) | 4,198 | |||||
Unrealized gains (losses) | (14,513 | ) | 5,874 | |||||
Realized and unrealized gains (losses) | $ | (16,613 | ) | $ | 1,108 | |||
For a further discussion of our realized and unrealized loss from derivatives, please see “Quantitative and Qualitative Disclosures About Market Risks — Commodity Price Risk.”
Oil and Natural Gas Production Taxes. Our oil and natural gas production taxes for the nine months ended September 30, 2006, were $2.5 million, an increase of $67,000, or 3%, from the first three quarters of the previous year. Production taxes are based on realized prices at the wellhead. As revenues from oil and natural gas sales increase or decrease, production taxes on these sales increase or decrease also. As a percentage of oil and natural gas sales, oil and natural gas production taxes were 4.8% for the nine months ended September 30, 2006, compared to 5.1% for the nine months ended September 30, 2005.
Index to Financial Statements
Oil and Natural Gas Production Expense. Our oil and natural gas production expense was $13.2 million for the nine months ended September 30, 2006, an increase of $1.8 million, or 15%, from the $11.4 million for the nine months ended September 30, 2005. The increase was primarily due to increased utility
costs and higher maintenance costs due to additional producing wells. For the nine months ended September 30, 2006, our oil and natural gas production expense was $13.38 per Boe compared to $11.13 per Boe for the nine months ended September 30, 2005, an increase of 20%. As a percentage of oil and natural gas sales, oil and natural gas production expense increased to 25% for the nine months ended September 30, 2006 compared to 24% for the first nine months in 2005.
Amortization and Depreciation Expense. Our amortization and depreciation expense increased $806,000, or 9%, for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005. The increase was a result of higher capitalized costs due to increased drilling. On an equivalent basis, our amortization of the full cost pool of $9.5 million was $9.63 per Boe for the nine months ended September 30, 2006, an increase per Boe of 14% compared to $8.7 million, or $8.43 per Boe, for the nine months ended September 30, 2005.
Accretion Expense. SFAS No. 143, “Accounting for Asset Retirement Obligations,” includes, among other things, the reporting of the “fair value” of asset retirement obligations. Accretion expense is a function of changes in fair value from period-to-period. We recorded $398,000 for the nine months ended September 30, 2006, compared to $217,000 for the nine months ended September 30, 2005.
Share-Based Compensation.Concurrent with our acquisition of RAM Energy, Inc. on May 8, 2006, our Board of Directors awarded grants of an aggregate 330,000 shares of our common stock to certain of our senior officers and directors under our 2006 Long-Term Incentive Plan.For the nine months ended September 30, 2006, our share-based compensation was $2.2 million, calculated at a closing price on May 8, 2006, the day the shares were granted, of $6.72 per share.
General and Administrative Expense. For the nine months ended September 30, 2006, our general and administrative expense was $6.4 million, compared to $6.3 million for the nine months ended September 30, 2005, an increase of $66,000, or 1%.
Interest Expense. Our interest expense increased by $4.4 million to $13.2 million for the nine months ended September 30, 2006, compared to the $8.8 million incurred for the nine months ended September 30, 2005. During the second quarter we charged off $1.1 million of unamortized costs associated with our previous credit facility and we paid $1.0 million in prepayment premiums. The remaining interest expense of $11.1 million represents an increase of $2.3 million, or 38%, over the $8.8 million reported for the nine months ended September 30, 2005. This increase was due to higher interest rates and higher outstanding indebtedness during the 2006 period.
Income Taxes. For the nine months ended September 30, 2006, we recorded an income tax expense of $2.9 million on pre-tax income of $6.9 million. For the nine months ended September 30, 2005, the income tax effect was a $2.2 million benefit, on a pre-tax loss of $5.8 million. The effective tax rate for the nine month period was 42% and 38% in 2006 and 2005, respectively.
Net Income. Our net income was $4.0 million for the nine months ended September 30, 2006, compared to a net loss of $3.6 million for the nine months ended September 30, 2005. The income for the first three quarters of 2006 results from increased prices and gains on derivatives, partially offset by non-cash charges to share-based compensation and the remaining unamortized costs associated with our previous credit facility.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Revenues and Other Operating Income.Our revenues and other operating income increased by $26.0 million, or 87%, for the year ended December 31, 2005, compared to the year ended December 31, 2004.
Index to Financial Statements
The following table summarizes our oil and natural gas sales, production volumes, average sales prices and period-to-period comparisons for the periods indicated (dollars in thousands except average sales prices):
Year Ended December 31, | Increase (Decrease) | ||||||||
| 2004 | 2005 | ||||||||
Oil and natural gas sales: | |||||||||
RAM Energy | $ | 16,540 | $ | 16,486 | (0.3 | )% | |||
RWG (WG Energy Acquisition) | 1,435 | 49,757 | 3,367.4 | % | |||||
Total | $ | 17,975 | $ | 66,243 | 268.5 | % | |||
Production volumes: | |||||||||
Oil (Mbls): | |||||||||
RAM Energy | 151 | 95 | (36.9 | )% | |||||
RWG (WG Energy Acquisition) | 27 | 692 | 2,473.8 | % | |||||
Total Oil (Mbls) | 178 | 787 | 343.0 | % | |||||
NGL (Mbls): | |||||||||
RAM Energy | 7 | 7 | 8.3 | % | |||||
RWG (WG Energy Acquisition) | 5 | 163 | 2,719.9 | % | |||||
Total NGL (Mbls) | 12 | 170 | 1,270.9 | % | |||||
Natural gas (MMcf): | |||||||||
RAM Energy | 1,901 | 1,666 | (12.4 | )% | |||||
RWG (WG Energy Acquisition) | 27 | 1,015 | 3,607.3 | % | |||||
Total natural gas (MMcf) | 1,928 | 2,681 | 39.0 | % | |||||
Average sale prices: | |||||||||
Oil (per Bbl) | $ | 37.63 | $ | 53.75 | 43.0 | % | |||
NGL (per Bbl) | 26.41 | 36.33 | 37.6 | % | |||||
Natural gas (per Mcf) | 5.69 | 6.61 | 16.3 | % | |||||
Oil and Natural Gas Sales.Our oil and natural gas revenues were higher for the year ended December 31, 2005, as compared to the year ended December 31, 2004, with a 175% increase in production due, primarily, to the properties included in the WG Energy Acquisition and a 34% increase in realized prices, both on a Boe basis.
Our average daily production was 3.8 MBoe in the year ended December 31, 2005, compared to 1.4 MBoe for the year ended December 31, 2004, an increase of 175%. For the year ended December 31, 2005, our oil production increased 343%, our NGL production increased 1,271% and our natural gas production increased 39% compared to the year ended December 31, 2004. Our average realized sales price for oil was $53.75 per Bbl for the year ended December 31, 2005, an increase of 43% compared to $37.63 per Bbl for the year ended December 31, 2004. Our average realized NGL price for the year ended December 31, 2005, was $36.33 per Bbl, a 38% increase compared to $26.41 per Bbl for the year ended December 31, 2004. Our average realized natural gas price was $6.61 per Mcf for the year ended December 31, 2005, an increase of 16% compared to $5.69 per Mcf for the year ended December 31, 2004.
Index to Financial Statements
Decreases in production shown above, excluding effects of our WG Energy Acquisition, are due primarily to the following volumes and values of our former wholly owned subsidiary, RB Operating Company, or RBOC, included through the end of April 2004:
| Year Ended December 31, 2004 | |||
Oil and natural gas sales (in thousands) | $ | 2,302 | |
Production volumes: | |||
Oil (Mbls) | 47 | ||
Natural gas (MMcf) | 410 | ||
Average sale prices: | |||
Oil (per Bbl) | $ | 32.64 | |
Natural gas (per Mcf) | $ | 5.68 | |
Gain On Sale of Subsidiary.On April 29, 2004, we completed the sale of all of the outstanding capital stock of our subsidiary, RBOC, for gross proceeds of $23.0 million. After adjustments for closing costs, we reported a gain of $12.1 million. The assets of RBOC at the time of the sale consisted entirely of oil and natural gas properties located withinin New Mexico, together with cash, accounts receivable and certain liabilities.
Other Revenues and Operating Income. Our other revenues and operating income for the United States,year ended December 31, 2005 increased $513,000, or 152%, over the year ended December 31, 2004 due, primarily, to an increase in consulting service fees of approximately $200,000, sales of oilfield supplies of approximately $100,000, and numerous other non-material items.
Realized and Unrealized Loss from Derivatives.For the year ended December 31, 2005, our loss from derivatives was $11.7 million, compared to a loss of $793,000 for the year ended December 31, 2004. Our losses during these periods were the net result of recording unrealized mark-to-market values of our contracts, the premium costs paid for various derivative contracts, and actual contract settlements.
Year Ended December 31, | ||||||||
| 2004 | 2005 | |||||||
Contract settlements | $ | (690 | ) | $ | (3,902 | ) | ||
Premium costs | (180 | ) | (1,491 | ) | ||||
Realized losses | (870 | ) | (5,393 | ) | ||||
Mark-to-market gains (losses) | 77 | (6,302 | ) | |||||
Realized and unrealized losses | $ | (793 | ) | $ | (11,695 | ) | ||
Oil and Natural Gas Production Taxes.Our oil and natural gas production taxes for the year ended December 31, 2005, were $3.3 million, an increase of $2.0 million, or 163%, from the $1.3 million incurred for the year ended December 31, 2004. Of the increase in production taxes for the year ended December 31, 2005, $2.3 million was attributable to our WG Energy Acquisition, while our production taxes decreased $300,000. Production taxes are based on realized prices at the wellhead. As revenues from oil and natural gas sales increase or decrease, production taxes on these sales increase or decrease also. As a percentage of oil and natural gas sales, oil and natural gas production taxes were 5.0% for the year ended December 31, 2005, compared to 7.0% for the year ended December 31, 2004. The reason for this decrease in percentage is because, after our WG Energy Acquisition, our greatest revenue source is oil sales in Texas, which are taxed at a 4.6% rate.
Index to Financial Statements
Oil and Natural Gas Production Expense.Our oil and natural gas production expense was $16.1 million for the year ended December 31, 2005, an increase of $12.5 million, or 347%, from $3.6 million for the year ended December 31, 2004. The increase of $12.8 million for the year ended December 31, 2005 was due to our WG Energy Acquisition, while our oil and natural gas production expense decreased $300,000. For the year ended December 31, 2005, our oil and natural gas production expense was $11.46 per Boe compared to $7.04 per Boe for the year ended December 31, 2004, an increase of 63%. As a percentage of oil and natural gas sales, oil and natural gas production expense increased from 20% for the year ended December 31, 2004, to 24% for the year ended December 31, 2005. The reason for the increase in costs, both in absolute amount and on a per Bbl basis is that one of the major fields included in our WG Energy Acquisition is a cost intensive, shallow water-flood unit. Fixed costs of the shallow water-flood unit, such as payroll, utilities, insurance, property and ad valorem taxes, regulatory compliance, and maintenance account for approximately 85% of the total operating costs. Repairs account for the balance. Our management expects that operating costs will remain at this level for the foreseeable future.
Amortization and Depreciation Expense.Our amortization and depreciation expense increased $9.7 million, or 298%, for the year ended December 31, 2005, compared to the year ended December 31, 2004. Our WG Energy Acquisition accounted for $9.7 million of the increase, offset by a $200,000 decrease for RAM. On an equivalent basis, our amortization of the full cost pool of $12.5 million was $8.93 per Boe for the year ended December 31, 2005, an increase per Boe of 52% compared to $3.0 million, or $5.89 per Boe for the year ended December 31, 2004.
Accretion Expense.SFAS No. 143,Accounting for Asset Retirement Obligations,includes, among other things, the reporting of the“fair value” of asset retirement obligations. Accretion expense is a function of changes in fair value from period-to-period, and we recorded $510,000 for the year ended December 31, 2005, compared to $78,000 for the year ended December 31, 2004. The increase of $432,000 for the year ended December 31, 2005 was due to the higher amount of the asset retirement obligation attributable to our WG Energy Acquisition.
General & Administrative Expense.For the year ended December 31, 2005, our general and administrative expense was $8.6 million and increased $2.0 million, or 30%, as compared with the $6.6 million reported for the year ended December 31, 2004. This increase was due primarily to the increased costs of accounting services, higher benefits, salaries, travel and legal fees during the 2005 period.
Interest Expense.Our interest expense increased by $7.5 million to $12.6 million for the year ended December 31, 2005, compared to $5.1 million for the year ended December 31, 2004. This increase was attributable to higher outstanding balances, primarily to fund the WG Energy Acquisition, and higher interest rates during the 2005 period.
Income Taxes.For the year ended December 31, 2005, we recorded income tax expense of $806,000 an effective tax rate of 60%, on pre-tax income of $1.3 million. The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The significant differences between pre-tax book income and taxable book income relate to non-deductible expenses, such as unrealized losses from derivatives.
For the year ended December 31, 2004, we recorded an income tax provision of $3.7 million, based on an effective tax rate of 38%, on pre-tax income of $9.8 million.
Net Income (Loss).Our net income was $543,000 for the year ended December 31, 2005, compared to net income of $6.0 million for the year ended December 31, 2004. The decrease in our net income for 2005 compared to 2004 was primarily attributable to realized losses from derivatives, increases in oil and natural gas production expenses and taxes, amortization and depreciation expenses, interest expense and general and administrative expenses.
Index to Financial Statements
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenue and Other Operating Income.Our operating revenues increased by $9.6 million, or 48%, for the year ended December 31, 2004, compared to the year ended December 31, 2003.
The following table summarizes our oil and natural gas sales, production, average sales prices and period-to-period comparisons for the periods indicated:
Year Ended December 31, | % Increase (Decrease) | ||||||||
| 2003 | 2004 | ||||||||
Oil and natural gas sales (in thousands). | $ | 20,053 | $ | 17,975 | (10.4 | )% | |||
Production volumes: | |||||||||
Oil (MBbls) | 277 | 178 | (35.8 | )% | |||||
Natural gas liquids (MBbls) | 5 | 12 | 161.6 | % | |||||
Natural gas (MMcf) | 2,334 | 1,928 | (17.4 | )% | |||||
Average net sales prices: | |||||||||
Oil (per Bbl) | $ | 29.47 | $ | 37.63 | 27.7 | % | |||
Natural gas liquids (per Bbl) | 16.94 | $ | 26.41 | 55.9 | % | ||||
Natural gas (per Mcf) | 5.06 | 5.69 | 12.4 | % | |||||
Oil and Natural Gas Sales.Our oil and natural gas sales revenues were lower in 2004 compared to 2003 with a 24% decrease in production due, primarily, to the sale of our subsidiary, RBOC, on April 29, 2004, partially offset by an 18% increase in realized prices, on a Boe basis. Our average daily production was 1,473 Boe in 2004 compared to 1,838 Boe during 2003, a decrease of 20%. For 2004, our natural gas production decreased by 17% and oil production decreased 36% compared to 2003. The average sale price realized by us for oil for 2004 was $37.63 per Bbl, a 28% increase from the $29.47 received for 2003, and for natural gas was $5.69 per Mcf for 2004, compared to $5.06 per Mcf for 2003, an increase of 12%.
Gain On Sale of Subsidiary.On April 29, 2004, we completed the sale of all of the outstanding capital stock of our wholly owned subsidiary, RBOC, for gross proceeds of $23.0 million. After adjustments for closing costs, we reported a gain of $12.1 million. The assets of RBOC at the time of the sale consisted of oil and natural gas properties located in New Mexico, cash, accounts receivable and certain liabilities.
Realized and Unrealized Loss from Derivatives.For 2004, our loss from derivatives was $793,000. For 2003, we recorded a loss from derivatives of $203,000. These losses were the net result of contract settlements, premium costs of various derivative contracts, and mark-to-market values of those contracts at year-end (in thousands).
| 2003 | 2004 | |||||||
Contract settlements | $ | — | $ | (690 | ) | |||
Premium costs | (328 | ) | (180 | ) | ||||
Realized losses | (328 | ) | (870 | ) | ||||
Mark-to-market gains | 125 | 77 | ||||||
Realized and unrealized losses | $ | (203 | ) | $ | (793 | ) | ||
Oil and Natural Gas Production Taxes.Our oil and natural gas production taxes for 2004 were $1.3 million, a decrease of $145,000, or 10%, from $1.4 million for 2003. As a percentage of wellhead prices received, these production taxes were 7% for both 2004 and 2003.
Oil and Natural Gas Production Expense.Our oil and natural gas production expense for 2004 was $3.6 million, an increase of $73,000, or 2%, from $3.5 million for 2003. Our oil and natural gas production
Index to Financial Statements
expense was 20% of sales of oil and natural gas, or $7.04 per Boe for 2004, compared to 18%, or $5.26 per Boe for 2003. This increase was due primarily to $568,000 attributable to RWG production expense in the 2004 period, offset by a decrease caused by the sale of RBOC.
Accretion Expense.We adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” during the first quarter of 2003. One aspect of SFAS No. 143 is the reporting of the “fair value” of asset retirement obligations. Accretion expense is a function of changes in fair value from period-to-period. We recorded $78,000 of accretion expense for 2004, compared to $48,000 for 2003.
Amortization and Depreciation Expense.Our amortization and depreciation expense for 2004 was $3.3 million, a decrease of $825,000, or 20%, compared to $4.1 million for 2003. This decrease was due primarily to lower production during 2004. On a Boe basis, the amortization of our full cost pool was $5.89 per Boe for 2004, an increase of 4% compared to $5.64 per Boe for 2003.
General & Administrative Expense.Our general and administrative expense for 2004 was $6.6 million, an increase of $270,000, or 4% over our general and administrative expense of $6.3 million recorded for 2003. The increase was due primarily to increased salaries and benefits to employees, excluding officers, during 2004.
Interest Expense.Our interest expense increased by $158,000 to $5.1 million for 2004 compared to $4.9 million for 2003. This increase for 2004 was attributable to higher average interest rates during 2004, the write-off of deferred loan costs of $309,000, and the allocation in 2003 of $609,000 to discontinued operations.
Income Taxes.Our overall effective tax rate for 2004 and 2003 was 38% and (87%), respectively.
Loss from Discontinued Operations.On July 31, 2003, we sold our 145-mile oil and natural gas pipeline system located in the Anadarko Shelf area in Oklahoma to Continental Gas, Inc., or CGI, for $15.0 million, effective August 1, 2003, subject to certain adjustments. The sale price was reduced by $3.0 million in consideration of the settlement and mutual release by our subsidiary, Great Plains Pipeline Company, or GPPC, and by CGI of all claims that were or could have been asserted by CGI and GPPC in a lawsuit filed by CGI in September 2003, relating to disputes arising under a gas service contract between the parties. We received net sale proceeds of $11.8 million after all adjustments and less expenses relating to the sale.
The results of our discontinued operations for the year ended December 31, 2003 are as follows (in thousands):
Pipeline system revenue | $ | 14,500 | ||
Pipeline system costs and expenses: | ||||
Purchases | 12,066 | |||
Operating costs | 598 | |||
Depreciation | 388 | |||
Impairment | 2,562 | |||
Interest | 609 | |||
Total system costs and expenses | 16,223 | |||
Loss from discontinued operations | (1,723 | ) | ||
Income tax benefit | (655 | ) | ||
Loss from discontinued operations | $ | (1,068 | ) | |
Net Income.We recorded net income of $6.1 million for 2004 compared to a net loss of $2.0 million for 2003, due primarily to the sale of RBOC.
Index to Financial Statements
Liquidity and Capital Resources
As of September 30, 2006, we had net working capital of $670,000, a ratio of current assets to current liabilities of 1.1 to 1, cash and cash equivalents of $7.6 million, and $37.0 million was available under our revolving credit facility. At that date, we had $131.7 million of indebtedness outstanding, including $103.0 million under our credit facility, $28.4 million principal amount ($28.3 million net of the original issue discount) of indebtedness evidenced by RAM Energy, Inc.’s 11 1/2% senior notes due 2008, and $356,000 in other indebtedness. On September 22, 2006, we repurchased 739,175 shares of our common stock from an unaffiliated party in a negotiated transaction, at a purchase price of $4.295 per share.
Credit Facility. On April 5, 2006, RAM Energy, Inc. entered into a Third Amended and Restated Loan Agreement with Guggenheim Corporate Funding, LLC, for itself and as Agent for a group of lenders. This facility, which we refer to as the Guggenheim facility, amended, restated and replaced a prior credit facility known as the Foothill facility. Currently, we are not limiteda party to, or a guarantor of obligations under, the Guggenheim facility. As part of the transaction creating the Guggenheim facility, Foothill assigned the notes and liens under the Foothill facility to the Agent for the lenders under the Guggenheim facility. The Guggenheim facility includes a $150.0 million revolving credit facility of which $50.0 million was immediately available, and a $150.0 million term loan facility of which $90.0 million was advanced at closing. The remainder of the term loan facility may become available, subject to approval of each lender desiring to fund its proportionate share of the additional term loan advance, for certain of the future needs of RAM Energy, Inc., including acquisitions. The Guggenheim revolving credit facility is scheduled to mature in four years, during which time amounts may be borrowed, repaid and re-borrowed, subject to a borrowing base limitation to be determined by the lenders. The term loan facility is scheduled to mature in five years, with permitted prepayments after the first year, subject to a prepayment premium in the second and third years of the term. Advances under the revolving credit facility bear interest at LIBOR plus 2% per annum, while amounts outstanding under the term loan bear interest at LIBOR plus 5 1/2% to 6% per annum. Obligations under the Guggenheim facility are secured by liens on substantially all of the assets of RAM Energy, Inc. and its subsidiaries. The initial advance under the Guggenheim facility was used to refinance the Foothill facility, to pay expenses associated with establishing the Guggenheim facility, and to fund a $10.0 million redemption payment. Subsequent advances may be used to:
| Ÿ | repurchase all of RAM Energy, Inc.’s outstanding 11 1/2% senior notes due 2008 ($28.4 million principal amount); and |
| Ÿ | fund general working capital purposes. |
The Guggenheim facility contains financial covenants requiring RAM Energy, Inc. to maintain certain ratios, including a current ratio, a ratio of EBITDA to interest expense, a ratio of total indebtedness to EBITDA, and a ratio of asset value to total indebtedness. In addition, the Guggenheim facility contains other affirmative and negative covenants customary in lending transactions of this geographical region.nature, including restrictions on the payment of dividends and the maintenance by RAM Energy, Inc. of derivative contracts on not less than 50% nor more than 85% of RAM Energy, Inc.’s projected oil and natural gas production from its properties on a rolling 24-month period; provided that the derivative requirements will be waived for any quarter in which RAM Energy Inc.’s leverage ratio is less than 2.0 to 1.0.
Senior Notes. On February 24, 1998, RAM Energy, Inc. issued $115.0 million principal amount of its 11 1/2% senior notes which mature February 15, 2008. Currently, we are not a party to, or a guarantor of, the senior notes or of any obligations under the indenture covering the senior notes. At September 30, 2006, RAM Energy, Inc. had outstanding $28.4 million aggregate principal amount of its senior notes. The notes bear interest at an annual rate of 11 1/2%, payable semi-annually on each February 15 and August 15. Pursuant to a Second Supplemental Indenture executed in November 2002, substantially all of the restrictive
Index to Financial Statements
covenants and certain events of default contained in the original indenture were eliminated. We may redeem our outstanding senior notes prior to February 15, 2007 at 107.67% of the stated principal amount and thereafter at 103.84% until their maturity on February 15, 2008.
Cash Flow From Operating Activities. Our directorscash flow from operating activities is comprised of three main items: net income (loss), adjustments to reconcile net income to cash provided (used) before changes in working capital, and changes in working capital. For the nine months ended September 30, 2006, our net income was $4.0 million, as compared with net loss of $3.6 million for the nine months ended September 30, 2005. Adjustments (primarily non-cash items such as depreciation and amortization, unrealized (gain) loss on derivatives, share-based compensation and deferred income taxes) were $11.8 million for the nine months ended September 30, 2006 compared to $21.3 million for the first nine months of 2005, a decrease of $9.4 million. Unrealized gain on derivatives, partially offset by changes in deferred income taxes, was the primary reason for the decrease. Working capital changes for the nine months ended September 30, 2006 were a positive $9.5 million compared with negative changes of $7.0 million for the nine months ended September 30, 2005. For the nine months ended September 30, 2006, in total, net cash provided by operating activities was $25.3 million compared to $10.6 million of net cash provided by operations for the first three quarters of the previous year.
For the year ended December 31, 2005, our net income was $543,000, as compared with net income of $6.1 million for the year ended December 31, 2004. Net income for the 2004 period resulted primarily from gain recognized on the sale of RBOC. Adjustments (primarily non-cash items such as depreciation and amortization, unrealized loss on derivatives, gain on the sale of RBOC and deferred income taxes) were $21.8 million for the year ended December 31, 2005 compared to a negative adjustment of $11.1 million for the year ended December 31, 2004, an increase of $32.9 million. Working capital changes for the year ended December 31, 2005 were a negative $4.0 million compared with a positive $6.9 million for the year ended December 31, 2004. For the year ended December 31, 2005, in total, net cash provided by operating activities was $18.4 million compared to $1.8 million of net cash provided by operations for the year ended December 31, 2004.
For the year ended December 31, 2004, our net income was $6.1 million, compared with net loss of $2.0 million for the year ended December 31, 2003. Adjustments (primarily non-cash items such as depreciation and amortization, loss from discontinued operations, gain on early extinguishment of debt and deferred income taxes) were negative $11.1 million for the year ended December 31, 2004 compared to $2.1 million for the prior year, a decrease of $13.2 million. The $12.1 million gain on sale of subsidiary in 2004, $1.1 million loss from discontinued operations in 2003, and unrealized gain on derivatives, partially offset by changes in deferred income taxes, caused most of this decrease. Working capital changes for the year ended December 31, 2004 were a positive $6.9 million compared with changes of $5.7 million for the year ended December 31, 2003. Cash provided by discontinued operations was $898,000 in 2003. For the year ended December 31, 2004, net cash provided by operating activities was $1.8 million compared to $5.8 million of net cash provided by operations for the previous year.
Cash Flow From Investing Activities. For the nine months ended September 30, 2006, net cash used in our investing activities was $18.7 million, consisting of $21.5 million in payments for oil and natural gas properties and equipment and $726,000 in payments for other property and equipment, offset by $3.5 million of proceeds from the sale of undeveloped acreage, $366,000 in proceeds from the sale of other property and equipment, and $386,000 of net merger costs. The first nine months of 2006 reflected an 89% increase in cash used in investing activities compared to the first nine months of the previous year. For the nine months ended September 30, 2005, net cash used in our investing activities was $9.9 million, consisting of $11.1 million in payments for oil and natural gas properties and $1.1 million for other property and equipment additions, offset by $2.3 million in proceeds from the sale of oil and natural gas properties.
Index to Financial Statements
For the year ended December 31, 2005, net cash used by our investing activities was $12.6 million, consisting of $13.5 million in payments for oil and natural gas properties and other property and equipment additions, offset partially by $2.5 million in proceeds from the sale of oil and natural gas properties. This compares with net cash used in our investing activities for the year ended December 31, 2004, of $64.9 million, consisting of $21.8 million in proceeds from the sale of RBOC, and $1.7 million in proceeds from short-term investments, offset by $88.7 million in net payment for property additions and the WG Energy Acquisition.
For the year ended December 31, 2004, net cash used by our investing activities was $64.9 million, which included $82.6 million net cash used for the WG Energy Acquisition, $5.9 million in payments for oil and natural gas properties and equipment, and $205,000 in payments for other property and equipment. Offsets to cash used in investing activities for 2004 included $21.8 million in proceeds from the sale of a subsidiary, $1.7 million in proceeds from short-term investments, and $358,000 in proceeds from sales of oil and natural gas properties and other equipment. For the year ended December 31, 2003, net cash provided by our investing activities was $7.4 million, consisting of $12.0 million of proceeds from the sale of pipeline system, and $202,000 of proceeds from the sale of oil, natural gas and other property, offset by $4.3 million in payments for oil and natural gas properties, $343,000 in payments for other property and equipment, and $181,000 in payments for short-term investments.
Cash Flow From Financing Activities. For the nine months ended September 30, 2006, net cash provided by our financing activities was $938,000, compared to net cash used of $161,000 for the nine months ended September 30, 2005. The cash provided in the first nine months of 2006 included an approximate $15.1 million net debt increase, partially offset by a stock redemption of $10.0 million, a stock repurchase of $3.8 million and $500,000 in dividends.
For the year ended December 31, 2005, net cash used by our financing activities was $6.9 million, compared to $62.1 million provided during the year ended December 31, 2004. The cash used in 2005 included $5.5 million in net debt reduction and $1.4 million in dividends. Cash provided in 2004 was primarily debt incurred for the WG Energy Acquisition.
For the year ended December 31, 2004, net cash provided by our financing activities was $62.1 million, compared to net cash used $12.3 million for the year ended December 31, 2003. The net cash provided in 2004 consisted of $70.4 million net borrowings on long-term debt, offset by $5.1 million used for stock repurchased and returned, $1.5 million in payments for deferred loan costs, and $1.6 million in dividends. The net cash used in 2003 included $11.9 million in payments on long-term debt and $404,000 in dividends.
Capital Commitments
During the nine months ended September 30, 2006, we had capital expenditures of $21.5 million relating to our oil and natural gas operations, of which $14.4 million was allocated to drilling new development wells, $1.9 million was for exploration costs, and $5.2 million was for acquisition costs. We have strong tiesbudgeted an aggregate of $24.3 million for non-acquisition capital expenditures for the year 2006. However, the amount and timing of our capital expenditures may vary depending on the rate at which we expand and develop our oil and natural gas properties. We may require additional financing for future acquisitions and to refinance our debt before or at its final maturities.
Our capital expenditures for 2005 were $15.0 million, excluding the sale of producing properties, the majority of which was allocated to drilling new wells at proved undeveloped locations outsideand re-completing existing wells. During the year ended December 31, 2004, we made an $82.6 million acquisition and had capital expenditures of $5.9 million. In 2003, our capital expenditures were $5.3 million, including $5.1 million in development costs and $202,000 in exploration costs.
Index to Financial Statements
Although we cannot provide any assurance, assuming successful implementation of our strategy, including the future development of our proved reserves and realization of our cash flows as anticipated, we believe that borrowings available under our credit facility, the balance of our unrestricted cash and cash flows from operations will be sufficient to satisfy our budgeted capital expenditures, working capital and debt service obligations for the foreseeable future. The actual amount and timing of our future capital requirements may differ materially from our estimates as a result of, among other things, changes in product pricing and regulatory, technological and competitive developments. Sources of additional financing available to us may include commercial bank borrowings, vendor financing and the sale of equity or debt securities. We cannot provide any assurance that any such financing will be available on acceptable terms or at all.
The table below sets forth our contractual cash obligations as of December 31, 2005, which are obligations during the following years:
| 2006 | 2007-2008 | 2009-10 | and after | |||||||||
| (in thousands) | ||||||||||||
Contractual Cash Obligations | ||||||||||||
Long-term debt | $ | 4,500 | $ | 108,500 | $ | — | $ | — | ||||
Operating leases | 325 | 469 | — | — | ||||||||
Capital leases | — | — | — | — | ||||||||
Purchase obligations | — | — | — | — | ||||||||
Total contractual cash obligations | $ | 4,825 | $ | 108,969 | $ | — | $ | — | ||||
Index to Financial Statements
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The carrying amounts reported in our consolidated balance sheets for cash and cash equivalents, trade receivables and payables, installment notes and variable rate long-term debt approximate their fair values.
Interest Rate Risk
We are exposed to changes in interest rates. Changes in interest rates affect the interest earned on our cash and cash equivalents and the interest rate paid on our borrowings, other than our 11 1/2% senior notes. We have not used interest rate derivative instruments to manage our exposure to interest rate changes.
Commodity Price Risk
Our revenue, profitability and future growth depend substantially on prevailing prices for oil and natural gas. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital. Lower prices may also reduce the amount of oil and natural gas that we can economically produce. We currently sell most of our oil and natural gas production under market price contracts.
To reduce exposure to fluctuations in oil and natural gas prices and to achieve more predictable cash flow, we periodically utilize various derivative strategies to manage the price received for a portion of our future oil and natural gas production. We have not established derivatives in excess of our expected production.
Our derivative positions at September 30, 2006 are shown in the following table:
| Crude Oil (Bbls) | Natural Gas (MMBtu) | |||||||||||||||||||
| Floors | Ceilings | Floors | Ceilings | |||||||||||||||||
| Per day | Price | Per day | Price | Per day | Price | Per day | Price | |||||||||||||
Collars | ||||||||||||||||||||
2006 | 1,500 | $ | 43.33 | 1,500 | $ | 65.80 | 5,000 | $ | 7.00 | 5,000 | $ | 11.95 | ||||||||
2007 | 1,500 | 52.67 | 1,500 | 73.24 | 4,247 | 7.43 | 4,247 | 11.62 | ||||||||||||
2008 | 1,000 | 53.34 | 1,000 | 86.37 | 4,000 | 7.16 | 4,000 | 13.25 | ||||||||||||
Bare Floors | ||||||||||||||||||||
2006 | 250 | 40.00 | ||||||||||||||||||
Secondary Floors | ||||||||||||||||||||
2007 | 4,000 | 12.00 | ||||||||||||||||||
Crude oil contracts for 2006 are for October through December; natural gas contracts for 2006 are for November and December. Crude oil and natural gas contracts cover each month of 2007 and natural gas secondary floors for 2007 are for April through October. Crude oil contracts and natural gas contracts for 2008 are for January through September.
Index to Financial Statements
General
We are an independent oil and natural gas company engaged in the acquisition, development, exploitation, exploration and production of oil and natural gas properties, primarily in Texas, Louisiana and Oklahoma. Our producing properties are located in highly prolific basins with long histories of oil and natural gas operations. We have been active in these core areas since our inception in 1987 and have grown through a balanced strategy of acquisitions and development and exploratory drilling. We have completed over 20 acquisitions of producing oil and natural gas properties and related assets for an aggregate purchase price approximating $400 million. We have drilled or participated in the drilling of540 oil and natural gas wells, 93% of whichwere successfully completed and produced hydrocarbons in commercial quantities. Our management team has extensive technical and operating expertise in all areas of our geographic focus.
Our oil and natural gas assets are characterized by a combination of conventional and unconventional reserves and prospects. We have conventional reserves and production in four main onshore locations:
| Ÿ | Electra/Burkburnett, Wichita and Wilbarger Counties, Texas; |
| Ÿ | Boonsville, Jack and Wise Counties, Texas; |
| Ÿ | Vinegarone, Val Verde County, Texas; and |
| Ÿ | Egan, Acadia Parish, Louisiana. |
We have unconventional reserves and production in our Barnett Shale play located in Jack and Wise Counties, Texas, where we own interests in approximately 27,700 gross (6,800 net) acres.
In addition, we have positioned ourselves for participation in two emerging resource plays in southwest Texas. We have an exploratory play targeting the Barnett and Woodford Shale formations where we own interests in approximately 84,000 gross (6,600 net) acres. We also have an exploratory play targeting the Wolfcamp formation where we are actively acquiring acreage and have accumulated leases and options covering over 15,000 gross and net acres.
At December 31, 2005, our estimated net proved reserves were 18.8 MMBoe, of which approximately 60% were crude oil, 30% were natural gas, and 10% were natural gas liquids, or NGLs. The PV-10 Value of our proved reserves was approximately $345.5 million based on prices we were receiving as of December 31, 2005, which were $58.63 per Bbl of oil, $35.89 per Bbl of NGLs and $9.14 per Mcf of natural gas. At December 31, 2005, our proved developed reserves comprised 70% of our total proved reserves, and the estimated reserve life for our total proved reserves was approximately 15 years.
We own interests in approximately 2,900 wells and are the operator of leases upon which approximately 1,900 of these wells are located. The PV-10 Value attributable to our interests in the properties we operate represented approximately 86% of our aggregate PV-10 Value as of December 31, 2005. We also own a drilling rig and various gathering systems, a natural gas processing plant, service rigs and a supply company that service our producing properties.
From January 1, 1997 through December 31, 2005, our reserve replacement percentage, through discoveries, extensions, revisions and acquisitions, but excluding divestitures, was 344%. Since January 1, 1997, our historical average finding cost from all sources, exclusive of divestitures, has been $6.27 per Boe. During the nine months ended September 30, 2006, we drilled or participated in the drilling of 71 wells on our oil and natural gas properties, 61 of which were successfully completed as producing wells and seven of which were either drilling or waiting to be completed at September 30, 2006.
Index to Financial Statements
Principal Properties
The following is a description of each of our principal properties, together with a general description of our miscellaneous and non-core properties.
Electra/Burkburnett Area. Our properties in the Electra/Burkburnett Area of north Texas include 26 leases covering 12,190 gross acres. As of September 30, 2006, we owned interests in approximately 1,600 wells in the Electra/Burkburnett Area, of which 503 were active producing wells and 215 were active injection wells.
We drilled more than 134 wells in the Electra/Burkburnett Area from November 1, 2004 through September 30, 2006, and 151 drilling locations are currently booked as proved undeveloped locations. We estimate the average recoverable proved reserves attributable to each infill well remaining to be drilled in the Electra/Burkburnett Area should be approximately 22,000 Bbls of oil per well.
During the nine months ended September 30, 2006, we drilled 61 net wells in the Electra/Burkburnett Area, of which 57 were completed as producing wells and four were in various stages of completion at the end of the third quarter. We own a 100% working interest in and operate all 61 of the wells. The initial net daily production from wells drilled and completed during the nine months ended September 30, 2006 averaged 26 Bbls of oil. The average cost incurred by us to drill, complete and equip a producing well in our Electra/Burkburnett Area during the nine months ended September 30, 2006 was $126,700.
The Electra Field has produced millions of barrels of crude oil over the past 80 years. Our currently active wells in this field produce through secondary recovery (waterflood) operations. Well spacing has been decreased to two to three acre spacing in most areas to permit the recovery of bypassed oil and to improve waterflood operations.
Since January 1, 2002, a significant number of new infill and injection wells have been drilled on our Electra/Burkburnett Area leasehold, with a 99% success rate.
Approximately 30% of our wells in the Electra/Burkburnett Area are not equipped to gather casinghead gas, and this gas is vented at the wellhead. The remainder of our produced casinghead gas is processed at our 100% owned Electra Gas Plant, which is located approximately three miles northwest of Electra, Texas on lands leased by us. The term of the surface lease on which our Electra Gas Plant is located will continue for so long as the land is used for the Electra Gas Plant. We pay no rental under the terms of this lease. The plant receives approximately 850 Mcf per day of casinghead gas produced from our properties in the area. The gas is processed in a 1,400 Mcf per day capacity refrigeration unit where approximately 163 Bbls of NGLs per day, net to our interest, are extracted and sold. Approximately 250 Mcf per day of residue gas is used for compressor fuel at the plant and the remainder is flared due to a lack of pipeline facilities in the area.
The largest single operating cost in the field historically has been electricity. In an effort to substantially reduce this cost, in November 2005, we installed two natural gas powered field generators to provide electricity for lease operations. The natural gas used to operate the generators is our natural gas that was previously vented or flared, so the installation of the generators has not reduced sales volumes or lease revenues or increased operating costs. We estimate that since the generators have been in full operation, the resulting savings in field electricity costs has been approximately $38,000 per month.
On April 1, 2005, we purchased a drilling rig specifically for the purpose of facilitating our ongoing drilling program in the Electra/Burkburnett Area and have been using this rig and our own crew and equipment to drill from six to eight wells per month in the field. We also use our own personnel and equipment to perform routine maintenance on our properties and typically do not require third party vendor services. We own our own pulling units, earthmoving equipment, tank trucks and other field equipment to
Index to Financial Statements
ensure availability and facilitate operations in the field. We employ approximately 65 field employees dedicated to our Electra/Burkburnett operations, all of which work out of our field office in the town of Electra.
We sell the crude oil produced from our Electra/Burkburnett area properties to Shell Trading (US) Company at the STUSCO WTI posted price, plus $1.50. For the month of September 2006, the sale price was $62.50 per Bbl.
During the nine months ended September 30, 2006, the aggregate net production attributable to our interest in the Electra/Burkburnett properties was 485,281 Bbls of oil and 34,598 Bbls of NGLs, or 519,879 Boe, and the average daily production for the period was 1,778 Bbls of oil and 127 Bbls of NGLs, or 1,904 Boe per day.
During September 2006, the aggregate net production attributable to our interest in the Electra/ Burkburnett properties was 50,360 Bbls of oil and 4,878 Bbls of NGLs, or 55,238 Boe, and the average daily production for the period was 1,679 Bbls of oil and 163 Bbls of NGLs, or 1,842 Boe per day.
Egan Field.Our Egan Field, located in Acadia Parish, Louisiana, covers an area of approximately 4,400 acres. Over the past 60 years, more than 90 wells have been drilled in the field at depths ranging from 9,000 feet to 12,400 feet.
The Egan Field is a geologically complex domal feature that produces from a number of different formations that are dissected by extensive faulting. This type of heavily faulted geology is typical of Acadia Parish, where a number of similar fields have been productive for several decades.
Over the past five years, we have undertaken a recompletion program in the Egan Field, conducting successful operations in 12 wells, and have identified more than seven additional recompletion opportunities in existing wellbores.
We own interests in approximately 4,367 gross (2,633 net) leasehold acres and ten producing wells in the Egan Field, and are the operator of all such wells. Our average working interest in the Egan Field properties is approximately 84%, with an average net revenue interest of 70%.
For the nine months ended September 30, 2006, the aggregate net production attributable to our interest in the Egan Field properties was 13,273 Bbls of oil and 302 MMcf of natural gas, or 63,645 Boe, and average daily production for the period was 49 Bbls of oil and 1,106 Mcf of natural gas, or 233 Boe per day.
During September 2006, aggregate net production attributable to our interest in the Egan Field properties was 1,103 Bbls of oil and 31 MMcf of natural gas, or 6,307 Boe, and our average daily production for the period was 37 Bbls of oil and 1,041 Mcf of natural gas, or 210 Boe per day.
Boonsville Area.The Boonsville Area is located in the Fort Worth Basin of north central Texas in Jack and Wise Counties. Our leasehold in the area covers approximately 9,950 gross acres lying within the much larger Boonsville Field, which includes several hundred thousand acres.
Our properties in Jack and Wise Counties are comprised of two discrete subsets: the shallow gas zones and the Barnett Shale acreage. Because a considerable portion of our leasehold in the area is segregated with respect to rights above and below the Marble Falls formation, a prominent geologic marker in the area, and our substantially undeveloped Barnett Shale acreage (which lies below the Marble Falls) represents a distinct property requiring drilling, completion and production techniques quite dissimilar from the shallow gas producing zones, we treat our Barnett Shale acreage as a separate major property. We consider the Boonsville Area to include only the properties described herein as the shallow gas zones. Our Barnett Shale acreage is discussed separately below.
Index to Financial Statements
Our oil and natural gas production from the Boonsville Area is derived principally from sands found at depths ranging from 3,800 feet to 6,100 feet. We own working interests in 88 wells producing from these shallow gas zones and operate all but one of such wells.
We own and operate an extensive gas gathering system in the field which gathers gas solely from our wells. The gas is compressed in the field through compression facilities also owned by us, and then is delivered into a system owned and operated by a third party for delivery to the Chico gas processing plant, where the natural gas is processed for the extraction of NGLs. We currently receive 85% of both the residue gas and the NGLs attributable to our share of delivered volumes.
During the nine months ended September 30, 2006, the aggregate net production attributable to our working interests in the Boonsville shallow gas properties (above the Marble Falls) was 12,442 Bbls of oil, 322 MMcf of natural gas and 64,400 Bbls of NGLs, or 130,446 Boe, and average daily production for the period was 46 Bbls of oil, 1,178 Mcf of natural gas and 236 Bbls of NGLs, or 478 Boe per day.
During September 2006, aggregate net production attributable to our interest in the Boonsville shallow gas properties was984 Bbls of oil, 33,196 Mcf of natural gas and 7,126 Bbls of NGLs, or 13,704 Boe, and the average daily production for the period was 33 Bbls of oil, 1,107 Mcf of natural gas and 238 Bbls of NGLs, or 457 Boe per day.
We have drilled and successfully completed two wells since our acquisition of WG Energy in 2004. We own a 74% working interest in and operate both wells. Currently, there are 20 drilling locations identified as proved undeveloped locations. We believe that additional wells, not currently identified as proved undeveloped locations, will eventually be drilled to test the shallow gas zones underlying our Boonsville properties. We are also actively pursuing a workover program in our existing wells to maximize production and take advantage of opportunities in other potentially productive zones in existing well bores that present attractive recompletion targets.
Barnett Shale Acreage.We own leases covering approximately 27,700 gross (6,800 net) acres of Barnett Shale rights in the Fort Worth Basin of north central Texas, all of which are held by production from wells completed in the shallow gas zones. The Fort Worth Basin Barnett Shale play currently is the largest natural gas play in Texas and one of the leading natural gas plays in the United States. Our Fort Worth Basin Barnett Shale acreage lies in the Boonsville Area of Jack and Wise Counties, Texas, below the Marble Falls geologic marker at depths ranging from 6,500 feet to 8,500 feet and is, for the most part, undeveloped.
The core area of the play is in Denton, Wise and Tarrant Counties, lying just to the east-southeast of our acreage in Jack and Wise Counties. The most productive wells in the Barnett Shale play are wells that have been drilled horizontally. The average cost of drilling and completing a horizontal well to the Barnett Shale is approximately $2.6 million.
We are a party to two separate agreements covering our Barnett Shale acreage position in the Fort Worth Basin:
| Ÿ | Approximately 3,500 gross acres are subject to a Participation Agreement with Devon Energy Corporation in which we have the right to participate with a 36% working interest in each well proposed to be drilled on the contract area. The agreement is on a “drill-to-earn” basis, which means that Devon can earn a 50% working interest and a 40% net revenue interest in a particular lease by drilling and paying its proportionate share of the costs of a well on lands covered by the lease. This agreement includes a continuous drilling obligation, requiring Devon to commence a new well within 120 days after the filing of a completion report on the preceding well, failing which Devon’s right to earn under the agreement will terminate, and Devon’s interests in undrilled acreage will |
Index to Financial Statements
revert to us. Through September 30, 2006, six horizontal wells have been drilled under the agreement and completed as commercially productive in the Barnett Shale. |
| Ÿ | Approximately 23,500 gross acres are committed to an agreement with EOG Resources, Inc. In April 2004, we entered into a purchase and sale agreement with EOG, under which EOG purchased from us an undivided 50% working interest and a 40.6% net revenue interest in certain oil and natural gas leases comprising a portion of our Barnett Shale acreage. After giving effect to the sale to EOG, we retained a 23.9% working interest in the subject leases. Currently, our net revenue interest in our Barnett Shale acreage subject to the EOG Agreement is approximately 18%. Through September 30, 2006, EOG has drilled one well on our Barnett Shale acreage, which was completed as a commercially productive well. |
During the nine months ended September 30, 2006, the aggregate net production attributable to our interest in the currently producing Barnett Shale wells was 3,428 Bbls of oil and 320 MMcf of natural gas, and average daily production for the period was 13 Bbls of oil and 1,173 Mcf of natural gas, or 208 Boe per day.
During September 2006, the aggregate net production attributable to our interest in the Barnett Shale properties was 313 Bbls of oil, 39 MMcf of natural gas and 287 Bbls of NGLs, and the average daily production for the period was 10 Bbls of oil, 1,316 Mcf of natural gas and 10 Bbls of NGLs, or 239 Boe per day.
Although our Fort Worth Basin Barnett Shale acreage has not yet made a substantial contribution to our daily production, we believe that there are more than 325 potential drilling locations on our acreage, with more than 290 of those locations on leasehold subject to the EOG agreement and more than 35 on the Devon acreage block.
We continue to acquire and interpret seismic data covering a portion of our Barnett Shale acreage. Currently, we own 25 square miles of 3-D seismic data and are in the process of acquiring an additional 70 square miles of 3-D seismic data. At September 30, 2006, we owned an interest in nine (gross) Barnett Shale producing wells, two of which are operated by us, six of which are operated by Devon Energy and one of which is operated by EOG.
Vinegarone Field.The Vinegarone Field is located in Val Verde County, Texas, which is in the Big Bend region of South Texas. We own working interests in seven producing wells in the field, none of which are operated by us.
Production from Vinegarone Field is obtained primarily from three distinct horizons at depths ranging from 9,100 feet to 10,100 feet. We own interests in 6,686 gross (1,820 net) leasehold acres in the Vinegarone Field. In most instances, our working interest is 25%, with an average 21.9% net revenue interest, although in one section (Section 49), in which there are two producing wells, our working interest is 43.8% and our net revenue interest is 38.3%.
During the nine months ended September 30, 2006, we participated in the drilling of three wells in the Vinegarone Field, two of which are in the process of being completed and one of which was a dry hole. We have identified three proved undeveloped locations in the field and expect to continue our development of the field over the next two years.
For instance, Lawrence S. Coben,the nine months ended September 30, 2006, the aggregate net production attributable to our interest in the Vinegarone Field properties was 241 MMcf of natural gas, and the average daily production for the period was 882 Mcf of natural gas, or 147 Boe per day.
During September 2006, the aggregate net production attributable to our interest in the Vinegarone Field was 26 MMcf of natural gas, and average daily production for the period was 860 Mcf of natural gas, or 143 Boe per day.
Index to Financial Statements
Other Properties
In addition to the principal fields and core operating areas, we also own interests in other properties located in Texas, Oklahoma, Mississippi, Louisiana, Kansas, New Mexico, Wyoming, Arkansas and offshore California.
We own a significant number of properties scattered throughout the principal producing basins in Oklahoma and are actively seeking exploration opportunities within these areas.
In Texas, in addition to the Electra/Burkburnett and Boonsville Area properties, we own miscellaneous operated and non-operated interests in 554 producing wells across the state, from the Panhandle down through the Permian Basin to South Texas, and eastward to Louisiana. We also own leasehold interests in approximately 84,000 gross (6,600 net) acres in an exploratory project located in southwest Texas principally targeting the Barnett and Woodford Shales and approximately 15,000 gross and net acres (including options) in another southwest Texas exploration project targeting the Wolfcamp formation.
Nearly 43,000 gross (5,700 net) acres of our leasehold in the southwest Texas Barnett/Woodford project area are subject to a farmout agreement with J. Cleo Thompson, et. al. Under this agreement, Thompson has acquired ten square miles of 3-D seismic data and drilled the Fasken Ranch 34-2H, a horizontal well recently completed in the Woodford Shale. This well is currently producing approximately 400 Mcf per day with net natural gas sales averaging between 30 and 40 Mcf per day. The remaining natural gas production is being re-injected for gas lift purposes. We will have the right to participate for one-half of our interest following the drilling of the next earning well, which is expected to commence in December 2006. Our remaining acreage in this play is subject to a third-party joint operating agreement which allows us the right to participate for an approximate 2% working interest in all future drilling proposals located on this acreage.
On our southwest Texas Wolfcamp project, we drilled two 100%-owned wells during the fourth quarter of 2006. These wells are currently being evaluated.
Ownership and Control of Service and other Supply Assets
We own and control service and supply assets, including a drilling rig, service rigs, a supply company, gathering systems and other related assets. We believe that ownership and use of these assets for our own account provides us with a significant competitive advantage with respect to availability, lead-time and cost of these services. For the 2007 calendar year, approximately 75% of our projected capital expenditures will be in areas serviced by these assets.
Development, Exploitation and Exploration Programs
Development and Exploitation Program.Our future production and performance depends to a large extent on the successful development of our existing reserves of oil and natural gas. We have identified multiple development projects on our existing properties (substantially all of which are located in our core areas), and these projects involve both the drilling of development wells (which includes 445 injection wells) and extension wells. We are lease operator of leases covering approximately 1,943 of the wells in which we own interests, and as such we are able to control expenses, capital allocation and the timing of development activities of these properties. During the nine months ended September 30, 2006, we drilled or participated in the drilling of 66 gross (63.2 net) development wells on our oil and gas properties, 65 of which were either successfully completed as producing wells, were still drilling, or were awaiting completion at the end of that period. Capital expenditures in connection with these activities during this period aggregated approximately $14.4 million.
Another determinant of future performance is the exploitation of existing wells that can be re-completed or otherwise reworked to extract additional hydrocarbons. We have identified 178 projects
Index to Financial Statements
involving re-completions of existing wells, all of which involve reserves included in our proved reserves at December 31, 2005. During the nine months ended September 30, 2006, we conducted or participated in recompletion/workover operations on eight of our existing wells, resulting in the reestablishment or enhancement of production from each of these wells. Our capital expenditures in connection with these recompletion operations aggregated approximately $1.7 million.
Exploration Program.A principal component of our strategy to expand our reserves and production includes an exploration program focused on adding long-lived oil and natural gas reserves from our core areas and other resource plays. Since 1987, we have conducted a successful development and exploitation program resulting in the accumulation of significant long-lived oil and natural gas reserves at relatively moderate depths, located principally in our core areas. In 1998, utilizing the knowledge and expertise gained from this effort, we initiated an exploration program by adding exploration professionals to our technical staff. We intend to maintain an exploration focus in our core areas, while remaining opportunistic with respect to other exploration concepts. These additional exploration concepts include pursuing opportunities in tight gas and other unconventional natural gas plays. In our core areas, we own in excess of 131,000 gross (31,900 net) undeveloped leasehold acres (including options), which enhances our competitive exploration position and provides the foundation for future reserve additions. Included in this number are 99,000 gross (21,600 net) undeveloped leasehold acres (including options) in our Wolfcamp, Barnett, and Woodford Shale resource plays located in southwest Texas. We intend to proceed with exploration in these areas.
We have an experienced technical staff, including geologists, landmen, engineers and other technical personnel devoted to prospect generation and identification of potential drilling locations. We seek to reduce exploration risk by exploring at moderate depths that are deep enough to discover sizeable gas accumulations (generally less than 13,000 feet). Our established presence in our core areas has provided our staff with substantial expertise. Many of our exploration plays are based upon seismic data comparisons to our existing producing fields. While we will maintain this focus, we plan to broaden our exposure and be opportunistic in pursuing growth-oriented exploration plays in other basins, primarily on an operated basis. For exploration prospects we generate, we typically will own a greater interest in these projects than our drilling partners, if any, and will operate the wells. As a result, we will be able to influence the areas of exploration and the acquisition of leases, as well as the timing and drilling of each well.
During the nine months ended September 30, 2006, we participated in the drilling of four gross (2.1 net) exploratory wells at a cost of approximately $1.5 million and incurred total capital expenditures of approximately $1.9 million for all exploration activities.
Oil and Natural Gas Reserves
At December 31, 2005, our estimated net proved reserves were 18.8 million Boe, of which 60% was crude oil, 30% was natural gas, and 10% was NGLs, with a PV-10 Value of approximately $345.5 million before income taxes. Our estimated proved developed reserves comprised 70% of our total proved reserves, and our reserve life for total proved reserves was approximately 15 years.
The following table summarizes the estimates of our historical net proved reserves and the related present values of such reserves at the dates shown. The reserve and present value data for our oil and natural gas properties as of December 31, 2005 was prepared by the independent petroleum engineering firms of Williamson Petroleum Consultants, Inc. and Forrest A. Garb & Associates. Our management believes that for each $1.00 per Boe increase or decrease in the price of oil and natural gas, the PV-10 Value of our proved reserves at December 31, 2005 would increase or decrease, as the case may be, by $8.7 million.
Estimated quantities of proved reserves and future net revenues therefrom are affected by oil and natural gas prices, which have fluctuated widely in recent years. There are numerous uncertainties inherent
Index to Financial Statements
in estimating oil and natural gas reserves and their values, including many factors beyond the control of the producer. The reserve data set forth in this report represent only estimates. Reservoir engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers, including those used by us, may vary. In addition, estimates of reserves are subject to revisions based upon actual production, results of future development and exploration activities, prevailing oil and natural gas prices, operating costs and other factors, which revisions may be material. The PV-10 Value of our proved oil and natural gas reserves does not necessarily represent the current or fair market value of such proved reserves, and the 10% discount factor may not reflect current interest rates, our cost of capital or any risks associated with the development and production of our proved oil and natural gas reserves. Proved reserves include proved developed and proved undeveloped reserves.
| As of December 31, | |||||||||
| 2003 | 2004 | 2005 | |||||||
Reserve Data: | |||||||||
Proved developed reserves: | |||||||||
Oil (MBbls) | 2,151 | 6,198 | 7,337 | ||||||
Natural gas (MMcf) | 26,237 | 31,048 | 26,752 | ||||||
Natural gas liquids (MBbls)(1) | — | 1,611 | 1,396 | ||||||
Total (MBoe) | 6,524 | 12,984 | 13,192 | ||||||
PV-10 Value (in thousands) | $ | 84,781 | $ | 164,007 | $ | 245,107 | |||
Proved reserves: | |||||||||
Oil (MBbls) | 2,322 | 10,667 | 11,199 | ||||||
Natural gas (MMcf) | 34,567 | 38,195 | 34,234 | ||||||
Natural gas liquids (MBbls)(1) | — | 2,087 | 1,891 | ||||||
Total (MBoe) | 8,083 | 19,120 | 18,796 | ||||||
PV-10 Value (in thousands) | $ | 104,570 | $ | 236,201 | $ | 345,501 | |||
Prices used in calculating PV-10 Value: | |||||||||
$/Bbl (Oil) | 29.25 | 40.25 | 58.63 | ||||||
$/Mcf | 6.17 | 6.02 | 9.14 | ||||||
$/Bbl (NGL) | — | 27.56 | 35.89 | ||||||
| (1) | Approximately 16.3% of our estimated proved reserves of NGLs at December 31, 2005, result from our equity ownership in the Electra Gas Plant. |
Index to Financial Statements
The following is a summary of the standardized measure of discounted net cash flows using methodology provided for in Statement of Financial Accounting Standard No. 69, related to our estimated proved oil and natural gas reserves. For these calculations, estimated future cash flows from estimated future production of proved reserves were computed using oil and natural gas prices as of the end of the period presented. Future development and production costs attributable to the proved reserves were estimated assuming that existing conditions would continue over the economic lives of the individual leases and costs were not escalated for the future. Estimated future income tax expenses were calculated by applying future statutory tax rates (based on the current tax law adjusted for permanent differences and tax credits) to the estimated future pretax net cash flows related to proved oil and natural gas reserves, less the tax basis of the properties involved. For further information regarding the standardized measure of discounted net cash flows related to our estimated proved oil and natural gas reserves for the years ended December 31, 2003, 2004 and 2005, please review note R in the notes to our year-end 2005 financial statements appearing elsewhere in this prospectus.
The standardized measure of discounted future net cash flows relating to our estimated proved oil and natural gas reserves at December 31 is summarized as follows:
| Year ended December 31, | ||||||||||||
| 2003 | 2004 | 2005 | ||||||||||
| (in thousands) | ||||||||||||
Future cash inflows | $ | 281,149 | $ | 711,781 | $ | 1,037,337 | ||||||
Future production costs | (70,644 | ) | (247,314 | ) | (336,048 | ) | ||||||
Future development costs | (9,534 | ) | (36,495 | ) | (45,271 | ) | ||||||
Future income tax expenses | (69,787 | ) | (136,669 | ) | (219,640 | ) | ||||||
Future net cash flows | 131,184 | 291,303 | 436,418 | |||||||||
10% annual discount for estimated timing of cash flows | (63,469 | ) | (129,983 | ) | (209,758 | ) | ||||||
Standardized measure of discounted future net cash flows | $ | 67,715 | $ | 161,320 | $ | 226,660 | ||||||
In general, the volume of production from oil and natural gas properties declines as reserves are depleted. Except to the extent we acquire properties containing proved reserves or conduct successful exploration and development activities, our proved reserves will decline as reserves are produced. Our future oil and natural gas production is, therefore, highly dependent upon our level of success in finding or acquiring additional reserves.
Index to Financial Statements
Net Production, Unit Prices and Costs
The following table presents certain information with respect to our oil and natural gas production and prices and costs attributable to all oil and natural gas properties owned by us for the periods shown. Average realized prices reflect the actual realized prices received by us, before and after giving effect to the results of our derivative contracts. Our derivative contracts are financial, and our production of oil, natural gas and NGLs, and the average realized prices we receive from our production, are not affected by our derivative contracts.
| Year ended December 31, | Nine months 2006 | ||||||||||||||
| 2003 | 2004 | 2005 | |||||||||||||
Production volumes: | |||||||||||||||
Oil (MBbls) | 277 | 178 | 787 | 592 | |||||||||||
Natural gas liquids (MBbls) | 5 | 12 | 170 | 103 | |||||||||||
Natural gas (MMcf) | 2,334 | 1,928 | 2,681 | 1,761 | |||||||||||
Total (MBoe) | 671 | 511 | 1,405 | 989 | |||||||||||
Average realized prices (before effects of derivative contracts): | |||||||||||||||
Oil (per Bbl) | $ | 29.47 | $ | 37.63 | $ | 53.75 | $ | 63.80 | |||||||
Natural gas liquids (per Bbl) | 16.94 | 26.41 | 36.33 | 41.89 | |||||||||||
Natural gas (per Mcf) | 5.06 | 5.69 | 6.61 | 6.22 | |||||||||||
Total per Boe | 29.89 | 35.14 | 47.16 | 53.66 | |||||||||||
Effect of settlement of derivative contracts: | |||||||||||||||
Oil (per Bbl) | $ | — | $ | (4.48 | ) | $ | (1.40 | ) | $ | (6.34 | ) | ||||
Natural gas liquids (per Bbl) | — | — | — | — | |||||||||||
Natural gas (per Mcf) | — | .05 | (1.04 | ) | (0.10 | ) | |||||||||
Total per Boe | — | (1.37 | ) | (2.78 | ) | (3.98 | ) | ||||||||
Average realized prices (after effects of derivative contracts): | |||||||||||||||
Oil (per Bbl) | $ | 29.47 | $ | 33.15 | $ | 52.35 | $ | 57.46 | |||||||
Natural gas liquids (per Bbl) | 16.94 | 26.41 | 36.33 | 41.89 | |||||||||||
Natural gas (Per Mcf) | 5.06 | 5.74 | 5.57 | 6.12 | |||||||||||
Total per Boe | 29.89 | 33.77 | 44.38 | 49.68 | |||||||||||
Expenses (per Boe): | |||||||||||||||
Oil and natural gas production taxes | $ | 2.10 | $ | 2.47 | $ | 2.36 | $ | 2.56 | |||||||
Oil and natural gas production expenses | 5.26 | 7.04 | 11.46 | 13.38 | |||||||||||
Amortization of full cost pool | 5.64 | 5.89 | 8.93 | 9.63 | |||||||||||
General and administrative | 9.44 | 12.90 | 6.13 | 6.42 | |||||||||||
Index to Financial Statements
Acquisition, Development and Exploration Capital Expenditures
The following table presents information regarding our net costs incurred in our acquisitions of proved and unproved properties, and our development and exploration activities:
| Year ended December 31, | Nine months 2006 | |||||||||||
| 2003 | 2004 | 2005 | ||||||||||
| (in thousands) | ||||||||||||
Proved property acquisition costs | $ | — | $ | 96,819 | $ | 155 | $ | 4,483 | ||||
Unproved property acquisition costs | — | — | — | 757 | ||||||||
Development costs | 5,056 | 5,173 | 11,864 | 14,393 | ||||||||
Exploration costs | 202 | 727 | 1,507 | 1,896 | ||||||||
Total costs incurred | $ | 5,258 | $ | 102,719 | $ | 13,526 | $ | 21,529 | ||||
Finding Costs
The following table sets forth the estimated proved reserves we acquired or discovered, including revisions of previous estimates, during each stated period. In calculating finding costs, we include acquisition costs related to proved and unproved property acquisitions, exploration costs and development costs that resulted in reserve additions.
| Year ended December 31, | ||||||
| 2003 | 2004 | 2005 | ||||
Proved reserves acquired/discovered (MBoe) | 319 | 13,704 | 1,323 | |||
Total cost per Boe of reserves acquired/discovered | $4.01 | $5.85 | $11.91 | |||
Producing Wells
The following table sets forth the number of productive wells in which we owned an interest as of September 30, 2006. Productive wells consist of producing wells and wells capable of production, including wells awaiting pipeline connections or connection to production facilities. Wells that we complete in more than one producing horizon are counted as one well.
| Gross | Net | |||
Oil | 1,990 | 1,331 | ||
Natural gas | 266 | 124 | ||
Total | 2,256 | 1,456 | ||
Acreage
The following table sets forth our developed and undeveloped gross and net leasehold acreage, including options to acquire leasehold acreage, as of September 30, 2006:
| Gross | Net | |||
Developed | 104,179 | 38,248 | ||
Undeveloped | 131,563 | 31,908 | ||
Total | 235,742 | 70,156 | ||
Index to Financial Statements
Approximately 90% of our net acreage was located in our core areas as of September 30, 2006. Our undeveloped acreage includes leased acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas, regardless of whether or not such acreage is held by production or contains proved reserves. A gross acre is an acre in which we own an interest. A net acre is deemed to exist when the sum of fractional ownership interests in gross acres equals one. The number of net acres is the sum of the fractional interests owned in gross acres.
Drilling Activities
During the periods indicated, we drilled or participated in drilling the following wells:
| Year Ended December 31, | Nine Months September 30, 2006 (1) | |||||||||||||||
| 2003 | 2004 | 2005 | ||||||||||||||
| Gross | Net | Gross | Net | Gross | Net | Gross | Net | |||||||||
Development wells: | ||||||||||||||||
Productive | 1 | 0.5 | 23 | 16.3 | 66 | 58.1 | 59 | 58.5 | ||||||||
Non-productive | — | — | 1 | 0.3 | — | — | 1 | 0.3 | ||||||||
Exploratory wells: | ||||||||||||||||
Productive | 3 | 0.3 | 1 | 0.3 | 1 | 0.3 | 2 | 0.6 | ||||||||
Non-productive | — | — | 4 | 0.5 | — | — | 2 | 1.5 | ||||||||
Total | 4 | 0.8 | 29 | 17.3 | 67 | 58.3 | 64 | 60.9 | ||||||||
| (1) | Does not include wells drilling or awaiting completion as of September 30, 2006. |
Oil and Natural Gas Marketing and Derivative Activities
During the nine months ended September 30, 2006, two purchasers accounted for approximately 73% of our oil and natural gas revenue. Shell Trading-US accounted for $31.8 million, or 60%, and Dynegy (now, Targa Midstream Services, or Targa) accounted for $6.9 million, or 13%, of our oil and natural gas revenue for that period. No other purchaser accounted for 10% or more of our oil and natural gas revenue during the nine months ended September 30, 2006. Our agreement with Shell Trading-US, or STUSCO, which covers all of our north Texas oil production, through June 30, 2006 provided for payment, on a per barrel basis, of a price equal to Koch’s posted price for West Texas Intermediate Crude, plus Platt’s Trade-month P+ (a fluctuating premium based on refinery demand), minus $1.15. Effective July 1, 2006, we negotiated a new price of STUSCO WTI plus $1.50. For the month of September 2006, the sales price was $62.50 per Bbl. The agreement is on a month-to-month basis and is cancelable by either party upon 30 days’ prior written notice. Our gas purchase contract with Targa, which expires February 1, 2013, covers our predominately natural gas producing properties located in Jack and Wise Counties, Texas. Under the terms of the contract, Targa takes delivery of our gas in the field and transports the gas to the nearby Chico Plant where it is processed for the extraction of liquefiable hydrocarbons. Targa pays us 85% of the weighted average price received by Targa for the sale of natural gas and natural gas liquids attributable to the gas delivered by us. There are other purchasers in the fields where our production sold to these two purchasers is produced and marketed, and such other purchasers would be available to purchase our production should any of these two purchasers discontinue operations. We have no reason to believe that any such cessation is likely to occur. However, if the Chico Plant were to cease operations, whether for mechanical, financial or other reasons, such cessation could materially and adversely affect our cash flow
Index to Financial Statements
from operations on a temporary basis, until a new purchaser could install the necessary facilities to take delivery of our natural gas production in the area. We have no reason to believe that any such cessation is likely to occur.
To reduce exposure to fluctuations in oil and natural gas prices and to achieve more predictable cash flow, we periodically utilize various derivative strategies to manage the price received for a portion of our future oil and natural gas production. The notional volumes under our derivative contracts do not exceed our expected production. Our derivative strategies customarily involve the purchase of put options to provide a price floor for our production, put/call collars that establish both a floor and a ceiling price to provide price certainty within a fixed range, put/call call collars that establish a secondary floor above the put/call collar ceiling or swap arrangements that establish an index-related price above which we pay the derivative counterparty and below which we are paid by the derivative counterparty. These contracts allow us to predict with greater certainty the effective oil and natural gas prices to be received for our production and benefit us when market prices are less than the strike prices or fixed prices under our derivative contracts. However, we will not benefit from market prices that are higher than the strike or fixed prices in these contracts for our hedged production.
Our derivative positions at September 30, 2006 are shown in the following table:
| Crude Oil (Bbls) | Natural Gas (MMBtu) | |||||||||||||||||||
| Floors | Ceilings | Floors | Ceilings | |||||||||||||||||
| Per Day | Price | Per Day | Price | Per Day | Price | Per Day | Price | |||||||||||||
Collars | ||||||||||||||||||||
2006 | 1,500 | $ | 43.33 | 1,500 | $ | 65.80 | 5,000 | $ | 7.00 | 5,000 | $ | 11.95 | ||||||||
2007 | 1,500 | 52.67 | 1,500 | 73.24 | 4,247 | 7.43 | 4,247 | 11.62 | ||||||||||||
2008 | 1,000 | 53.34 | 1,000 | 86.37 | 4,000 | 7.16 | 4,000 | 13.25 | ||||||||||||
Bare Floors | ||||||||||||||||||||
2006 | 250 | 40.00 | ||||||||||||||||||
Secondary Floors | ||||||||||||||||||||
2007 | 4,000 | 12.00 | ||||||||||||||||||
For the nine months ended September 30, 2006 our average daily production was 2,169 Bbls of oil, 6,452 Mcf of natural gas, and 376 Bbls of NGLs.
Competition
The oil and natural gas industry is highly competitive. We compete for the acquisition of oil and natural gas properties, primarily on the basis of the price to be paid for such properties, with numerous entities including major oil companies, other independent oil and natural gas concerns and individual producers and operators. Many of these competitors are large, well-established companies and have financial and other resources substantially greater than ours. Our ability to acquire additional oil and natural gas properties and to discover reserves in the future will depend upon our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment.
Title to Properties
We believe that we have satisfactory title to our properties in accordance with standards generally accepted in the oil and natural gas industry. As is customary in the oil and natural gas industry, we make only a cursory review of title to farmout acreage and to undeveloped oil and natural gas leases upon execution of any contracts. Prior to the commencement of drilling operations, a title examination is conducted and curative work is performed with respect to significant defects. To the extent title opinions or
Index to Financial Statements
other investigations reflect title defects, we, rather than the seller of the undeveloped property, typically are responsible to cure any such title defects at our expense. If we were unable to remedy or cure any title defect of a nature such that it would not be prudent for us to commence drilling operations on the property, we could suffer a loss of our entire investment in the property. We have obtained title opinions or reports on substantially all of our producing properties. Prior to completing an acquisition of producing oil and natural gas leases, we perform a title review on a material portion of the leases. Our oil and natural gas properties are subject to customary royalty interests, liens for current taxes and other burdens that we believe do not materially interfere with the use of or affect the value of such properties.
Facilities
Our executive and operating offices are located at Suite 650, Meridian Tower, 5100 E. Skelly Drive, Tulsa, Oklahoma 74135 which we occupy under a lease with a remaining term ending in June 2008, at an annual rental of $275,800, subject to escalations for taxes and utilities. We also lease a small office in Houston. We believe that our facilities are adequate for our current needs.
Regulation
General.Various aspects of our oil and gas operations are subject to extensive and continually changing regulation, as legislation affecting the oil and gas industry is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, are authorized by statute to issue, and have issued, rules and regulations binding upon the oil and gas industry and our individual members.
Regulation of Sales and Transportation of Natural Gas.The Federal Energy Regulatory Commission, or the FERC, regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. In the past, the federal government has regulated the prices at which natural gas can be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future. Our sales of natural gas are affected by the availability, terms and cost of transportation. The price and terms for access to pipeline transportation are subject to extensive regulation and proposed regulation designed to increase competition within the natural gas industry, to remove various barriers and practices that historically limited non-pipeline natural gas sellers, including producers, from effectively competing with interstate pipelines for sales to local distribution companies and large industrial and commercial customers and to establish the rates interstate pipelines may charge for their services. Similarly, the Oklahoma Corporation Commission and the Texas Railroad Commission have been reviewing changes to their regulations governing transportation and gathering services provided by intrastate pipelines and gatherers. While the changes being considered by these federal and state regulators would affect us only indirectly, they are intended to further enhance competition in natural gas markets. We cannot predict what further action the FERC or state regulators will take on these matters; however, we do not believe that any actions taken will have an effect materially different than the effect on other natural gas producers with which we compete.
Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC, state commissions and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue.
Oil Price Controls and Transportation Rates.Our sales of crude oil, condensate and natural gas liquids are not currently regulated and are made at market prices. The price we receive from the sale of these products may be affected by the cost of transporting the products to market.
Index to Financial Statements
Environmental.Our oil and natural gas operations are subject to pervasive federal, state, and local laws and regulations concerning the protection and preservation of the environment (e.g., ambient air, and surface and subsurface soils and waters), human health, worker safety, natural resources and wildlife. These laws and regulations affect virtually every aspect of our oil and natural gas operations, including our exploration for, and production, storage, treatment, and transportation of, hydrocarbons and the disposal of wastes generated in connection with those activities. These laws and regulations increase our costs of planning, designing, drilling, installing, operating, and abandoning oil and natural gas wells and appurtenant properties, such as gathering systems, pipelines, and storage, treatment and salt water disposal facilities.
We have expended and will continue to expend significant financial and managerial resources to comply with applicable environmental laws and regulations, including permitting requirements. Our failure to comply with these laws and regulations can subject us to substantial civil and criminal penalties, claims for injury to persons and damage to properties and natural resources, and clean-up and other remedial obligations. Although we believe that the operation of our properties generally complies with applicable environmental laws and regulations, the risks of incurring substantial costs and liabilities are inherent in the operation of oil and natural gas wells and appurtenant properties. We could also be subject to liabilities related to the past operations conducted by others at properties now owned by us, without regard to any wrongful or negligent conduct by us.
We cannot predict what effect future environmental legislation and regulation will have upon our oil and natural gas operations. The possible legislative reclassification of certain wastes generated in connection with oil and natural gas operations as “hazardous wastes” would have a significant impact on our operating costs, as well as the oil and natural gas industry in general. The cost of compliance with more stringent environmental laws and regulations, or the more vigorous administration and enforcement of those laws and regulations, could result in material expenditures by us to remove, acquire, modify, and install equipment, store and dispose of wastes, remediate facilities, employ additional personnel, and implement systems to ensure compliance with those laws and regulations. These accumulative expenditures could have a material adverse effect upon our profitability and future capital expenditures.
Regulation of Oil and Gas Exploration and Production.Our exploration and production operations are subject to various types of regulation at the federal, state and local levels. Such regulations include requiring permits and drilling bonds for the drilling of wells, regulating the location of wells, the method of drilling and casing wells, and the surface use and restoration of properties upon which wells are drilled. Many states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from oil and natural gas wells and the regulation of spacing, plugging and abandonment of such wells. Some state statutes limit the rate at which oil and natural gas can be produced from our properties.
Legal Proceedings
From time to time, we are a party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. Other than the pending lawsuit described below, we are not involved in any legal proceedings, nor are we a party to any pending or threatened claims, that could reasonably be expected to have a material adverse effect on our financial condition or results of operations.
In the pending lawsuit, RAM Energy, together with certain of its subsidiaries and affiliates, are defendants in the litigation entitled Sacket v. Great Plains Pipeline Company, et al., in the District Court of Woods County, Oklahoma (Case No. CJ-2002-70). This is a putative class action case filed by a landowner alleging that the royalty payments to landowners for oil and natural gas produced from wells connected to a RAM Energy subsidiary’s natural gas, oil and saltwater pipeline system in Woods, Alfalfa and Major Counties, Oklahoma, were calculated on a price that was lower than the price at which the production from
Index to Financial Statements
the related wells was resold by the subsidiary. RAM Energy and its subsidiaries sold their interests in the affected leases effective December 1, 2001. The plaintiff filed the lawsuit as a class action on behalf of himself and all other royalty owners under leases held by any of the defendants upon which wells were connected to the system. Plaintiff seeks unspecified damages for breach of contract, tortious breach of implied covenants and breach of fiduciary duty, together with an accounting, imposition of a constructive trust, a permanent injunction, punitive damages and recovery of litigation costs and fees. We believe that a fair and proper accounting was made to the royalty owners for production from the affected leases. We have filed a response contesting the existence of a class and denying the allegations made by the plaintiff. No substantive action has been taken in the case since it was filed in 2002 and no class has been certified. Hearings on class certification were held in June and August, 2006, and the matter is currently under advisement by the Court. We are vigorously resisting any class certification. If no class is certified, then we do not expect any material liability as a result of the lawsuit. Whether or not a class is certified, we will strenuously defend against any substantive claims made in the litigation.
Employees
At September 30, 2006, we had 99 employees, 11 of whom were administrative, accounting or financial personnel and 88 of whom were technical and operations personnel. Our exploration staff includes two exploration geologists and two exploration landmen. Our future success will depend partially on our ability to attract, retain and motivate qualified personnel. We are not a party to any collective bargaining agreement and we have not experienced any strikes or work stoppages. We consider our relations with our employees to be satisfactory.
Index to Financial Statements
Our board of directors and executive officers are:
Name | Age | Position | ||
Larry E. Lee | 58 | Chairman, President and Chief Executive Officer | ||
John M. Longmire | 64 | Senior Vice President and Chief Financial Officer | ||
Larry G. Rampey | 61 | Senior Vice President | ||
Drake N. Smiley | 58 | Senior Vice President | ||
John L. Cox | 56 | Vice President, Secretary and Treasurer | ||
Robert E. Phaneuf | 60 | Vice President — Corporate Development | ||
Sean P. Lane | 48 | Director | ||
Gerald R. Marshall | 72 | Director | ||
John M. Reardon | 64 | Director |
Larry E. Lee has served as our chairman, president and chief executive officer since May 2006. He is a founder of RAM Energy and has served as its president and, with the exception of the period from June 1992 to November 1997, when he served as chief operating officer, he has served as its chief executive officer since September 1987. Mr. Lee became chairman of the board of RAM Energy in October 2005. Mr. Lee has been active in the oil and gas industry since 1976. Mr. Lee worked for the private companies of Goldman Enterprises and Kerr Consolidated before developing the RAM Energy companies in 1984. He served in the public sector as Budget Director for the city of Oklahoma City from 1971 to 1976, and was a member of the staff of Governor David Boren during 1976. Mr. Lee is a Wildcatter member of the Oklahoma Independent Petroleum Association and a member of the Independent Petroleum Association of America, having previously served as director. Mr. Lee is a member of the Board of Trustees, serves as Chairman of the Finance Committee, is a member of the Executive Committee, and is Chairman Elect of the Board of Trustees for the Philbrook Museum of Art. He is also a member of the Board of Directors and Vice Chairman of the Oklahoma Heritage Association, where he serves on the Executive and Finance Committees. Mr. Lee serves as a member of the Executive Board of the Indian Nations Council of the Boy Scouts of America. He is a lifetime member of World Presidents’ Organization. Mr. Lee received his B.B.A. in finance from the University of Oklahoma.
John M. Longmire has been our chief financial officer and a senior vice president since May 2006 and has been chief financial officer of RAM Energy since August 1994 and a senior vice president since December 1997. Previously, Mr. Longmire was vice president of RAM Energy from August 1994 until December 1997 and was its controller from March 1990 until August 1994. Mr. Longmire has 30 years experience in various financial management positions in the oil and gas industry. Prior to joining RAM Energy in 1990, Mr. Longmire held various positions with Texas International Company, Amarex, Inc. and Union Oil Company of California. Mr. Longmire is a Certified Public Accountant and received his B.S. in 1973 from California State University at Los Angeles.
Larry G. Rampey has been our senior vice president since May 2006 and a senior vice president of RAM Energy since February 1998, previously serving as vice president of operations since May 1989. Mr. Rampey has 30 years of experience in the management of both domestic and international oil and gas properties. From 1972 until May 1989, Mr. Rampey was employed by Reading & Bates Petroleum Co., holding positions of vice president of international operations and vice president of domestic operations. Mr. Rampey was employed by Amoco prior to joining Reading & Bates. Mr. Rampey is a member of the Society of Petroleum Engineers and the Oklahoma Independent Petroleum Association. Mr. Rampey received his B.S. in Industrial Engineering from Oklahoma State University.
Drake N. Smiley has been our senior vice president of land and exploration since May 2006 and has held a similar position with RAM Energy since January 1998. Mr. Smiley served as vice president of land,
Index to Financial Statements
legal and business development of RAM Energy from February 1997 until December 1997. Previously, Mr. Smiley was employed by Reading & Bates, serving as manager of land. Before Reading & Bates, he was employed by Cities Service Company. In June of 1994, Mr. Smiley accepted the position of vice president, land with Continental Resources, Inc. in Enid, Oklahoma. Mr. Smiley has 28 years of experience in the petroleum industry and is a member of the Oklahoma and Tulsa County Bar Associations, the Tulsa and American Associations of Petroleum Landmen and the Oklahoma Independent Petroleum Association. He is a Phi Beta Kappa graduate of the University of Missouri, where he also received his Juris Doctorate.
John L. Cox has been our vice president, secretary and treasurer since May 2006, vice president RAM Energy since June 2005 and secretary and treasurer of RAM Energy since November 2005. Prior to joining RAM Energy, Mr. Cox served as chief financial officer of Cannon Energy, Inc. from March 2003 until June 2005. Mr. Cox previously was controller for Mannix Oil and Gas, Inc. from February 2001 until March 2003 and controller/bankruptcy accountant for the bankruptcy trustee for Bristol Resources Corporation from 1997 to February 2001. Mr. Cox was also a vice president and chief financial officer for Latex Petroleum from 1994 to 1997, controller of Panada Exploration, Inc. from 1990 to 1994, and controller/ manager of financial reporting for Reading & Bates Petroleum Co. from 1976 to 1989. Mr. Cox is a Certified Public Accountant and received a B.S. in Accounting from Oklahoma City University.
Robert E. Phaneuf has been our vice president-corporate development since May 2006 and served in a similar capacity with RAM Energy since March 2006. From September 1995 until February 2006, Mr. Phaneuf served as vice president of corporate development at Vintage Petroleum Corporation. From 1994 until September 1995, he was employed in the corporate finance group at Arthur Andersen LLP. From 1972 to 1976, Mr. Phaneuf was an investment advisor with First International Investment Management Company. From 1976 to 1994, Mr. Phaneuf served as an energy analyst in the research department of several investment banking and brokerage firms, including Schneider, Bernet & Hickman from 1976 to 1978; as Vice President of Kidder, Peabody & Co. from 1978 to 1988; as Senior Vice President — Energy Research, Rauscher, Pierce, Refsnes, Inc. from 1988 to 1993; and as Senior Vice President — Head of Energy Research Group, Kemper Securities, from 1993 to 1994. Mr. Phaneuf received a B.A. in psychology and an MBA in Finance from the University of Texas at Austin.
Sean P. Lane was appointed to our board in May 2006. He has served as a Managing Member of Kinsale Advisors LLC since January 2003, providing business and risk management advisory services to companies and investors in the energy, environmental and technology industries. From May 1999 until December 2002, Mr. Lane was an executive vice president, chief administrative officer, general counsel and director of beenz.com inc. a global internet currency business. Mr. Lane served as a managing director of Liberty Power Investments, LLC, an international electric power project development, finance and acquisition firm from December 1992 until May 1999. Mr. Lane has also served as an executive of Compania Boliviana de Energia Electrica, S.A., the leading Bolivian electric utility, as well as The Henley Group, Inc., Wheelabrator Technologies, Inc. and Catalyst Energy Corporation, all publicly traded firms with significant investments in the U.S. or international independent power and environmental industries. Mr. Lane received his J.D. from Georgetown University Law Center and a Bachelor’s degree in Political Economy and History from Fordham University.
Gerald R. Marshall was appointed to our board in May 2006 and has been a director of RAM Energy since December 1997. Mr. Marshall was vice chairman of the Midland Group of Oklahoma City, Oklahoma, which includes Midland Mortgage Co., MidFirst Bank, Midland Asset Management Co. and Home Shield Insurance Co., from October 1996 to March 2003 and served as a director of MidFirst Bank from 1993 until March 2003, and served as its chief credit officer from October 1996 until March 2001. From 1990 until 1995, Mr. Marshall was chairman, chief executive officer and principal owner of RAM
Index to Financial Statements
Management Associates, an asset management contractor for the Resolution Trust Corporation. From 1989 until 1990, Mr. Marshall served as a special consultant to Worthen Banking Corporation of Arkansas. From 1987 until 1989, Mr. Marshall was interim chief executive officer of an insolvent savings and loan association in Little Rock, Arkansas, pending federal resolution. From September 1984 until November 1986, Mr. Marshall served as chairman of the board and chief executive officer has significant experience in South America. It is possible that
prospective target businesses could be introducedof Bank of Oklahoma, Oklahoma City, N.A and from August 1981 to us in thisApril 1984, Mr. Marshall served as president and other areas.
If we locatechief executive officer of Goldman Enterprises, a suitable target business outsideprivately owned, diversified group of the United States, we would
be subjectcompanies. Prior to all the inherent risks of doing business in that foreign country.
For instance, many countries in South America have had economic difficulties and
political instability. If we were to complete a business combination with a
target business located in another country suchAugust 1981, Mr. Marshall served as one in South America, our
operations and profitability could be negatively affected by that country's
response to these and other issues.
IF WE COMPLETE A BUSINESS COMBINATION WITH A TARGET BUSINESS LOCATED OUTSIDE OF
THE UNITED STATES AND OUR MANAGEMENT FOLLOWING A BUSINESS COMBINATION IS
UNFAMILIAR WITH UNITED STATES SECURITIES LAWS, THEY MAY HAVE TO EXPEND TIME AND
RESOURCES BECOMING FAMILIAR WITH SUCH LAWS WHICH COULD LEAD TO VARIOUS
REGULATORY ISSUES.
It is possible that we could complete a business combination with a
target business located outside of the United States. Following a business
combination, it is likely that our management will resign from their positions
as officers of the company and the management of the target business at the time
of the business combination will remain in place. We cannot assure you that
management of the target business will be familiar with United States securities
laws. If new management is unfamiliar with our laws, they may have to expend
time and resources becoming familiar with such laws. This could be expensive and
time-consuming and could lead to various regulatory issues which may adversely
affect our operations.
RISKS ASSOCIATED WITH THE ENERGY AND ENVIRONMENTAL INDUSTRIES
AND THEIR RELATED INFRASTRUCTURES
FLUCTUATIONS IN ENERGY PRICES MAY CAUSE A REDUCTION IN THE DEMAND OR
PROFITABILITY OF THE PRODUCTS OR SERVICES WE MAY ULTIMATELY PRODUCE OR OFFER.
Prices for energy sources such as oil and natural gas tend to fluctuate
widely based on a variety of political and economic factors. These price
fluctuations heavily influence both the energy and environmental industries and
their related infrastructures. Lower energy prices for existing products
15
tend to limit the demand for alternate forms of energy services and related
products and infrastructure. Factors that impact price fluctuations include the
actions of the members of the Organization of Petroleum Exporting Countries
(OPEC), the level of production by non-OPEC countries, worldwide demand for oil
and natural gas, political tensions involving OPEC and non-OPEC countries and
other varying factors. If we complete a business combination with a target
business that is involved with an energy source that is affected by these or
other factors, there may be a decrease in the demand for the products or
services we may ultimately produce or offer and our profitability could be
adversely affected.
CHANGES IN TECHNOLOGY MAY RENDER OUR PRODUCTS OR SERVICES OBSOLETE FOLLOWING A
BUSINESS COMBINATION.
Both the energy and environmental industries and their related
infrastructures are substantially affected by rapid and significant changes in
technology. These changes may render certain existing services and technologies
currently used obsolete. We cannot assure you that the technologies used by or
relied upon by a target business with which we effect a business combination
will not be subject to such obsolescence. While we may attempt to adapt and
apply the services provided by the target business to newer technologies, we
cannot assure you that we will have sufficient resources to fund these changes
or that these changes will ultimately prove successful.
FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS COULD RESULT IN THE IMPOSITION
OF PENALTIES, FINES OR RESTRICTIONS ON OPERATIONS AND REMEDIAL LIABILITIES.
Both the energy and environmental industries are subject to extensive
federal, state and local laws and regulations related to our population's
health and safety and those associated with compliance and permitting
obligations (including those related to the use, storage, handling, discharge,
emission and disposal of municipal solid waste and other waste, pollutants or
hazardous substances or wastes, or discharges and air and other emissions) as
well as land use and development. Existing laws also impose obligations to
clean up contaminated properties or to pay for the cost of such remediation,
often upon parties that did not actually cause the contamination. Compliance
with these laws, regulations and obligations could require substantial capital
expenditures. Failure to comply could result in the imposition of penalties,
fines or restrictions on operations and remedial liabilities. These costs and
liabilities could adversely affect our operations following a business
combination. These laws, regulations and obligations could change with the
promulgation of new laws and regulations or a change in the interpretation of
existing laws and regulations, which could result in substantially similar
risks. We cannot assure you that we will be able to comply with existing or new
regulations.
IF WE ARE UNABLE TO ACQUIRE OR RENEW PERMITS AND APPROVALS REQUIRED FOR OUR
OPERATIONS FOLLOWING A BUSINESS COMBINATION, WE MAY BE FORCED TO SUSPEND OR
CEASE OUR OPERATIONS ALTOGETHER.
The construction and operation of energy projects require numerous permits
and approvals from governmental agencies. We cannot assure you that we will be
able to obtain all necessary permits and approvals following a business
combination. If we are unable to obtain or renew permits or approvals necessary
for the operation of our business following a business combination, our
operations would be adversely affected. In addition, obtaining all necessary
permits and approvals may necessitate substantial expenditures and may create a
significant risk of expensive delays or loss of value if a project is unable to
function as planned due to changing requirements or local opposition.
REGULATION WITHIN THE ENERGY INDUSTRY COULD REDUCE OUR PROFITABILITY FOLLOWING
A BUSINESS COMBINATION.
Essentially all of the energy sectors including electric generation,
transmission and distribution, natural gas transmission and distribution, and
oil transportation are subject to highly technical Federal and state regulatory
regimes. Rates, terms of service, facility sites, financing, dividend payments,
wages, divestitures, changes in control and business dealings with affiliates
are all subject to ongoing regulatory disclosure and approval on the merits.
The failure or refusal of any jurisdictional regulator to grant approval as to
any particular rate, service or transaction could prove harmful to us, as could
the occurrence of any dispute with a regulator.
16
USE OF PROCEEDS
We estimate that the net proceeds of this offering will be as set forth in
the following table:
Without Over- Over-Allotment
Allotment Option Option Exercised
---------------- ----------------
Gross proceeds.................................................. $33,000,000.00 $37,950,000.00
- --------------
Offering expenses
- -----------------
Underwriting discount (6% of gross proceeds)................ 1,980,000.00 2,277,000.00
Underwriting non-accountable expense allowance
(3% of gross proceeds)................................. 990,000.00 1,138,500.00
Legal fees and expenses (including blue sky services
and expenses).......................................... 350,000.00 350,000.00
Miscellaneous expenses....................................... 90,161.46 90,161.46
Printing and engraving expenses.............................. 35,000.00 35,000.00
Accounting fees and expenses................................. 20,000.00 20,000.00
SEC registration fee......................................... 13,602.53 13,602.53
NASD registration fee........................................ 11,236.01 11,236.01
Net proceeds
- ------------
Held in trust................................................ 28,490,000.00 32,994,500.00
Not held in trust............................................ 1,020,000.00 1,020,000.00
----------------- -------------------
Total net proceeds..................................... $29,510,000.00 $34,014,500.00
================= ===================
Use of net proceeds not held in trust
- -------------------------------------
Legal, accounting and other expenses attendant to
the due diligence investigations, structuring and
negotiation of a business combination................ $180,000 (17.6%)
Payment of administrative fee to Coqui Capital Partners ($3,500
per month for two years)............................. 84,000 (8.2%)
Due diligence of prospective target businesses............ 50,000 (4.9%)
Legal and accounting fees relating to SEC reporting
obligations.......................................... 40,000 (3.9%)
Working capital to cover miscellaneous expenses,
D&O insurance and reserves........................... 666,000 (65.4%)
--------------------------------
Total............................................ $1,020,000 (100.0%)
================================
$28,490,000, or $32,994,500 if the underwriters' over-allotment option is
exercised in full, of net proceeds will be placed in a trust fund maintained by
Continental Stock Transfer & Trust Company, New York, New York, as trustee. The
proceeds will not be released from the trust fund until the earlier of the
completion of a business combination or our liquidation. The proceeds held in
the trust fund may be used as consideration to pay the sellers of a target
business with which we ultimately complete a business combination. Any amounts
not paid as consideration to the sellers of the target business may be used to
finance operations of the target business or to effect other acquisitions, as
determined by our board of directors at that time.
The payment to Coqui Capital Partners, L.P., an affiliate of Isaac Kier,
our secretary, treasurer and a member of our board of directors, of a monthly
fee of $3,500 is for general and administrative services including office
space, utilities and secretarial support. We believe, based on rents and fees
for similar services in the New York, New York metropolitan area, that the fee
charged by Coqui Capital Partners is at least as favorable as we could have
obtained from an unaffiliated person.
We intend to use the excess working capital (approximately $666,000) for
director and officer liability insurance premiums (approximately $115,000),
with the balance of $115,000 being held in reserve in the event due diligence,
legal, accounting and other expenses of structuring and negotiating
17
business combinations exceed our estimates, as well as for reimbursement of any
out-of-pocket expenses incurred by our existing stockholders in connection with
activities on our behalf as described below. We believe that the excess working
capital will be sufficient to cover the foregoing expenses and reimbursement
costs.
To the extent that our capital stock is used in whole or in part as
consideration to effect a business combination, the proceeds held in the trust
fund as well as any other net proceeds not expended will be used to finance the
operations of the target business.
Lawrence S. Coben, our chairman and chief executive officer of Capital Bank, N.A. of Houston, Texas and was a senior vice president of its then parent company, Mercantile Texas Corporation. Prior to 1981, Mr. Marshall served as president and director of The First National Bank and Trust Company of Oklahoma City; as executive vice president of First National Bank in Dallas, and as president of Liberty National Bank and Trust Company of Oklahoma City. Mr. Marshall received a B.S. in Finance and Accounting from the University of Oklahoma.
John M. Reardon was appointed to our board in May 2006 and has advanced
to usserved as a totaldirector of $77,500 ($70,000 on February 17, 2004 and $7,500 on April 23,
2004) whichRAM Energy since October 2005. He previously was used to pay a portionmember of the expensesRAM Energy board from January 1998 to May 2002. Mr. Reardon has been market president of this offering
referencedUnion Bank of California, in Valencia, California, since November 2002. From August 1994 until November 2002, Mr. Reardon was president and chief executive officer of Valencia National Bank, Santa Clarita, California. From 1991 to August 1994, Mr. Reardon was executive vice president of Ramco Oil and Gas, Inc. and RAM Management Associates, Inc. Mr. Reardon was a senior vice president of Wells Fargo Bank, Los Angeles, California from 1987 to 1991. Previously, he served as chairman, president and chief executive officer of Southwestern Bank and Trust Company, Oklahoma City; executive vice president of The First National Bank and Trust Company of Oklahoma City, Oklahoma; and vice president of Liberty National Bank and Trust Company, Oklahoma City, Oklahoma. Mr. Reardon is currently president of the board of directors of the Santa Clarita Valley Boys & Girls Club Foundation. In 2000, Mr. Reardon was presented the Entrepreneur of the Year Award by Ernst & Young and he is a life member in the line items above for SEC registration fee, NASD registration
feeEntrepreneur of the Year Award Hall of Fame. Mr. Reardon has served as a director of Gene Autry Western Heritage Museum, Los Angeles, California; as a member and legal feesofficer of several committees and expenses. The loans will be payable without interestsub-committees of the Housing and Real Estate Finance Committee of the American Bankers Association; and as a director of the Oklahoma Bankers Association. Mr. Reardon has served on the earlier of February 17, 2005 or the consummation of this offering. The loans
will be repaid outfaculty of the proceedsUniversity of this offering not being placed in trust.
The net proceedsOklahoma School of this offering not held inCommercial Banking; Southwestern Graduate School of Banking, Southern Methodist University, Dallas, Texas; the trust fundReal Estate Finance School and not
immediately required for the purposes set forth above will only be invested in
United States "government securities," definedNational Commercial Lending School of the American Bankers Association; and the Secured Lending School of the Oklahoma Bankers Association. He served as any Treasury Bill issued byChairman of the Federal Government Relations Committee of the Oklahoma Bankers Association and as a member of the board of directors of the Chair of Banking, the College of Business of the University of Oklahoma. He has also served as an advisory director of Oklahoma State University and a member of the Oklahoma State Advisory Council of the United States havingSmall Business Administration, and President. Mr. Reardon received a maturityB.S. in business from Oklahoma State University and is a graduate of one hundredthe Southwestern Graduate School of Banking, Southern Methodist University in Dallas, Texas.
Independence of Directors
We adhere to the rules of Nasdaq in determining whether a director is independent. Our board of directors also consults with our counsel to ensure that the board’s determinations are consistent with those rules and eighty days or less so
that we are not deemed to be an investment company under the Investment Company
Act. The interest income derived from investment of these net proceeds during
this period will be used to defray our generalall relevant securities and administrative expenses, as
well as costs relating to compliance with securitiesother laws and regulations including associated professional fees, untilregarding the independence of directors. The Nasdaq listing standards define an “independent director” generally as a business combinationperson, other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s
Index to Financial Statements
exercise of independent judgment. Consistent with these considerations, our board of directors has affirmatively determined that Messrs. Lane, Marshall and Reardon are the independent directors. Mr. Lee is completed.
We believe that, upon consummationnot independent.
Board Committees
Our board of this offering, wedirectors currently has an audit committee, a compensation committee, and a nominating and governance committee. Our board may establish other committees from time to time to facilitate our management.
Audit Committee. The principal functions of the audit committee are to assist the board in monitoring the integrity of our consolidated financial statements, the independent auditor’s qualifications and independence, the performance of our independent auditors and our compliance with legal and regulatory requirements. The audit committee will have sufficient available fundsthe sole authority to operateretain and terminate our independent auditors and to approve the compensation paid to our independent auditors. The audit committee also will be responsible for at leastoverseeing our internal audit function. The audit committee currently consists of Messrs. Lane, Marshall and Reardon, with Mr. Marshall acting as the next 24 months, assuming
that a business combinationChairman. Messrs. Lane, Marshall and Reardon are “independent,” and Mr. Marshall is not consummated during that time.
Commencing onour audit committee financial expert, under the effective date of this prospectus through the
consummationlisting standards of the acquisitionNasdaq and under SEC rules and regulations.
Compensation Committee. The principal functions of the target business, we will pay Coqui
Capital Partnerscompensation committee are to determine awards to employees of stock or other equity compensation, establish performance criteria for and evaluate the fee described above. Other than this $3,500 per month
administrative fee, noperformance of the chief executive officer and approve compensation of any kind (including finder'sall senior executives and consulting fees) will be paid todirectors. The compensation committee is currently comprised of Messrs. Lane, Marshall and Reardon, with Mr. Reardon acting as the Chairman. None of the members of our compensation committee is one of our officers or an officer of any of our existingsubsidiaries.
Nominating and Governance Committee. Our board of directors has established a nominating and governance committee. The members are Messrs. Marshall, Lane and Reardon, with Mr. Lane acting as Chairman. Each is independent director under Nasdaq listing standards. The nominating and governance committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominating and governance committee will consider persons identified by our members, management, stockholders, investment bankers and others. During the period ending immediately after our 2008 annual meeting, the nominees for our board of directors will be determined pursuant to the terms of a voting agreement (described below) and approved by the nominating and governance committee.
We do not have any restrictions on stockholder nominations under our certificate of incorporation or by-laws. However, any of
their affiliates, for services rendered tostockholder nominations must be received by us not less than sixty (60) days nor more than ninety (90) days prior to or in connection with
the consummation of the business combination. However, our existing
stockholders will receive reimbursement for any out-of-pocket expenses incurred
by them in connection with activities on our behalf, such as identifying
potential target businesses and performing due diligence on suitable business
combinations. Since the role of present management after a business combination
is uncertain, we have no ability to determine what remuneration, if any, will
be paid to those persons after a business combination.
A public stockholder will be entitled to receive funds from the trust fund
(including interest earned on his, her or its portion of the trust fund) onlyannual meeting; provided however, that in the event that less than seventy (70) days notice or prior public disclosure of our liquidationthe date of the meeting is given or if that public stockholder weremade to seek to
convert such shares into cash in connection with a business combination which
the public stockholder voted against and which we actually consummate. In no
other circumstances will a public stockholder have any right or interest of any
kind to or in the trust fund.
18
DILUTION
The difference between the public offering price per share of common
stock, assuming no value is attributed to the warrants included in the units,
and the pro forma net tangible book value per share of our common stock after
this offering constitutes the dilution to investors in this offering. Net
tangible book value per share is determined by dividing our net tangible book
value, which is our total tangible assets less total liabilities (including the
value of common stock which may be converted into cash),stockholders, notice by the numberstockholder, to be timely, must be received no later than the close of outstanding shares of our common stock.
At March 10, 2004, our net tangible book value was $(65,735), or
approximately $(0.05) per share of common stock. After giving effect tobusiness on the sale
of 5,500,000 shares of common stock included intenth (10th) day following the units, and the deduction of
underwriting discounts and estimated expenses of this offering, our pro forma
net tangible book value (as decreased by the value of 1,099,450 shares of common
stockday on which may be converted into cash) at March 10, 2004 would have been
$23,839,849 or $4.13 per share, representing an immediate increase in net
tangible book value of $4.18 per share to the existing stockholders and an
immediate dilution of $1.87 per share or 31% to new investors not exercising
their conversion rights.
The following table illustrates the dilution to the new investors on a
per-share basis, assuming no value is attributed to the warrants included in
the units:
Public offering price ......................................... $ 6.00
Net tangible book value before this offering ................ (.05)
Increase attributable to new investors ...................... 4.18
-----
Pro forma net tangible book value after this offering ......... $ 4.13
-------
Dilution to new investors ..................................... $ 1.87
=======
Our pro forma net tangible book value after this offering has been reduced
by approximately $5,695,151 because if we effect a business combination, the
conversion rights to the public stockholders may result in the conversion into
cash of up to approximately 19.99%such notice of the aggregatedate of the meeting was mailed or such public disclosure was made, whichever first occurs. The stockholder’s notice to our secretary shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (a) the name, age, business address and residence address of the person, (b) the principal occupation or employment of the person, (c) the class and number of the shares sold
in this offering at a per-share conversion price equal to the amount in the
trust fund as of the record date for the determination of stockholders entitled
to vote on the business combination, inclusive of any interest, divided by the
number of shares sold in this offering.
The following table sets forth information with respect to our existing
stockholders and the new investors:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- ----------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ------------ -------------- ------------ ----------
Existing stockholders ......... 1,375,000 20.0% $ 25,000 0.1% $ 0.02
New investors ................. 5,500,000 80.0% $33,000,000 99.9% $ 6.00
--------- ----- ----------- -----
6,875,000 100.0% $33,025,000 100.0%
========= ===== =========== =====
19
CAPITALIZATION
The following table sets forth our capitalization at March 10, 2004 and as
adjusted to give effect to the sale of our units and the application of the
estimated net proceeds derived from the sale of our units:
MARCH 10, 2004
--------------------------
AS
ACTUAL ADJUSTED
---------- -------------
Common stock, $.0001 par value, -0- and 1,099,450 shares which are subject
to possible conversion, shares at conversion value ...................... $ -- $ 5,695,151
======= ===========
Stockholders' equity:
Preferred stock, $.0001 par value, 1,000,000 shares authorized; none
issued or outstanding ................................................. $ -- $ --
======= ===========
Common stock, $.0001 par value, 30,000,000 shares authorized; 1,375,000
shares issued and outstanding; 5,775,550 shares issued and outstanding
(excluding 1,099,450 shares subject to possible conversion), as adjusted 137 578
Additional paid-in capital .............................................. 24,863 23,839,271
------- -----------
Total stockholders' equity: ........................................... $25,000 $23,839,849
======= ===========
Total capitalization .................................................. $25,000 $29,535,000
======= ===========
If we consummate a business combination, the conversion rights afforded to
our public stockholders may result in the conversion into cash of up to
approximately 19.99% of the aggregate number of shares sold in this offering at
a per-share conversion price equal to the amount in the trust fund as of the
record date for determination of stockholders entitled to vote on the business
combination, inclusive of any interest thereon, divided by the number of shares
sold in this offering.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We were formed on February 5, 2004, to serve as a vehicle to effect a
merger, capital stock exchange, asset acquisition or other similar business
combination with a company in either of the energy or environmental industries
and their related infrastructures. We intend to utilize cash derived from the
proceeds of this offering, our capital stock, debt or a combination of cash,
capital stock and debt, in effecting a business combination. The issuance of
additional shares of our capital stock:
o may significantly reducestock which are beneficially owned by the equity interest of our stockholders;
o will likely cause a change in control if a substantial number of our
shares of common stock are issued, which may affect, among other
things, our ability to use our net operating loss carry forwards, if
any,person, and most likely will also result in the resignation or removal of
our present officers and directors; and
o may adversely affect prevailing market prices for our common stock.
Similarly, if we issued debt securities, it could result in:
o default and foreclosure on our assets if our operating revenues after
a business combination were insufficient to pay our debt obligations;
o acceleration of our obligations to repay the indebtedness even if we
have made all principal and interest payments when due if the debt
security contained covenants that required the maintenance of certain
financial ratios or reserves and any such covenant were breached
without a waiver or renegotiation of that covenant;
o our immediate payment of all principal and accrued interest, if any,
if the debt security was payable on demand; and
o our inability to obtain additional financing, if necessary, if the
debt security contained covenants restricting our ability to obtain
additional financing while such security was outstanding.
We have neither engaged in any operations nor generated any revenues to
date. Our entire activity since inception has been to prepare for our proposed
fundraising through an offering of our equity securities.
We estimate that the net proceeds from the sale of the units, after
deducting offering expenses of approximately $1,510,000, including $990,000
evidencing the underwriters' non-accountable expense allowance of 3% of the
gross proceeds, and underwriting discounts of approximately $1,980,000, will be
approximately $29,510,000, or $34,014,500 if the underwriters' over-allotment
option is exercised in full. Of this amount, $28,490,000, or $32,994,500 if the
underwriters' over-allotment option is exercised in full, will be held in trust
and the remaining $1,020,000 in either event will not be held in trust. We will
use substantially all of the net proceeds of this offering to acquire a target
business, including identifying and evaluating prospective acquisition
candidates, selecting the target business, and structuring, negotiating and
consummating the business combination. To the extent that our capital stock is
used in whole or in part as consideration to effect a business combination, the
proceeds held in the trust fund as well as(d) any other net proceeds not expended
will be used to finance the operations of the target business. We believe that,
upon consummation of this offering, the funds available to us outside of the
trust fund will be sufficient to allow us to operate for at least the next 24
months, assuming that a business combination is not consummated during that
time. Over this time period, we anticipate approximately $180,000 of expenses
for legal, accounting and other expenses attendant to the due diligence
investigations, structuring and negotiating of a business combination, $84,000
for the administrative fee payable to Coqui Capital Partners ($3,500 per month
for two years), $50,000 of expenses for the due diligence and investigation of a
target business, $40,000 of expenses in legal and accounting fees relating to
our SEC reporting obligations and $666,000 for general working capital that will
be used for miscellaneous expenses and reserves, including approximately
$115,000 for director and officer liability insurance
21
premiums. We do not believe we will need to raise additional funds following
this offering in order to meet the expenditures required for operating our
business. However, we may need to raise additional funds through a private
offering of debt or equity securities if such funds are required to consummate
a business combination that is presented to us. We would only consummate such a
fund raising simultaneously with the consummation of a business combination.
We are obligated, commencing on the date of this prospectus, to pay to
Coqui Capital Partners, an affiliate of Isaac Kier, a monthly fee of $3,500 for
general and administrative services. In addition, in February and April 2004,
Lawrence S. Coben advanced an aggregate of $77,500 to us, on a non-interest
bearing basis, for payment of offering expenses on our behalf. The loans will be
payable without interest on the earlier of February 17, 2005 or the consummation
of this offering. The loans will be repaid out of the proceeds of this offering
not being placed in trust.
22
PROPOSED BUSINESS
INTRODUCTION
We are a recently organized Delaware blank check company formed to serve
as a vehicle for the acquisition of an operating business. Our objective is to
acquire an operating business in either the energy or the environmental
industries and their related infrastructures.
ENERGY INDUSTRY AND ITS RELATED INFRASTRUCTURE
The energy industry and its related infrastructure generally includes the
production, generation, transmission and distribution of electricity, heat,
fuel and other consumable forms of energy and the infrastructure needed to
maintain and operate the facilities, services and installations used in the
foregoing areas. The shortage of natural gas, rising oil prices and blackouts
that have occurred as a result of over-usage in current energy forms have
brought renewed focus on a variety of energy forms and the infrastructure
related to the transmission of such energy.
Although we may consider a target business in any segment of the energy
industry, we currently intend to concentrate our search for an acquisition
candidate on companies in the following segments:
o Electricity generation, distribution and transmission;
o Natural gas production, distribution and transmission;
o Energy related services including conservation, metering, operations
and maintenance;
o Steam generation and distribution;
o Alternative and renewable energy technologies; and
o The infrastructure necessary to operate in the energy industry
including but not limited to areas such as the production,
transportation or distribution of towers, power lines, scaffolding
products and other equipment or supplies incidental to the energy
industry.
ENVIRONMENTAL INDUSTRY AND ITS RELATED INFRASTRUCTURE
The environmental industry and its related infrastructure generally
includes the technologies and services that protect the natural and human
environment from destruction and pollution, and the infrastructure needed to
maintain and operate the facilities, services and installations used in the
foregoing areas. The environmental industry also seeks to ameliorate the
negative effects of industrial production and unhealthy practices and materials
on our population as a whole.
Landfill closures and the difficulty of positioning new facilities in
certain parts of the country have required that waste be transported long
distances for environmentally sound disposal. New landfills require additional
remediation measures to ensure that waste does not contaminate the surrounding
ground or nearby water supplies. New technologies and expenditures are
increasingly required with respect to air emissions and water cleanup, as
pollution from power and industrial plants merit increasing examination and
concern. Searches for new energy and water sources must meet stringent
environmental standards, while existing and alternative forms of energy that
are being used, developed and tested must adhere to an expanding body of
practices and procedures to ensure that our environment is protected.
Although we may consider a target business in any segment of the
environmental industry, we currently intend to concentrate our search for an
acquisition candidate on companies in the following segments:
o Waste management and disposal, including wastewater treatment and
management and sewage control;
o Air treatment and ionization, pollution and emission control;
23
o Medical waste disposal;
o Radon and site cleanup services;
o Other energy/environmental related technologies; and
o The infrastructure necessary to operate in the environmental industry
including but not limited to areas such as the operation of water
supply facilities, waste and wastewater treatment facilities,
pollution control facilities and transportation facilities and the
production, transportation or distribution of the equipment and
products incidental to such operations.
EFFECTING A BUSINESS COMBINATION
General
We are not presently engaged in, and we will not engage in, any
substantive commercial business for an indefinite period of time following this
offering. We intend to utilize cash derived from the proceeds of this offering,
our capital stock, debt or a combination of these in effecting a business
combination. Although substantially all of the net proceeds of this offering
are intended to be generally applied toward effecting a business combination as
described in this prospectus, the proceeds are not otherwise being designated
for any more specific purposes. Accordingly, prospective investors will invest
in us without an opportunity to evaluate the specific merits or risks of any
one or more business combinations. A business combination may involve the
acquisition of, or merger with, a company which does not need substantial
additional capital but which desires to establish a public trading market for
its shares, while avoiding what it may deem to be adverse consequences of
undertaking a public offering itself. These include time delays, significant
expense, loss of voting control and compliance with various Federal and state
securities laws. In the alternative, we may seek to consummate a business
combination with a company that may be financially unstable or in its early
stages of development or growth. While we may seek to effect business
combinations with more than one target business, we will probably have the
ability, as a result of our limited resources, to effect only a single business
combination.
We have not identified a target business
To date, we have not selected any target business on which to concentrate
our search for a business combination. Subject to the limitations that a target
business be within the energy or environmental industry and their related
infrastructures and has a fair market value of at least 80% of our net assets at
the time of the acquisition, as described below in more detail, we will have
virtually unrestricted flexibility in identifying and selecting a prospective
acquisition candidate. We intend to focus our search on target businesses within
the United States. However, as a result of our directors' previous contacts, it
is possible that they may locate a suitable target business outside of the
United States. For instance, Lawrence S. Coben, our chairman and chief executive
officer, has had significant experience in South America, including Bolivia.
Through these contacts, we may be introduced to suitable target businesses
located outside of the United States. If we complete a business combination with
a target business located outside of the United States, we will be subject to
the risks inherent in doing business in that country as well as the possibility
that our future management will not be familiar with United States securities
laws.
As a result of the foregoing, there is no basis for investors in this
offering to evaluate the possible merits or risks of the target business with
which we may ultimately complete a business combination. To the extent we effect
a business combination with a financially unstable company or an entity in its
early stage of development or growth, including entities without established
records of sales or earnings, we may be affected by numerous risks inherent in
the business and operations of financially unstable and early stage or potential
emerging growth companies. Although our management will endeavor to evaluate the
risks inherent in a particular target business, we cannot assure you that we
will properly ascertain or assess all significant risk factors.
Sources of target businesses
We anticipate that target business candidates will be brought to our
attention from various unaffiliated sources, including investment bankers,
venture capital funds, private equity funds, leveraged buyout funds, management
buyout funds and other members of the financial community, who may present
solicited or unsolicited proposals. Our officers and directors as well as their
affiliates may also bring to our attention target business candidates. While we
do not presently anticipate engaging the services of professional firms that
specialize in business acquisitions on any formal basis, we may engage these
firms in the future, in which event we may pay a finder's fee or other
compensation. In no event, however, will we pay any of our existing officers,
directors or stockholders or any entity with which they are affiliated any
finder's fee or other compensation for services rendered to us prior to or in
connection with the consummation of a business combination.
24
Selection of a target business and structuring of a business combination
Subject to the requirement that our initial business combination must be
with a target business with a fair market value that is at least 80% of our net
assets at the time of such acquisition, our management will have virtually
unrestricted flexibility in identifying and selecting a prospective target
business. In evaluating a prospective target business, our management will
consider, among other factors, the following:
o financial condition and results of operation;
o growth potential;
o experience and skill of management and availability of additional
personnel;
o capital requirements;
o competitive position;
o stage of development of the products, processes or services;
o degree of current or potential market acceptance of the products,
processes or services;
o proprietary features and degree of intellectual property or other
protection of the products, processes or services;
o regulatory environment of the industry; and
o costs associated with effecting the business combination.
These criteria are not intended to be exhaustive. Any evaluationinformation relating to the meritsperson that is required to be disclosed in solicitations for proxies for election of a particular business combination will be based,directors pursuant to the extent
relevant, on the above factors as well as other considerations deemed relevant
by our management in effecting a business combination consistent with our
business objective. In evaluating a prospective target business, we will
conduct an extensive due diligence review which will encompass, among other
things, meetings with incumbent managementrules and inspection of facilities, as
well as review of financial and other information which will be made available
to us.
The time and costs required to select and evaluate a target business and
to structure and complete the business combination cannot presently be
ascertained with any degree of certainty. Any costs incurred with respect to
the identification and evaluation of a prospective target business with which a
business combination is not ultimately completed will result in a loss to us
and reduce the amount of capital available to otherwise complete a business
combination. However, we will not pay any finders or consulting fees to our
existing stockholders, or any of their respective affiliates, for services
rendered to or in connection with a business combination.
Fair Market Value of Target Business
The initial target business that we acquire must have a fair market value
equal to at least 80% of our net assets at the time of such acquisition. The
fair market value of such business will be determined by our board of directors
based upon standards generally accepted by the financial community, such as
actual and potential sales, earnings and cash flow and book value. If our board
is not able to independently determine that the target business has a
sufficient fair market value, we will obtain an opinion from an unaffiliated,
independent investment banking firm which is a memberregulations of the National
AssociationSEC under Section 14 of Securities Dealers, Inc. with respect to the satisfaction of
such criteria. Since any opinion, if obtained, would merely state that fair
market value meets the 80% of net assets threshold, it is not anticipated that
copies of such opinion would be distributed to our stockholders, although
copies will be provided to stockholders who request it. We will not be required
to obtain an opinion from an investment banking firm as to the fair market
value if our board of directors independently determines that the target
business has sufficient fair market value.
Probable lack of business diversification
While we may seek to effect business combinations with more than one
target business, our initial business combination must be with a target
business which satisfies the minimum valuation standard at
25
the time of such acquisition, as discussed above. Consequently, it is probable
that we will have the ability to effect only a single business combination.
Accordingly, the prospects for our success may be entirely dependent upon the
future performance of a single business. Unlike other entities which may have
the resources to complete several business combinations of entities operating
in multiple industries or multiple areas of a single industry, it is probable
that we will not have the resources to diversify our operations or benefit from
the possible spreading of risks or offsetting of losses. By consummating a
business combination with only a single entity, our lack of diversification
may:
o subject us to numerous economic, competitive and regulatory
developments, any or all of which may have a substantial adverse
impact upon the particular industry in which we may operate subsequent
to a business combination, and
o result in our dependency upon the development or market acceptance of
a single or limited number of products, processes or services.
Limited ability to evaluate the target business' management
Although we intend to closely scrutinize the management of a prospective
target business when evaluating the desirability of effecting a business
combination, we cannot assure you that our assessment of the target business'
management will prove to be correct. In addition, we cannot assure you that the
future management will have the necessary skills, qualifications or abilities
to manage a public company. Furthermore, the future role of our officers and
directors, if any, in the target business cannot presently be stated with any
certainty. While it is possible that one or more of our directors will remain
associated in some capacity with us following a business combination, it is
unlikely that any of them will devote their full efforts to our affairs
subsequent to a business combination. Moreover, we cannot assure you that our
officers and directors will have significant experience or knowledge relating
to the operations of the particular target business.
Following a business combination, we may seek to recruit additional
managers to supplement the incumbent management of the target business. We
cannot assure you that we will have the ability to recruit additional managers,
or that additional managers will have the requisite skills, knowledge or
experience necessary to enhance the incumbent management.
Opportunity for stockholder approval of business combination
Prior to the completion of a business combination, we will submit the
transaction to our stockholders for approval, even if the nature of the
acquisition is such as would not ordinarily require stockholder approval under
applicable state law. In connection with seeking stockholder approval of a
business combination, we will furnish our stockholders with proxy solicitation
materials prepared in accordance with the Securities Exchange Act of 1934,
which, among other matters, will include a description of the operations of the
target business and audited historical financial statements of the business.
In connection with the vote required for any business combination, all of
our existing stockholders, including all of our officers and directors, have
agreed to vote their respective shares of common stock owned by them
immediately prior to this offering in accordance with the majority of the
shares of common stock voted by the public stockholders. This voting
arrangement shall not apply to shares included in units purchased in this
offering or purchased following this offering in the open market by any of our
existing stockholders, officers and directors. We will proceed with the
business combination only if a majority of the shares of common stock voted by
the public stockholders are voted in favor of the business combination and
public stockholders owning less than 20% of the shares sold in this offering
exercise their conversion rights.
Conversion rights
At the time we seek stockholder approval of any business combination, we
will offer each public stockholder the right to have such stockholder's shares
of common stock converted to cash if the stockholder votes against the business
combination and the business combination is approved and completed. The actual
per-share conversion price will be equal to the amount in the trust fund,
26
inclusive of any interest, as of the record date for determination of
stockholders entitled to vote on the business combination, divided by the
number of shares sold in this offering. Without taking into any account
interest earned on the trust fund, the initial per-share conversion price would
be $5.18, or $0.82 less than the per-unit offering price of $6.00. An eligible
stockholder may request conversion at any time after the mailing to our
stockholders of the proxy statement and prior to the vote taken with respect to
a proposed business combination at a meeting held for that purpose, but the
request will not be granted unless the stockholder votes against the business
combination and the business combination is approved and completed. Any request
for conversion, once made, may be withdrawn at any time up to the date of the
meeting. It is anticipated that the funds to be distributed to stockholders
entitled to convert their shares who elect conversion will be distributed
promptly after completion of a business combination. Public stockholders who
convert their stock into their share of the trust fund still have the right to
exercise the warrants that they received as part of the units. We will not
complete any business combination if public stockholders, owning 20% or more of
the shares sold in this offering, exercise their conversion rights.
Liquidation if no business combination
If we do not complete a business combination within 18 months after the
consummation of this offering, or within 24 months if the extension criteria
described below have been satisfied, we will be dissolved and will distribute
to all of our public stockholders, in proportion to their respective equity
interests, an aggregate sum equal to the amount in the trust fund, inclusive of
any interest, plus any remaining net assets. Our existing stockholders have
waived their rights to participate in any liquidation distribution with respect
to shares of common stock owned by them immediately prior to this offering.
There will be no distribution from the trust fund with respect to our warrants.
If we were to expend all of the net proceeds of this offering, other than
the proceeds deposited in the trust fund, and without taking into account
interest, if any, earned on the trust fund, the initial per-share liquidation
price would be $5.18, or $0.82 less than the per-unit offering price of $6.00.
The proceeds deposited in the trust fund could, however, become subject to the
claims of our creditors which could be prior to the claims of our public
stockholders. We cannot assure you that the actual per-share liquidation price
will not be less than $5.18, plus interest, due to claims of creditors.
Lawrence S. Coben, our chairman of the board and chief executive officer, has
agreed pursuant to an agreement with us and EarlyBirdCapital that, if we
liquidate prior to the consummation of a business combination, he will be
personally liable to pay debts and obligations to vendors or other entities
that are owed money by us for services rendered or products sold to us in
excess of the net proceeds of this offering not held in the trust account. We
cannot assure you, however, that Mr. Coben would be able to satisfy those
obligations.
If we enter into either a letter of intent, an agreement in principle or a
definitive agreement to complete a business combination prior to the expiration
of 18 months after the consummation of this offering, but are unable to
complete the business combination within the 18-month period, then we will have
an additional six months in which to complete the business combination
contemplated by the letter of intent, agreement in principle or definitive
agreement. If we are unable to do so by the expiration of the 24-month period
from the consummation of this offering, we will then liquidate. Upon notice
from us, the trustee of the trust fund will commence liquidating the
investments constituting the trust fund and will turn over the proceeds to our
transfer agent for distribution to our stockholders. We anticipate that our
instruction to the trustee would be given promptly after the expiration of the
applicable 18-month or 24-month period.
Our public stockholders shall be entitled to receive funds from the trust
fund only in the event of our liquidation or if the stockholders seek to
convert their respective shares into cash upon a business combination which the
stockholder voted against and which is actually completed by us. In no other
circumstances shall a stockholder have any right or interest of any kind to or
in the trust fund.
COMPETITION
In identifying, evaluating and selecting a target business, we expect to
encounter intense competition from other entities having a business objective
similar to ours. Many of these entities are
27
well established and have extensive experience identifying and effecting
business combinations directly or through affiliates. Many of these competitors
possess greater technical, human and other resources than us and our financial
resources will be relatively limited when contrasted with those of many of
these competitors. While we believe there are numerous potential target
businesses that we could acquire with the net proceeds of this offering, our
ability to compete in acquiring certain sizable target businesses will be
limited by our available financial resources. This inherent competitive
limitation gives others an advantage in pursuing the acquisition of a target
business. Further:
o our obligation to seek stockholder approval of a business combination
may delay the completion of a transaction;
o our obligation to convert into cash shares of common stock held by our
public stockholders in certain instances may reduce the resources
available to us for a business combination; and
o our outstanding warrants and options, and the future dilution they
potentially represent, may not be viewed favorably by certain target
businesses.
Any of these obligations may place us at a competitive disadvantage in
successfully negotiating a business combination. Our management believes,
however, that our status as a public entity and potential access to the United
States public equity markets may give us a competitive advantage over
privately-held entities having a similar business objective as us in acquiring
a target business with significant growth potential on favorable terms.
If we succeed in effecting a business combination, there will be, in all
likelihood, intense competition from competitors of the target business in the
energy and environmental industries and their related infrastructures and
elsewhere. Such a business combination may also be subject to regulatory
approval. There is substantial competition in all aspects and segments of our
industry focus. Numerous companies, most of which have substantially greater
financial resources available to them than we do, are already engaged in the
industry segments we intend to focus on. We cannot assure you that, subsequent
to a business combination, we will have the resources or ability to compete
effectively.
FACILITIES
We maintain our executive offices at 1775 Broadway, Suite 604, New York,
New York. The cost for this space is included in the $3,500 per-month fee Coqui
Capital Partners charges us for general and administrative services pursuant to
a letter agreement between us and Coqui Capital Partners. We believe, based on
rents and fees for similar services in the New York, New York metropolitan
area, that the fee charged by Coqui Capital Partners is at least as favorable
as we could have obtained from an unaffiliated person. We consider our current
office space adequate for our current operations.
EMPLOYEES
Lawrence S. Coben, our chairman of the board and chief executive officer,
and Isaac Kier, our secretary and treasurer, are our only executive officers.
These employees are not obligated to contribute any specific number of hours
per week and intend to devote only as much time as they deem necessary to our
affairs. The amount of time they will devote in any time period will vary based
on the availability of suitable target businesses to investigate, although we
expect they will devote an average of approximately ten hours per week to our
business. We do not intend to have any full time employees prior to the
consummation of a business combination.
PERIODIC REPORTING AND AUDITED FINANCIAL STATEMENTS
We have registered our units, common stock and warrants under the Securities Exchange Act of 1934, as amended, and have reporting obligations,
including(ii) as to the requirement that we file annualstockholder giving the notice (a) the name and quarterly reports with the
SEC. In accordance with the requirementsrecord address of the Securities Exchange Actstockholder and (b) the class and number of 1934, our annual reports will contain financial statements audited and reported
on by our independent accountants.
28
We will not acquire a target business if audited financial statements
based on United States generally accepted accounting principles cannot be
obtained for the target business. Additionally, our management will provide
stockholders with audited financial statements, prepared in accordance with
generally accepted accounting principles, of the prospective target business as
part of the proxy solicitation materials sent to stockholders to assist them in
assessing the target business. Our management believes that the requirement of
having available audited financial statements for the target business will not
materially limit the pool of potential target businesses available for
acquisition.
COMPARISON TO OFFERINGS OF BLANK CHECK COMPANIES
The following table compares and contrasts the termsshares of our offering and
the terms of an offering of blank check companies under Rule 419 promulgatedcapital stock which is beneficially owned by the SEC assuming thatstockholder. We may require any proposed nominee to furnish such other information as may reasonably be required by us to determine the gross proceeds, underwriting discounts and
underwriting expenses for the Rule 419 offering are the same as this offering
and that the underwriters will not exercise their over-allotment option. Noneeligibility of the terms of a Rule 419 offering will applysuch proposed nominee to this offering.
TERMS OF OUR OFFERING TERMS UNDER A RULE 419 OFFERING
------------------------------------ ------------------------------------
ESCROW OF OFFERING PROCEEDS .......... $28,490,000 of the net offering $27,027,000 of the offering
proceeds will be deposited into a proceeds would be required to
trust fund maintained by be deposited into either an
Continental Stock Transfer & escrow account with an insured
Trust Company. depositary institution or in a
separate bank account
established by a broker-dealer in
which the broker-dealer acts as
trustee for persons having the
beneficial interests in the
account.
INVESTMENT OF NET PROCEEDS ........... The $28,490,000 of net offering Proceeds could be invested only
proceeds held in trust will only in specified securities such as a
be invested in U.S. "government money market fund meeting
securities," defined as any conditions of the Investment
Treasury Bill issued by the Company Act of 1940 or in
United States having a maturity securities that are direct
of one hundred and eighty days obligations of, or obligations
or less. guaranteed as to principal or
interest by, the United States.
LIMITATION ON FAIR VALUE OR NET
ASSETS OF TARGET BUSINESS ............ The initial target business that We would be restricted from
we acquire must have a fair acquiring a target business unless
market value equal to at least the fair value of such business or
80% of our net assets at the time net assets to be acquired
of such acquisition. represent at least 80% of the
maximum offering proceeds.
29
TERMS OF OUR OFFERING TERMS UNDER A RULE 419 OFFERING
------------------------------------ ----------------------------------
TRADING OF SECURITIES ISSUED ......... The units may commence trading No trading of the units or the
on or promptly after the date of underlying common stock and
this prospectus. The common warrants would be permitted
stock and warrants comprising until the completion of a
the units will begin to trade business combination. During
separately on the 90th day after this period, the securities would
the date of this prospectus unless be held in the escrow or trust
EarlyBirdCapital informs us of account.
its decision to allow earlier
separate trading, provided we
have filed with the SEC a
Current Report on Form 8-K,
which includes an audited
balance sheet reflecting our
receipt of the proceeds of this
offering, including any proceeds
we receive from the exercise of
the over-allotment option, if such
option is exercised prior to the
filing of the Form 8-K.
EXERCISE OF THE WARRANTS ............. The warrants cannot be The warrants could be exercised
exercised until the later of the prior to the completion of a
completion of a business business combination, but
combination or one year from securities received and cash paid
the date of this prospectus, and, in connection with the exercise
accordingly, will only be would be deposited in the
exercised after the trust fund has escrow or trust account.
been terminated and distributed.
30
TERMS OF OUR OFFERING TERMS UNDER A RULE 419 OFFERING
------------------------------------ ------------------------------------
ELECTION TO REMAIN AN INVESTOR ......... We will give our stockholders A prospectus containing
the opportunity to vote on the information required by the SEC
business combination. In would be sent to each investor.
connection with seeking Each investor would be given
stockholder approval, we will the opportunity to notify the
send each stockholder a proxy company, in writing, within a
statement containing information period of no less than 20
required by the SEC. A business days and no more than
stockholder following the 45 business days from the
procedures described in this effective date of the
prospectus is given the right to post-effective amendment, to
convert his or her shares into his decide whether he or she elects
or her pro rata share of the trust to remain a stockholder of the
fund. However, a stockholder company or require the return of
who does not follow these his or her investment. If the
procedures or a stockholder who company has not received the
does not take any action would notification by the end of the
not be entitled to the return of 45th business day, funds and
any funds. interest or dividends, if any, held
in the trust or escrow account
would automatically be returned
to the stockholder. Unless a
sufficient number of investors
elect to remain investors, all of
the deposited funds in the
escrow account must be returned
to all investors and none of the
securities will be issued.
BUSINESS COMBINATION DEADLINE .......... A business combination must If an acquisition has not been
occur within 18 months after the consummated within 18 months
consummation of this offering or after the effective date of the
within 24 months after the initial registration statement,
consummation of this offering if funds held in the trust or escrow
a letter of intent or definitive account would be returned to
agreement relating to a investors.
prospective business combination
was entered into prior to the end
of the 18-month period.
RELEASE OF FUNDS ....................... The proceeds held in the trust The proceeds held in the escrow
account will not be released until account would not be released
the earlier of the completion of a until the earlier of the
business combination or our completion of a business
liquidation upon failure to effect combination or the failure to
a business combination within effect a business combination
the allotted time. within the allotted time.
31
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our current directors and executive officers are as follows:
NAME AGE POSITION
- ------------------------------ ----- ---------------------------------------------
Lawrence S. Coben .......... 45 Chairman of the Board of Directors and Chief
Executive Officer
Isaac Kier ................. 51 Secretary, Treasurer and Director
David A. Preiser ........... 46 Director
Jon Schotz ................. 48 Director
LAWRENCE S. COBEN has been our chairman of the board and chief executive
officer since our inception. From January 2001 until December 2003, Mr. Coben
served as senior principal of Sunrise Capital Partners L.P., a private equity
firm established by Houlihan Lokey Howard & Zukin, an international investment
banking firm that invests capital in middle market companies. From January 1997
to December 2000, Mr. Coben was an independent consultant. From October 1994 to
December 1996, Mr. Coben was chief executive officer of Bolivian Power Company,
Ltd., a New York Stock Exchange-listed company that was one of Bolivia's
largest private electric generator and distributor until its sale to an
American-Swedish utility consortium. He was also a managing director of Liberty
Power Latin America, L.P., a private developer and owner of power facilities,
from January 1993 to December 1996. He has servedserve as a directordirector.
Index to Financial Statements
Election of PrismaDirectors; Voting Agreement
As provided in the merger agreement, the former stockholders of RAM Energy, one of the successor Enron companies, since September 2003. Mr. Coben
has also been a director of NRG Energy, Inc. since December 2003, when he was
appointed in connection with its plan of reorganization following its emergence
from Chapter 11 bankruptcy. Mr. Coben is a member of the board of directors of
the Bolivian-American Chamber of Commerce and was the co-chairman of the
Lieberman 2004 National Energy Policy Committee which has devised a plan (the
Declaration of Energy Independence) to reduce American dependence on
politically unstable sources of energy. Mr. Coben is also an archaeologist
affiliated with the University of Pennsylvania and is completing a doctorate in
Anthropology. Mr. Coben received a B.A. in economics from Yale University, an
M.A. in Anthropology (Archaeology) from the University of Pennsylvania and a
J.D. from Harvard School of Law.
ISAAC KIER has been a member of our board of directors and our secretary
and treasurer since our inception. Since February 2000, Mr. Kier has served as
a general partner of Coqui Capital Patners L.P., a venture capital firm, which
invests primarily in early stage companies. Mr. Kier has been a director of
eDiets.com, Inc., a Nasdaq-listed leading provider of online diet and fitness
programs and related products and services, since November 1999. Since October
1997, he has been a principal and managing partner of First Americas Partners,
LLC, an investment partnership focusing on investments in North and South
America. From 1987 to 1997, he served as the managing partner of the Alabama 8
Market, a non-wireline cellular licensee. From 1982 until its sale in 1995, Mr.
Kier served as the chairman of the board and chief executive officer of Lida,
Inc., a Nasdaq-listed company engaged in textile production and printing. Mr.
Kier also serves on the board of directors of several private companies
including Hudson Health Sciences, Caribbean Storage, Inc.one hand, and Montebello Brand
Liquors, Inc. Mr. Kier received a B.A. in Economics from Cornell University and
a J.D. from George Washington University Law School.
DAVID A. PREISER has been a director of ours since our inception. Since
January 1991, Mr. Preiser has served as an officer of Houlihan Lokey and is
currently a senior managing director and a member of the board of directors of
Houlihan Lokey and has served as managing partner of Sunrise Capital Partners
since December 1998. Mr. Preiser has been a director of NVR, Inc., an American
Stock Exchange-listed home building and mortgage banking company, since
September 1993. Mr. Preiser is also a director of Jos. A Bank Clothiers, Inc.,
a Nasdaq-listed company, and Akrion, LLC. Mr. Preiser received a B.A. (magna
cum laude) in Economics from the University of Virginia and a J.D. (with
honors) from Columbia University.
32
JON SCHOTZ has been a director of ours since our inception. Mr. Schotz has
been a partner of Saybrook Capital, LLC, a private investment bank engaged in
capital management and financial advisory services, since he co-founded it in
February 1990 and has managed the Saybrook Tax-Exempt Opportunity Funds since
May 1999. Mr. Schotz also helps manage the investments of Saybrook's
proprietary capital as well as the investments of the Saybrook Fund. Prior to
co-founding Saybrook, Mr. Schotz was involved in opening the Los Angeles office
of Ehrlich Bober & Co., Inc., a public finance investment bank, in 1983. Mr.
Schotz is also a director of Saybrook Capital Corp. Mr. Schotz received a B.A.
and a Master of Public and Private Management degree from Yale University.
Our board of directors is divided into three classes with only one class
of directors being elected in each year and each class serving a three-year
term. The term of office of the first class of directors, consisting of Jon
Schotz, will expire at our first annual meeting of stockholders. The term of
office of the second class of directors, consisting of David A. Preiser, will
expire at the second annual meeting. The term of office of the third class of
directors, consisting of Lawrence S. Coben and Isaac Kier (founders of Tremisis), on the other hand, entered into a voting agreement pursuant to which they have agreed to vote for the other’s designees as our directors until immediately following the election that will expire atbe held in 2008 as follows:
| Ÿ | in the class to stand for reelection in 2007-Larry E. Lee and Gerald R. Marshall; and |
| Ÿ | in the class to stand for reelection in 2008-John M. Reardon and Sean P. Lane. |
Pursuant to the third annual meeting.
These individuals will playvoting agreement, the former stockholders of RAM Energy shall designate three directors and Messrs. Coben and Kier shall designate one director. Messrs. Marshall, Lee and Reardon are all designees of the former RAM Energy stockholders. Mr. Lane is a key role in identifyingdesignee of Messrs. Coben and evaluating
prospective acquisition candidates, selectingKier.
Executive Compensation
Summary Compensation Table
The following table sets forth for the target business, and
structuring, negotiating and consummating its acquisition. Noneyears indicated the compensation of these
individuals has been a principal of a public company or blank check company
that executed a business plan similar to our business plan. However, we believe
that the skills and expertise of these individuals, their collective access to
acquisition opportunities and ideas, their contacts, and their transactional
expertise should enable them to successfully identify and effect an
acquisition.
EXECUTIVE COMPENSATION
Nochief executive officer has receivedand each of our other most highly compensated executive officers as of December 31, 2005.
| Annual Compensation | Long-Term Compensation | ||||||||||||
| Year | Salary ($) | Bonus ($) | Other Annual Compensation ($)(1) | All Other Compensation ($)(2)(3) | |||||||||
Larry E. Lee | 2005 | $ | 450,000 | $ | 300,000 | — | $ | 31,483 | |||||
President and Chief | 2004 | 450,000 | 400,000 | — | 29,672 | ||||||||
Executive Officer | 2003 | 450,000 | 475,000 | — | 26,319 | ||||||||
Larry G. Rampey | 2005 | $ | 192,850 | $ | 75,000 | — | $ | 31,031 | |||||
Senior Vice President | 2004 | 164,300 | 87,500 | — | 29,554 | ||||||||
| 2003 | 153,700 | 70,000 | — | 26,319 | |||||||||
John M. Longmire | 2005 | $ | 180,650 | $ | 75,000 | — | $ | 31,440 | |||||
Senior Vice President | 2004 | 153,700 | 87,500 | — | 29,600 | ||||||||
and Chief Financial | 2003 | 153,700 | 70,000 | — | 26,252 | ||||||||
Officer | |||||||||||||
Drake N. Smiley | 2005 | $ | 180,650 | $ | 75,000 | — | $ | 34,525 | |||||
Senior Vice President | 2004 | 153,700 | 87,500 | — | 32,466 | ||||||||
| 2003 | 153,700 | 70,000 | — | 28,835 | |||||||||
| (1) | Personal benefits did not exceed the lesser of $50,000 or 10% of total annual salary and bonus for any executive officer. No other annual compensation was paid. |
| (2) | The amounts specified represent matching contributions made by us to the account of the executive officer under our 401(k) Profit Sharing Plan of $18,000 for 2005, $16,000 for 2004 and $14,000 for 2003. |
| (3) | Includes premiums paid on policies of life insurance owned by each officer as follows: $798 for 2005 and $828 for both 2003 and 2004. |
Index to Financial Statements
Directors’ Compensation
We pay our non-employee directors an annual fee of $75,000, of which at least $40,000 is payable in the form of restricted stock awards under our 2006 Long-Term Incentive Plan discussed below. Mr. Lee, as our president and chief executive officer, does not receive any cashdirector’s fee. We reimburse all of our directors for travel and other expenses. On May 8, 2006, we made restricted stock awards of 10,000 shares to each of Messrs. Lane, Marshall and Reardon, which fully vested on June 8, 2006.
Employment Agreement
In connection with the consummation of the merger in May 2006, we entered into an employment agreement with Larry E. Lee, under the terms of which Mr. Lee will serve as our president and chief executive officer for a term of three years. The employment agreement provides that Mr. Lee will receive an annual base salary of $450,000. In addition, we pay the annual premium on a term life insurance policy owned by Mr. Lee, the costs of his annual physical examinations, and certain country club dues and expenses. Mr. Lee also may be awarded a bonus for any fiscal year during the employment term, either pursuant to an incentive compensation plan maintained by us or as otherwise may be determined by our board of directors.
The employment agreement provides that, in the event of the termination of Mr. Lee’s employment by us without Cause (as defined in the employment agreement) or by Mr. Lee for services
rendered. Commencing onGood Reason (as defined in the effective date of this prospectus through the
acquisition of a target business,employment agreement), we will pay Coqui Capital Partners,him a lump sum equal to two times his base salary plus a prorated bonus. In addition, we shall continue benefits to him and/or his family equal to those which would have been provided to them in accordance with the plans, programs, practices and policies if his employment had not been terminated.
If Mr. Lee’s employment is terminated by reason of his death or disability, we shall pay him a lump sum equal to his then current base salary for twelve months or such shorter period as may remain in the employment term, plus a prorated bonus.
The employment agreement contains certain restrictive covenants that prohibit Mr. Lee from disclosing information that is confidential to us and our subsidiaries and generally prohibits him, during the employment term and for one year thereafter, from soliciting or hiring our employees and those of our subsidiaries. The employment agreement does not contain any restrictive covenants that otherwise limit Mr. Lee’s ability to compete with us and our subsidiaries following his employment.
2006 Long-Term Incentive Plan
Our 2006 Long-Term Incentive Plan, or the 2006 Plan, became effective in May 2006 upon consummation of the merger.
The purposes of our 2006 Plan are to create incentives designed to motivate our employees to significantly contribute toward our growth and profitability, to provide our executives, directors and other employees, and persons who, by their position, ability and diligence, are able to make important contributions to our growth and profitability, with an affiliateincentive to assist us in achieving our long-term corporate objectives, to attract and retain executives and other employees of Isaac Kier, a fee of $3,500 per month for providing usoutstanding competence, and to provide such persons with office
space and certain office and secretarial services. No other executive officer
or director has a relationship with oran opportunity to acquire an equity interest in Coqui Capital Partners.
Other than this $3,500 per-month fee, no compensation of any kind, including
finder'sus.
We may grant incentive and consulting fees, will be paidnon-qualified stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses, which we refer to any of our existing stockholders,
including our directors, or any of their respective affiliates, for services
rendered priorcollectively as awards, to or in connection with a business combination. However, our
existing stockholders will be reimbursed for any out-of-pocket expenses
incurred in connection with activities on our behalf such as identifying
potential target businesses and performing due diligence on suitable business
combinations. There is no limit on the amount of these out-of-pocket expenses
and there will be no review of the reasonableness of the expenses by anyone
other than our board of directors, which includes persons who may seek
reimbursement, or a court of competent jurisdiction if such reimbursement is
challenged. Because none of our directors will be deemed "independent," we will
generally not have the benefit of independent directors examining the propriety
of expenses incurred on our behalf and subject to reimbursement.
CONFLICTS OF INTEREST
Potential investors should be aware of the following potential conflicts of
interest:
o None of our officers and directors are required to commit their full
timekey employees, and those of our subsidiaries. In addition, the 2006 Plan authorizes the grant of non-qualified stock options and restricted stock awards to our affairsdirectors and accordingly, theyto any independent contractors and
Index to Financial Statements
consultants who by their position, ability and diligence are able to make important contributions to our future growth and profitability. Generally, all classes of our employees are eligible to participate in our 2006 Plan.
We reserved 2,400,000 shares of our authorized common stock for issuance of awards to be granted pursuant to our 2006 Plan. Each share issued under an option or under a restricted stock award will be counted against this limit. Shares to be delivered at the time a stock option is exercised or at the time a restricted stock award is made may be available from authorized but unissued shares or from stock previously issued but which we have conflicts of
interestreacquired and hold in allocating management time among various business
activities.
o our treasury.
In the courseevent of theirany change in our outstanding common stock by reason of any reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, issuance of rights or other business activities, our officers and
directors may become awaresimilar transactions, the number of investment and business opportunities
which may be appropriate for presentation to us as well as the other
entities with which they are affiliated. They may have conflicts of
interest in determining to which entity a particular business
opportunity should be presented.
o Our officers and directors may in the future become affiliated with
entities, including other blank check companies, engaged in business
activities similar to those intended to be conducted by us.
33
o Since our directors own shares of our common stock which may be issued upon exercise of outstanding options, and the exercise price of options previously granted under our 2006 Plan, will be released from escrow only if a business combination is successfully
completed, our boardproportionally adjusted to prevent any enlargement or dilution of the rights of holders of previously granted options as may have a conflict of interest in determining
whether a particular target business isbe appropriate to effect a
business combination. The personal and financial interestsreflect any such transaction or event.
On May 8, 2006, we made restricted stock awards of our
directors and officers may influence their motivation in identifying
and selecting a target business, completing a business combination
timely and securing the release of their stock.
In general, officers and directors of a corporation incorporated under the
laws of the State of Delaware are required to present business opportunities to
a corporation if:
o the corporation could financially undertake the opportunity;
o the opportunity is within the corporation's line of business; and
o it would not be fair to the corporation and its stockholders for the
opportunity not to be brought to the attention of the corporation.
Accordingly, as a result of multiple business affiliations, our officers
and directors may have similar legal obligations relating to presenting
business opportunities meeting the above-listed criteria to multiple entities.
In addition, conflicts of interest may arise when our board evaluates a
particular business opportunity with respect to the above-listed criteria. We
cannot assure you that any of the above mentioned conflicts will be resolved in
our favor.
In order to minimize potential conflicts of interest which may arise from
multiple corporate affiliations, each of our officers and directors has agreed,
until the earlier of a business combination, our liquidation or such time as he
ceases to be an officer or director, to present to us for our consideration,
prior to presentation to any other entity, any suitable business opportunity
which may reasonably be required to be presented to us subject to any
pre-existing fiduciary or contractual obligations he might have.
Each of Lawrence Coben, as a result of his board membership on Prisma
Energy and NRG Energy, Inc., David A. Preiser, as a result of his affiliation
with Houlihan Lokey Howard & Zukin, and Jon Schotz, as a result of his
affiliation with Saybrook Capital, have to a certain degree, pre-existing
fiduciary or contractual obligations as these entities continually examine
business opportunities in the industries we propose to operate in. To the
extent that Messrs. Coben, Preiser and Schotz identify business opportunities
that may be suitable for any of the aforementioned entities, they will honor
their pre-existing fiduciary obligations to such entities. Accordingly, they
may not present opportunities to us that otherwise may be attractive unless
each of the aforementioned entities has declined to accept such opportunities.
In connection with the vote required for any business combination, all of
our existing stockholders, including all of our officers and directors, have
agreed to vote their respective shares of common stock which were owned prior
to this offering in accordance with the vote of the public stockholders owning
a majority of the10,000 shares of our common stock sold in this offering. In
addition, they have agreed to waive their respective rights to participate in
any liquidation distribution but only with respect to thoseeach of Messrs. Marshall, Reardon and Lane, our non-management directors. At the same time, we made restricted stock awards of 100,000 restricted shares of our common stock acquired by them prior to this offering.
To further minimize potential conflictseach of interest, we have agreed not to
consummate a business combination with an entity whichMessrs. Longmire, Rampey and Smiley, each of whom is affiliated with anyone of our existing stockholders unless we obtainsenior vice presidents. In each instance, the shares were issued under our 2006 Plan and became fully vested 30 days following issuance, at which time, each of Messrs. Longmire, Rampey and Smiley sold 32,700 shares back to us to cover income and other withholding taxes. On November 10, 2006, our Compensation Committee approved the grant of restricted stock awards under our 2006 Plan to 22 of our employees, aggregating 646,805 shares of our common stock. All of the awards are effective November 10, 2006 and vest ratably over a five-year period. Two of our executive officers received awards. Mr. Robert Phaneuf, vice president — corporate development, received an opinion fromaward of 75,100 shares, and Mr. John L. Cox, vice president, secretary and treasurer, received an independent
investment banking firm that the business combination is fairaward of 69,170 shares. As a result of these awards, 1,423,195 shares of our common stock remain reserved for issuance under our 2006 Plan.
Index to our
stockholders from a financial point of view.
34
PRINCIPAL STOCKHOLDERS
Financial Statements
SELLING STOCKHOLDER AND SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of our common stock as of April 27, 2004,November 21, 2006 by:
| Ÿ | the selling stockholder and each other person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; |
| Ÿ | each of our named executive officers; |
| Ÿ | each of our directors; and |
| Ÿ | all our current executive officers and directors as a group. |
Shares Beneficially Owned Prior to Offering | Shares Beneficially Owned After Offering | |||||||||||
Name and Address of Beneficial Owner | Number of Shares | Percent of Class (1) | Shares Offered Hereby | Number of Shares | Percent of Class (1) | |||||||
Larry E. Lee (2)(3) | 12,555,186 | 38 | % | — | 12,555,186 | 29 | % | |||||
Britani Talley Bowman (4)(5) | 12,555,186 | 38 | % | 2,762,431 | 9,792,755 | 23 | % | |||||
John M. Longmire (2) | 67,300 | * | — | 67,300 | * | |||||||
Larry G. Rampey (2) | 67,300 | * | — | 67,300 | * | |||||||
Drake N. Smiley (2) | 67,300 | * | — | 67,300 | * | |||||||
Gerald R. Marshall (2) | 15,000 | * | — | 15,000 | * | |||||||
John M. Reardon (2) | 11,000 | * | — | 11,000 | * | |||||||
Sean P. Lane (6) | 10,000 | * | — | 10,000 | * | |||||||
All directors and executive officers as a group (9 individuals) | 12,937,356 | 38 | % | — | 12,937,356 | 30 | % | |||||
| * | Less than 1% |
| (1) | The outstanding shares of common stock used to determine the percentage of shares beneficially owned by the designated stockholders do not include approximately12,650,000 shares reserved for issuance upon the exercise of outstanding warrants and 825,000 shares of our common stock issuable upon the exercise of currently exercisable options to purchase 275,000 units, each unit consisting of one share of our common stock and warrants to purchase two shares of our common stock; an aggregate of 1,423,195 shares reserved for issuance upon the exercise of options that may be granted by us or awards that may be made under our 2006 Long-Term Incentive Plan, and a maximum of 1,795,580 shares issuable to the underwriters upon exercise of their over-allotment option. |
| (2) | The business address of this person is 5100 E. Skelly Drive, Suite 650, Tulsa, Oklahoma 74135. |
| (3) | Includes 500,000 shares owned by a family trust for the benefit of Mr. Lee’s family. |
| (4) | Ms. Bowman’s business address is 3155 East 86th Street, Tulsa, Oklahoma 74137. |
| (5) | These shares are held by Danish Knights, A Limited Partnership. Ms. Bowman beneficially owns 98.5% of Danish Knights and is the custodian for a 1.3% interest owned by her minor child. Dannebrog Corporation, the general partner of Danish Knights, owns the remaining 0.2% interest. Ms. Bowman is the president and sole director of Dannebrog Corporation. Accordingly, Ms. Bowman exercises voting and dispositive power over all shares held by Danish Knights. |
| (6) | Mr. Lane’s business address is 520 Eighth Avenue, 7th Floor, New York, NY 10018. |
Index to Financial Statements
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Former Directors, Executive Officers and Principal Stockholders
Tremisis:
Tremisis consummated its initial public offering on May 18, 2004. Prior to its IPO, Tremisis issued an aggregate of 750,000 shares of its common stock to the stockholders as set forth below at a purchase price of approximately $0.033 per share. Subsequent to the issuance, and prior to its IPO, its board of directors authorized several forward splits of its common stock, effectively lowering the purchase price to $0.018 per share. The following share numbers have been adjusted to reflect the sale of our commonthese stock included in the units offered by this prospectus,
by:
o each person known by us to be the beneficial owner of more than 5% of
our outstanding shares of common stock;
o each of our officers and directors; and
o all our officers and directors as a group.
Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common
stock beneficially owned by them.
splits.
Name | Number of Shares | Relationship to Tremisis | ||
Lawrence S. Coben | 1,008,334 | Chairman and Chief Executive Officer | ||
Isaac Kier | 183,334 | Secretary, Treasurer and Director | ||
David A. | 91,666 | Director | ||
Jon | 91,666 | Director |
These shares of our common stock. Because of this
ownership block, these stockholders may be able to effectively exercise control
over all matters requiring approval by our stockholders, including the election
of directors and approval of significant corporate transactions other than
approval of a business combination.
All of the shares of our common stock outstanding prior to the date of
this prospectus will be placedare being held in escrow with Continental Stock Transfer & Trust Company, as escrow agent, until May 2007 pursuant to an escrow agreement between Tremisis, the earliest of:
o three years followingabove stockholders and the date of this prospectus;
o our liquidation;escrow agent. These shares are not transferable except to such stockholders’ spouses, children or o the consummation oftrusts established for their benefit, and will be released prior to May 2007 only if Tremisis liquidates or upon a liquidation, merger, stock exchange or other
similarsubsequent transaction which resultsresulting in all of ourits stockholders having the right to exchange their shares of common stock for cash securities or other property subsequent to our consummating a business combination with
a target business.
During the escrow period, thesecurities.
The holders of these shares will not be able to sell
or transfer their securities except to their spouses and children or trusts
established for their benefit, but will retain all other rights as our
stockholders, including, without limitation, the right to vote their shares of
common stock and the right to receive cash dividends, if declared. If dividends
are declared and payable in shares of common stock, such dividends will also be
placed in escrow. If we are unable to effect a business combination and
liquidate, none of our existing stockholders will receive any portion of the
liquidation proceeds with respect to common stock owned by them prior to the
date of this prospectus.
35
Lawrence S. Coben has agreed with EarlyBirdCapital that after this
offering is completed and within the first forty trading days after separate
trading of the warrants has commenced, he or certain of his affiliates or
designees will collectively purchase up to 1,000,000 warrants in the public
marketplace at prices not to exceed $0.65 per warrant. He has further agreed
that any warrants purchased by him or his affiliates or designees will not be
sold or transferred until after we have completed a business combination in the
energy and environmental industry and its related infrastructure. The warrants
may trade separately on the 90th day after the date of this prospectus unless
EarlyBirdCapital determines that an earlier date is acceptable. In no event
will EarlyBirdCapital allow separate trading of the common stock and warrants
until we file a Current Report on Form 8-K which includes an audited balance
sheet reflecting our receipt of the proceeds of this offering including any
proceeds we receive from the exercise of the over-allotment option if such
option is exercised prior to our filing of the Form 8-K. Purchases of warrants
demonstrate confidence in our ultimate ability to effect a business combination
because the warrants will expire worthless if we are unable to consummate a
business combination and are ultimately forced to liquidate.
Lawrence S. Coben and Isaac Kier may be deemed to be our "parents" and
"promoters," as these terms are defined under the Federal securities laws.
36
CERTAIN TRANSACTIONS
In February 2004, we issued 750,000 shares of our common stock to the
individuals set forth below for $25,000 in cash, at an average purchase price
of approximately $0.033 per share, as follows:
NAME NUMBER OF SHARES RELATIONSHIP TO US
- ---------------------------- ------------------ ----------------------------------
Lawrence S. Coben .......... 550,000 Chairman of the Board and Chief
Executive Officer
Isaac Kier ................. 100,000 Secretary, Treasurer and Director
David A. Preiser ........... 50,000 Director
Jon Schotz ................. 50,000 Director
On March 10, 2004, our board of directors authorized a 1.1666666-to-one forward
stock split of our common stock, effectively lowering the purchase price to
$0.029 per share. On April 16, 2004, our board of directors authorized a
1.1428571-to-one forward stock split of our common stock, effectively lowering
the purchase price to $0.025 per share. On April 23, 2004, our board of
directors authorized a 1.375-to-one forward stock split of our common stock,
effectively lowering the purchase price to $0.018 per share.
The holders of the majority of these shares will be entitled to make up to two demands that we register these shares pursuant to an agreement to be signed
prior to or on the date of this prospectus. The holders of the majority of
these shares may elect to exercise thesea registration rights at any time after
the date on which these shares of common stock are released from escrow.agreement dated April 27, 2004. In addition, these stockholders have certain "piggy-back"“piggy-back” registration rights on registration statements filed subsequent toeither before or after the date on which these shares of common stock are released from escrow. We will bear the expenses incurred in connection with the filing of any such registration statements.
Coqui Capital Partners,
Commencing on Tremisis’ IPO through the consummation of the merger, Tremisis paid First Americas Management LLC a monthly fee of $3,500 for general and administrative services. First Americas Management was an affiliate of Isaac Kier, has agreed that,
commencing on the effective date of this prospectus through the acquisition of
a target business, it will make available to us a small amount of office space
and certain office and secretarial services, as we may require from time to
time. We have agreed to pay Coqui Capital Partners $3,500 per month for these
services. Mr. Kier is one of three general partners of Coqui Capital Partners
and owns approximately a 17% interest in the limited partner of Coqui Capital
Partners and, as a result, will benefit from the transaction to the extent of
his interest in Coqui Capital Partners. We believe, based on rents and fees for
similar services in the New York, New York metropolitan area, that the fee
charged by Coqui Capital Partners is at least as favorable as we could have
obtained from an unaffiliated person. However, as our directors may not be
deemed "independent," we did not have the benefit of disinterested directors
approving this transaction.Tremisis’ directors.
During 2004, Lawrence S. Coben, hasa director, executive officer and principal stockholder of Tremisis, advanced $77,500 to us as of the date of this
prospectusTremisis to cover expenses related to this offering. The loansits IPO. This loan was repaid without interest in June 2004.
Current Directors, Executive Officers and Principal Stockholders
All ongoing and future transactions between us and any of our officers and directors or their respective affiliates will be payable
withouton terms believed by us to be no less favorable than are available from unaffiliated third parties and will require prior approval in each instance by a majority of the members of our board who do not have an interest in the transaction.
In October 2004, our subsidiary, RAM Energy, agreed to purchase from KCS Energy an interest in an exploratory oil and gas prospect generated by KCS in the Arkoma Basin of Eastern Oklahoma, and to participate in the drilling of the first well to be drilled on the earlierprospect. RAM Energy acquired a 30.0% interest in prospect, generally, and an additional 8.6% interest in the drillsite section for the initial test well. In November 2004, RAM Energy paid its 38.7% share in the estimated $1.2 million dry hole cost for the
Index to Financial Statements
initial test well. In connection with its participation in the prospect, RAM Energy agreed to allow certain of February 17,its senior executive officers, managers, stockholders, an attorney and an independent geologist, to participate in the prospect for their own account by purchasing an aggregate 5% interest in the prospect at the same price paid by RAM Energy to KCS. Accepting participants included, among other officers and employees of RAM Energy, Messrs. Rampey and Smiley, both senior vice presidents of RAM Energy, Mr. Lee, president, CEO and a 50% stockholder of RAM Energy, and Dr. William W. Talley II, then Chairman of RAM Energy and principal owner of Danish Knights, a 50% stockholder of RAM Energy. Other participants included Forrest Fischer, John R. Frick, Jr., Brandon Lee, Sivad Corp., an entity in which Tully Davis is a beneficial owner, and Richard Erickson. Messrs. Fischer, Frick, Lee and Davis are non-officer employees of RAM Energy. In addition, David Stinson, an outside attorney, and an independent geologist under contract with RAM Energy, also participated. In November 2004, RAM Energy entered into a participation agreement with each of the participating parties pursuant to which such parties agreed to participate in the prospect and pay their respective shares of the costs (including dry hole costs) incurred in drilling and completing the initial well on the prospect and to subject their interests to an operating agreement for the further development of the prospect. The participation agreements provided that in order to facilitate billings, distribution of production revenues and other administrative matters, record title to the interests acquired by the participants would be held by REPCO, LLC, a limited liability company formed and owned 50% each by Mr. Lee and Danish Knights. REPCO was formed specifically for the purpose of holding title to the interests of the participating parties in the prospect and to facilitate their participation. In December 2004, RAM Energy assigned an undivided 5% interest in the prospect to REPCO, to hold as nominee for the participants, and the participants were invoiced by REPCO for their respective shares of acreage and dry hole costs on the initial test well. While REPCO is carried on the books of RAM Energy as the party liable for joint interest billings and as the party entitled to receive production revenues attributable to the interests owned by the participating parties, pursuant to the terms of the participation agreements, each participant is directly liable to RAM Energy for his proportionate share of such costs and is entitled to his proportionate share of such revenues. At December 31, 2004, the participating parties were indebted to RAM Energy in the amount of $184,722 representing their aggregate unpaid share of joint interest billings on the prospect. At December 31, 2005, the unpaid balance of joint interest billings on the prospect attributable to the participants was $141,988. An additional well was drilled on this prospect in 2006, and each of the original participants participated in that well through REPCO. At October 31, 2006, no balance was owing to us by REPCO.
In December 2004, we acquired WG Energy. Among WG Energy’s assets was a package of overriding royalty interests in various oil and gas properties. Following consummation of the WG Energy acquisition, Bridgeport Royalties, LLC (“Bridgeport”) was formed for the purpose of purchasing the overriding royalty interest package RAM Energy had acquired through its purchase of WG Energy, together with certain other overriding royalty interests on undeveloped WG Energy acreage. The managers of Bridgeport, initially, were Mr. Lee and Dr. Talley. Following Dr. Talley’s death in October 2005, Mr. Lee has continued as the sole manager of Bridgeport. Member interests in Bridgeport were offered as an employee benefit and perquisite to a number of RAM Energy’s officers and employees, and to an outside attorney. Thirteen of the offerees accepted and became members of the limited liability company, along with Mr. Lee and Dr. Talley. RAM Energy’s officers, directors and stockholders purchasing membership interests in Bridgeport, and their respective interests, include Messrs. Rampey and Smiley, 3.0% each; Mr. Cox, 2.0%; and Dr. Talley and Mr. Lee, 39.9% each. The proposed $2.3 million purchase price for the overriding royalty package was determined based on a percentage of the present value, discounted at 10% per annum, of the estimated future net revenues attributable to the overriding royalty interests included in the package and was approved by RAM Energy’s senior secured lender as a condition to such lender releasing its lien on the overriding royalties included in the sale. In June 2005, Bridgeport completed the purchase of the overriding royalty
Index to Financial Statements
package from RAM Energy at the $2.3 million agreed price. The purchase price was funded with $345,000 in cash provided by the members of Bridgeport and $1.955 million of loan proceeds obtained by Bridgeport from BancFirst. RAM Energy has no continuing obligation of any nature with respect to the Bridgeport loan from BancFirst or any other Bridgeport liability.
For the years ended December 31, 2005, 2004 and 2003, we paid rent expense of $29,000, $66,000 and $54,000, respectively, related to a condominium for the benefit of Mr. Lee, a director, executive officer and one of our principal stockholders. In addition, for the years ended December 31, 2005, 2004 and 2003, our general and administrative expenses include an aggregate of approximately $499,000, $792,000 and $299,000 of expenses paid for the benefit of Larry Lee and Dr. Talley who, at the time, was a director and chairman of the board of RAM Energy, and the principal owner of Danish Knights, A Limited Partnership, which was the other of RAM Energy’s two principal stockholders. Some of the expenses paid may have been personal in nature.
In the spring of 1998, after the issuance of its publicly held senior notes, RAM Energy determined that it would be appropriate to hire an experienced attorney to serve as company’s general counsel in our Tulsa Office. However, after discussions with an outside law firm, McAfee & Taft in Oklahoma City, RAM Energy decided that if Mr. David Stinson, the McAfee & Taft lawyer who had performed extensive legal services for RAM Energy since its inception in 1987, could be made available to RAM Energy on a priority and essentially full-time, but not exclusive, basis, RAM Energy would continue to utilize McAfee & Taft and Mr. Stinson as its primary counsel and would pay McAfee & Taft a monthly retainer fee for Mr. Stinson’s services, which fee was fixed for a period of three years, with scheduled annual escalations thereafter. As an incentive for Mr. Stinson to agree to the proposed arrangement, RAM Energy agreed to grant Mr. Stinson options to acquire shares of RAM Energy common stock. Effective July 1, 1998, RAM Energy, McAfee & Taft and Mr. Stinson entered into a Special Retainer Agreement containing the terms agreed upon between the parties, and immediately thereafter the agreed stock options were granted to Mr. Stinson. Under the terms of the Special Retainer Agreement, as amended, in the event the agreement is terminated by Mr. Stinson for “good cause” or upon a “change of control,” as such terms are defined in the agreement, or by RAM Energy other than for “cause,” RAM Energy is required to pay to McAfee & Taft an amount equal to twelve times the monthly retainer amount. The amount of the monthly retainer has escalated over time both by agreement of the parties and by operation of the automatic escalation provisions of the agreement, and effective as of January 1, 2006, is set at $30,000 per month. Pursuant to the terms of the Special Retainer Agreement and subsequent issuances and adjustments, Mr. Stinson held options to acquire 83.33 shares of RAM Energy common stock at an exercise price of $2,500 per share. In April 2006, prior to consummation of the merger, Mr. Stinson exercised all of his options. This resulted in Mr. Stinson becoming one of our stockholders and being paid his pro rata portion of the merger consideration.
On May 8, 2006, we approved the issuance of and issued 10,000 restricted shares of our common stock to each of Messrs. Marshall, Reardon and Lane, our non-management directors. At the same time, we approved the issuance of and issued 100,000 restricted shares of our common stock to each of Messrs. Longmire, Rampey and Smiley, each of whom is one of our senior vice presidents. In each instance, the shares were issued under our 2006 Long-Term Incentive Plan and became fully vested 30 days following issuance, at which time, each of Messrs. Longmire, Rampey and Smiley sold 32,700 shares back to us to cover income taxes.
On November 10, 2006, our Compensation Committee approved the grant of restricted stock awards under our 2006 Long-Term Incentive Plan to a number of our employees, including an award of 75,100 shares to Mr. Robert Phaneuf, vice president — corporate development, and an award of 69,170 shares to Mr. John L. Cox, vice president, secretary and treasurer.
Index to Financial Statements
On May 8, 2006, in conjunction with the consummation of this
offering. the merger, we entered into a registration rights agreement with the former stockholders of RAM Energy under which we agreed to provide them with demand and “piggyback” registration rights with respect to our shares of common stock which they received in the merger.
For the year ended December 31, 2003, RAM Energy paid expenses in the amount of $260,000 on behalf of the Danish Knights, a Limited Partnership, one of RAM Energy’s principal stockholders which was beneficially owned by a former director and executive officer.
During 2004 and 2005, three of our executive officers were granted awards under RAM Energy’s Deferred Bonus Compensation Plan. Each award provides for a total cash compensation of $75,000 and vests on each anniversary date for three years beginning on July 1, 2004 and July 1, 2005, respectively. Receipt of the award is contingent on the officer being employed on the anniversary date. Should there be a change of control or involuntary termination, as defined in the award contract, each holder of an award will become fully vested in his award.
We intendhave and will continue to repay these loans from the proceeds of this offering not
being placed in trust.
We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf, such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of
accountable out-of-pocket expenses reimbursable by us, which will be reviewed
only by our board or a court of competent jurisdiction if such reimbursement is
challenged.
Other than the $3,500 per-month administrative fee and reimbursable
out-of-pocket expenses payable
Index to our officers and directors, no compensation
or fees of any kind, including finders and consulting fees, will be paid to any
of our existing stockholders, officers or directors who owned our common stock
prior to this offering, or to any of their respective affiliates for services
rendered to us prior to or with respect to the business combination.
All ongoing and future transactions between us and any of our officers and
directors or their respective affiliates, including loans by our officers and
directors, will be on terms believed by us to be no less favorable than are
available from unaffiliated third parties and such transactions or loans,
including any forgiveness of loans, will require prior approval in each
instance by a majority of our uninterested "independent" directors (to the
extent we have any) or the members of our board who do not have an interest in
the transaction, in either case who had access, at our expense, to our
attorneys or independent legal counsel.
37
Financial Statements
DESCRIPTION OF SECURITIES
GENERAL
We areCAPITAL STOCK
Our authorized to issue 30,000,000capital stock consists of 100,000,000 shares of common stock, par value $.0001 per share, and 1,375,0001,000,000 shares of preferred stock, par value $.0001. As of the
date of this prospectus, 1,375,000$.0001 per share. At November 21, 2006, 33,439,530 shares of common stock are outstanding, held
by four recordholders. Noand no shares of preferred stock are currentlywere outstanding. UNITS
EachAlso outstanding at that date were 491,812 units, each unit consistsconsisting of one share of our common stock and two warrants. Each
warrant entitles the holderwarrants, each to purchase one share of our common stock. TheWe have reserved 12,650,000 shares of our common stock for issuance upon the exercise of outstanding warrants and 825,000 shares of our common stock issuable upon the exercise of currently exercisable options to purchase 275,000 units, each unit consisting of one share of our common stock and warrants will begin to trade separately onpurchase two shares of our common stock. We have also reserved 1,423,195 shares of our common stock for issuance under our 2006 Long-Term Incentive Plan.
The following description of certain matters relating to our capital stock is a summary and is qualified in its entirety by the 90th day afterprovisions of our certificate of incorporation and bylaws, copies of which have been filed as exhibits to the dateregistration statement of which this prospectus unless EarlyBirdCapital informs usis a part.
Common Stock
The holders of its decision to
allow earlier separate trading, provided that in no event may theour common stock
and warrants be traded separately until we have filed with the SEC a Current
Report on Form 8-K which includes an audited balance sheet reflecting our
receipt of the gross proceeds of this offering. We will file a Current Report
on Form 8-K which includes this audited balance sheet upon the consummation of
this offering. The audited balance sheet will reflect proceeds we receive from
the exercise of the over-allotment option, if the over-allotment option is
exercised prior to the filing of the Form 8-K.
COMMON STOCK
Our stockholders are entitled to one vote for eachper share held of record on all matters submitted to be voted on bya vote of stockholders. In connection withaddition, such holders are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available, subject to the vote
required for any business combination, allpayment of our existing stockholders,
including all of our officers and directors, have agreed to vote their
respective shares of common stock owned by them immediately prior to this
offering in accordance with the public stockholders. This voting arrangement
shall not apply to shares included in units purchased in this offering or
purchased following this offering in the open market by any of our existing
stockholders, officers and directors. Additionally, our existing stockholders,
officers and directors will vote all of their shares in any manner they
determine, in their sole discretion,preferential dividends with respect to any other itemspreferred stock that come
before a votefrom time to time may be outstanding. In the event of our stockholders.
We will proceed with the business combination only if a majority of the
shares of common stock voted by the public stockholders are voted in favor of
the business combination and public stockholders owning less than 20% of the
shares sold in this offering exercise their conversion rights discussed below.
Our board of directors is divided into three classes, each of which will
generally serve for a term of three years with only one class of directors
being elected in each year. There is no cumulative voting with respect to the
election of directors, with the result thatdissolution, liquidation or winding-up, the holders of more than 50% of the
shares voted for the election of directors can elect all of the directors.
If we are forced to liquidate prior to a business combination, our public
stockholderscommon stock are entitled to share ratably in the trust fund, inclusive of any
interest, and any netall assets remaining available for distribution to them after payment of liabilities. Our existing stockholders have agreedall our liabilities and subject to waive theirthe prior distribution rights to share inof the holders of any distribution with respect topreferred stock that may be outstanding at that time. The holders of common stock owned by them
prior to the offering if we are forced to liquidate.
Our stockholdersdo not have no conversion,cumulative voting rights or preemptive or other subscription
rights and there are no sinking fundto acquire or redemption provisions applicable to the
common stock, except that public stockholders have the right to have theirsubscribe for additional, unissued or treasury shares. All outstanding shares of common stock converted to cash equal to their pro rata shareare and, when issued, the shares of common stock offered hereby will be, fully paid and nonassessable.
In connection with the merger, we, together with the principal stockholders of RAM Energy and certain of our principal stockholders, entered into a voting agreement. Upon consummation of the trustmerger, these stockholders beneficially owned approximately 80.5% of our common stock. The voting agreement provides that, until after the election of our board of directors in 2008, each of these persons will vote for the respective designees of the individual parties as members of our board of directors. We are obligated to maintain a board of directors comprised of at least four members during the term of this agreement.
Preferred Stock
We have an authorized class of preferred stock consisting of 1,000,000 shares, none of which are issued and outstanding. Our board of directors is authorized, subject to any limitations prescribed by law, without further stockholder approval, to issue shares of preferred stock from time to time. Our board of directors may designate one or more series of preferred stock. Each series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our board of directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund if they vote againstprovisions, liquidation preferences and conversion rights.
Anti-Takeover Provisions
Our certificate of incorporation and bylaws and the General Corporation Law of Delaware include a number of provisions that may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-
Index to Financial Statements
negotiated takeover attempts. These provisions include a classified board of directors, authorized blank check preferred stock, restrictions on business combinations and the availability of authorized but unissued common stock.
Classified Board of Directors. Our certificate of incorporation contains provisions for a staggered board of directors with only one-third of the board standing for election each year. Our directors can only be removed for cause. A staggered board makes it more difficult for stockholders to change the majority of the directors and instead promotes a continuity of existing management.
Blank Check Preferred Stock. Our certificate of incorporation authorizes blank check preferred stock. Our board of directors can set the voting rights, redemption rights, conversion rights and other rights relating to the preferred stock and could issue preferred stock in either a private or public transaction. In some circumstances, the blank check preferred stock could be issued and have the effect of preventing a merger, tender offer or other takeover attempt which our board of directors opposes.
Delaware Takeover Statute. We are subject to Section 203 of the Delaware General Corporation Law. In general, Section 203 prevents an “interested stockholder” from engaging in a “business combination” with a Delaware corporation for three years following the date such person became an interested stockholder, unless (i) prior to the date such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approves the business combination, (ii) upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding stock held by directors who are also officers of the corporation and stock held by certain employee stock plans, or (iii) on or subsequent to the date of the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and completed. Publicauthorized at a meeting of stockholders who convert theirby the affirmative vote of the holders of at least two-thirds of the outstanding voting stock into theirof the corporation not owned by the interested stockholder.
Section 203 defines a “business combination” to include (i) any merger or consolidation involving the corporation and an interested stockholder, (ii) any sale, transfer, pledge or other disposition involving an interested stockholder of 10% or more of the assets of the corporation, (iii) subject to certain exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to an interested stockholder, (iv) any transaction involving the corporation which has the effect of increasing the proportionate share of the trust fund still have the right to exercise the
warrants that they received as partstock of any class or series of the units.
PREFERRED STOCK
corporation beneficially owned by the interested stockholder or (v) the receipt by an interested stockholder of any loans, guarantees, pledges or other financial benefits provided by or through the corporation. In addition, Section 203 defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person.
Stockholder Action
Except as otherwise required by law or our certificate of incorporation, with respect to any act or action required of or by the holders of the common stock, the affirmative vote of the holders of a majority of the issued and outstanding shares of common stock entitled to vote thereon is sufficient to authorize the act or action.
Index to Financial Statements
Limitation of Liability of Directors
Our certificate of incorporation authorizesprovides that no director shall be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability as follows:
| Ÿ | for any breach of the director’s duty of loyalty to us or our stockholders; |
| Ÿ | for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
| Ÿ | for an act or omission for which the liability of a director is expressly provided by an applicable statute; and |
| Ÿ | for any transaction from which the director derived an improper personal benefit. |
In addition, we have entered into indemnity agreements with all of our directors under which we will indemnify them against loss, cost and expense incurred by them in serving as our directors so long as they are innocent of willful misconduct or gross negligence. The effect of the issuance of 1,000,000
shares of blank check preferred stock with such designation,above provisions and the indemnity agreements is to eliminate our rights and preferencesthose of our stockholders, through derivative suits on our behalf, to recover monetary damages against a director for a breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior, except in the situations described above.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be determined from timepermitted to time
38
by our board of directors. No shares of preferred stock are being issued or
registereddirectors, officers and persons controlling us pursuant to the foregoing provisions, we have been informed that in this offering. Accordingly, our board of directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect
the voting power or other rightsopinion of the holdersSecurities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Transfer Agent and Registrar
The transfer agent and registrar of our common stock although the
underwriting agreement prohibits us, prior to a business combination, from
issuing preferred stock which participates in any manner in the proceeds of the
trust fund, or which votes as a class with theis Continental Stock & Transfer Company.
Warrants
We currently have outstanding 12,650,000 redeemable common stock on a business
combination. We may issue some or all of the preferred stock to effect a
business combination. In addition, the preferred stock could be utilized as a
method of discouraging, delaying or preventing a change in control of us.
Although we do not currently intend to issue any shares of preferred stock, we
cannot assure you that we will not do so in the future.
WARRANTS
No warrants are currently outstanding.purchase warrants. Each warrant entitles the registered holder to purchase one share of our common stock at a price of $5.00 per share, subject to adjustment as discussed below, at any time commencing on the later of:
o the completion of a business combination; or
o one year from the date of this prospectus.merger. The warrants will expire four years from the date of this prospectuson May 11, 2008 at 5:00 p.m., New York City time. We may call the warrants for redemption,
o in whole and not in part,
o at a price of $.01 per warrant at any time after the warrants become
exercisable,
o upon not less than 30 days' prior written notice of redemption to each
warrantholder, and
o if, and only if, the reported last sale price of the common stock
equals or exceeds $8.50 per share, for any 20 trading days within a 30
trading day period ending on the third business day prior to the
notice of redemption to warrantholders.
The warrants will be issued in registered form under a warrant agreement
between Continental Stock Transfer & Trust Company, as warrant agent, and us.
You should review a copy of the warrant agreement, which has been filed as an
exhibit to the registration statement of which this prospectus is a part, for a
complete description of the terms and conditions applicable to the warrants.
redemption:
| Ÿ | in whole and not in part; |
| Ÿ | at a price of $.01 per warrant at any time after the warrants become exercisable; |
| Ÿ | upon not less than 30 days’ prior written notice of redemption to each warrant holder; and |
| Ÿ | if, and only if, the reported last sale price of our common stock equals or exceeds $8.50 per share, for any 20 trading days within a 30 trading day period ending on the third business day prior to the notice of redemption to warrant holders. |
The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of common stock at a price below their respectivethe exercise prices.
price.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, withcompletion of the exercise form on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price by certified check payable to us for the number of
Index to Financial Statements
warrants being exercised. The warrantholderswarrant holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their warrants and receive shares of common stock. After the issuance of shares of common stock upon exercise of the
warrants, each holder will be entitled to one vote for each share held of
record on all matters to be voted on by stockholders.
No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Under the terms of thea warrant agreement, we have agreed to meet
these conditions and to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants. However, we cannot assure you that we will be able to do so. The warrants may be deprived of any value and the market for the warrants may be limited if the
39
No fractional shares will be issued upon
We have engaged EarlyBirdCapital, Inc., the representative of the underwriters of Tremisis’ IPO, on a non-exclusive basis, as our agent for the solicitation of the exercise of the warrants. However, we will pay toTo the warrantholder, in lieuextent not inconsistent with the guidelines of the issuance of any
fractional share which is otherwise issuable toNASD and the warrantholder, an amount in
cash based on the market valuerules and regulations of the common stock on the last trading day
prior to the exercise date.
PURCHASE OPTION
WeSEC, we have agreed to sellpay a commission equal to 5% of the exercise price for each warrant exercised more than one year after the date of Tremisis’ IPO if the exercise was solicited by EarlyBirdCapital. In addition to soliciting, either orally or in writing, the exercise of the warrants, EarlyBirdCapital’s services may also include disseminating information, either orally or in writing, to warrantholders about us or the market for our securities, and assisting in the processing of the exercise of warrants. No compensation will be paid to the representative upon the exercise of the underwriterswarrants if:
| Ÿ | the market price of the underlying shares of common stock is lower than the exercise price; |
| Ÿ | the holder of the warrants has not confirmed in writing that EarlyBirdCapital Inc. solicited the exercise; |
| Ÿ | the warrants are held in a discretionary account; |
| Ÿ | the warrants are exercised in an unsolicited transaction; or |
| Ÿ | the arrangement to pay the commission is not disclosed in the prospectus provided to warrantholders at the time of exercise. |
In conjunction with the closing of Tremisis’ IPO, we sold to EarlyBirdCapital an option to purchase up to a total of 275,000 units, at a per-unit priceeach unit consisting of $9.90.one share of our common stock and two warrants, each to purchase one share of our common stock. The units issuable upon exercise of this option arewere identical to those offered by
this prospectusissued in the Tremisis IPO, except that the warrants included in theEarlyBirdCapital’s option have an exercise price of $6.25 (125% of the exercise price of the warrants included in the units sold in the offering)Tremisis IPO). For a more complete description of the
purchase option, see the section below entitled "Underwriting--Purchase
Option."
DIVIDENDS
We have not paid any dividends on our common stock to date and do not
intend to pay dividends prior to the completion of a business combination. The payment of dividends in the future will be contingent upon our revenues and
earnings, if any, capital requirements and general financial condition
subsequent to completion of a business combination. The payment of any
dividends subsequent to a business combination will be within the discretion of
our then board of directors. It is the present intention of our board of
directors to retain all earnings, if any, for use in our business operations
and, accordingly, our board does not anticipate declaring any dividends in the
foreseeable future.
OUR TRANSFER AGENT AND WARRANT AGENT
The transfer agent for our securities and warrant agent for our warrants
is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New
York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after this offering, we will have 6,875,000 shares of common
stock outstanding, or 7,700,000 shares if the underwriters' over-allotment
option is exercised in full. Of these shares, the 5,500,000 shares sold in this
offering, or 5,825,000 shares if the over-allotment option is exercised, will be
freely tradable without restriction or further registration under the Securities
Act, except for any shares purchased by one of our affiliates within the meaning
of Rule 144 under the Securities Act. All of the remaining 1,375,000 shares are
restricted securities under Rule 144, in that they were issued in private
transactions not involving a public offering. None of those will be eligible for
sale under Rule 144 prior to February 5, 2005. Notwithstanding this, all of
those shares have been placed in escrow and will not be transferable for a
period of three years from the date of this prospectus and will only be released
prior to that date subject to certain limited exceptions.
Rule 144
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted shares of our common stock for at least one year
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of either of the following:
o 1% of the number of shares of common stock then outstanding, which
will equal 68,750 shares immediately after this offering (or 77,000 if
the underwriters' exercise their over-allotment option); and
o the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale.
40
Sales under Rule 144 are also limited by manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at the time of or at any time during the three months preceding a
sale, and who has beneficially owned the restricted shares proposed to be sold
for at least two years, including the holding period of any prior owner other
than an affiliate, is entitled to sell their shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
SEC Position on Rule 144 Sales
The Securities and Exchange Commission has taken the position that
promoters or affiliates of a blank check company and their transferees, both
before and after a business combination, would act as an "underwriter" under
the Securities Act when reselling the securities of a blank check company.
Accordingly, the Securities and Exchange Commission believes that those
securities can be resold only through a registered offering and that Rule 144
would not be available for those resale transactions despite technical
compliance with the requirements of Rule 144.
Registration Rights
The holders of our 1,375,000 issued and outstanding shares of common stock
on the date of this prospectus will be entitled to registration rights pursuant
to an agreement to be signed prior to or on the effective date of this offering.
The holders of the majority of these shares are entitled to make up to two
demands that we register these shares. The holders of the majority of these
shares can elect to exercise these registration rights at any time after the
date on which these shares of common stock are released from escrow. In
addition, these stockholders have certain "piggy-back" registration rights on
registration statements filed subsequent to the date on which these shares of
common stock are released from escrow. We will bear the expenses incurred in
connection with the filing of any such registration statements.
41
UNDERWRITING
In accordance with the terms and conditions contained in the underwriting
agreement, we have agreed to sell to each of the underwriters named below, and
each of the underwriters, for which EarlyBirdCapital is acting as
representative, have severally, and not jointly, agreed to purchase on a firm
commitment basis the number of units offered in this offering set forth
opposite their respective names below:
UNDERWRITERS NUMBER OF UNITS
- --------------------------------- ----------------
EarlyBirdCapital, Inc. ..........
----------------
Total ..........................
================
A copy of the underwriting agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part.
STATE BLUE SKY INFORMATION
We will offer and sell the units to retail customers only in Delaware, the
District of Columbia, Florida, Hawaii, Illinois, Maryland, New York and Rhode
Island. In New York and Hawaii, we have relied on exemptions from the state
registration requirements for transactions between an issuer and an underwriter
involving a firm-commitment underwritten offering. In the other states, we have
applied to have the units registered for sale and will not sell the units in
these states until such registration is effective. We also believe that the
units, from and after the effective date, and the common stock and warrants
comprising the units, once they become separately transferable, will be
eligible for sale on a secondary market basis in each of the following states
based upon the registration of the units, common stock and warrants in those
states or the availability of an applicable exemption from the state's
registration requirements:
o immediately in Alabama, Colorado, Delaware, the District of Columbia,
Florida, Georgia, Illinois, Kentucky, Maryland, New York,
Pennsylvania, Rhode Island and Wisconsin;
o commencing 90 days from the date of this prospectus in Iowa, Maine,
Missouri, Nevada, New Mexico; and
o commencing 180 days from the date of this prospectus in Massachusetts.
Additionally, the units, from and after the effective date, and the common
stock and warrants comprising the units, once they become separately
transferable, will be eligible for sale on a secondary market basis in certain
states based on exemptions from such states' registration requirements as a
result of the National Securities Markets Improvement Act of 1996. The National
Securities Markets Improvement Act exempts from state registration requirements
certain secondary market trading transactions for issuers that file periodic
and annual reports under the Securities Exchange Act of 1934. However, under
the act, the states are able to continue to require notice filings and collect
fees with regard to these transactions. As of the date of this prospectus, we
have not determined in which states we will submit the required notice filing
and applicable fee to take advantage of this exemption.
We will amend this prospectus for the purpose of disclosing additional
states, if any, in which our securities will be eligible for resale in the
secondary trading market. If you are not an institutional investor, you may
purchase our securities in this offering or in any subsequent trading market
which may develop, only in the jurisdictions described above. Institutional
investors in every state except in Idaho and South Dakota may purchase the
units in this offering and in the secondary market pursuant to exemptions
provided to such entities under the Blue Sky laws of various states. The
definition of an
42
"institutional investor" varies from state to state but generally includes
financial institutions, broker-dealers, banks, insurance companies and other
qualified entities.
PRICING OF SECURITIES
We have been advised by the representative that the underwriters propose
to offer the units to the public at the initial offering price set forth on the
cover page of this prospectus. They may allow some dealers concessions not in
excess of $ per unit and the dealers may reallow a concession not in excess
of $ per unit to other dealers.
Prior to this offering there has been no public market for any of our
securities. The public offering price of the units and the terms of the
warrants were negotiated between us and the representative. Factors considered
in determining the prices and terms of the units, including the common stock
and warrants underlying the units, include:
o the history and prospects of companies whose principal business is the
acquisition of other companies;
o prior offerings of those companies;
o our prospects for acquiring an operating business at attractive
values;
o our capital structure;
o an assessment of our management and their experience in identifying
operating companies in the energy and environmental industry;
o general conditions of the securities markets at the time of the
offering; and
o other factors as were deemed relevant.
However, although these factors were considered, the determination of our
offering price is more arbitrary than the pricing of securities for an
operating company in a particular industry since the underwriters are unable to
compare our financial results and prospects with those of public companies
operating in the same industry.
OVER-ALLOTMENT OPTION
We have also granted to the underwriters an option, exercisable during the
45-day period commencing on the date of this prospectus, to purchase from us at
the offering price, less underwriting discounts and the non-accountable expense
allowance, up to an aggregate of 750,000 additional units for the sole purpose
of covering over-allotments, if any. The over- allotment option will only be
used to cover the net syndicate short position resulting from the initial
distribution. The underwriters may exercise that option if the underwriters
sell more units than the total number set forth in the table above. If any
units underlying the option are purchased, the underwriters will severally
purchase shares in approximately the same proportion as set forth in the table
above.
COMMISSIONS AND DISCOUNTS
The following table shows the public offering price, underwriting discount
to be paid by us to the underwriters and the proceeds, before expenses, to us.
This information assumes either no exercise or full exercise by the
underwriters of their over-allotment option.
PER UNIT WITHOUT OPTION WITH OPTION
---------- ---------------- --------------
Public offering price ...................... $ 6.00 $33,000,000 $37,950,000
Discount ................................... $ 0.36 $ 1,980,000 $ 2,277,000
Non Accountable Expense Allowance .......... $ 0.18 $ 990,000 $ 1,138,500
Proceeds before expenses(1) ................ $ 5.46 $30,030,000 $34,345,000
- ----------
(1) The offering expenses are estimated at $520,000.
43
PURCHASE OPTION
We have agreed to sell to the representative, for $100, an option to
purchase up to a total of 275,000 units. The units issuable upon exercise of
this option are identical to those offered by this prospectus except that the
warrants included in the option have an exercise price of $6.25 (125% of the
exercise price of the warrants included in the units sold in the offering).
This option is exercisable at $9.90 per unit commencing on the later of the
consummation of a business combination or one year from the date of this
prospectusMay 8, 2006 and expiring five years from the date of this prospectus. The option
may not be sold, transferred, assigned, pledged or hypothecated for a one-year
period following the date of this prospectus. However, the option may be
transferred to any underwriter and selected dealer participating in the
offering and their bona fide officers or partners.May 12, 2009. Although the purchase option and its underlying securities have beenwere registered under the registration
statementSecurities Act of which this prospectus forms a part of,1933, the option grants to
holders have demand and "piggy back"“piggyback” rights for periods of five and seven years, respectively, from the date of this prospectusMay 12, 2004 with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances of common stock at a price below its exercise price.
WARRANT SOLICITATION FEE
Index to Financial Statements
PRICE RANGE OF SECURITIES AND DIVIDENDS
Our units, common stock and warrants are traded on the Nasdaq Capital Market under the symbols RAMEU, RAME and RAMEW, respectively. The following table sets forth the range of high and low closing bid prices for the units, common stock and warrants for the periods indicated since the units commenced public trading on May 13, 2004 and since the common stock and warrants commenced public trading on May 24, 2004. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
| Units | Common Stock | Warrants | ||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||
2006: | ||||||||||||||||||
First Quarter | $ | 8.25 | $ | 7.00 | $ | 5.89 | $ | 5.46 | $ | 1.18 | $ | 0.78 | ||||||
Second Quarter | 11.00 | 7.20 | 6.79 | 5.19 | 2.00 | 1.05 | ||||||||||||
Third Quarter | 8.74 | 6.45 | 5.79 | 4.68 | 1.75 | 0.77 | ||||||||||||
Fourth Quarter (through November 21) | 6.95 | 6.00 | 5.43 | 4.65 | 0.96 | 0.67 | ||||||||||||
2005: | ||||||||||||||||||
First Quarter | $ | 7.35 | $ | 6.70 | $ | 5.50 | $ | 5.01 | $ | 0.94 | $ | 0.74 | ||||||
Second Quarter | 7.05 | 6.36 | 5.56 | 5.12 | 0.82 | 0.57 | ||||||||||||
Third Quarter | 7.30 | 6.20 | 5.55 | 5.13 | 0.98 | 0.50 | ||||||||||||
Fourth Quarter | 7.35 | 6.65 | 5.56 | 5.31 | 0.95 | 0.65 | ||||||||||||
2004: | ||||||||||||||||||
Second Quarter (commencing May 24) | $ | 6.40 | $ | 6.10 | $ | 5.00 | $ | 4.70 | $ | 0.82 | $ | 0.69 | ||||||
Third Quarter | 6.35 | 5.97 | 5.00 | 4.81 | 0.72 | 0.52 | ||||||||||||
Fourth Quarter | 6.65 | 5.70 | 5.14 | 4.80 | 0.80 | 0.48 | ||||||||||||
Holders
As of November 21, 2006, there was one holder of record of our units, 40 holders of record of our common stock and one holder of record of our warrants. We have engaged EarlyBirdCapital,believe that the representativebeneficial holders of the underwriters,units, common stock and warrants are in excess of 400 persons each.
Dividends
It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
Index to Financial Statements
Subject to the terms and conditions stated in the underwriting agreement dated ________, 2006, we and the selling stockholder have agreed to sell to the underwriter named below, and the underwriter has agreed to purchase, the number of shares of common stock appearing opposite the underwriter’s name below.
Name | Number of Shares | |
RBC Capital Markets Corporation | ||
Total | ||
The underwriting agreement provides that the underwriter’s obligation to purchase the shares depends on the satisfaction of the conditions contained in the underwriting agreement and that if any of our shares are purchased by the underwriter, all of our shares must be purchased. The conditions contained in the underwriting agreement include the condition that all the representations and warranties made by us to the underwriter are true, that there has been no material adverse change in our condition or in the condition of the financial markets and that we deliver to the underwriter customary closing documents.
The underwriter has advised us that it proposes to offer the shares of common stock to the public at the public offering price appearing on the cover page of this prospectus and to certain dealers at that price less a concession of not more than $ per share, of which up to $ may be reallowed to other dealers. After the initial offering, the public offering price, concession and reallowance to dealers may be changed.
The following table shows the public offering price, underwriting discounts and commissions and proceeds, before expenses, to us and to the selling stockholder, both on a non-exclusiveper share basis as our agent forand in total, assuming either no exercise or full exercise by the solicitationunderwriter of its over-allotment option.
| Total | |||||||||
| Per Share | Without Option | With Option | |||||||
Public offering price | $ | $ | $ | ||||||
Underwriting discounts and commissions payable by us | |||||||||
Proceeds, before expenses, to us | |||||||||
Underwriting discounts and commissions payable by the selling stockholder | |||||||||
Proceeds, before expenses, to the selling stockholder | |||||||||
We estimate that the exerciseexpenses of the warrants. To the extentthis offering payable by us, not inconsistent with the guidelines of the NASDincluding underwriting discounts and the rules and regulations of the SEC, wecommissions, will be approximately $ . We have agreed to pay the
representative for bona fide services rendered a commission equal to 5%certain expenses of the exerciseselling stockholder incurred in connection with this offering, other than underwriting discounts and commissions payable in respect of the shares sold by the selling stockholder.
We have agreed to indemnify the underwriter against certain liabilities, including liabilities under the Securities Act or to contribute to payments that may be required to be made with respect to these liabilities.
We have granted to the underwriter an option to purchase up to an aggregate of 1,795,580 additional shares at the price to the public less the underwriting discount set forth on the cover page of this prospectus
Index to Financial Statements
exercisable solely to cover over-allotments, if any. Such option may be exercised in whole or in part at any time until 30 days after the date of this prospectus. If this option is exercised, the underwriter will be committed, subject to satisfaction of the conditions specified in the underwriting agreement, to purchase such number of additional shares, and we will be obligated, pursuant to the option, to sell these shares to the underwriter.
We, our directors and executive officers, and the selling stockholder have agreed that we will not, directly or indirectly, sell, offer or otherwise dispose of any shares or enter into any derivative transaction with similar effect as a sale of shares for each warrant exercised more than one yeara period of 90 days after the date of this prospectus ifwithout the exercise was solicitedprior written consent of RBC Capital Markets Corporation. The restrictions described in this paragraph do not apply to:
| Ÿ | the sale of shares to the underwriter; or |
| Ÿ | restricted shares issued by us under the 2006 Long-Term Incentive Plan or upon the exercise of options issued under the 2006 Long-Term Incentive Plan. |
The 90-day restricted period described in the underwriters. In additionpreceding paragraphs will be extended if:
| Ÿ | during the last 17 days of the 90-day restricted period we issue an earnings release or material news or a material event relating to us occurs; or |
| Ÿ | prior to the expiration of the 90-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day period; |
in which case the restrictions described in the preceding paragraph will continue to soliciting, either orallyapply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
RBC Capital Markets Corporation, in its sole discretion, may release the shares subject to lock-up agreements in whole or in writing,part at any time with or without notice. When determining whether or not to release shares from lock-up agreements, RBC Capital Markets Corporation will consider, among other factors, the exercisestockholders’ reasons for requesting the release (including, without limitation, a stockholder’s need to satisfy personal tax obligations), the number of shares for which the warrants, the
representative's services may also include disseminating information, either
orally or in writing, to warrantholders about us or therelease is being requested and market for our
securities, and assisting in the processing of the exercise of warrants. No
compensation will be paid to the representative upon the exercise of the
warrants if:
o the market price of the underlying shares of common stock is lower
than the exercise price;
o the holder of the warrants has not confirmed in writing that the
underwriters solicited the exercise;
o the warrants are held in a discretionary account;
o the warrants are exercised in an unsolicited transaction; or
o the arrangement to pay the commission is not disclosed in the
prospectus provided to warrantholdersconditions at the time of exercise.
REGULATORY RESTRICTIONS ON PURCHASE OF SECURITIES
Rules oftime.
In connection with this offering, the SEC may limit the ability of the underwriters to bid for or
purchase our securities before the distribution of the securities is completed.
However, the underwritersunderwriter may engage in the following activitiesstabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the rules:
o Securities Exchange Act of 1934, as amended.
Stabilizing Transactions. The underwriters may maketransactions permit bids or purchases
forto purchase the purpose of pegging, fixing or maintaining the price of our
securities,underlying security so long as the stabilizing bids do not exceed a specified maximum.
o Over-Allotments and Syndicate Coverage Transactions. The underwriters
| Ÿ | Over-allotment transactions involve sales by the underwriter of the shares in excess of the number of shares the underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriter is not greater than the number of shares it may purchase in its option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in the underwriter’s option to purchase additional shares. The underwriter may close out any short position by either exercising its option and/or purchasing shares in the open market. |
Index to Financial Statements
| Ÿ | Syndicate covering transactions involve purchases of the shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of the shares to close out the short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through its option. If the underwriter sells more shares than could be covered by its option to purchase additional shares, which we refer to in this prospectus as a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
| Ÿ | Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the shares originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
Similar to other purchase transactions, the underwriter’s purchases to cover the syndicate short sales may createhave the effect of raising or maintaining the market price of the shares or preventing or retarding a short positiondecline in our securities by selling morethe market price of our
securitiesthe shares. As a result, the price of the shares may be higher than are set forth on the cover page of this prospectus. Ifprice that might otherwise exist in the underwriters create a short position during the offering, the
44
representative may engage inopen market.
These stabilizing transactions, syndicate covering transactions by
purchasingand penalty bids may have the effect of raising or maintaining the market price of our securitiesshares or preventing or retarding a decline in the market price of the shares. As a result, the price of the shares may be higher than the price that might otherwise exist in the open market. The representative may
also elect to reduce any short position by exercising all or part of
the over-allotment option.
o Penalty Bids. The representative may reclaim a selling concession from
a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
Stabilization and syndicate coveringThese transactions may cause the price of
the securities to be higher than they wouldeffected on The Nasdaq Capital Market or otherwise and, if commenced, may be in the absence of these
transactions. The imposition of a penalty bid might also have an effect on the
prices of the securities if it discourages resales of the securities.
discontinued at any time.
Neither we nor the underwriters makesunderwriter make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the pricesprice of the securities. Theseshares. In addition, neither we nor the underwriter make any representation that the underwriter will engage in these stabilizing transactions may occur on the OTC Bulletin Board, in the
over-the-counter market or onthat any trading market. If any of these transactions
aretransaction, if commenced, they maywill not be discontinued without notice at any time.
OTHER TERMS
We have granted the representative the right to havenotice.
RBC Capital Markets Corporation and its designee present
at all meetings of our board of directors for a period of five years from the
date of this prospectus. The designee will be entitled to the same notices and
communications sent by us to our directors and to attend directors' meetings,
but will not have voting rights. The representative has not named a designee as
of the date of this prospectus.
Although they are not obligated to do so, any of the underwritersaffiliates may
introduce us to potential target businesses or assist us in raising additional
capital, as needs may arise in the future but there are no preliminary
agreements or understandings between anyperform various financial advisory, investment banking and other commercial banking services in the ordinary course of business with us and our affiliates for which they will receive customary compensation.
No sales to accounts over which the underwriter exercises discretionary authority in excess of 5% of the underwritersshares offered by it may be made without the prior written approval of the customer.
A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by the underwriter and/or selling group members participating in this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the selling group member, prospective investors may be allowed to place orders online. The underwriter may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriter on the same basis as other allocations.
Other than the prospectus in electronic format, information contained in any potential
targets. Weother web site maintained by the underwriter or selling group member is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been endorsed by us and should not be relied on by investors in deciding whether to purchase any shares. The underwriter and selling group members are not under any contractual obligationresponsible for information contained in web sites that they do not maintain.
Index to engage any of the
underwriters to provide any services for us after this offering, but if we do,
we may pay the underwriters a finder's fee that would be determined at that
time in an arm's length negotiation where the terms would be fair and
reasonable to each of the interested parties; provided that no agreement will
be entered into and no fee will be paid prior to the one year anniversary of
the date of this prospectus.
INDEMNIFICATION
We have agreed to indemnify the underwriters against some liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in this respect.
Financial Statements
The validity of the securitiesissuance of the shares of common stock offered inby this prospectus are beingwill be passed upon for us by Graubard Miller, New York, New York. Bingham McCutchen LLP, New
York, New York, is actingMcAfee & Taft A Professional Corporation, Oklahoma City, Oklahoma. C. David Stinson, a stockholder of McAfee & Taft A Professional Corporation, currently beneficially owns 489,626 shares of our common stock. Certain legal matters relating to this offering will be passed on by Fulbright & Jaworski L.L.P., as counsel for the underwritersunderwriter.
Index to Financial Statements
The consolidated financial statements of RAM Energy, Inc. at December 31, 2005 and 2004, and for each of the three years in this offering.
EXPERTS
the period ended December 31, 2005, have been audited by UHY Mann Frankfort Stein & Lipp CPAs, LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The financial statements of RAM Energy Resources, Inc. (formerly known as Tremisis Energy Acquisition Corporation) at December 31, 2005 and 2004, the year ended December 31, 2005, the period from February 5, 2004 (inception) to December 31, 2004, and the period from February 5, 2004 (inception) to December 31, 2005, included in this prospectus and in the
registration statementelsewhere herein, have been audited by BDO Seidman, LLP, independent certifiedregistered public accountants, to the extent and for the periodaccounting firm as set forth in their report (which contains an explanatory paragraph regarding our ability to
continue as a going concern) appearing elsewhere in this prospectusherein, and in the
registration statement. The financial statements and the report of BDO Seidman,
LLP are included in reliance upon theirsuch report given on the authority of such firm as experts in accounting and auditing.
Certain estimates of oil and natural gas reserves incorporated herein were based upon engineering studies prepared by Williamson Petroleum Consultants, Inc., independent petroleum engineers, and Forrest A. Garb & Associates, Inc., independent petroleum engineers. Each such estimate is included herein in reliance upon the authority of BDO
Seidman, LLPeach of the respective firms as expertsan expert in auditing and accounting.
45
Index to Financial Statements
WHERE YOU CAN FIND ADDITIONALMORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 which
includes exhibits, schedules and amendments, underwith the Securities Act,and Exchange Commission in connection with respectthis offering. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy the registration statement and any other documents we have filed at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Public Reference Room. Our Securities and Exchange Commission filings are also available to the public at the Securities and Exchange Commission’s Internet site at “http://www.sec.gov.”
This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this offeringprospectus to any of our securities. Although this prospectus, which
formscontracts or other documents, the reference may not be complete and, for a copy of the contract or document, you should refer to the exhibits that are a part of the registration statement, contains all materialstatement.
After the offering, we expect to provide annual reports to our stockholders that include financial information includedexamined and reported on by our independent public accountant.
Index to Financial Statements
GLOSSARY OF OIL AND NATURAL GAS TERMS
The definitions set forth below apply to the indicated terms as used in this prospectus. All volumes of natural gas referred to herein are stated at the legal pressure base of the state or area where the reserves exist and at 60 degrees Fahrenheit and in most instances are rounded to the nearest major multiple.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas.
Boe. Barrels of oil equivalent in which six Mcf of natural gas equals one Bbl of oil.
Btu. British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of oil or natural gas or, in the registration statement, partscase of a dry hole, the reporting of abandonment to the appropriate agency.
Development well. A well drilled within the proved areas of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBoe. One thousand Boe.
MMBoe. One million Boe.
Mcf. One thousand cubic feet of natural gas.
MMBbls. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million Btus.
MMcf. One million cubic feet of natural gas.
Net acres or net wells. The sum of the registration statement
have been omittedfractional working interests owned in gross acres or gross wells, as permitted by rulesthe case may be.
Operator. The individual or company responsible for the exploration, exploitation and regulationsproduction of an oil or natural gas well or lease.
PV-10 Value. When used with respect to oil and natural gas reserves, the estimated future gross revenues to be generated from the production of proved reserves, net of estimated production and future development costs, using the prices provided in this prospectus and costs in effect as of the SEC. We refer
youdate indicated, without giving effect to non-property related expenses such as general and administrative expenses, debt
Index to Financial Statements
service and future income tax expenses or to depreciation, depletion and amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the registration statementsale of such production exceed production expenses and its exhibits for further information
about us, our securitiestaxes.
Proved developed producing reserves. Proved developed reserves that are expected to be recovered from completion intervals currently open in existing wells and this offering.capable of production.
Proved developed reserves. Proved reserves that are expected to be recovered from existing wellbores, whether or not currently producing, without drilling additional wells. Production of such reserves may require a recompletion.
Proved reserves. The registration statementestimated quantities of crude oil, natural gas and its
exhibits, asnatural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well as our other reports filed with the SEC, can be inspected and
copied atdrilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing wellbore in another formation from that in which the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004. The public may obtain information about the
operationwell has been previously completed.
Reserve life. A ratio determined by dividing our estimated existing reserves determined as of the public reference roomstated measurement date by callingproduction from such reserves for the SEC at 1-800-SEC-0330. In
addition,prior twelve month period.
Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
3-D seismic. The method by which a three dimensional image of the SEC maintainsearth’s subsurface is created through the interpretation of reflection seismic data collected over a web site at http://www.sec.govsurface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys and contribute significantly to field appraisal, exploitation and production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest that gives the Form S-1owner the right to drill, produce and other reports, proxyconduct operating activities on the property and information statements and information
regarding issuers that file electronically with the SEC.
46
TREMISIS ENERGY ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
a share of production.
Workover. Operations on a producing well to restore or increase production.
Index to Financial Statements
RAM Energy Resources, Inc.
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | F-21 | |
| F-23 |
Tremisis Energy Acquisition Corporation
| F-47 | ||
| F-48 | ||
| F-49 | ||
| F-50 | ||
| F-51 | ||
| F-52 | ||
| F-53 | ||
Index to Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2006 | December 31, 2005 | |||||||
| (unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 7,592 | $ | 70 | ||||
Accounts receivable: | ||||||||
Oil and natural gas sales | 6,501 | 7,422 | ||||||
Joint interest operations, net of allowance of $185 ($31 at December 31, 2005) | 234 | 566 | ||||||
Related party | — | 142 | ||||||
Other, net of allowance of $39 ($13 at December 31, 2005) | 296 | 175 | ||||||
Derivative assets | 308 | — | ||||||
Prepaid expenses | 391 | 756 | ||||||
Other current assets | 36 | 484 | ||||||
Total current assets | 15,358 | 9,615 | ||||||
PROPERTIES AND EQUIPMENT, AT COST: | ||||||||
Oil and natural gas properties and equipment, using full cost accounting | 178,668 | 160,704 | ||||||
Other property and equipment | 6,110 | 7,276 | ||||||
| 184,778 | 167,980 | |||||||
Less accumulated amortization and depreciation | (45,351 | ) | (36,848 | ) | ||||
Total properties and equipment | 139,427 | 131,132 | ||||||
OTHER ASSETS: | ||||||||
Deferred loan costs, net of accumulated amortization of $4,639 ($4,905 at December 31, 2005) | 2,791 | 1,613 | ||||||
Other | 581 | 916 | ||||||
Total assets | $ | 158,157 | $ | 143,276 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable: | ||||||||
Trade | $ | 5,386 | 4,343 | |||||
Oil and natural gas proceeds due others | 4,703 | 3,201 | ||||||
Related party | 18 | 41 | ||||||
Other | 32 | — | ||||||
Accrued liabilities: | ||||||||
Compensation | 830 | 749 | ||||||
Interest | 3,064 | 1,745 | ||||||
Income taxes | 461 | 146 | ||||||
Derivative liabilities | — | 3,510 | ||||||
Long-term debt due within one year | 194 | 560 | ||||||
Total current liabilities | 14,688 | 14,295 | ||||||
OIL & NATURAL GAS PROCEEDS DUE OTHERS | 2,465 | 1,972 | ||||||
LONG-TERM DEBT | 131,502 | 112,286 | ||||||
DEFERRED AND OTHER NON-CURRENT INCOME TAXES | 27,834 | 25,300 | ||||||
ASSET RETIREMENT OBLIGATION | 10,711 | 10,192 | ||||||
COMMITMENTS AND CONTINGENCIES | — | — | ||||||
STOCKHOLDERS’ DEFICIT: | ||||||||
Common stock, $0.0001 par value, 100,000,000 and 30,000,000 shares authorized, 33,630,000 and 7,700,000 shares issued at September 30, 2006 and December 31, 2005, respectively | 3 | 1 | ||||||
Additional paid-in capital | 2,218 | 95 | ||||||
Treasury stock—837,275 shares at cost | (3,768 | ) | — | |||||
Accumulated deficit | (27,496 | ) | (20,865 | ) | ||||
Stockholders’ deficit | (29,043 | ) | (20,769 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 158,157 | $ | 143,276 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Index to Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ToOPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
OPERATING REVENUES: | ||||||||||||||||
Oil and natural gas sales | $ | 18,267 | $ | 17,974 | $ | 53,050 | $ | 48,140 | ||||||||
Realized and unrealized gains (losses) on derivatives | 3,878 | (12,397 | ) | 1,108 | (16,613 | ) | ||||||||||
Other | 42 | 398 | 466 | 983 | ||||||||||||
Total operating revenues | 22,187 | 5,975 | 54,624 | 32,510 | ||||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Oil and natural gas production taxes | 843 | 919 | 2,527 | 2,460 | ||||||||||||
Oil and natural gas production expenses | 4,309 | 3,917 | 13,222 | 11,453 | ||||||||||||
Amortization and depreciation | 3,495 | 3,397 | 10,019 | 9,213 | ||||||||||||
Accretion expense | 133 | 71 | 398 | 217 | ||||||||||||
Share-based compensation | — | — | 2,218 | — | ||||||||||||
General and administrative, overhead and other expenses | 2,304 | 2,367 | 6,351 | 6,285 | ||||||||||||
Total operating expenses | 11,084 | 10,671 | 34,735 | 29,628 | ||||||||||||
Operating income (loss) | 11,103 | (4,696 | ) | 19,889 | 2,882 | |||||||||||
OTHER INCOME (EXPENSE): | ||||||||||||||||
Interest expense | (3,906 | ) | (3,145 | ) | (13,213 | ) | (8,769 | ) | ||||||||
Interest income | 129 | 19 | 238 | 41 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | 7,326 | (7,822 | ) | 6,914 | (5,846 | ) | ||||||||||
INCOME TAX PROVISION (BENEFIT) | 3,081 | (2,972 | ) | 2,924 | (2,222 | ) | ||||||||||
NET INCOME (LOSS) | $ | 4,245 | $ | (4,850 | ) | $ | 3,990 | $ | (3,624 | ) | ||||||
EARNINGS (LOSS) PER SHARE: | ||||||||||||||||
Basic | $ | 0.13 | $ | (0.63 | ) | $ | 0.19 | $ | (0.47 | ) | ||||||
Diluted | $ | 0.13 | $ | (0.63 | ) | $ | 0.18 | $ | (0.47 | ) | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||||||
Basic | 33,459,589 | 7,700,000 | 21,501,633 | 7,700,000 | ||||||||||||
Diluted | 33,692,544 | 7,700,000 | 22,105,987 | 7,700,000 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Index to Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2006 | 2005 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 3,990 | $ | (3,624 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Amortization and depreciation: | ||||||||
Oil and natural gas properties and equipment | 9,524 | 8,894 | ||||||
Amortization of deferred loan costs and senior notes discount | 776 | 629 | ||||||
Charge off of unamortized deferred loan costs | 1,055 | — | ||||||
Other property and equipment | 495 | 321 | ||||||
Accretion expense | 398 | 217 | ||||||
Unrealized gain (loss) on derivatives | (5,874 | ) | 14,855 | |||||
Deferred income taxes | 3,337 | (3,648 | ) | |||||
Share-based compensation | 2,218 | — | ||||||
Gain on disposal of other property and equipment | (99 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,303 | (1,346 | ) | |||||
Prepaid expenses, deposits, and other assets | 816 | 120 | ||||||
Accounts payable | 2,550 | 103 | ||||||
Accrued liabilities and other | 4,805 | (5,905 | ) | |||||
Total adjustments | 21,304 | 14,240 | ||||||
Net cash provided by operating activities | 25,294 | 10,616 | ||||||
INVESTING ACTIVITIES: | ||||||||
Payments for oil and natural gas properties and equipment | (21,529 | ) | (11,078 | ) | ||||
Proceeds from sales of oil and natural gas properties and equipment | 3,565 | 2,346 | ||||||
Payments for other property and equipment | (726 | ) | (1,145 | ) | ||||
Proceeds from sales of other property and equipment | 366 | — | ||||||
Payments of merger costs | (4,187 | ) | — | |||||
Cash acquired in merger | 3,801 | — | ||||||
Net cash used in investing activities | (18,710 | ) | (9,877 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2006 | 2005 | |||||||
FINANCING ACTIVITIES: | ||||||||
Payments on long-term debt | (87,738 | ) | (6,840 | ) | ||||
Payments of loan fees | (2,978 | ) | (424 | ) | ||||
Proceeds from borrowings on long-term debt | 106,557 | 8,003 | ||||||
Stock redemption | (9,792 | ) | — | |||||
Repurchase of stock | (3,768 | ) | — | |||||
Deferred income taxes on share-based compensation | (843 | ) | — | |||||
Dividends paid | (500 | ) | (900 | ) | ||||
Net cash provided by (used in) financing activities | 938 | (161 | ) | |||||
Net increase in cash and cash equivalents | 7,522 | 578 | ||||||
Cash and cash equivalents at beginning of period | 70 | 1,175 | ||||||
Cash and cash equivalents at end of period | $ | 7,592 | $ | 1,753 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 7,214 | $ | 3,297 | ||||
Cash paid for income taxes | $ | 124 | $ | 20 | ||||
DISCLOSURE OF NONCASH FINANCING ACTIVITIES: | ||||||||
Accrued interest added to principal balance of revolving credit facility | $ | 2,848 | $ | 8,093 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Index to Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ORGANIZATION, AND BASIS OF PRESENTATION
| 1. | Basis of Financial Statements |
The accompanying unaudited condensed consolidated financial statements present the Directorsfinancial position at September 30, 2006 and ShareholdersDecember 31, 2005 and the consolidated results of operations for the three and nine month periods ended September 30, 2006 and 2005 and cash flows for the nine month periods ended September 30, 2006 and 2005 of RAM Energy Resources, Inc. and its subsidiaries, including RAM Energy, Inc., (collectively, the “Company”). These condensed consolidated financial statements include all adjustments, consisting of normal and recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position and the results of operations for the indicated periods. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006. Reference is made to the consolidated financial statements of RAM Energy, Inc. for the year ended December 31, 2005, for an expanded discussion of the Company’s financial disclosures and accounting policies.
| 2. | Nature of Operations and Organization |
On May 8, 2006, Tremisis Energy Acquisition Corporation, or Tremisis, acquired RAM Energy, Inc. through the merger of a subsidiary of Tremisis into RAM Energy, Inc. The merger was accomplished pursuant to the terms of an Agreement and Plan of Merger dated October 20, 2005, as amended, among Tremisis, its subsidiary, RAM Energy, Inc. and the stockholders of RAM Energy, Inc. Upon completion of the merger, RAM Energy, Inc. became a wholly-owned subsidiary of Tremisis and Tremisis changed its name to RAM Energy Resources, Inc.
Tremisis was formed in February 2004 to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an unidentified operating business in either the energy or the environmental industry. Prior to the consummation of the merger, Tremisis did not engage in an active trade or business.
Prior to the merger, RAM Energy, Inc. was a privately held, independent oil and natural gas company engaged in the acquisition, exploration, exploitation and development of oil and natural gas properties and the production of oil and natural gas.
Upon consummation of the merger, the stockholders of RAM Energy, Inc. received an aggregate of 25,600,000 shares of Tremisis common stock and $30.0 million of cash. The merger agreement provided, among other things, that, prior to the consummation of the merger, RAM Energy, Inc. was entitled to either pay its stockholders a one-time extraordinary dividend or effect one or more redemptions of a portion of its outstanding stock, although the aggregate amount of such cash payments to the RAM Energy, Inc. stockholders could not exceed the difference between $40.0 million and the aggregate amount of cash they would receive from Tremisis in the merger. On April 6, 2006, RAM Energy, Inc. redeemed a portion of its outstanding stock for an aggregate consideration of $10.0 million.
The merger has been accounted for as a reverse acquisition. Because Tremisis had no active business operations prior to consummation of the merger, the merger has been accounted for as a recapitalization of
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
RAM Energy, Inc. and RAM Energy, Inc. has been treated as the acquirer and continuing reporting entity for accounting purposes. The assets and liabilities of Tremisis were recorded, as of completion of the merger, at fair value, which is considered to approximate historical cost, and added to those of RAM Energy, Inc.
The Company operates exclusively in the upstream segment of the oil and gas industry with activities including the drilling, completion, and operation of oil and gas wells. The Company conducts the majority of its operations in the states of Texas, Louisiana, Oklahoma and New York, New York
Mexico.
| 3. | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions that, in the opinion of management of the Company are significant include oil and natural gas reserves, amortization relating to oil and natural gas properties, asset retirement obligations and income taxes.
| 4. | Reclassifications |
Certain reclassifications of previously reported amounts for 2005 have been made to conform with the 2006 presentation format. These reclassifications had no effect on net income or loss.
| 5. | Stockholders’ Equity, Earnings Per Share, and Share-Based Compensation |
In connection with the reverse acquisition, the stockholders of RAM Energy, Inc. received an aggregate of 25,600,000 shares of Tremisis stock and $30.0 million. As of September 30, 2006, RAM Energy Resources, Inc. (formerly named Tremisis Energy Acquisition Corporation) had 100,000,000 shares of authorized common stock; 33,630,000 shares issued; and 32,792,725 shares outstanding. At December 31, 2005, the Company had 30,000,000 shares of authorized common stock, of which 7,700,000 shares were issued and outstanding.
Basic earnings or loss per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if dilutive stock options and warrants were exercised, calculated using the treasury stock method, unless such effect would be anti-dilutive. A reconciliation of earnings or loss and weighted average shares used in computing basic and diluted earnings or loss per share is as follows for the three and nine months ended September 30, 2006 and 2005 (in thousands, except share data and per share amounts):
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||
Net income (loss) | $ | 4,245 | $ | (4,850 | ) | $ | 3,990 | $ | (3,624 | ) | ||||
Weighted average shares—basic | 33,459,589 | 7,700,000 | 21,501,633 | 7,700,000 | ||||||||||
Dilutive effect of warrants | 232,955 | — | 604,354 | — | ||||||||||
Weighted average shares—diluted | 33,692,544 | 7,700,000 | 22,105,987 | 7,700,000 | ||||||||||
Basic earnings (loss) per share | $ | 0.13 | $ | (0.63 | ) | $ | 0.19 | $ | (0.47 | ) | ||||
Diluted earnings (loss) per share | $ | 0.13 | $ | (0.63 | ) | $ | 0.18 | $ | (0.47 | ) | ||||
The Company has outstanding 12,650,000 warrants, exercisable at $5 per share. The warrants expire May 11, 2008 and are redeemable by the Company at a price of $.01 per warrant upon 30 days’ prior written notice if the closing price of Company common stock equals or exceeds $8.50 per share for 20 trading days within any 30 trading day period.
| 6. | New Accounting Pronouncements |
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. FIN 48 requires that the Company recognize in the consolidated financial statements the impact of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. The provisions of FIN 48 will be effective for the Company as of the beginning of its 2007 year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48.
In September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No. 108 which provides guidance on quantifying and evaluating the materiality of unrecorded misstatements. SAB 108 is effective for annual financial statements covering the fiscal years ending on or after November 15, 2006. SAB 108 requires that a company use both the “iron curtain” and “rollover” approaches when quantifying misstatement amounts. The determination that an error is material in a current year that includes prior-year effects may result in the need to correct prior-year financial statements, even if the misstatement in the prior year or years is considered immaterial. When companies correct prior-year financial statements for immaterial errors, SAB 108 does not require previously filed reports to be amended. Such correction may be made the next time the company files the prior year financial statements. Although the Company is evaluating the impact of SAB 108, the Company does not currently believe there are any errors – material or immaterial – in the current year which would impact prior-year financial statements.
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning on or after November 15, 2007. SFAS No. 157 applies under other accounting pronouncements that require or
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
permit fair value measurements, however, it does not require any new fair value measurements. In some instances, the application of SFAS No. 157 will change current accounting practices. The Company is currently evaluating the impact of adopting SFAS No. 157.
B—DERIVATIVE CONTRACTS
During 2006 and 2005, the Company entered into numerous derivative contracts. The Company did not formally designate these transactions as hedges as required by SFAS No. 133 in order to receive hedge accounting treatment. Accordingly, all gains and losses on the derivative financial instruments have been recorded in the statement of operations.
At September 30, 2006 the Company held put options on 23,000 barrels of oil through December 2006, with a price of $40.00 per barrel. The Company also had collars in place on 138,000 barrels of oil through December 2006 with a weighted average floor price of $43.33 and a weighted average ceiling price of $65.80 per barrel, 548,000 barrels of oil for 2007 with a weighted average floor price of $52.67 and a weighted average ceiling price of $73.24, and 274,000 barrels of oil for January through September, 2008 with a weighted average floor price of $53.34 and a weighted average ceiling price of $86.37. For natural gas, the Company had collars on 305,000 Mmbtu through December 2006 with a weighted average floor price of $7.00 per Mmbtu and a weighted average ceiling price of $11.95 per Mmbtu. For 2007, the Company had collars on 1,550,000 Mmbtu with a weighted average floor price of $7.43 and a weighted average ceiling price of $11.62, and 1,096,000 Mmbtu for January through September, 2008 with a weighted average floor price of $7.16 and a weighted average ceiling price of $13.25. The Company also held call options for April through October, 2007 on 856,000 Mmbtu with a weighted average floor price of $12.00.
At December 31, 2005, the Company had collars in place on 45,625 barrels per month through 2006 and 30,417 barrels per month through 2007. The 45,625 barrels per month in 2006 had a weighted average floor and ceiling of $42.51 and $60.56, respectively. The 30,417 barrels per month in 2007 had a weighted average floor and ceiling of $35.00 and $69.74, respectively. For natural gas, the Company had collars in place on 159,583 Mmbtu per month through 2006 and 150,000 Mmbtu per month for the three months ending March 2007. The 159,583 Mmbtu per month in 2006 had a weighted average floor and ceiling of $6.23 and $8.86, respectively. The 150,000 Mmbtu per month for the three months ending March 2007 had a weighted average floor and ceiling of $7.00 and $11.95. The Company also had purchased put options on 7,604 barrels per month of crude oil through 2006 at a weighted average floor price of $40.00. The Company purchased call options on 157,000 Mmbtu per month of natural gas for eight months in 2006 at a weighted average floor price of $9.94.
The Company measured the fair value of its derivatives at September 30, 2006 and December 31, 2005, based on quoted market prices. Accordingly, an asset of $308,000 and a liability of $3,510,000 were recorded in the consolidated balance sheets at September 30, 2006 and December 31, 2005, respectively.
C—SUBSIDIARY GUARANTORS
RAM Energy Resources, Inc. is not a party to, or a guarantor of obligations under, RAM Energy, Inc.’s outstanding 11.5% senior notes due 2008. RAM Energy Inc.’s senior notes are fully and unconditionally
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
guaranteed, jointly and severally, on a senior unsecured basis, by all current and future subsidiaries of RAM Energy, Inc. which are referred to as the “Subsidiary Guarantors”. The following table sets forth condensed consolidating financial information of the Subsidiary Guarantors. Currently there are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to RAM Energy Inc. in the form of cash dividends, loans or advances.
The following represents the condensed consolidating balance sheets for RAM Energy Resources, Inc. (“Parent”), RAM Energy Inc. and its subsidiaries at September 30, 2006 and December 31, 2005 (in thousands):
| Parent | RAM Energy, Inc | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | |||||||||||||||
September 30, 2006 | |||||||||||||||||||
Current assets | $ | 1,792 | $ | (7,494 | ) | $ | 32,195 | $ | (11,135 | ) | $ | 15,358 | |||||||
Property and equipment, net | 7 | 11,563 | 127,857 | — | 139,427 | ||||||||||||||
Investment in subsidiary | (31,610 | ) | 41,211 | — | (9,601 | ) | — | ||||||||||||
Other assets | 1 | 3,236 | 135 | — | 3,372 | ||||||||||||||
Total assets | $ | (29,810 | ) | $ | 48,516 | $ | 160,187 | $ | (20,736 | ) | $ | 158,157 | |||||||
Current liabilities | 433 | 17,104 | 8,286 | (11,135 | ) | 14,688 | |||||||||||||
Long-term debt | — | 48,956 | 82,546 | — | 131,502 | ||||||||||||||
Other non-current liabilities | — | 3,305 | 9,871 | — | 13,176 | ||||||||||||||
Deferred income taxes | (1,200 | ) | 10,761 | 18,273 | — | 27,834 | |||||||||||||
Total liabilities | (767 | ) | 80,126 | 118,976 | (11,135 | ) | 187,200 | ||||||||||||
Stockholders’ equity (deficit) | (29,043 | ) | (31,610 | ) | 41,211 | (9,601 | ) | (29,043 | ) | ||||||||||
Total liabilities and stockholders’ equity (deficit) | $ | (29,810 | ) | $ | 48,516 | $ | 160,187 | $ | (20,736 | ) | $ | 158,157 | |||||||
| Parent | RAM Energy, Inc | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | |||||||||||||||
December 31, 2005 | |||||||||||||||||||
Current assets | $ | — | $ | 3,355 | $ | 26,527 | $ | (20,267 | ) | $ | 9,615 | ||||||||
Property and equipment, net | — | 14,167 | 116,965 | — | 131,132 | ||||||||||||||
Investment in subsidiary | — | 27,324 | — | (27,324 | ) | — | |||||||||||||
Other assets | — | 2,395 | 134 | — | 2,529 | ||||||||||||||
Total assets | $ | — | $ | 47,241 | $ | 143,626 | $ | (47,591 | ) | $ | 143,276 | ||||||||
Current liabilities | — | 28,713 | 5,849 | (20,267 | ) | 14,295 | |||||||||||||
Long-term debt | — | 29,767 | 82,519 | — | 112,286 | ||||||||||||||
Other non-current liabilities | — | 3,038 | 9,126 | — | 12,164 | ||||||||||||||
Deferred income taxes | — | 6,492 | 18,808 | — | 25,300 | ||||||||||||||
Total liabilities | — | 68,010 | 116,302 | (20,267 | ) | 164,045 | |||||||||||||
Stockholders’ equity (deficit) | — | (20,769 | ) | 27,324 | (27,324 | ) | (20,769 | ) | |||||||||||
Total liabilities and stockholders’ equity (deficit) | $ | — | $ | 47,241 | $ | 143,626 | $ | (47,591 | ) | $ | 143,276 | ||||||||
The following represents the condensed consolidating statements of operations for RAM Energy Resources, Inc., RAM Energy Inc. and its subsidiaries for the three months and nine months ended September 30, 2006 and 2005, and condensed consolidating statements of cash flows for the nine months ended September 30, 2006 and 2005 (in thousands):
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Parent | RAM Energy, Inc. | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | ||||||||||||||||
Three Months Ended September 30, 2006 | ||||||||||||||||||||
Operating revenues | $ | — | $ | 6,064 | $ | 16,123 | $ | — | $ | 22,187 | ||||||||||
Operating expenses | 503 | 1,548 | 9,033 | — | 11,084 | |||||||||||||||
Operating income (loss) | (503 | ) | 4,516 | 7,090 | — | 11,103 | ||||||||||||||
Other income | 4,866 | 1,874 | (2,180 | ) | (8,337 | ) | (3,777 | ) | ||||||||||||
Income (loss) before income taxes | 4,363 | 6,390 | 4,910 | (8,337 | ) | 7,326 | ||||||||||||||
Income taxes | 118 | 1,552 | 1,411 | — | 3,081 | |||||||||||||||
Net income (loss) | $ | 4,245 | $ | 4,838 | $ | 3,499 | $ | (8,337 | ) | $ | 4,245 | |||||||||
| �� | ||||||||||||||||||||
| Parent | RAM Energy, Inc. | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | ||||||||||||||||
Three Months Ended September 30, 2005 | ||||||||||||||||||||
Operating revenues | $ | — | $ | (9,688 | ) | $ | 15,663 | $ | — | $ | 5,975 | |||||||||
Operating expenses | — | 3,417 | 7,254 | — | 10,671 | |||||||||||||||
Operating income (loss) | — | (13,105 | ) | 8,409 | — | (4,696 | ) | |||||||||||||
Other income | — | (1,391 | ) | 11 | (1,746 | ) | (3,126 | ) | ||||||||||||
Income (loss) before income taxes | — | (14,496 | ) | 8,420 | (1,746 | ) | (7,822 | ) | ||||||||||||
Income taxes | — | (9,646 | ) | 6,674 | — | (2,972 | ) | |||||||||||||
Net income (loss) | $ | — | $ | (4,850 | ) | $ | 1,746 | $ | (1,746 | ) | $ | (4,850 | ) | |||||||
| Parent | RAM Energy, Inc. | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | ||||||||||||||||
Nine Months Ended September 30, 2006 | ||||||||||||||||||||
Operating revenues | $ | — | $ | 6,950 | $ | 47,674 | $ | — | $ | 54,624 | ||||||||||
Operating expenses | 2,954 | 4,533 | 27,248 | — | 34,735 | |||||||||||||||
Operating income | (2,954 | ) | 2,417 | 20,426 | — | 19,889 | ||||||||||||||
Other income | 6,136 | 3,738 | (6,525 | ) | (16,324 | ) | (12,975 | ) | ||||||||||||
Income (loss) before income taxes | 3,182 | 6,155 | 13,901 | (16,324 | ) | 6,914 | ||||||||||||||
Income taxes | (808 | ) | 63 | 3,669 | — | 2,924 | ||||||||||||||
Net income (loss) | $ | 3,990 | $ | 6,092 | $ | 10,232 | $ | (16,324 | ) | $ | 3,990 | |||||||||
Cash flows provided by (used in) operating activities | 29 | 1,768 | 23,497 | — | 25,294 | |||||||||||||||
Cash flows provided by (used in) investing activities | (386 | ) | 740 | (19,064 | ) | — | (18,710 | ) | ||||||||||||
Cash flows provided by (used in) financing activities | 2,070 | (1,158 | ) | 26 | — | 938 | ||||||||||||||
Increase (decrease) in cash and cash equivalents | 1,713 | 1,350 | 4,459 | — | 7,522 | |||||||||||||||
Cash and cash equivalents at beginning of period | — | 617 | (547 | ) | — | 70 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 1,713 | $ | 1,967 | $ | 3,912 | $ | — | $ | 7,592 | ||||||||||
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Parent | RAM Energy, Inc. | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | |||||||||||||||
Nine Months Ended September 30, 2005 | |||||||||||||||||||
Operating revenues | $ | — | $ | (9,809 | ) | $ | 42,319 | $ | — | $ | 32,510 | ||||||||
Operating expenses | — | 9,138 | 20,490 | — | 29,628 | ||||||||||||||
Operating income | — | (18,947 | ) | 21,829 | — | 2,882 | |||||||||||||
Other income | — | 2,400 | 26 | (11,154 | ) | (8,728 | ) | ||||||||||||
Income (loss) before income taxes | — | (16,547 | ) | 21,855 | (11,154 | ) | (5,846 | ) | |||||||||||
Income taxes | — | (12,923 | ) | 10,701 | — | (2,222 | ) | ||||||||||||
Net income (loss) | $ | — | $ | (3,624 | ) | $ | 11,154 | $ | (11,154 | ) | $ | (3,624 | ) | ||||||
Cash flows provided by (used in) operating activities | — | (913 | ) | 11,529 | — | 10,616 | |||||||||||||
Cash flows provided by (used in) investing activities | — | (2,574 | ) | (7,303 | ) | — | (9,877 | ) | |||||||||||
Cash flows provided by (used in) financing activities | — | 4,142 | (4,303 | ) | — | (161 | ) | ||||||||||||
Increase (decrease) in cash and cash equivalents | — | 655 | (77 | ) | — | 578 | |||||||||||||
Cash and cash equivalents at beginning of period | — | 1,043 | 132 | — | 1,175 | ||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 1,698 | $ | 55 | $ | — | $ | 1,753 | |||||||||
Due to intercompany allocations among RAM Energy, Inc. and its subsidiaries, the above condensed consolidating information is not intended to present the subsidiaries of RAM Energy, Inc. on a stand-alone basis.
D—COMMITMENTS AND CONTINGENCIES
In April 2002, a lawsuit was filed in the District Court for Woods County, Oklahoma against RAM Energy, Inc., certain of its subsidiaries and various other individuals and unrelated companies, by a lessor of certain oil and gas leases from which production was sold to a gathering system owned and operated by Magic Circle Energy Corporation (Magic Circle) or its wholly-owned subsidiary, Carmen Field Limited Partnership (CFLP). The lawsuit covers the period from 1977 to a current date. In 1998, both Magic Circle and CFLP became wholly-owned subsidiaries of RAM Energy, Inc. The lawsuit was filed as a class action on behalf of all royalty owners under leases owned by any of the defendants during the period Magic Circle or CFLP owned and operated the gathering system. The petition claims that additional royalties are due because Magic Circle and CFLP resold oil and gas purchased at the wellhead for an amount in excess of the price upon which royalty payments were based and paid no royalties on natural gas liquids extracted from the gas at plants downstream of the system. Other allegations include under-measurement of oil and gas at the wellhead by Magic Circle and CFLP, failure to pay royalties on take or pay settlement proceeds and failure to properly report deductions for post-production costs in accordance with Oklahoma’s check stub law.
RAM Energy, Inc. and other defendants have filed answers in the lawsuit denying all material allegations set out in the petition. The Company believes that fair and proper accounting was made to the royalty owners for production from the subject leases and intends to vigorously defend the lawsuit. Plaintiffs have not specified an amount of claim, nor the time period covered. Management is unable to estimate a range of potential loss, if any, related to this lawsuit, and accordingly no amounts have been
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recorded in the consolidated financial statements. In the event the court should find RAM Energy, Inc. and its related defendants liable for damages in the lawsuit, a former joint venture partner is contractually obligated to pay a portion of any damages assessed against the defendant lessees up to a maximum contribution of approximately $2.8 million.
The Company is also involved in legal proceedings and litigation in the ordinary course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s financial position or results of operations.
E—LONG-TERM DEBT
Long-term debt consists of the following:
| September 30, 2006 | December 31, 2005 | |||||
| (in thousands) | ||||||
11.5% senior notes due 2008, net of discount | $ | 28,340 | $ | 28,309 | ||
Term and revolving credit facility | 103,000 | 83,897 | ||||
Installment loan agreements | 356 | 640 | ||||
| 131,696 | 112,846 | |||||
Less amount due within one year | 194 | 560 | ||||
| $ | 131,502 | $ | 112,286 | |||
| 1. | Senior Notes |
In February 1998, RAM Energy, Inc. issued $115.0 million principal amount of its unsecured 11.5% senior notes due 2008 of which $28.4 million remained outstanding at September 30, 2006 and December 31, 2005. The senior notes are redeemable at the option of RAM Energy, Inc. in whole or in part, at any time prior to their scheduled maturity in 2008 at a prices ranging from 107.7% to 103.8% of the face amount. RAM Energy Resources, Inc. is not a party to, or a guarantor of obligations under, the senior notes issued by RAM Energy, Inc.
At September 30, 2006 and December 31, 2005, the unamortized original issue discount associated with the senior notes totaled $56,000 and $87,000, respectively.
| 2. | Revolving Credit Facility |
On April 5, 2006, RAM Energy, Inc. obtained a $300.0 million senior secured credit facility, consisting of a $150.0 million, five-year term loan facility and a $150.0 million four-year revolving credit facility. RAM Energy Resources, Inc. is not a party to or a guarantor of obligations under this credit facility.
At closing, $50.0 million of the revolving credit facility was immediately available, and $90.0 million of the term loan was advanced. The remainder of the term loan facility will be available, subject to approval of the lenders, for certain future needs, including acquisitions. The revolving credit facility will mature in April, 2010, during which time amounts may be borrowed and repaid as often as needed, subject to a borrowing base limitation that is re-determined semi-annually, based on oil and gas reserves. The term loan
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
facility will mature in April, 2011, with permitted prepayments after the first year, subject to a prepayment premium in the second and third years of the term. Advances under the revolving credit facility will bear interest at LIBOR plus 2% per annum, while amounts outstanding under the term loan will bear interest at LIBOR plus 5.5% to 6.0% per annum. Obligations under the credit facility are secured by a first lien on substantially all of the assets of RAM Energy, Inc. and its subsidiaries. The initial advance under the credit facility was used to refinance the previous credit facility, and to fund the pre-merger redemption payment permitted by the merger agreement. Subsequent advances may be used to:
| Ÿ | repurchase all of RAM Energy, Inc.’s outstanding 11.5% senior notes ($28.4 million principal amount); and |
| Ÿ | for general working capital purposes. |
The credit facility contains financial covenants requiring RAM Energy, Inc. to maintain certain ratios, including a current ratio, a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest expense, a ratio of total indebtedness to EBITDA, and a ratio of asset value to total indebtedness. In addition, the credit facility contains other affirmative and negative covenants customary in lending transactions of this nature, including the maintenance by RAM Energy, Inc. of hedging contracts for a minimum and maximum amount of projected oil and natural gas production from its properties. The Company was in compliance with all covenants as of September 30, 2006.
F—CAPITAL STOCK
RAM Energy, Inc. paid cash dividends of $0 and $500,000 for the three and nine months ended September 30, 2006, respectively. RAM Energy, Inc. declared cash dividends of $0 and $900,000 for the three and nine months ended September 30, 2005, respectively.
On April 6, 2006, RAM Energy, Inc. redeemed a portion of the outstanding shares of its common stock for an aggregate redemption price of $10.0 million.
On May 8, 2006, the Company acquired RAM Energy, Inc. by merger in exchange for an issuance of 25,600,000 shares of common stock and $30.0 million in cash. RAM Energy, Inc. is now a wholly-owned subsidiary of the Company. As a result of the merger, RAM Energy, Inc. was recapitalized so that the historical basis of its assets and liabilities remain intact. The only operations of the parent company included in the results of operations for 2006 are those that occurred subsequent to the date of the merger.
On May 8, 2006, the shareholders of the Company approved the Company’s 2006 Long-Term Incentive Plan, effective upon the consummation of the Company’s acquisition by merger of RAM Energy, Inc. The Company reserved a maximum of 2,400,000 shares of its common stock for issuance under the plan.
On May 8, 2006, 330,000 shares of common stock were awarded to certain officers and directors of the Company under the Company’s long-term incentive plan. The value of the shares was recorded at $6.72 per share, the closing market price of the Company’s common stock as of that date (see note J). At the request of the grantees, on June 8, 2006, the Company repurchased 98,100 of these shares at $6.04 per share, the closing market price of the Company’s common stock as of that date, to satisfy the grantees’ federal and state income tax withholding requirements, as permitted by the plan. The repurchased shares are held by the Company as treasury shares.
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On September 22, 2006, the Company purchased 739,175 shares of its common stock in a privately negotiated transaction. The purchase price was $4.295 per share, and the shares are included in treasury stock at September 30, 2006.
G—DEFERRED COMPENSATION
On April 21, 2004, RAM Energy, Inc. adopted a Deferred Bonus Compensation Plan for its senior management employees. The plan provides additional compensation for significant business transactions with a portion of each bonus to be deferred to encourage retention of key employees. Determination of significant business transactions and terms of awards is made by a committee comprised of the directors of RAM Energy, Inc.
During 2004 and 2005 three members of senior management were granted awards under the bonus plan. Each award provides for a total cash compensation of $75,000 per year and vests ratably on each anniversary date for three years beginning on July 1, 2004. Receipt of the award is contingent on the members being employed on the respective anniversary date. Should there be a change of control or involuntary termination, as defined in the award contract, each member will become fully vested in his award. Compensation expense is recorded on a straight-line basis. No awards were granted for the nine months ended September 30, 2006.
H—FINANCIAL CONDITION AND MANAGEMENT PLANS
As shown in the condensed consolidated financial statements, for the three and nine months ended September 30, 2006, the Company reported net income of approximately $4.2 million and $4.0 million, respectively, as compared to net loss of approximately $4.9 million and $3.6 million for the three and nine months ended September 30, 2005, respectively. The condensed consolidated financial statements also show an accumulated deficit of approximately $27.5 million at September 30, 2006.
Management believes that borrowings currently available to RAM Energy, Inc. under its credit facility, together with the remaining balance of unrestricted cash and cash flows from operations will be sufficient to satisfy the Company’s currently expected capital expenditures, working capital and debt service obligations for the foreseeable future. The actual amount and timing of future capital requirements may differ materially from estimates as a result of, among other things, changes in product pricing and regulatory requirements, and technological and competitive developments. Sources of additional financing may include commercial bank borrowings, vendor financing and the sale of oil and natural gas properties or equity or debt securities. Management cannot provide any assurance that any such financing will be available on acceptable terms or at all.
I— RELATED PARTY TRANSACTIONS
RAM Energy, Inc., while a private company, paid rent expense of approximately $0 and $29,000 relating to a condominium for one of its shareholders for the nine months ended September 30, 2006 and 2005, respectively.
For the nine months ended September 30, 2006 and 2005, approximately $104,000 and $374,000, respectively, of expenses for the shareholders of RAM Energy, Inc., while a private company, are included
Index to Financial Statements
RAM ENERGY RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in general and administrative expenses in the consolidated statements of operations, some of which may be personal in nature.
No such expenses have been incurred by the Company since the date of the merger.
J—SHARE-BASED COMPENSATION
In December 2004, the FASB issued SFAS No. 123R,Share-Based Payment. 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 their fair values. The Company adopted the provisions of SFAS No. 123R, as required, effective January 1, 2006.
On May 8, 2006, certain officers and directors of the Company were awarded an aggregate 330,000 shares of common stock under the Company’s long-term incentive plan, which shares became fully vested at June 8, 2006. Accordingly, share-based compensation expense in the amount of $2,218,000 was recognized in the second quarter of 2006, representing the fair market value of the shares awarded as of May 8, 2006.
Index to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
RAM Energy, Inc.
We have audited the accompanying consolidated balance sheetsheets of TremisisRAM Energy, Acquisition CorporationInc. (a corporation in the development stage)Delaware corporation) and subsidiaries (the “Company”) as of March
10,December 31, 2005 and 2004, and the related statementconsolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period February 5,
2004 (inception) to March 10, 2004.ended December 31, 2005. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
audits.
We conducted our auditaudits in accordance with auditingthe standards generally
accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of RAM Energy, Inc. and subsidiaries as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note A, effective January 1, 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement Obligations.
/s/ UHY Mann Frankfort Stein & Lipp CPAs, LLP
Houston, Texas
March 6, 2006, except for Note Q, as to which the date is April 6, 2006
Index to Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, 2005 and 2004
| 2005 | 2004 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 70 | $ | 1,175 | ||||
Accounts receivable: | ||||||||
Oil and natural gas sales, net of allowance of $0 ($0 in 2004) | 7,422 | 5,039 | ||||||
Joint interest operations, net of allowance of $31 ($687 in 2004) | 566 | 630 | ||||||
Related party, net of allowance of $0 ($0 in 2004) | 142 | — | ||||||
Other, net of allowance of $0 ($37 in 2004) | 175 | 28 | ||||||
Prepaid expenses | 756 | 141 | ||||||
Other current assets | 484 | 565 | ||||||
Derivative assets | — | 1,627 | ||||||
Total current assets | 9,615 | 9,205 | ||||||
PROPERTIES AND EQUIPMENT, AT COST | ||||||||
Oil and natural gas properties and equipment, using full cost accounting | 160,704 | 146,598 | ||||||
Other property and equipment | 7,276 | 5,779 | ||||||
| 167,980 | 152,377 | |||||||
Less accumulated depreciation and amortization | 36,848 | 23,919 | ||||||
Net properties and equipment | 131,132 | 128,458 | ||||||
OTHER ASSETS: | ||||||||
Deferred loan costs, net of accumulated amortization of $4,905 ($4,110 in 2004) | 1,613 | 1,845 | ||||||
Other | 916 | 816 | ||||||
Total assets | $ | 143,276 | $ | 140,324 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable: | ||||||||
Trade | $ | 4,343 | $ | 5,273 | ||||
Oil and natural gas proceeds due others | 3,201 | 2,528 | ||||||
Related party | 41 | — | ||||||
Accrued liabilities: | ||||||||
Compensation | 749 | 583 | ||||||
Interest | 1,745 | 1,547 | ||||||
Income taxes | 146 | 289 | ||||||
Derivative liabilities | 3,510 | — | ||||||
Long-term debt due within one year | 560 | 3,891 | ||||||
Total current liabilities | 14,295 | 14,111 | ||||||
OIL AND NATURAL GAS PROCEEDS DUE OTHERS | 1,972 | 1,642 | ||||||
LONG-TERM DEBT | 112,286 | 113,453 | ||||||
DEFERRED AND OTHER NON-CURRENT INCOME TAXES | 25,300 | 24,374 | ||||||
ASSET RETIREMENT OBLIGATION | 10,192 | 6,656 | ||||||
COMMITMENTS AND CONTINGENCIES (Note K) | — | — | ||||||
STOCKHOLDERS’ DEFICIT: | ||||||||
Common stock, $10 par value; authorized—5,000 shares; issued and outstanding—2,273 shares at December 31, 2005 and 2004 | 23 | 23 | ||||||
Additional paid-in capital | 73 | 73 | ||||||
Accumulated deficit | (20,865 | ) | (20,008 | ) | ||||
Total stockholders’ deficit | (20,769 | ) | (19,912 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 143,276 | $ | 140,324 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Index to Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Years Ended December 31, 2005, 2004, and 2003
| 2005 | 2004 | 2003 | ||||||||||
REVENUES AND OTHER OPERATING INCOME: | ||||||||||||
Oil and natural gas sales | $ | 66,243 | $ | 17,975 | $ | 20,053 | ||||||
Gain on sale of subsidiary | — | 12,139 | — | |||||||||
Other | 851 | 338 | 170 | |||||||||
Realized and unrealized losses from derivatives | (11,695 | ) | (793 | ) | (203 | ) | ||||||
Total revenues and other operating income | 55,399 | 29,659 | 20,020 | |||||||||
OPERATING EXPENSES: | ||||||||||||
Oil and natural gas production taxes | 3,320 | 1,263 | 1,408 | |||||||||
Oil and natural gas production expenses | 16,099 | 3,600 | 3,527 | |||||||||
Depreciation and amortization | 12,972 | 3,273 | 4,098 | |||||||||
Accretion expense | 510 | 78 | 48 | |||||||||
General and administrative, overhead and other expenses, net of operator’s overhead fees | 8,610 | 6,601 | 6,331 | |||||||||
Total operating expenses | 41,511 | 14,815 | 15,412 | |||||||||
Operating income | 13,888 | 14,844 | 4,608 | |||||||||
OTHER INCOME (EXPENSE): | ||||||||||||
Interest expense | (12,614 | ) | (5,070 | ) | (4,912 | ) | ||||||
Interest income | 75 | 35 | 41 | |||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 1,349 | 9,809 | (263 | ) | ||||||||
INCOME TAX PROVISION | 806 | 3,733 | 228 | |||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS | 543 | 6,076 | (491 | ) | ||||||||
DISCONTINUED OPERATIONS: | ||||||||||||
Loss from discontinued operations | — | — | (1,723 | ) | ||||||||
Income tax benefit | — | — | (655 | ) | ||||||||
LOSS FROM DISCONTINUED OPERATIONS | — | — | (1,068 | ) | ||||||||
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | 543 | 6,076 | (1,559 | ) | ||||||||
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE | ||||||||||||
(Net of tax benefit of $0, $0, and $275 in 2005, 2004, and 2003, respectively) | — | — | (448 | ) | ||||||||
Net income (loss) | $ | 543 | $ | 6,076 | $ | (2,007 | ) | |||||
BASIC EARNINGS (LOSS) PER SHARE: | ||||||||||||
Income (loss) from continuing operations | $ | 238.94 | $ | 2,383.67 | $ | (180.05 | ) | |||||
Loss from discontinued operations | — | — | (391.64 | ) | ||||||||
Cumulative effect of change in accounting principle | — | — | (164.28 | ) | ||||||||
Net income (loss) | $ | 238.94 | $ | 2,383.67 | $ | (735.97 | ) | |||||
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING | 2,273 | 2,549 | 2,727 | |||||||||
DILUTED EARNINGS (LOSS) PER SHARE: | ||||||||||||
Income (loss) from continuing operations | $ | 230.72 | $ | 2,299.77 | $ | (180.05 | ) | |||||
Loss from discontinued operations | — | — | (391.64 | ) | ||||||||
Cumulative effect of change in accounting principle | — | — | (164.28 | ) | ||||||||
Net income (loss) | $ | 230.72 | $ | 2,299.77 | $ | (735.97 | ) | |||||
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING | 2,354 | 2,642 | 2,727 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Index to Financial Statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(In thousands, except share amounts)
Years Ended December 31, 2005, 2004, and 2003
| Common Stock | Additional Capital | Accumulated Deficit | Total Stockholders Deficit | ||||||||||||||||
| Shares | Amount | ||||||||||||||||||
BALANCE, January 1, 2003 | 2,727 | $ | 27 | $ | 88 | $ | (16,957 | ) | $ | (16,842 | ) | ||||||||
Net loss | — | — | — | (2,007 | ) | (2,007 | ) | ||||||||||||
Dividends declared | — | — | — | (804 | ) | (804 | ) | ||||||||||||
BALANCE, December 31, 2003 | 2,727 | 27 | 88 | (19,768 | ) | (19,653 | ) | ||||||||||||
Net income | — | — | — | 6,076 | 6,076 | ||||||||||||||
Dividends declared | — | — | — | (1,200 | ) | (1,200 | ) | ||||||||||||
Purchase and cancellation of common shares and outstanding options | (454 | ) | (4 | ) | (15 | ) | (5,116 | ) | (5,135 | ) | |||||||||
BALANCE, December 31, 2004 | 2,273 | 23 | 73 | (20,008 | ) | (19,912 | ) | ||||||||||||
Net income | — | — | — | 543 | 543 | ||||||||||||||
Dividends declared | — | — | — | (1,400 | ) | (1,400 | ) | ||||||||||||
BALANCE, December 31, 2005 | 2,273 | $ | 23 | $ | 73 | $ | (20,865 | ) | $ | (20,769 | ) | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Index to Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31, 2005, 2004, and 2003
| 2005 | 2004 | 2003 | ||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | 543 | $ | 6,076 | $ | (2,007 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities - | ||||||||||||
Depreciation and amortization | 12,972 | 3,273 | 4,098 | |||||||||
Amortization of deferred loan costs and Senior Notes discount | 839 | 492 | 445 | |||||||||
Accretion expense | 510 | 78 | 48 | |||||||||
Gain on sale of subsidiary | — | (12,139 | ) | — | ||||||||
Loss from discontinued operations, net of tax | — | — | 1,068 | |||||||||
Cumulative effect of change in accounting principle, net of tax | — | — | 448 | |||||||||
Provision for doubtful accounts | — | 385 | 17 | |||||||||
Unrealized (gain) loss on derivatives | 6,302 | (77 | ) | (125 | ) | |||||||
Loss (gain) on sale of other property and equipment | — | (1 | ) | 13 | ||||||||
Deferred income taxes | 1,199 | (3,159 | ) | (3,962 | ) | |||||||
Changes in operating assets and liabilities, net of acquisitions | ||||||||||||
Accounts receivable | (2,608 | ) | (18 | ) | 94 | |||||||
Prepaid expenses and other assets | (143 | ) | 342 | 126 | ||||||||
Accounts payable | (165 | ) | (67 | ) | (664 | ) | ||||||
Accrued liabilities | (697 | ) | 109 | 1,876 | ||||||||
Income taxes payable | (393 | ) | 6,892 | 4,190 | ||||||||
Gas balancing liability | — | (393 | ) | 109 | ||||||||
Total adjustments | 17,816 | (4,283 | ) | 7,781 | ||||||||
Net cash provided by operating activities | 18,359 | 1,793 | 5,774 | |||||||||
INVESTING ACTIVITIES: | ||||||||||||
Payments for oil and natural gas properties and equipment | (13,528 | ) | (5,900 | ) | (4,282 | ) | ||||||
Proceeds from sales of oil and natural gas properties | 2,471 | 320 | 187 | |||||||||
Payments for other property and equipment | (1,497 | ) | (205 | ) | (343 | ) | ||||||
Proceeds from sales of other property and equipment | — | 38 | 15 | |||||||||
RWG acquisition, net of cash acquired | — | (82,577 | ) | — | ||||||||
Proceeds from the sale of subsidiary | — | 21,791 | — | |||||||||
Proceeds from sale of pipeline system | — | — | 12,026 | |||||||||
Proceeds from (payments for) short-term investments | — | 1,681 | (181 | ) | ||||||||
Net cash (used in) provided by investing activities | (12,554 | ) | (64,852 | ) | 7,422 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
Index to Financial Statements
RAM ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31, 2005, 2004, and 2003
| 2005 | 2004 | 2003 | ||||||||||
FINANCING ACTIVITIES: | ||||||||||||
Payments on long-term debt | (15,615 | ) | (18,234 | ) | (11,929 | ) | ||||||
Proceeds from borrowings on long-term debt | 10,670 | 88,585 | — | |||||||||
Payments for deferred loan costs | (565 | ) | (1,500 | ) | — | |||||||
Stock repurchased and retired | — | (5,135 | ) | — | ||||||||
Dividends paid | (1,400 | ) | (1,600 | ) | (404 | ) | ||||||
Net cash provided by (used in) financing activities | (6,910 | ) | 62,116 | (12,333 | ) | |||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,105 | ) | (943 | ) | 863 | |||||||
CASH AND CASH EQUIVALENTS, beginning of year | 1,175 | 2,118 | 1,255 | |||||||||
CASH AND CASH EQUIVALENTS, end of year | $ | 70 | $ | 1,175 | $ | 2,118 | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||
Cash paid for income taxes | $ | 20 | $ | 300 | $ | — | ||||||
Cash paid for interest | $ | 3,297 | $ | 4,285 | $ | 3,292 | ||||||
DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||
Accrued interest added to principal balance of credit facility | $ | 8,093 | $ | 554 | $ | 1,699 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
Index to Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004
A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ORGANIZATION AND BASIS OF PRESENTATION
| 1. | Nature of Operations and Organization |
RAM Energy, Inc. (the “Company”) operates exclusively in the upstream segment of the oil and natural gas industry with activities including drilling, completion and operation of onshore oil and natural gas wells. The Company conducts the majority of its operations in the states of Texas, Louisiana, Oklahoma and New Mexico. On December 17, 2004, the Company completed its acquisition of WG Energy Holdings, Inc. (“WG”), a Delaware corporation, in which a wholly owned subsidiary of the Company created specifically for such purpose merged with and into WG and WG was the surviving corporation in the merger (the “WG Acquisition”). At the time of the merger, the name of WG was changed to RWG Energy, Inc., or RWG. RWG, with its subsidiaries, are now first and second tier subsidiaries of the Company. On August 1, 2003, the Company sold its oil and natural gas pipeline system and saltwater disposal operation in north central Oklahoma (the pipeline system). The pipeline system purchased, transported and marketed oil and natural gas production and disposed of saltwater from properties owned by the Company and other oil and natural gas companies (see Note J).
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
3. Properties and Equipment
The Company follows the full cost method of accounting for oil and natural gas operations. Under this method all productive and nonproductive costs incurred in connection with the acquisition, exploration, and development of oil and natural gas reserves are capitalized. No gains or losses are recognized upon the sale or other disposition of oil and natural gas properties except in transactions that would significantly alter the relationship between capitalized costs and proved reserves.
Under the full cost method the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% (the ceiling limitation). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, and certain production-related and ad valorem taxes are deducted. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes that are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly and yearly basis. The excess, if any, of the net book value above the ceiling limitation is charged to expense in the period in which it occurs and is not subsequently reinstated. Reserve estimates used in determining estimated future net revenues have been prepared by an independent petroleum engineer.
The Company has capitalized internal costs of approximately $1,778,000, $596,000, and $434,000 for the years ended December 31, 2005, 2004, and 2003, respectively. Such capitalized costs include salaries and related benefits of individuals directly involved in the Company’s acquisition, exploration and development activities based on the percentage of their time devoted to such activities.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
Other property and equipment consists principally of furniture and equipment and leasehold improvements. Other property and equipment and related accumulated amortization and depreciation are relieved upon retirement or sale and the gain or loss is included in operations. Renewals and replacements that extend the useful life of property and equipment are treated as capital additions. Accumulated depreciation of other property and equipment at December 31, 2005 and 2004 is approximately $4,246,000 and $3,845,000, respectively.
In accordance with the impairment provisions of Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company assesses the recoverability of the carrying value of its non-oil and gas long-lived assets when events occur that indicate an impairment in value may exist. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If this occurs, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the estimated fair value of the asset. No impairments were recorded in 2005, 2004, or 2003.
| 4. | Depreciation and Amortization |
All capitalized costs of oil and natural gas properties and equipment, including the estimated future costs to develop proved reserves, are amortized using the unit-of-production method based on total proved reserves. Depreciation of other equipment is computed on the straight line method over the estimated useful lives of the assets, which range from three to ten years. Amortization of leasehold improvements is computed based on the straight-line method over the term of the associated lease or estimated useful life, whichever is shorter.
| 5. | Natural Gas Sales and Gas Imbalances |
Natural gas imbalances are generated on properties for which two or more owners have the right to take production “in-kind” and, in doing so, take more or less than their respective entitled percentage.
The Company follows the entitlement method of accounting for natural gas sales, recognizing as revenues only its net interest share of all production sold. Any amount attributable to the sale of production in excess of or less than the Company’s net interest is recorded as a gas balancing asset or liability. At December 31, 2005, the Company’s net underproduced position was approximately 162,000 Mcf with an associated asset of approximately $237,000, which is recorded in other assets on the consolidated balance sheet. At December 31, 2004, the Company’s net underproduced position was approximately 153,000 Mcf with an associated asset of approximately $230,000.
| 6. | Cash Equivalents |
All highly liquid unrestricted investments with a maturity of three months or less when purchased are considered to be cash equivalents.
| 7. | Credit and Market Risk |
The Company sells oil and natural gas to various customers and participates with other parties in the drilling, completion and operation of oil and natural gas wells. Joint interest and oil and natural gas sales receivables related to these operations are generally unsecured. In 2005, approximately 73% of total
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
revenues were to two customers (52% to four customers in 2004 and 68% to four customers in 2003), with sales to each comprising 55% and 18% (23%, 11%, 10% and 8% in 2004 and 27%, 20%, 12% and 9% in 2003) of total revenues.
In 2005 and 2004 the Company had cash deposits in certain banks that at times exceeded the maximum insured by the Federal Deposit Insurance Corporation. The Company monitors the financial condition of the banks and has experienced no losses on these accounts.
| 8. | Deferred Loan Costs |
Deferred loan costs are stated at cost net of amortization computed using the straight-line method over the term of the related loan agreement, which approximates the interest method.
The estimated future amortization expense is as follows:
2006 | $ | 990,000 | |
2007 | 614,000 | ||
2008 | 9,000 |
| 9. | General and Administrative Expense |
The Company receives fees for the operation of jointly owned oil and natural gas properties and records such reimbursements as reductions of general and administrative expense. Such fees totaled approximately $228,000, $212,000, and $406,000 for the years ended December 31, 2005, 2004, and 2003, respectively.
| 10. | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions that, in the opinion of management of the Company are significant include oil and natural gas reserves, amortization relating to oil and natural gas properties, asset retirement obligations, and income taxes.
| 11. | Fair Value of Financial Instruments |
Cash and cash equivalents, trade receivables and payables, and installment notes: The carrying amounts reported on the consolidated balance sheets approximate fair value due to the short-term nature of these instruments.
Credit Facility: The carrying amount reported on the consolidated balance sheets approximates fair value because this debt instrument carries a variable interest rate based on market interest rates.
Senior Notes: The carrying amount reported on the consolidated balance sheets is approximately $1.1 million below fair value at December 31, 2005 and exceeds fair value at December 31, 2004 by approximately $1.4 million based upon management’s estimates. Management bases its estimate on information from the bond underwriters on current bids for the Company’s senior notes.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
Derivative contracts: The carrying amount reported on the consolidated balance sheets is the fair value of the contracts based upon commodity futures prices for similar contracts.
| 12. | Reclassifications |
Certain reclassifications of previously reported amounts for 2004 and 2003 have been made to conform to the 2005 presentation. These reclassifications had no effect on net income or loss.
| 13. | Derivatives |
The Company applies the provisions of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 requires companies to recognize all derivative instruments as either assets or liabilities in the statement of financial position at fair value.
The Company entered into numerous derivative contracts to reduce the impact of oil and natural gas price fluctuations and as required by the terms of its credit facility (see Note L). The Company did not designate these transactions as hedges as required by SFAS No. 133 in order to receive hedge accounting treatment. Accordingly, all gains and losses on the derivative instruments during 2005, 2004 and 2003 have been recorded in the statements of operations.
| 14. | Earnings per Common Share |
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if dilutive stock options were exercised, calculated using the treasury stock method. A reconciliation of net income (loss) and weighted average shares used in computing basic and diluted net income (loss) per share is as follows for the years ended December 31 (in thousands, except share and per share amounts):
| 2005 | 2004 | 2003 | ||||||||
BASIC INCOME (LOSS) PER SHARE: | ||||||||||
Net income (loss) | $ | 543 | $ | 6,076 | $ | (2,007 | ) | |||
Weighted average shares | 2,273 | 2,549 | 2,727 | |||||||
Basic net income (loss) per share | $ | 238.94 | $ | 2,383.67 | $ | (735.97 | ) | |||
DILUTED INCOME (LOSS) PER SHARE: | ||||||||||
Net income (loss) | $ | 543 | $ | 6,076 | $ | (2,007 | ) | |||
Weighted average shares—basic | 2,273 | 2,549 | 2,727 | |||||||
Dilutive effect of stock options | 81 | 93 | — | |||||||
Weighted average shares assuming dilutive effect of stock options | 2,354 | 2,642 | 2,727 | |||||||
Diluted net income (loss) per share | $ | 230.72 | $ | 2,299.77 | $ | (735.97 | ) | |||
During 2003 the Company executed a 1,000-to-1 reverse stock split. Prior period amounts have been restated to reflect the reverse stock split.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
| 15. | Asset Retirement Obligations |
In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS No. 143Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and amends FASB Statement No. 19Financial Accounting and Reporting by Oil and Gas Producing Companies. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Company adopted this standard as of January 1, 2003. The effect of this standard on the Company’s results of operations and financial position at adoption included an increase in long-term liabilities for plugging and abandonment costs of oil and natural gas properties of $1,304,000, net increase in oil and natural gas properties and equipment of $530,000, and a non-cash loss as a result of the cumulative effect of change in accounting principle, net of tax, of $448,000 (using a 6.25% discount factor). The Company recorded accretion expense of approximately $510,000, $78,000, and $48,000 in 2005, 2004, and 2003, respectively.
The Company recorded the following activity related to the asset retirement obligation for the years ended December 31, 2005 and 2004 (in thousands):
| 2005 | 2004 | |||||||
Liability for asset retirement obligations, beginning of year | $ | 6,656 | $ | 1,952 | ||||
Obligations for wells sold with RB Operating Company | — | (238 | ) | |||||
Accretion expense | 510 | 78 | ||||||
Obligations for new wells drilled or new estimates | 3,177 | 275 | ||||||
Obligations for wells purchased in WG Acquisition | — | 4,660 | ||||||
Obligations for wells sold or retired | (151 | ) | (71 | ) | ||||
Liability for asset retirement obligations, end of year | $ | 10,192 | $ | 6,656 | ||||
| 16. | Recently Issued Accounting Pronouncements |
In December 2004 the FASB issued SFAS No. 123RShare-Based Payments. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and is effective for the first annual reporting period beginning after June 30, 2005. No share-based payment to employees or grants of employee stock options have ever been made. Management has not yet determined the impact of SFAS 123R on the Company’s future financial position or results of operations.
| 17. | Income Taxes |
The Company accounts for income taxes under the liability method as prescribed by SFAS 109. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates expected to be in effect during the year in which the bases differences reverse.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
B—WG ACQUISITION
The Company completed the WG Acquisition on December 17, 2004. The final adjusted purchase price was $82.6 million, including the assumption and payment of WG’s long-term debt of $24.5 million, the settlement of all outstanding derivative instruments of $14.4 million, and the balance (excluding the escrow) of $32.7 million was paid in cash. $11.0 million of the purchase price was deposited in two separate escrow accounts to provide funds against which the Company may make claims for any subsequently determined breach by WG of representations and warranties in the merger agreement and for potential losses that may arise in connection with certain existing litigation against WG (see Note K). The acquisition was financed with a credit facility provided by Wells Fargo Foothill, Inc. (Foothill) (see Note D). WG’s principal assets are producing oil properties located in north Texas, a gas plant and a significant block of undeveloped deep rights in held-by-production leases.
The WG acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141,Business Combinations, and the purchase price has been allocated based on the estimated fair value of the individual assets acquired and liabilities assumed at the date of acquisition.
The assets acquired and purchase price allocation of the WG acquisition is as follows (in thousands):
Current assets | $ | 5,437 | ||
Oil and natural gas properties | 97,243 | |||
Current liabilities | (4,233 | ) | ||
Debt | (340 | ) | ||
Asset retirement obligations | (4,661 | ) | ||
Deferred taxes | (10,869 | ) | ||
| $ | 82,577 | |||
The results of operations for the acquisition have been included in the consolidated statements of operations from the date of acquisition. The following unaudited pro forma information is presented as if the acquisition had occurred at the beginning of the periods presented (in thousands, except per share amounts):
| Year ended December 31, 2004 | Year ended December 31, 2003 | |||||||
Revenues and other operating income | $ | 49,792 | $ | 40,526 | ||||
Loss before cumulative effect of change in accounting principle | (5,040 | ) | (4,909 | ) | ||||
Net loss | $ | (5,040 | ) | $ | 5,357 | |||
Basic and diluted loss per share | $ | (1,977.25 | ) | $ | (1,964.43 | ) | ||
C—SALE OF SUBSIDIARY
On April 23, 2004 the Company entered into a stock sale agreement with Range Energy I, Inc. to sell all of the issued and outstanding shares of common capital stock of RB Operating Company (RBOC), a wholly-owned subsidiary of the Company. The transaction closed on April 29, 2004 for a purchase price of
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
$22.5 million, subject to customary post-closing adjustments. The Company received proceeds of $21.8 million, net of transaction costs of $363,000 and cash paid of $814,000, from the sale, of which $17.9 million was used to pay the remaining balance on the Foothill loan and security agreement.
With this sale the Company sold approximately 27% of its proved oil and natural gas reserves. As this significantly altered the relationship between the Company’s capitalized costs and proved reserves, the Company recognized a gain on the sale of $12.1 million.
Although the Company sold a wholly-owned subsidiary, the subsidiary was formed solely to effect this transaction and the assets included in the subsidiary consisted solely of oil and gas properties located in New Mexico that were carved out of another RAM Energy entity. That RAM Energy entity continues to hold and operate significant other oil and gas properties, including oil and gas properties located in New Mexico, which have similar quality hydrocarbons and similar economic characteristics as those properties sold. Because the net assets of RBOC were part of a larger cash-flow-generating product group and, in the aggregate, did not represent a group that on their own would be a component of the Company, the conditions in Statement of Financial Accounting Standard No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets for reporting the gain associated with the sale of RBOC in discontinued operations were not met.
D—LONG-TERM DEBT
Long-term debt at December 31 consists of the following (in thousands):
| 2005 | 2004 | |||||
11.5% Senior Notes due 2008, net of discount | $ | 28,309 | $ | 28,268 | ||
Credit facility | 83,897 | 88,663 | ||||
Installment loan agreements | 640 | 413 | ||||
| 112,846 | 117,344 | |||||
Less amount due within one year | 560 | 3,891 | ||||
| $ | 112,286 | $ | 113,453 | |||
The amount of required principal payments for the next five years and thereafter, as of December 31, 2005, is as follows: 2006-$560,000; 2007-$58,000; 2008-$28,418,000; 2009 - none, and 2010 - $83,897,000.
1. Senior Notes
In February 1998 the Company completed the sale of $115.0 million of 11.5% Senior Notes due 2008 in a public offering of which $28.2 million remained outstanding at December 31, 2005 and 2004. The Senior Notes are senior unsecured obligations of the Company and are redeemable at the option of the Company in whole or in part, at any time on or after February 15, 2005, at prices ranging from 111.5% to 103.8% of face amount to their scheduled maturity in 2008.
The indenture under which the Senior Notes were issued contained certain covenants, including covenants that limited (i) incurrence of additional indebtedness and issuances of disqualified capital stock, (ii) restricted payments, (iii) dividends and other payments affecting subsidiaries, (iv) transactions with affiliates and outside directors’ fees, (v) asset sales, (vi) liens, (vii) lines of business, (viii) merger, sale or consolidation and (ix) non-refundable acquisition deposits.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
In November 2002 the Company recognized a gain (net of unamortized deferred offering and original issue discount costs and transaction fees) of $32.9 million as a result of the purchase of $63.475 million face amount of the Senior Notes. The Senior Notes, plus accrued interest of $1.988 million, were purchased at 46% of face amount and were canceled by the Company. The Company utilized borrowings under its revolving credit agreement and available cash to purchase the Senior Notes.
In connection with the Company’s November 2002 purchase of the Senior Notes, the indenture was amended to eliminate the covenant limitations described above.
At December 31, 2005 and 2004 the unamortized original issue discount associated with the Notes totaled approximately $87,000 and $128,000, respectively.
2. Credit Facility
In November 2002 the Company entered into a two-part revolving credit facility with Foothill. It provided for a three year, $30 million revolving commitment. In December 2004 the Company entered into an amended and restated $90.0 million senior secured credit facility provided by Foothill. The facility included a $30.0 million term loan and a $60.0 million revolving credit facility. The Company and Foothill amended the credit facility on March 7, 2005. This amendment decreased the minimum EBITDA threshold and decreased the limit on the annual maximum amount of capital expenditures. On May 24, 2005 the credit facility was amended and restated in its entirety to accommodate Ableco Finance LLC as a participating lender. Significant changes in the amended and restated facility included increasing the interest rate on the term loan to Foothill’s base rate plus 5%, or 10.5%, whichever is greater, or LIBOR plus 7%, or 9.5%, whichever is greater, at the Company’s option. (12.25% at December 31, 2005).
In August and September 2005 the Company paid $6,400,000 in margin calls related to the derivative contracts required under the amended and restated facility. Principally due to these margin call requirements, the amended and restated credit facility was amended once again on October 11, 2005 with an effective date of September 30, 2005. That amendment increased the amount of the facility to $100.0 million and created a new special revolving facility in the amount of $10.0 million specifically to fund margin calls under the Company’s hedging contracts. The special revolving credit facility was funded in the amount of $6.9 million, including a $500,000 closing fee, and the revolving credit facility was reduced by that amount. The facility also included a conditional deferred fee in the amount of $375,000. On November 4, 2005 the counterparty to the Company’s hedging contracts refunded $4,600,000 of the margin deposits and on February 17, 2006 refunded $1,800,000 of the margin deposits. These amounts were applied to reduce the special revolving facility. The conditional deferred fee of $375,000 was paid during January, 2006, and accrued at December 31, 2005.
The amount of credit available under the credit facility at December 31, 2005 and 2004 was $3.4 million and $1.3 million, respectively.
On April 3, 2006, the Company and an institutional lender executed a new senior secured credit facility to replace the above mentioned credit facility. The outstanding amounts at December 31, 2005 were repaid in April, 2006 at the closing of this new credit facility. (See Note Q)
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
E—SUBSIDIARY GUARANTORS
The Company’s Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by all of the Company’s current and future subsidiaries (the “Subsidiary Guarantors”). The following table sets forth condensed consolidating financial information of the Subsidiary Guarantors. There are currently no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
The following represents the condensed consolidating balance sheets for the Company and its subsidiaries as of December 31, 2005 and 2004 (in thousands):
| Parent | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | ||||||||||||
December 31, 2005 | |||||||||||||||
Current assets | $ | 3,355 | $ | 26,527 | $ | (20,267 | ) | $ | 9,615 | ||||||
Property and equipment, net | 14,167 | 116,965 | — | 131,132 | |||||||||||
Investment in subsidiaries | 27,324 | — | (27,324 | ) | — | ||||||||||
Other assets | 2,395 | 134 | — | 2,529 | |||||||||||
Total assets | $ | 47,241 | $ | 143,626 | $ | (47,591 | ) | $ | 143,276 | ||||||
Current liabilities | $ | 28,713 | $ | 5,849 | $ | (20,267 | ) | $ | 14,295 | ||||||
Long-term debt | 29,767 | 82,519 | — | 112,286 | |||||||||||
Other non-current liabilities | 3,038 | 9,126 | — | 12,164 | |||||||||||
Deferred income taxes | 6,492 | 18,808 | — | 25,300 | |||||||||||
Total liabilities | 68,010 | 116,302 | (20,267 | ) | 164,045 | ||||||||||
Stockholders’ equity (deficit) | (20,769 | ) | 27,324 | (27,324 | ) | (20,769 | ) | ||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 47,241 | $ | 143,626 | $ | (47,591 | ) | $ | 143,276 | ||||||
| Parent | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | ||||||||||||
December 31, 2004 | |||||||||||||||
Current assets | $ | 1,203 | $ | 8,002 | $ | — | $ | 9,205 | |||||||
Property and equipment, net | 10,563 | 117,895 | — | 128,458 | |||||||||||
Investment in subsidiaries | 11,882 | — | (11,882 | ) | — | ||||||||||
Other assets | 2,661 | — | — | 2,661 | |||||||||||
Total assets | $ | 26,309 | $ | 125,897 | $ | (11,882 | ) | $ | 140,324 | ||||||
Current liabilities | $ | 6,086 | $ | 8,025 | $ | — | $ | 14,111 | |||||||
Long-term debt | 34,489 | 78,964 | — | 113,453 | |||||||||||
Other non-current liabilities | 3,104 | 5,194 | — | 8,298 | |||||||||||
Deferred income taxes | 2,542 | 21,832 | — | 24,374 | |||||||||||
Total liabilities | 46,221 | 114,015 | — | 160,236 | |||||||||||
Stockholders’ equity (deficit) | (19,912 | ) | 11,882 | (11,882 | ) | (19,912 | ) | ||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 26,309 | $ | 125,897 | $ | (11,882 | ) | $ | 140,324 | ||||||
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
The following represents the condensed consolidating statements of operations and statements of cash flows for the Company and its subsidiaries for the years ended December 31, 2005, 2004 and 2003 (in thousands):
| Parent | Subsidiary Guarantors | Consolidating Adjustments | Total Consolidated Amounts | |||||||||||||
Year ended December 31, 2005 | ||||||||||||||||
Operating revenues | $ | (2,064 | ) | $ | 57,463 | $ | — | $ | 55,399 | |||||||
Operating expenses | 6,948 | 34,563 | — | 41,511 | ||||||||||||
Operating income (loss) | (9,012 | ) | 22,900 | — | 13,888 | |||||||||||
Other expense | 2,477 | (7,171 | ) | (7,845 | ) | (12,539 | ) | |||||||||
Income (loss) before income taxes | (6,535 | ) | 15,729 | (7,845 | ) | 1,349 | ||||||||||
Income taxes | (7,078 | ) | 7,884 | — | 806 | |||||||||||
Net income (loss) | $ | 543 | $ | 7,845 | $ | (7,845 | ) | $ | 543 | |||||||
Cash flows provided by (used in) operating activities | $ | 9,592 | $ | 8,767 | $ | — | $ | 18,359 | ||||||||
Cash flows (used in) provided by investing activities | (3,108 | ) | (9,446 | ) | — | (12,554 | ) | |||||||||
Cash flows (used in) provided by financing activities | (6,910 | ) | — | — | (6,910 | ) | ||||||||||
Increase (decrease) in cash and cash equivalents | (426 | ) | (679 | ) | — | (1,105 | ) | |||||||||
Cash and cash equivalents, beginning of year | 1,043 | 132 | — | 1,175 | ||||||||||||
Cash and cash equivalents, end of year | $ | 617 | $ | (547 | ) | $ | — | $ | 70 | |||||||
Year ended December 31, 2004 | ||||||||||||||||
Operating revenues | $ | 20,370 | $ | 9,369 | $ | (80 | ) | $ | 29,659 | |||||||
Operating expenses | 11,553 | 3,342 | (80 | ) | 14,815 | |||||||||||
Operating income | 8,817 | 6,027 | — | 14,844 | ||||||||||||
Other income | 359 | 25 | (5,419 | ) | (5,035 | ) | ||||||||||
Income before income taxes | 9,176 | 6,052 | (5,419 | ) | 9,809 | |||||||||||
Income taxes | 3,100 | 633 | — | 3,733 | ||||||||||||
Net income | $ | 6,076 | $ | 5,419 | $ | (5,419 | ) | $ | 6,076 | |||||||
Cash flows provided by (used in) operating activities | $ | 85,784 | $ | (83,991 | ) | $ | — | $ | 1,793 | |||||||
Cash flows (used in) provided by investing activities | (66,556 | ) | 1,704 | — | (64,852 | ) | ||||||||||
Cash flows (used in) provided by financing activities | (20,109 | ) | 82,225 | — | 62,116 | |||||||||||
Decrease in cash and cash equivalents | (881 | ) | (62 | ) | — | (943 | ) | |||||||||
Cash and cash equivalents, beginning of year | 1,924 | 194 | — | 2,118 | ||||||||||||
Cash and cash equivalents, end of year | $ | 1,043 | $ | 132 | $ | — | $ | 1,175 | ||||||||
Year ended December 31, 2003 | ||||||||||||||||
Operating revenues | $ | 14,612 | $ | 5,408 | $ | — | $ | 20,020 | ||||||||
Operating expenses | 14,320 | 1,092 | — | 15,412 | ||||||||||||
Operating income | 292 | 4,316 | — | 4,608 | ||||||||||||
Other expense | (3,257 | ) | — | (1,614 | ) | (4,871 | ) | |||||||||
Income (loss) from continuing operations before income taxes | (2,965 | ) | 4,316 | (1,614 | ) | (263 | ) | |||||||||
Income taxes | (1,406 | ) | 1,634 | — | 228 | |||||||||||
Income (loss) from continuing operations | (1,559 | ) | 2,682 | (1,614 | ) | (491 | ) | |||||||||
Loss from discontinued operations, net of tax | — | (1,068 | ) | — | (1,068 | ) | ||||||||||
Net income (loss) before cumulative effect of change in accounting principle | (1,559 | ) | 1,614 | (1,614 | ) | (1,559 | ) | |||||||||
Cumulative effect of change in accounting principle, net of tax | (448 | ) | — | — | (448 | ) | ||||||||||
Net income (loss) | $ | (2,007 | ) | $ | 1,614 | $ | (1,614 | ) | $ | (2,007 | ) | |||||
Cash flows provided by (used in) operating activities | $ | 17,756 | $ | (11,982 | ) | $ | — | $ | 5,774 | |||||||
Cash flows (used in) provided by investing activities | (4,423 | ) | 11,845 | — | 7,422 | |||||||||||
Cash flows (used in) provided by financing activities | (12,333 | ) | — | — | (12,333 | ) | ||||||||||
Increase (decrease) in cash and cash equivalents | 1,000 | (137 | ) | — | 863 | |||||||||||
Cash and cash equivalents, beginning of year | 924 | 331 | — | 1,255 | ||||||||||||
Cash and cash equivalents, end of year | $ | 1,924 | $ | 194 | $ | — | $ | 2,118 | ||||||||
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
Due to intercompany allocations among RAM Energy, Inc. and its subsidiaries, the above condensed consolidating information is not intended to present the Company’s subsidiaries on a stand-alone basis.
F—LEASES
The Company leases office space and certain equipment under non-cancelable operating lease agreements that expire on various dates through 2009. Approximate future minimum lease payments for operating leases at December 31, 2005 are as follows:
Year Ending December 31 | |||
2006 | $ | 325,000 | |
2007 | $ | 316,000 | |
2008 | $ | 153,000 | |
2009 | $ | 3,000 | |
Rent expense of approximately $519,000, $288,000, and $254,000 was incurred under operating leases in the years ended December 31, 2005, 2004, and 2003, respectively.
In conjunction with the WG Acquisition in 2004, the Company assumed capital leases for operating equipment. Future minimum lease payments for capital leases are approximately $59,000 in 2006.
G—DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan for the benefit of substantially all of its employees. The plan allows eligible employees to contribute up to 100% of their annual compensation, not to exceed the maximum amount permitted by IRS regulations. Employer contributions to the plan are discretionary. The Company paid contributions to the plan in 2005, 2004, and 2003 of $210,000, $190,000, and $163,000, respectively.
H—CAPITAL STOCK
Pursuant to a Special Retainer Agreement effective July 1, 1998, as amended, the Board of Directors granted an outside counsel an option to purchase 50 shares of the Company’s common stock, which became fully vested during 2000, and was exercisable through June 30, 2008. On April 4, 2002 the Board of Directors granted fully-vested options to purchase an additional 50 shares of the Company’s common stock and set the exercise price on all options at $2,500 per share, an amount which management believes approximated the per common share value of the Company at that date. Expense of approximately $72,000 related to the stock options was recognized in the 2002 statement of operations based on the estimated fair value of the stock options. As of December 31, 2005 after the redemption of one-sixth of the outstanding stock options in August 2004 described below, options to purchase 83.33 shares remained outstanding.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.0%, no expected dividends, expected life of 6.7 years and no volatility.
In January 1998 the Company adopted its 1998 Stock Incentive Plan and reserved 550 shares of common stock for issuance under the plan. No awards have been granted under the Plan as of December 31, 2005.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
In April 2002 the Company amended its Certificate of Incorporation to eliminate its authorized preferred stock and reduce its authorized common stock to 5,000,000 shares. Prior to the amendment, the Company’s authorized capital consisted of 5,000,000 shares of preferred stock, none of which were issued and outstanding, and 15,000,000 shares of common stock.
In December 2003 the Company effected a 1,000-to-1 reverse stock split and amended its Certificate of Incorporation to reduce its authorized common stock to 5,000 shares, with a par value of $10.00 per share. Prior period amounts have been restated to reflect the reverse stock split.
In August 2004 the Company repurchased and retired one-sixth of its outstanding common shares and vested stock options for $5.0 million and $135,000, respectively. The cash paid to repurchase the common shares and stock options was equal to their respective estimated fair values on the date of settlement and, therefore, is recorded as a reduction of equity. Absent a market price for or comparable to the untraded securities, management estimated the fair value of the common stock by dividing the estimated net asset value per share by the total number of shares outstanding. Management believes the estimation method and assumptions utilized represent the best available evidence of the value of the equity securities at the settlement date.
The Company declared cash dividends of $804,000 for the year ended December 31, 2003, $294.68 per share. The unpaid dividends at December 31, 2003 are recorded as other accrued liabilities on the balance sheet and were paid in January 2004. The Company declared cash dividends of $1,200,000 for the year ended December 31, 2004, $146.68 per share for $800,000 declared prior to the stock repurchase, and $176.02 per share for the $400,000 declared subsequent to the stock repurchase. The Company declared cash dividends of $1,400,000 for the year ended December 31, 2005, $615.93 per share. All dividends declared in 2005 and 2004 were paid by the respective year ends.
I—INCOME TAXES
The (provision) benefit for income taxes is comprised of (in thousands):
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Current | $ | 393 | $ | (6,892 | ) | $ | (4,190 | ) | ||||
Deferred | (1,199 | ) | 3,159 | 3,962 | ||||||||
Provision for income tax expense | $ | (806 | ) | $ | (3,733 | ) | $ | (228 | ) | |||
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The significant differences between pre-tax book income and taxable book income relate to non-deductible personal expenses, meals and entertainment expenses and state income taxes.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
The sources and tax effects of the differences are as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Income tax provision at the federal statutory rate (34%) | $ | (459 | ) | $ | (3,088 | ) | $ | (73 | ) | |||
State income (tax) benefit, net of federal benefit | 12 | (361 | ) | (6 | ) | |||||||
Meals and entertainment expense | (34 | ) | 0 | 0 | ||||||||
Non-deductible dues | (15 | ) | 0 | 0 | ||||||||
Non-deductible related party expenses | (302 | ) | (284 | ) | (149 | ) | ||||||
Other | (8 | ) | 0 | 0 | ||||||||
Income tax provision | $ | (806 | ) | $ | (3,733 | ) | $ | (228 | ) | |||
The Company’s income tax provision was computed based on the federal statutory rate and the average state statutory rates, net of the related federal benefit.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Deferred tax assets: | ||||||||
Current: | ||||||||
Hedge termination payment | $ | 0 | $ | 4,894 | ||||
Accrued expenses and other | 163 | 85 | ||||||
| $ | 163 | $ | 4,979 | |||||
Valuation allowance | 0 | 0 | ||||||
Net current deferred tax assets | $ | 163 | $ | 4,979 | ||||
Noncurrent deferred tax assets: | ||||||||
Net operating loss carryforward | $ | 1,510 | $ | 1,887 | ||||
Accrued liabilities and other | 3,059 | 1,855 | ||||||
| $ | 4,569 | $ | 3,742 | |||||
Valuation allowance | 0 | 0 | ||||||
Net noncurrent deferred tax assets | $ | 4,569 | $ | 3,742 | ||||
Deferred tax liabilities: | ||||||||
Current: | ||||||||
Prepaid expenses and other | $ | (230 | ) | 0 | ||||
| $ | (230 | ) | $ | 0 | ||||
Noncurrent: | ||||||||
Depreciable/depletable property, plant and equipment | $ | (20,236 | ) | $ | (23,257 | ) | ||
Other | (0 | ) | (0 | ) | ||||
Total noncurrent deferred tax liabilities | $ | (20,236 | ) | $ | (23,257 | ) | ||
Net noncurrent deferred tax liability | $ | (20,466 | ) | $ | (19,515 | ) | ||
Net deferred tax liability | $ | (15,734 | ) | $ | (14,536 | ) | ||
As of December 31, 2005, the Company has federal net operating loss carryforwards of approximately $4.02 million for tax purposes, which were an inherited attribute from the WG Energy Holdings, Inc. acquisition during 2004. These net operating loss carryforwards are subject to the ownership change limitation provisions of Section 382 of the Internal Revenue Code. However, based upon the value of WG Energy Holdings, Inc. at the time of the acquisition, the amount of these net operating losses that may be used annually should be sufficient to allow the losses to be utilized prior to their expiration. Accordingly, the Company believes that it will more likely than not be able to utilize these losses and that no valuation allowance for the deferred tax asset associated therewith is required. If not used, these carryforwards will generally expire between 2021 and 2023. In addition, the Company has generated net operating loss carryforwards for state income tax purposes, which the Company believes will more likely than not be realized during the relevant carryforward periods; however, such amounts have not been separately
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
disclosed in the financial statements as the Company does not believe that these net operating losses are material to the amounts presented herein.
The Company has reported the recovery of tax basis amounts in certain assets in prior years that generated net operating losses for tax return filing purposes; however, the Company has not recorded a tax benefit for such amounts due to certain factual and technical issues related thereto. The Company will record the benefit for such tax basis amounts in future periods when it can appropriately conclude that the realization of such benefit is more likely than not assured.
J—SALE OF PIPELINE SYSTEM
On July 18, 2003 the Company entered into an agreement to sell its oil and natural gas pipeline system in north central Oklahoma to Continental Gas, Inc. (CGI) for $15.0 million, effective August 1, 2003, and subject to certain adjustments. $3.0 million in settlement of the claim by CGI reduced the sale price. (see Note K). The sale of the pipeline closed July 31, 2003 and approximately $11.8 million net proceeds were used to reduce the Company’s credit facility.
The results of operations and cash flows related to the pipeline system are reflected in the accompanying financial statements as discontinued operations. For the year ended December 31, 2003, revenues for discontinued operations were $14,500,000. Interest expense of $609,000 for the year ended December 31, 2003 has been allocated to discontinued operations in the statements of operations.
No gain or loss on disposal was recorded because impairment provisions had written the pipeline system down to its realizable value.
K—COMMITMENTS AND CONTINGENCIES
In November 2004 Ted Collins, Jr. filed a lawsuit against WG Energy Holdings, Inc. and Michael G. Grella, the former president of that company. Mr. Collins alleged that WG and Mr. Grella failed to timely apply a $1.5 million advance toward developing the shallow formations underlying certain leases, and failed to deliver assignments of certain interests in those leases, both as allegedly required by the participation agreement between them. Mr. Collins further claimed that WG failed to account to him for revenues allegedly accruing to him under the terms of the participation agreement. Mr. Collins sought an accounting and to have the partial assignment and/or participation agreement reformed based on allegations of mutual mistake, and further pled claims of fraud and negligent misrepresentation. He did not specify the amount of damages claimed. As this lawsuit existed at the time of the Company’s acquisition of WG, a $5 million escrow was established as a reserve for this lawsuit (see Note B). A settlement agreement was reached on September 14, 2005, whereby Ted Collins Jr. and the defendants settled and released all claims that had been asserted and those that might have been asserted in the lawsuit. On October 19, 2005, RWG received $250,000 from the escrow account as a result of this settlement.
In June 2003 a lawsuit was filed by CGI against Great Plains Pipeline Company (GPPC), a wholly owned subsidiary of the Company, in the District Court of Garfield County, Oklahoma. GPPC and CGI were parties to a Gas Service Contract (the Contract) dated November 22, 1996; pursuant to which GPPC delivered to CGI all of the gas that flowed through GPPC’s pipeline system. CGI compressed and processed the gas and then redelivered thermally equivalent volumes to GPPC at the tailgate of the CGI processing plant in Woods County. The term of the Contract was for the life of the leases from which GPPC purchased gas in a specified service area.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
In the lawsuit CGI alleged that over several years GPPC delivered gas under the Contract that was produced from wells and leases lying outside the specified service area and that such gas was not covered by and should not have been delivered under the Contract. CGI alleged that only gas produced from wells and leases lying inside the service area should be counted for purposes of determining whether or not a compression and processing fee was due, that when outside volumes were excluded, compressing and processing fees were due CGI, and with respect to the outside volumes GPPC delivered under the Contract, GPPC owed CGI a market rate for compressing and processing services performed with respect to such gas.
As a part of the agreement for the sale of the pipeline system by GPPC to CGI, the parties agreed to $3.0 million as consideration for a contemporaneous mutual release by CGI and GPPC of all claims of every nature arising out of the Contract. A provision for litigation settlements in the amount of $3.0 million was recorded at December 31, 2002 as a current liability and netted from the proceeds received from the sale of the pipeline (see Note J).
In April 2002 a lawsuit was filed in the District Court for Woods County, Oklahoma against the Company, certain of its subsidiaries and various other individuals and unrelated companies, by lessors and royalty owners of certain tracts of land, which were sold to a subsidiary of Chesapeake Energy Corporation in 2001. The petition claims that additional royalties are due, because Carmen Field Limited Partnership (CFLP), a wholly-owned subsidiary of the Company, resold oil and gas purchased at the wellhead for an amount in excess of the price upon which royalty payments were based and paid no royalties on natural gas liquids extracted from the gas at plants downstream of the system. Other allegations include under-measurement of oil and gas at the wellhead by CFLP, failure to pay royalties on take-or-pay settlement proceeds and failure to properly report deductions for post-production costs in accordance with Oklahoma’s check stub law.
Company defendants have filed answers in the lawsuit denying all material allegations set out in the petition. The Company believes that fair and proper accounting was made to the royalty owners for production from the subject leases and intends to vigorously defend the lawsuit. Management is unable to estimate a range of potential loss, if any, related to this lawsuit, and accordingly no amounts have been recorded in the consolidated financial statements. In the event the court should find Company defendants liable for damages in the lawsuit, a former joint venture partner is contractually obligated to pay a portion of any damages assessed against the Company defendants up to a maximum contribution of approximately $2.8 million.
In a suit filed in mid-2001 by a large independent oil and gas exploration and production company, claims arising from gas balancing on seven wells located in western Oklahoma, then operated by the Company, were made. In December 2002, a provision for settlement of this claim was made in the amount of $140,000, which was paid in May 2003.
The Company is also involved in other legal proceedings and litigation in the ordinary course of business. In the opinion of management, the outcome of such matters will not have a material adverse effect on the Company’s financial position or results of operations.
The Company has established a severance agreement for the president and CEO of the Company. This agreement provides for severance benefits to be paid upon involuntary separation as a result of actions taken by the Company or its successors. At December 31, 2005 and 2004, the severance benefits under this
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
agreement were approximately $1,650,000 and $1,750,000, respectively. A provision for these benefits will not be made until an involuntary termination is probable.
Pursuant to a Special Retainer Agreement effective July 1, 1998, as amended, the Company is obligated to pay an outside counsel law firm approximately $360,000 in the event that the agreement is terminated by reason of expiration of term, by counsel for good reason, by reason of change in control, or by the Company at will. A provision for the payment will not be made until termination of the agreement is probable.
L—HEDGING ACTIVITIES
The Company utilizes a hedging program to reduce its exposure to unfavorable changes in oil and natural gas prices that are subject to significant and often volatile fluctuation. This program customarily involves the purchase of put options to provide a price floor for its production, put/call collars that establish both a floor and a ceiling price to provide price certainty within a fixed range, put/call/call collars that establish a secondary floor above the put/call collar ceiling, forward sale contracts for specified monthly volumes at prices determined with reference to the natural gas futures market and swap arrangements that establish an index-related price above which the Company pays the hedging partner and below which the Company is paid by the hedging partner. When market prices for oil and natural gas decline, the decline in the value of the cash flows from the Company’s forecasted natural gas production designated as being hedged is substantially offset by gains in the value of the hedging contracts. Conversely, when market prices increase, the increase in the value of the cash flows from the Company’s forecasted natural gas production designated as being hedged is substantially offset by losses in the value of the hedging contracts.
In 2002 the Board of Directors approved risk management policies and procedures to utilize these hedging contracts for the reduction of defined commodity price risks in alignment with the terms of the Company’s revolving credit facility with Foothill. These policies prohibit speculation with derivatives, limit the amount of production hedged and limit hedge agreements to counterparties with appropriate credit standings.
During 2005, 2004, and 2003 the Company entered into numerous derivative contracts. The Company did not formally designate these transactions as hedges as required by SFAS No. 133 in order to receive hedge accounting treatment. Accordingly, all gains and losses on the derivative financial instruments during 2005, 2004, and 2003 have been recorded in the statements of operations.
At December 31, 2005 the Company had collars in place on 45,625 barrels/month through 2006 and 30,417 barrels/month through 2007. The 45,625 barrels/month in 2006 had a weighted average floor and ceiling of $42.51 and $60.56, respectively. The 30,417 barrels/month in 2007 had a weighted average floor and ceiling of $35.00 and $69.74, respectively. For natural gas, the Company had collars in place on 159,583 Mmbtu/month through 2006 and 150,000 Mmbtu/month for the three months ending March 2007. The 159,583 Mmbtu/month in 2006 had a weighted average floor and ceiling of $6.23 and $8.86, respectively. The 150,000 Mmbtu/month for the three months ending March 2007 had a weighted average floor and ceiling of $7.00 and $11.95. The Company also had purchased put options on 7,604 barrels/month of crude oil through 2006 at a weighted average floor price of $40.00. The Company purchased call options on 157,000 Mmbtu/month of natural gas for eight months in 2006 at a weighted average floor price of $9.94.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
At December 31, 2004 the Company had purchased put options on 37,958 barrels/month of crude oil through December 2005 with a floor price of $40.00 per barrel. For natural gas the Company had purchased collars on 152,000 Mmbtu/month through October 2005; the weighted average floor price was $5.65 per Mmbtu, and the weighted average ceiling price was $7.84 per MMbtu. An asset of approximately $1,627,000 was recorded in the consolidated balance sheets.
The primary market risk related to the Company’s derivative contracts are the volatility in commodity prices. However, this market risk is offset by the gain or loss recognized upon the related sale or purchase of the commodity that is hedged. Credit risk relates to the risk of loss as a result of nonperformance by the Company’s counterparties. The counterparties are primarily major trading companies which management believes present minimal credit risks.
M—LIQUIDITY
As of December 31, 2005, the Company has an accumulated deficit of $20,865,000 and a working capital deficit of $4,680,000. Management believes that borrowings currently available to the Company under the Company’s new credit facilities ($42 million available at April 6, 2006), the balance of unrestricted cash, and anticipated cash flows from operations will be sufficient to satisfy its currently expected capital expenditures, working capital, and debt service obligations for the foreseeable future. The actual amount and timing of future capital requirements may differ materially from estimates as a result of, among other things, changes in product pricing and regulatory, technological and competitive developments. Sources of additional financing may include commercial bank borrowings, vendor financing and the sale of oil and natural gas properties or equity or debt securities. Management cannot assure that any such financing will be available on acceptable terms or at all.
N—RELATED PARTY TRANSACTIONS
For the years ended December 31, 2005, 2004, and 2003 the Company paid expenses in the amount of $0, $0, and $260,000, respectively, for expenses on behalf of the Danish Knights, a Limited Partnership, which is owned by one of the shareholders of the Company.
The Company paid rent expense of approximately $29,000, $66,000, and $54,000 relating to a condominium for one of the shareholders of the Company for the years ended December 31, 2005, 2004, and 2003, respectively.
For the years ended December 31, 2005, 2004, and 2003 approximately $499,000, $792,000, and $299,000, respectively, of expenses (excluding the rent payments discussed above) for the shareholders of the Company are included in general and administrative expenses in the consolidated statements of operations, some of which may be personal in nature.
In June 2005 the Company sold overriding royalty interests in certain properties located in Jack and Wise Counties, Texas for $2.3 million to Bridgeport Royalties, LLC. Bridgeport Royalties, LLC is a related party of the Company, owned and operated by the owners and several officers and employees of the Company, in addition to outside counsel. No gain on the sale was recognized and the proceeds were applied to reduce the outstanding balance under the Company’s revolving credit facility.
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
O—DEFERRED COMPENSATION
On April 21, 2004 the Company adopted a Deferred Bonus Compensation Plan (the Plan) for senior management employees of the Company. The Plan is to provide additional compensation for significant business transactions with a portion of each bonus to be deferred to encourage retention of key employees. Determination of significant business transactions and terms of awards is made by a committee comprised of the shareholders of the Company.
During 2004 and 2005 three members of senior management were granted awards. Each award provides for a total cash compensation of $75,000 and vests on each anniversary date for three years beginning on July 1, 2004 and July 1, 2005, respectively. Receipt of the award is contingent on the members being employed on the anniversary date. Should there be a change of control or involuntary termination, as defined in the award contract, each member will become fully vested in his award. Compensation expense is recorded on a straight-line basis. For the years ended December 31, 2005 and 2004, $150,000 and $112,500, respectively, has been recorded as compensation expense in the consolidated statements of operations.
P—MERGER AGREEMENT
In October 2005 the Company entered into a definitive merger agreement with Tremisis Energy Acquisition Corporation pursuant to which the Company will become a wholly-owned subsidiary of Tremisis.
Q—SUBSEQUENT EVENTS
On April 3, 2006, the Company entered into and closed a new secured credit facility with a financial institution, consisting of a $150.0 million, five-year term loan facility and a $150.0 million, four-year revolving credit facility.
At closing, $90 million of the term loan was advanced and $42 million remained available under the revolving credit facility. The remainder of the term loan facility will be available, subject to approval of the lenders, for certain future needs, including acquisitions. The new revolving credit facility is scheduled to mature in April 2010, until which time amounts may be borrowed and repaid as often as needed, subject to a borrowing base limitation that is re-determined semi-annually, based on oil and gas reserves. The term loan facility is scheduled to mature in April 2011, with permitted prepayments after the first year, subject to a prepayment premium in the second and third years of the term. Advances under the revolving credit facility will bear interest at LIBOR plus 2% per annum, while amounts outstanding under the term loan will bear interest at LIBOR plus 5.5% to 6.0% per annum. Obligations under the new credit facility are secured by a first lien on substantially all assets of the Company and its subsidiaries. The initial advance under the new credit facility was used to refinance the Company’s existing credit facility, to pay expenses associated with establishing the new facility, and to fund $10.0 million of the pre-closing dividend/redemption payments permitted by the merger agreement (See Note P). Subsequent advances may be used to:
| Ÿ | repurchase all of the Company’s outstanding 11 1/2% Senior Notes due 2008 ($28.4 million principal amount), and |
| Ÿ | for general working capital purposes. |
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
The new credit facility contains financial covenants requiring the Company to maintain certain ratios, including a current ratio, a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest expense, a ratio of total indebtedness to EBITDA, and a ratio of asset value to total indebtedness. In addition, the new credit facility contains other affirmative and negative covenants customary in lending transactions of this nature, including the maintenance by the Company of hedging contracts for a minimum and maximum amount of projected oil and natural gas production from its properties. Amounts advanced under the new credit facility prior to the closing of the merger will not cause the Company to exceed the total indebtedness limitation at closing as provided in the merger agreement (See Note P).
As a result of the refinancing, the current portion of long-term debt under the Company’s previous credit facility as of December 31, 2005 has been reclassified to long-term debt.
On April 6, 2006, the Company effected a redemption of a portion of the outstanding shares of its common stock for an aggregate redemption payment of $10.0 million.
R—SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
The Company has interests in oil and natural gas properties that are principally located in Texas, Louisiana, Oklahoma, and New Mexico. The Company does not own or lease any oil and natural gas properties outside the United States of America.
The Company retains independent engineering firms to provide year-end estimates of the Company’s future net recoverable oil, natural gas and natural gas liquids reserves. Estimated proved net recoverable reserves as shown below include only those quantities that can be expected to be commercially recoverable at prices and costs in effect at the balance sheet dates under existing regulatory practices and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves expected to be recovered through existing wells. Proved undeveloped reserves include those reserves expected to be recovered from new wells on undrilled acreage or from existing wells on which a relatively major expenditure is required for re-completion.
Capitalized costs relating to oil and natural gas producing activities and related accumulated depreciation and amortization at December 31 are summarized as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Proved oil and natural gas properties | $ | 160,704 | $ | 146,598 | $ | 60,760 | ||||||
Accumulated depreciation and amortization | (32,602 | ) | (20,074 | ) | (24,006 | ) | ||||||
| $ | 128,102 | $ | 126,524 | $ | 36,754 | |||||||
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
Costs incurred in oil and natural gas producing activities for the years ended December 31 are as follows (in thousands, except per equivalent oil barrel):
| 2005 | 2004 | 2003 | ||||||||||
Acquisition of proved properties | $ | 155 | $ | 96,819 | $ | — | ||||||
Development costs | 11,864 | 5,173 | 5,056 | |||||||||
Exploration costs | 1,507 | 727 | 202 | |||||||||
Sale of producing properties | (2,471 | ) | (16,881 | ) | (187 | ) | ||||||
Additional asset retirement obligation | 3,051 | — | — | |||||||||
| $ | 14,106 | $ | 85,838 | $ | 5,071 | |||||||
Amortization rate per equivalent oil barrel | $ | 8.93 | $ | 5.89 | $ | 5.64 | ||||||
Net quantities of proved and proved developed reserves of oil and natural gas, including condensate and natural gas liquids, are summarized as follows:
Crude Oil Barrels) | Natural Gas Cubic Feet) | Natural Gas Barrels) | |||||||
December 31, 2002 | 2,451 | 35,920 | — | ||||||
Extensions and discoveries | 258 | 1,152 | — | ||||||
Sales of reserves in place | — | (16 | ) | — | |||||
Purchases of reserves in place | — | 1,114 | — | ||||||
Revisions of previous estimates | (110 | ) | (1,269 | ) | 5 | ||||
Production | (277 | ) | (2,334 | ) | (5 | ) | |||
December 31, 2003 | 2,322 | 34,567 | — | ||||||
Extensions and discoveries | 17 | 3,015 | — | ||||||
Sales of reserves in place | (1,319 | ) | (4,890 | ) | — | ||||
Purchases of reserves in place | 9,482 | 10,013 | 2,092 | ||||||
Revisions of previous estimates | 343 | (2,582 | ) | 7 | |||||
Production | (178 | ) | (1,928 | ) | (12 | ) | |||
December 31, 2004 | 10,667 | 38,195 | 2,087 | ||||||
Extensions and discoveries | 5 | 1,297 | — | ||||||
Sales of reserves in place | (25 | ) | (1,305 | ) | — | ||||
Purchases of reserves in place | — | — | — | ||||||
Revisions of previous estimates | 1,339 | (1,272 | ) | (26 | ) | ||||
Production | (787 | ) | (2,681 | ) | (170 | ) | |||
December 31, 2005 | 11,199 | 34,234 | 1,891 | ||||||
Proved developed reserves: | |||||||||
December 31, 2002 | 2,234 | 28,379 | — | ||||||
December 31, 2003 | 2,151 | 26,237 | — | ||||||
December 31, 2004 | 6,198 | 31,048 | 1,611 | ||||||
December 31, 2005 | 7,337 | 26,752 | 1,396 |
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
The following is a summary of a standardized measure of discounted net cash flows related to the Company’s proved oil and natural gas reserves. For these calculations, estimated future cash flows from estimated future production of proved reserves were computed using oil and natural gas prices as of the end of the period presented. Future development and production costs attributable to the proved reserves were estimated assuming that existing conditions would continue over the economic lives of the individual leases and costs were not escalated for the future. Estimated future income tax expenses were calculated by applying future statutory tax rates (based on the current tax law adjusted for permanent differences and tax credits) to the estimated future pretax net cash flows related to proved oil and natural gas reserves, less the tax basis of the properties involved.
The Company cautions against using this data to determine the fair value of its oil and natural gas properties. To obtain the best estimate of fair value of the oil and natural gas properties, forecasts of future economic conditions, varying discount rates, and consideration of other than proved reserves would have to be incorporated into the calculation. In addition, there are significant uncertainties inherent in estimating quantities of proved reserves and in projecting rates of production that impair the usefulness of the data.
The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves at December 31 are summarized as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Future cash inflows | $ | 1,037,337 | $ | 711,781 | $ | 281,149 | ||||||
Future production costs Future development costs | | (336,008 (45,271 | ) ) | | (247,314 (36,495 | ) ) | | (70,644 (9,534 | ) ) | |||
Future income tax expenses | (219,640 | ) | (136,669 | ) | (69,787 | ) | ||||||
Future net cash flows | 436,418 | 291,303 | 131,184 | |||||||||
10% annual discount for estimated timing of cash flows | (209,758 | ) | (129,983 | ) | (63,469 | ) | ||||||
Standardized measure of discounted future net cash flows | $ | 226,660 | $ | 161,320 | $ | 67,715 | ||||||
Index to Financial Statements
RAM ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 and 2004
The following are the principal sources of change in the standardized measure of discounted future net cash flows of the Company for each of the three years in the period ended December 31 (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Standardized measure of discounted future net cash flows at beginning of year | $ | 161,320 | $ | 67,715 | $ | 53,369 | ||||||
Changes during the year: | ||||||||||||
Sales and transfers of oil and natural gas produced, net of production costs | (46,823 | ) | (13,112 | ) | (15,118 | ) | ||||||
Net changes in prices and production costs | 133,301 | (5,758 | ) | 23,634 | ||||||||
Extensions and discoveries, less related costs | 2,311 | 9,337 | 5,153 | |||||||||
Development costs incurred and revisions | (8,771 | ) | 4,691 | (2 | ) | |||||||
Sales of reserves in place | (2,551 | ) | (21,507 | ) | (26 | ) | ||||||
Purchases of reserves in place | — | 152,083 | 1,643 | |||||||||
Revisions of previous quantity estimates | 8,219 | (4,560 | ) | 459 | ||||||||
Net change in income taxes | (43,960 | ) | (38,026 | ) | (9,472 | ) | ||||||
Accretion of discount | 23,620 | 10,457 | 8,075 | |||||||||
Net change | 65,340 | 93,605 | 14,346 | |||||||||
Standardized measure of discounted future net cash flows at end of year | $ | 226,660 | $ | 161,320 | $ | 67,715 | ||||||
Prices used in computing these calculations of future cash flows from estimated future production of proved reserves were $58.63, $40.25, and $29.25 per barrel of oil at December 31, 2005, 2004, and 2003, respectively, $9.14, $6.02, and $6.17 per thousand cubic feet of natural gas at December 31, 2005, 2004, and 2003, respectively, and $35.89 and $27.56 per barrel of natural gas liquids at December 31, 2005 and 2004, respectively.
Index to Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Tremisis Energy Acquisition Corporation
New York, NY
We have audited the accompanying balance sheets of Tremisis Energy Acquisition Corporation (a corporation in the development stage) as of December 31, 2005 and 2004 and the related statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2005, the period from February 5, 2004 (inception) to December 31, 2004 and the period from February 5, 2004 (inception) to December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company’s Certificate of Incorporation provides for mandatory liquidation of the Company, in the event that the Company does not consummate a business combination by May 18, 2006. As discussed in Note 3, the Company plans to merge with RAM Energy, Inc. subject to stockholder approval prior to May 18, 2006; and thus avoid such mandatory liquidation.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tremisis Energy Acquisition Corporation as of March 10,December 31, 2005 and 2004 and the related statementstatements of operations and cash flows for the year ended December 31, 2005, the period from February 5, 2004 (inception) to March 10,December 31, 2004 and the period from February 5, 2004 (inception) to December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming Tremisis
Energy Acquisition Corporationthat the Company will continue as a going concern. The Company
has a working capital deficit whereby current liabilities exceed current assets
(cash), has no operations and asAs discussed in Note 2,1 to the financial statements, the Company is in the processrequired to consummate a business combination by May 18, 2006. The possibility of raising capital through a Proposed Offering. Thissuch merger not being consummated raises substantial doubt about the Company'sits ability to continue as a going concern. Theconcern, and the financial statements do not includeincluded any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
New York, NY
March
February 10, 2004, except as2006
Index to Note 8 as to which the date is April 23, 2004
F-2
Financial Statements
TREMISIS ENERGY ACQUISITION CORPORATION
(A
(A CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET
SHEETS
MARCH 10, 2004
---------------
ASSETS
CURRENT ASSETS -- CASH ............................................ $ 4,265
DEFERRED REGISTRATION COSTS (NOTE 3) .............................. 90,735
--------
TOTAL ASSETS ...................................................... $95,000
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES -- NOTE PAYABLE, STOCKHOLDER (NOTE 4) ......... $70,000
COMMITMENT (NOTE 5)
STOCKHOLDERS' EQUITY (NOTES 1, 2, 6, 7 and 8)
Preferred stock, $.0001 par value
Authorized 1,000,000 shares; none issued
Common stock, $.0001 par value
Authorized 30,000,000 shares
Issued and outstanding 1,375,000 shares ........................ 137
Additional paid-in capital ....................................... 24,863
--------
TOTAL STOCKHOLDERS' EQUITY ........................................ 25,000
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $ 95,000
========
| December 31, 2005 | December 31, 2004 | |||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 290,751 | $ | 834,094 | ||
U.S. Government Securities held in Trust Account (Note 1) | 34,256,092 | 33,351,358 | ||||
Accrued interest receivable, Trust Account (Note 1) | 167,172 | 91,170 | ||||
Prepaid expenses | 25,314 | 22,125 | ||||
Total current assets | 34,739,329 | 34,298,747 | ||||
Deferred acquisition costs (Note 3) | 540,907 | — | ||||
Furniture and equipment (net of accumulated depreciation of $4,919 and $1,418) | 8,954 | 6,558 | ||||
Total assets | $ | 35,289,190 | $ | 34,305,305 | ||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities: | ||||||
Accrued expenses | $ | 37,373 | $ | 26,680 | ||
Accrued acquisition costs (Note 3) | 423,304 | — | ||||
Taxes payable | 224,887 | 26,000 | ||||
Total current liabilities | 685,564 | 52,680 | ||||
Common stock, subject to possible conversion 1,264,368 shares at conversion value (Note 1) | 6,881,213 | 6,685,164 | ||||
Commitment (Note 5) | ||||||
Stockholders’ equity (Notes 2, 3, 4, 6 and 7) | ||||||
Preferred stock, $.0001 par value, authorized 1,000,000 shares; none issued | — | — | ||||
Common stock, $.0001 par value | ||||||
Authorized 30,000,000 shares; Issued and outstanding 7,700,000 shares (which includes 1,264,368 subject to possible conversion) | 770 | 770 | ||||
Additional paid-in capital | 27,306,117 | 27,502,166 | ||||
Earnings accumulated during the development stage | 415,526 | 64,525 | ||||
Total stockholders’ equity | 27,722,413 | 27,567,461 | ||||
Total liabilities and stockholders’ equity | $ | 35,289,190 | $ | 34,305,305 | ||
See accompanying summary of significant accounting policies and notes to financial statements.
F-3
Index to Financial Statements
TREMISIS ENERGY ACQUISITION CORPORATION
(A
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT
STATEMENTS OF OPERATIONS
| Year Ended December 31, 2005 | Period from February 5, 2004 2004 | Period from February 5, 2004 2005 | ||||||||||
Expenses: | ||||||||||||
General and administrative expenses (Note 5) | $ | 324,786 | $ | 164,392 | $ | 489,178 | ||||||
Operating loss | (324,786 | ) | (164,392 | ) | (489,178 | ) | ||||||
Interest income | 989,337 | 308,032 | 1,297,369 | |||||||||
Income before provision for taxes | 664,551 | 143,640 | 808,191 | |||||||||
Provision for taxes (Note 8) | (313,550 | ) | (79,115 | ) | (392,665 | ) | ||||||
Net Income | $ | 351,001 | $ | 64,525 | $ | 415,526 | ||||||
Accretion of Trust Account relating to common stock subject to possible conversion | (196,049 | ) | (59,875 | ) | (255,924 | ) | ||||||
Net income attributable to common stockholders | $ | 154,952 | $ | 4,650 | $ | 159,602 | ||||||
Basic and fully diluted income per share | $ | 0.02 | $ | 0.00 | ||||||||
Weighted average common shares outstanding | 7,700,000 | 5,739,057 | ||||||||||
See accompanying summary of significant accounting policies and notes to financial statements.
Index to Financial Statements
TREMISIS ENERGY ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDER’S EQUITY
| Common Stock | Additional Paid-In Capital | Earnings accumulated during the development stage | Total | |||||||||||||
| Shares | Amount | |||||||||||||||
Balance, February 5, 2004 (inception) | — | $ | — | $ | — | $ | — | $ | — | |||||||
Issuance of common stock to initial stockholders | 1,375,000 | 137 | 24,863 | — | 25,000 | |||||||||||
Sale of 6,325,000 units and underwriters’ option, net of underwriters’ discount and offering expenses (includes 1,264,368 share subject to Possible conversion) | 6,325,000 | 633 | 27,537,178 | — | 27,537,811 | |||||||||||
Accretion of Trust Account relating to common stock subject to conversion | — | — | (59,875 | ) | — | (59,875 | ) | |||||||||
Net income for the period | — | — | — | 64,525 | 64,525 | |||||||||||
Balance, December 31, 2004 | 7,700,000 | 770 | 27,502,166 | 64,525 | 27,567,461 | |||||||||||
Accretion of Trust Account relating to common stock subject to possible conversion | — | — | (196,049 | ) | — | (196,049 | ) | |||||||||
Net income for the year ended December 31, 2005 | — | — | — | 351,001 | 351,001 | |||||||||||
Balance, December 31, 2005 | 7,700,000 | $ | 770 | $ | 27,306,117 | $ | 415,526 | 27,722,413 | ||||||||
See accompanying summary of significant accounting policies and notes to financial statements.
Index to Financial Statements
TREMISIS ENERGY ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
| Year ended December 31, 2005 | February 5, 2004 (inception) to December 31, 2004 | February 5, 2004 (inception) to December 31, 2005 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net income for the period | $ | 351,001 | $ | 64,525 | $ | 415,526 | ||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||
Depreciation | 3,501 | 1,418 | 4,919 | |||||||||
Gain on maturities of U.S. Government Securities held in Trust Account | (904,576 | ) | (208,605 | ) | (1,113,181 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||||
Increase in prepaid expenses | (3,189 | ) | (22,125 | ) | (25,314 | ) | ||||||
Increase in accrued interest receivable | (76,002 | ) | (91,170 | ) | (167,172 | ) | ||||||
Increase in accrued expenses | 10,693 | 26,680 | 37,373 | |||||||||
Increase in income tax payable | 198,887 | 26,000 | 224,887 | |||||||||
Net cash used in operating activities | (419,685 | ) | (203,277 | ) | (622,962 | ) | ||||||
Cash Flows from Investing Activities | ||||||||||||
Purchases of U.S. Government Securities held in Trust Account | (237,102,158 | ) | (66,493,753 | ) | (303,595,911 | ) | ||||||
Maturity of U.S. Government Securities held in Trust Account | 237,102,000 | 33,351,000 | 270,453,000 | |||||||||
Deferred acquisition costs | (117,603 | ) | — | (117,603 | ) | |||||||
Purchase of furniture and equipment | (5,897 | ) | (7,976 | ) | (13,873 | ) | ||||||
Net cash used in investing activities | (123,658 | ) | (33,150,729 | ) | (33,274,387 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Proceeds from public offering of 6,325,000 units and underwriter option, net | — | 34,163,100 | 34,163,100 | |||||||||
Proceeds from issuance of common stock to initial stockholders | — | 25,000 | 25,000 | |||||||||
Proceeds from note payable, stockholder | — | 77,500 | 77,500 | |||||||||
Repayment of note payable, stockholder | — | (77,500 | ) | (77,500 | ) | |||||||
Net cash provided by financing activities | — | 34,188,100 | 34,188,100 | |||||||||
Net (decrease) increase in cash and cash equivalents | (543,343 | ) | 834,094 | 290,751 | ||||||||
Cash and cash equivalents at beginning of the period | 834,094 | — | — | |||||||||
Cash and cash equivalents end of the period | $ | 290,751 | $ | 834,094 | $ | 290,751 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the period for income taxes | $ | 114,663 | $ | 53,115 | $ | 147,028 | ||||||
Supplemental disclosure of non cash activity: | ||||||||||||
Accrued acquisition costs | $ | 423,304 | $ | — | $ | 423,304 | ||||||
Accretion of Trust Account relating to common stock subject to possible conversion | $ | 196,049 | $ | 59,875 | $ | 255,924 | ||||||
See accompanying summary of significant accounting policies and notes to financial statements.
Index to Financial Statements
TREMISIS ENERGY ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Furniture and Equipment | Furniture and equipment is stated at cost, net of accumulated depreciation. Depreciation if computed on a straight-line basis over the estimated lives commencing upon the date the asset is placed in service. | |
Cash and Cash Equivalents | The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. | |
Securities Held in Trust Account | The Company carries its investment in US Government Securities at cost which approximates fair value. | |
Income Taxes | The Company follows Statement of Financial Accounting Standards No. 109 (“SFAS No. 109”), “Accounting for Income Taxes” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. | |
Net Income Per Share | Net income per share is computed on the basis of the weighted average number of common shares outstanding during the period. Basic earnings per share excludes dilution and is computed by dividing net income after accretion attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Since the effect of outstanding warrants to | |
Use of Estimates | The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. | |
Reclassification | Certain items have been reclassified from prior periods to conform with the current period presentation. | |
Index to financial statements.
F-4
Financial Statements
TREMISIS ENERGY ACQUISITION CORPORATION
(A
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS OPERATIONS
Tremisis Energy Acquisition Corporation ("Company")Organization and Business Operations The Company was incorporated in
Delaware on February 5, 2004 as a blank check company thewhose objective of which is to acquire an operating business in either the energy or the environmental industry and their related infrastructures.
The Company'sregistration statement for the Company’s initial stockholders
purchased 1,375,000 common shares, $.0001 par value, for $25,000 on February 5,
2004 (see Note 8 discussing a subsequent events). At March 10, 2004, the Company
had not yet commenced any operations and, accordingly, a statement of operations
has not been presented. All activity through March 10, 2004 relates to the
Company's formation.public offering (“Offering”) was declared effective May 13, 2004. The Company has selected December 31, as its fiscal
year-end.consummated the offering on May 18, 2004 and received net proceeds of $34,163,100 (Note 2). The Company's ability to commence operations is contingent upon obtaining
adequate financial resources through a proposed public offering ("Proposed
Offering") which is discussed in Note 2. The Company'sCompany’s management has broad discretion with respect to the specific application of the net proceeds of this Proposed Offering, although substantially all of the net proceeds of this
Proposed Offering are intended to be generally applied toward consummating a business combination with aan operating business in the energy and environmental industry and itstheir related infrastructure ("infrastructures (“Business Combination"Combination”). Furthermore,
thereAn amount of $34,423,264 and $33,442,528 (which includes accrued interest of $167,172 and $91,170) as of December 31, 2005 and 2004, respectively, is no assurance that the Company will be able to successfully effect a
Business Combination. Upon the closing of the Proposed Offering, at least ninety
percent (90%) of the net proceeds, after payment of certain amounts to the
underwriter, will bebeing held in aan interest-bearing trust account ("(“Trust Fund"Account”) and invested in
government securities until the earlier of (i) the consummation of its first Business Combination or (ii) liquidation of the Company. Under the agreement governing the Trust Account, funds will only be invested in United States government securities (Treasury Bills) with a maturity of 180 days or less. The remaining net proceeds may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.
The Company after signinghas signed a definitive agreement for the acquisition of a target business (see Note 3), and will submit such transaction for stockholder approval. In the event that stockholders owning 20% or more of the outstanding stock excluding, for
this purpose, those persons who were stockholders prior toshares sold in the Proposed Offering, vote against the Business Combination and exercise the conversion rights described below, the Business Combination will not be consummated. All of the Company'sCompany’s stockholders prior to the Proposed Offering, including all of the officers and directors of the Company ("(“Initial Stockholders"Stockholders”), have agreed to vote their 1,375,000 founding shares of common stock in accordance with the vote of the majority in interest of all other stockholders of the Company ("(“Public Stockholders"Stockholders”) with respect to anythe Business Combination (see Note 8 discussing a subsequent events).Combination. After consummation of the Company's first Business Combination, all of these voting safeguards will no longer be applicable.
With respect to the firsta Business Combination which is approved and consummated, any Public Stockholder who voted against the Business Combination may demand that the Company redeemconvert his or her shares. The per share redemptionconversion price will equal the amount in the Trust FundAccount as of the record date for determination of stockholders entitled to vote on the Business Combination divided by the number of shares of common stock held by Public Stockholders at the consummation of the Proposed Offering. Accordingly, Public Stockholders holding
approximately 19.99% of the aggregate number of shares owned by all Public Stockholders may seek redemptionconversion of their shares in the event of a Business Combination. Such Public Stockholders are entitled to receive their per share interest in the Trust FundAccount computed without regard to the shares held by Initial Stockholders. In this respect, $6,881,213 and $6,685,164 (which includes accretion of Trust Account) has been classified as common stock subject to possible conversion at December 31, 2005 and 2004, respectively.
The Company'sCompany’s Certificate of Incorporation provides for mandatory liquidation of the Company without stockholder approval, in the event that the Company does not consummate a Business Combination within 18 months from the date of the consummation of the Proposed Offering (such date was November 18, 2005), or 24 months from the consummation of the Proposed Offering (such date would be May 18, 2006) if certain extension criteria have been satisfied. In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Fund assets) will be less than the initial public F-5
TREMISIS ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
offering price per share in the Proposed Offering (assuming no value is attributed to the Warrants contained in the Units to be offeredsold in the Proposed
Index to Financial Statements
TREMISIS ENERGY ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS — (Continued)
Offering discussed in Note 2). 2. PROPOSED OFFERING
The Proposed Company has satisfied the extension criteria by entering into an Agreement and Plan of merger with RAM Energy, Inc as described in Note 3.
2.Offering calls for On May 18, 2004, the Company sold 6,325,000 units (“Units”) in the Offering including an additional 825,000 Units pursuant to offer for public sale up to
5,500,000 units ("Units").the underwriters’ over-allotment option. Each Unit consists of one share of the Company'sCompany’s common stock, $.0001 par value, and two Redeemable Common Stock Purchase Warrants ("Warrants"(“Warrants”). Each Warrant will entitle the holder to purchase from the Company one share of common stock at an exercise price of $5.00 commencing the later of the completion of a business combinationBusiness Combination with a target business or one year from the effective date of the Proposed Offering and expiring fourfive years from the date of the prospectus. The Warrants will be redeemable at a price of $.01 per Warrant upon 30 daysdays’ notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given. 3. DEFERRED REGISTRATION COSTS
As of March 10, 2004,In connection with this Offering, the Company has incurred deferred registration costs
of $90,735 relating to expenses incurred in connectionissued, for $100, an option (“UPO”) to the representative of the underwriters to purchase 275,000 Units at an exercise price of $9.90 per Unit. The Units underlying the UPO are identical to the Units sold in the Offering except that the Warrants underlying the UPO have an exercise price of $6.25 per share. The Company accounted for the fair value of the UPO, inclusive of the receipt of the $100 cash payment, as an expense of the Offering resulting in a charge directly to stockholders’ equity. The UPO may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated value of the UPO (the difference between the exercise prices of the UPO and the underlying Warrants and the market price of the Units and underlying securities) to exercise the UPO without the payment of any cash.
3.Proposed Offering. Upon consummationMerger On October 20, 2005, the Company entered into an Agreement and Plan of this Proposed Offering,Merger (“Merger Agreement”) with RAM Energy, Inc. (“RAM Energy”) and all of its stockholders (“Stockholders”), which was amended on November 11, 2005. Pursuant to the deferred
registration costsMerger Agreement, a wholly owned subsidiary of the Company will merge (“Merger”) with and into RAM Energy. RAM Energy will be chargedthe surviving corporation in the Merger, becoming a wholly owned subsidiary of the Company. RAM Energy is a privately-owned, independent, oil and gas company headquartered in Tulsa, Oklahoma. RAM Energy’s business strategy is to equity. Shouldacquire, explore, develop, exploit, produce and manage oil and gas properties, primarily in Texas, Louisiana and Oklahoma. RAM Energy has been active in these core areas since its inception in 1987. RAM Energy’s management team has extensive technical and operating expertise in all areas of RAM Energy’s operations and geographic focus.
Pursuant to the Proposed Offering
proveMerger Agreement, the Stockholders, in exchange for all of the securities of RAM Energy outstanding immediately prior to be unsuccessful, these deferred costs as well as additional expensesthe Merger, will receive from the Company $30 million in cash and 25,600,000 shares of the Company’s common stock. A portion of the shares of the Company’s common stock being issued to be incurred,the Stockholders in the Merger will be chargedplaced into escrow to operations.
secure the indemnity rights of the Company under the Merger Agreement and will be governed by the terms of an Escrow Agreement.
The financial statements have been prepared assuming the Company will continue as a going concern. In the event the Merger Agreement is not consummated before May 18, 2006, the Company will be forced to liquidate. Under such circumstances, an agreement with the Company’s Chairman/CEO would be implemented, whereby he would become personally liable for settlement of accrued expenses, taxes payable and acquisition costs incurred.
Index to Financial Statements
TREMISIS ENERGY ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS — (Continued)
In connection with this business combination, the Company incurred $540,907 of costs related to this proposed acquisition which have been deferred as of December 31, 2005.
4. NOTE PAYABLE, STOCKHOLDERNote Payable, Stockholder The Company issued a $70,000 unsecured non-interest bearing promissory note to a stockholder on February 17, 2004. The stockholder advanced additional amounts aggregating $7,500 through May 2004. The note is non-interest bearing and is payable onadvances were paid in full in June 2004 from the earlier of February 17, 2005 or the consummationnet proceeds of the Company's initial public
offering.
Offering.
5. COMMITMENTCommitment The Company presently occupies office space provided by anand affiliate of an Initial Stockholder.initial stockholder. Such affiliate has agreed that, until the acquisition of a target business by the Company, it will make such office space, as well as certain office and secretarial services available to the Company, as may be required by the Company from time to time. The Company has agreed to pay thispays such affiliate $3,500 per month for such services commencing on May 18, 2004, the effective date of the Proposed Offering. 6. COMMON STOCK
On March 10,Included in general and administrative such services are $42,000 for the year ended December 31, 2005, $28,000 for the period from February 5, 2004 (inception) to December 31, 2004 and $70,000 for the Company's Board of Directors authorized a
1.1666666-to-one forward stock split of its common stock (see Note 8 discussing
a subsequent events).
7. PREFERRED STOCKperiod from February 5, 2004 (inception) to December 31, 2005.
6.Preferred Stock The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
8. SUBSEQUENT EVENTS
On April 16, 2004, the Company's
7.Common Stock The Company’s Board of Directors authorized a 1.1428571-to-one forward stock split of its common stock. On April 23, 2004, the
Company's Board of Directors authorized a 1.375-to-one1.666666 to one forward stock split of its common stock and filed an amendmenton March 10, 2004, a 1.1428571 to its amended and restated certificateone forward stock split of incorporation to increase the number of authorized shares ofits common stock from 20,000,000 shareson April 16, 2004 and a 1.375 to 30,000,000 shares.one forward stock split of its common stock on April 23, 2004. All references in the accompanying financial statements to the numbernumbers of shares of stock have been retroactively restated to reflect thesethe transactions.
F-6
================================================================================
Until
As of December 31, 2005, 13,475,000 shares of common stock were reserved for issuance upon exercise of Warrants and the UPO.
8.Provision for Taxes Provision for taxes consists of:
| Year Ended December 31, 2005 | For the Period from February 5, 2004 (inception) to December 31, | For the Period from February 5, 2004 (inception) | |||||||
Current: | |||||||||
Federal | $ | 190,859 | $ | 33,000 | $ | 223,859 | |||
State and local | 122,691 | 46,115 | 168,806 | ||||||
Deferred: | — | — | — | ||||||
| $ | 313,550 | $ | 79,115 | $ | 392,665 | ||||
The effective rate exceeds statutory rates primarily due to state and local taxes which are calculated as a percentage of capital.
Index to Financial Statements
11,970,534 Shares
RAM Energy Resources, Inc.
Common Stock
PRICE PER SHARE
RBC CAPITAL MARKETS
P R O S P E C T U S
, 2004, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required2006
Index to deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
No dealer, salesperson or any other person is authorized to give any
information or make any representations in connection with this offering other
than those contained in this prospectus and, if given or made, the information
or representations must not be relied upon as having been authorized by us.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered by this prospectus,
or an offer to sell or a solicitation of an offer to buy any securities by
anyone in any jurisdiction in which the offer or solicitation is not authorized
or is unlawful.
-----------------------------------
TABLE OF CONTENTS
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by usOther Expenses of Issuance and Distribution.
Set forth below is an itemization of the costs expected to be incurred in connection with the offering
described in this registration statement (other than the underwriting discountoffer and commissions and the Representative's non-accountable expense allowance)
will be as follows:
Securities Act Registration Fee | $ | 6,955 | |
NASD Filing Fee | * | ||
Printing and Engraving Expenses | * | ||
Legal Fees and Expenses | * | ||
Accounting Fees and Expenses | * | ||
Independent Petroleum Engineer Fees | * | ||
Transfer Agent Fees | * | ||
Miscellaneous | * | ||
Total | $ | * | |
| * | To be completed by amendment. |
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General
Corporation Law.
Section 145 of the Delaware General Corporation Law concerningof Delaware, under which the Registrant is incorporated, permits indemnification of officers, directors, employeesagainst judgments, fines and agents is set forth
below.
"Section 145. Indemnification of officers, directors, employeesamounts paid in settlements, expenses, including attorneys’ fees, actually and agents; insurance.
(a) A corporation shall have power to indemnifyreasonably incurred by such persons in connection with any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)which such a person is a party by reason of the fact that the person ishis being or washaving been a director, officer, employee or agent of the corporation,Registrant, or is or was serving at the request of the
corporation as a director, officer, employee or agent of anotherany corporation, partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred bywhich he served as such at the person in connection with such action,
suit or proceeding ifrequest of the personRegistrant, provided that he acted in good faith and in a manner the personhe reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe the person'shis conduct was unlawful. The terminationunlawful, and provided further (if the threatened, pending or completed action or suit is by or in the right of any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent,the corporation) that he shall not of itself,
create a presumption that the person did not act in good faith and in a manner
which the person reasonably believedhave been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation (unless the court determines that indemnity would nevertheless be proper under the circumstances). Article VIII of the Registrant’s Amended and Restated Certificate of Incorporation provides for indemnification of the Registrant’s directors and officers. The Delaware General Corporation Law also permits the Registrant to purchase and maintain insurance on behalf of the Registrant’s directors and officers against any liability arising out of their status as such, whether or not opposed toRegistrant would have the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify them against such liability. These provisions may be sufficiently broad to indemnify such persons for liabilities arising under the Securities Act of 1933 (the “Securities Act”).
The Registrant has entered into indemnity agreements with each of its directors and executive officers. Under each indemnity agreement, the Registrant will pay on behalf of the indemnitee, and his executors, administrators and heirs, any amount which he is or becomes legally obligated to pay because of (i) any claim or claims from time to time threatened or made against him by any person who wasbecause of any act or isomission or neglect or breach of duty, including any actual or alleged error or misstatement or misleading statement, which he commits or suffers while acting in his capacity as a director and/or officer of the Registrant or an affiliate or (ii) being a party, or isbeing threatened to be made a party, to any threatened, pending or completedcontemplated action, suit or suit byproceeding, whether civil, criminal, administrative or in the
II-1
right of the corporation to procure a judgment in its favorinvestigative, by reason of the fact that the personhe is or was aan officer, director, officer, employee or agent of the corporation, Registrant or an affiliate
II-1
Index to Financial Statements
or is or was serving at the request of the corporationRegistrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees)
actuallyenterprise. The payments which the Registrant will be obligated to make hereunder shall include,inter alia, damages, charges, judgments, fines, penalties, settlements and reasonably incurred bycosts, cost of investigation and cost of defense of legal, equitable or criminal actions, claims or proceedings and appeals therefrom, and costs of attachment, supersedeas, bail, surety or other bonds. The Registrant also provides liability insurance for each of its directors and executive officers.
Item 15. Recent Sales of Unregistered Securities.
In February 2004, the person in connection with the defense
or settlementRegistrant issued an aggregate of such action or suit if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed750,000 shares of its common stock to the best
interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matterstockholders as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the present
or former director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made, with
respect tobelow at a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so
that any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
II-2
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this section with respect to the
resulting or surviving corporation as such person would have with respect to
such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees)."
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment of expenses incurred or paid by a director, officer or controlling
person in a successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to the court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Paragraph B of Article Eighth of our certificate of incorporation
provides:
"The Corporation, to the full extent permitted by Section 145 of the GCL,
as amended from time to time, shall indemnify all persons whom it may indemnify
pursuant thereto. Expenses (including attorneys' fees) incurred by an officer
or director in defending any civil, criminal, administrative, or investigative
action, suit or proceeding for which such officer or director may be entitled
to indemnification hereunder shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized hereby."
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, we have agreed to indemnify the Underwriter and the
Underwriter has agreed to indemnify us against certain civil liabilities that
may be incurred in connection with this offering, including certain liabilities
under the Securities Act.
II-3
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) During the past three years, we sold the following shares of common
stock without registration under the Securities Act:
STOCKHOLDERS NUMBER OF SHARES
- ------------------------------------- -----------------
Lawrence S. Coben ................. 550,000
Isaac Kier ........................ 100,000
David A. Preiser .................. 50,000
Jon Schotz ........................ 50,000
Such shares were issued in February 2004 in connection with our
organization pursuant to the exemption from registration contained in Section
4(2) of the Securities Act as they were sold to sophisticated, wealthy
individuals. The shares issued to the individuals above were sold at an average purchase price of approximately $0.033 per share. In March 2004, weSubsequent to the issuance, and prior to the Registrant’s IPO, the Registrant’s board of directors authorized a
1.1666666-for-one stock splitseveral forward splits of our common stock, effectively lowering the purchase price to approximately $0.029$0.018 per share. In April 2004, we authorized a
1.1428571-to-oneThe following share numbers have been adjusted to reflect these stock splitsplits.
Name | Number of Shares | Relationship to Us | ||
Lawrence S. Coben | 1,008,334 | Former Chairman and Chief Executive Officer | ||
Isaac Kier | 183,334 | Former Secretary, Treasurer and Director | ||
David A. Preiser | 91,666 | Former Director | ||
Jon Schotz | 91,666 | Former Director |
Upon closing of the merger, the stockholders of RAM Energy were issued 25,600,000 shares of our common stock.
In conjunction with the closing of the Registrant’s IPO, the Registrant issued an option to EarlyBirdCapital, Inc. to purchase up to a total of 275,000 units, each unit consisting of one share of the Registrant’s common stock and a 1.375-to-one stock splittwo warrants, each to purchase one share of ourthe Registrant’s common stock. The units issuable upon exercise of this option were identical to those issued in the Registrant’s IPO, except for the warrants included in the EarlyBirdCapital’s option have an exercise price of $6.25 per share.
On May 8, 2006, the Registrant issued 10,000 restricted shares of common stock effectively loweringto each of the purchase priceRegistrant’s three, non-management directors. At the same time, the Registrant issued 100,000 restricted shares of the Registrant’s common stock to approximately
$0.018 per share.
ITEMeach of the Registrant’s three senior vice presidents. In each instance, the shares were issued under the Registrant’s 2006 Long-Term Incentive Plan and became fully vested 30 days following issuance.
In each of the instances above, the shares of common stock were not registered under the Securities Act of 1933, and were issued in reliance upon the exemption from the registration requirements of the Securities Act as provided in Section 4(2) of the Securities Act.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this Registration
Statement:
Exhibits
| Exhibit | Description | Method of Filing | ||
| 1.1 | Form of Underwriting | ** | ||
| 3.1 | Amended and Restated Certificate of | (1) [3.1] | ||
| 3.2 | Amended and Restated Bylaws of the Registrant. | (1) [3.2] | ||
| 4.1 | Specimen Unit Certificate. | (1) [4.1] | ||
II-2
Index to Financial Statements
| Exhibit | Description | Method of Filing | ||
| 4.2 | Specimen Common Stock Certificate. | (1) [4.2] | ||
| 4.3 | Specimen Warrant Certificate. | (1) [4.3] | ||
| 4.4 | Form of Unit Purchase Option | (2) [4.4] | ||
| 4.5 | Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant. | (2) [4.5] | ||
| 4.6 | Indenture dated as of February 24, 1998 among RAM Energy, Inc., the Subsidiary Guarantors named therein, and United States Trust Company of New York, Trustee. | (7) [4.1] | ||
| 4.6.1 | Supplemental Indenture dated February 24, 1998 among RAM Energy, Inc., the Subsidiary Guarantors named therein, and United States Trust Company of New York, Trustee. | (8) [4.6.1] | ||
| 4.6.2 | Second Supplemental Indenture dated as of November 22, 2002 among RAM Energy, Inc., the Subsidiary Guarantors and The Bank of New York, Successor to United States Trust Company of New York, as trustee. | (8) [4.6.2] | ||
| 4.6.3 | Third Supplemental Indenture dated as of April 29, 2004 among RAM Energy, Inc., the Subsidiary Guarantors and The Bank of New York, Successor to United States Trust Company of New York, as trustee. | (8) [4.6.3] | ||
| 4.6.4 | Fourth Supplemental Indenture dated as of December 17, 2004 among RAM Energy, Inc., The Bank of New York, Successor to United States Trust Company of New York, as trustee, RWG Energy, Inc., WG Operating, Inc., WG Royalty Company, Wise County Construction Company, LLC, and WG Pipeline LLC, as Additional Subsidiary Guarantors. | (8) [4.6.4] | ||
| 5.1 | Opinion of | ** | ||
| 10.1 | Form of Stock Escrow Agreement between the Registrant, Continental Stock Transfer & Trust Company and the Initial Stockholders. | |||
| (2) [10.6] | ||||
| 10.2 | Form of Registration Rights Agreement among the Registrant and the Initial Stockholders. | (2) [10.9] | ||
| 10.2.1 | Amendment to Registration Rights Agreement among | (1) [10.9.1] | ||
II-3
Index to Financial Statements
| Exhibit | Description | Method of Filing | ||
| 10.3 | Agreement and Plan of Merger dated October 20, 2005 among Registrant, RAM Acquisition, Inc. | (3) [10.1] | ||
| 10.3.1 | Amendment No. 1, dated November 11, 2005, to | (4) [10.11] | ||
| 10.3.2 | Amendment No. 2, dated February 15, 2006, to Agreement and | (6) [10.12] | ||
| 10.4 | Voting Agreement dated October 20, 2005 among the Registrant, the stockholders of RAM Energy, Inc. and certain security holders of the Registrant. | (3) [10.2] | ||
| 10.4.1 | Second Amended and Restated Voting Agreement included as Annex D of the Registrant’s Definitive Proxy Statement (No. 000-50682), dated April | (5) [Annex D] | ||
| 10.5 | Lock-Up Agreement dated October 20, 2005 executed by the | (3) [10.4] | ||
| 10.6 | Employment Agreement between Registrant and Larry E. Lee dated May 8, 2006.* | (1) [10.15] | ||
| 10.6.1 | First Amendment to | (9) [10.1] | ||
| 10.7 | Escrow Agreement by and among the Registrant, Larry E. Lee and Continental Stock Transfer & Trust Company dated May 8, 2006. | (1) [10.16] | ||
| 10.8 | Registration Rights Agreement among Registrant and the investors signatory thereto dated May 8, 2006.* | (1) [10.17] | ||
| 10.9 | Form of Registration Rights Agreement among the Registrant and the Investors party thereto. | (3) [10.7] | ||
| 10.10 | Agreement between RAM and Shell Trading-US dated February 1, 2006. | (1) [10.22] | ||
II-4
Index to Financial Statements
| Exhibit | Description | Method of Filing | ||
| 10.11 | Agreement between RAM Energy and Targa dated January 30, 1998. | (1) [10.23] | ||
| 10.11.1 | Amendment to Agreement between RAM Energy and Targa dated effective as of April 1, 2006, filed as an exhibit to Registrant’s Form 8-K dated June 5, 2006 and incorporated by reference herein. | (10) [10.23.1] | ||
| 10.12 | Long-Term Incentive Plan of the Registrant. Included as Annex C of the Registrant’s Definitive Proxy Statement (No. 000-50682), dated April 12, 2006 and incorporated by reference herein.* | (5) [Annex C] | ||
| 10.13 | Third Amended and Restated Loan Agreement dated as of April 3, 2006, between RAM Energy, Inc., the lenders described therein, Guggenheim Corporate Funding, LLC as the Arranger and Administrative Agent, Wells Fargo Foothill, Inc., as the Documentation Agent, and WESTLB AG, New York Branch, as the Syndication Agent. | (8) [10.14] | ||
| 21.1 | Subsidiaries of the Registrant | Filed Herewith | ||
| 23.1 | Consent of UHY Mann Frankfort Stein & Lipp CPAs, LLP | Filed Herewith | ||
| 23.2 | Consent of BDO Seidman, | Filed Herewith | ||
| 23.3 | Consent of | Filed Herewith | ||
| 23.4 | Consent of Williamson Petroleum Consultants, Inc. | Filed Herewith | ||
| 23.5 | Consent of McAfee & Taft A Professional Corporation (included in Exhibit 5.1) | ** | ||
| 24.1 | Power of Attorney | Filed Herewith | ||
| * | Management contract or compensatory plan or arrangement. |
| ** | To be filed by amendment. |
| (1) | Filed as an exhibit to the Registrant’s Current Report on |
| (2) | Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-113583) as the exhibit number indicated in brackets and incorporated by reference herein. |
| (3) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on October 26, 2005, as the exhibit number indicated in brackets and incorporated by reference herein. |
II-5
Index to Financial Statements
| (4) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on November 14, 2005, as the exhibit number indicated in brackets and incorporated by reference herein. |
| (5) | Included as an annex to the Registrant’s Definitive Proxy Statement (No. 000-50682), dated April 12, 2006, as the annex letter indicated in brackets and incorporated by reference herein. |
| (6) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 21, 2006, as the exhibit number indicated in brackets and incorporated by reference herein. |
| (7) | Filed as an exhibit to the Registration Statement on Form S-1 (SEC File No. 333-42641) of |
| (8) | Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2006, as the exhibit number indicated in brackets and incorporated by reference herein. |
| (9) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K on October 20, 2006, as the exhibit number indicated in brackets and incorporated by reference herein. |
| (10) | Filed as an exhibit to the Registrant’s Current Report on Form 8-K on June 5, 2006, as the exhibit number indicated in brackets and incorporated by reference herein. |
Item 17. UNDERTAKINGS.
(a) Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other
II-5
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) The undersigned registrantRegistrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of thisthe registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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Index to Financial Statements
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York,Tulsa, State of New
York,Oklahoma, on the 27th day of April, 2004.
TREMISIS ENERGY ACQUISITION
CORPORATION
By: /s/ Lawrence S. Coben
------------------------------
Lawrence S. Coben
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
November 21, 2006.
RAM ENERGY RESOURCES, INC. | ||
By | /s/ Larry E. Lee | |
Larry E. Lee, Chairman of the Board, President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Larry E. Lee Larry E. Lee | Chairman of the Board, President and Chief | November 21, 2006 | ||
/s/ John M. Longmire John M. Longmire | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | November 21, 2006 | ||
/s/ Sean P. Lane Sean P. Lane | Director | November 21, 2006 | ||
/s/ Gerald R. Marshall Gerald R. Marshall | Director | November 21, 2006 | ||
/s/ John M. Reardon John M. Reardon | Director | November 19, 2006 | ||