(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 1 — Organization, Basis of Presentation and Nature of Operations
Organization
Tandem Energy Holdings, Inc. (“Tandem”) is a publicly traded, non-reporting company. It was originally incorporated in Nevada as Las Vegas Major League Sports, Inc. (“Las Vegas”) on July 22, 1993, to engage in certain business activities associated with the Canadian Football League. In April 1994, it completed an initial public offering and began trading under the symbol LVTD. In 1996, Las Vegas filed for bankruptcy protection and ceased being a reporting company and ceased operations. In 1998, Las Vegas changed its name to Pacific Medical Group, Inc. (“Pacific”) in connection with a share exchange transaction with a privately-held company whose business plan was to engage in the manufacture and sale of medical products. That business was unsuccessful and Pacific ceased operations for some years. In February, 2005, Pacific changed its name to Tandem Energy Holdings, Inc. and changed its trading symbol to TDYH.PK. In June, 2005, Tandem Energy Corporation, a privately held Colorado corporation (“TEC”), which had acquired certain oil and gas assets of Shamrock Energy Corporation, a privately held Texas corporation (“Shamrock”), became a wholly owned subsidiary of Tandem. TEC and Shamrock, independent oil and gas E & P companies headquartered in Midland, Texas, have been engaged in the oil and gas industry since 1977 and 2004, respectively.
Basis of Presentation
The acquisition by Tandem in June, 2005, of all of the outstanding stock of TEC is accounted for as a combination of entities under common control, sometimes referred to hereinafter as the “share exchange.” Consequently, the assets, liabilities and results of operations presented herein are the historical results of operations of Tandem and TEC. The financial statements presented herein are the historical financial statements of the combined entities. See Note 3 for a detailed discussion of this transaction.
Nature of Operations
Tandem based in Midland, Texas, is engaged in the exploration, development and production of oil and gas properties located primarily in Texas and New Mexico.
Substantially all of Tandem’s oil and gas production is sold under short-term contracts which are market-sensitive. Accordingly, Tandem’s financial condition, results of operations and capital resources are highly dependent upon prevailing market prices of, and demand for, crude oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of Tandem. These factors include the level of global demand for petroleum products, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil-exporting countries, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Tandem and its wholly owned subsidiaries, Tandem Energy Corporation and Mixon Drilling, Inc. All intercompany balances and transactions have been eliminated.
Estimates and Assumptions
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 the disclosure of contingent assets and liabilities as of 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. The accounting policy most affected by management’s estimates and assumptions is the reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization (“DD&A”), and the determination of any impairment of long-lived assets.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 2 — Summary of Significant Accounting Policies - (continued)
Oil and Gas Properties
Tandem uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (SEC). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country. Tandem has defined a cost center by country. Currently, all of Tandem’s oil and gas properties are located within the continental United States.
Properties and equipment include costs that are excluded from costs being depreciated or amortized. Oil and gas costs excluded represent investments in unproved properties and major development projects in which Tandem owns a direct interest. These unproved property costs include nonproducing leasehold, geological and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. The amount of any impairment is transferred to the capitalized costs being amortized in the DD&A pool.
Depreciation, Depletion and Amortization
The depreciable base for oil and gas properties includes the sum of capitalized costs net of accumulated DD&A, estimated future development costs and asset retirement costs not accrued in oil and gas properties, less costs excluded from amortization and salvage. The depreciable base of oil and gas properties and mineral investments are amortized using the unit-of-production method based on total proved oil and gas reserves. Properties and equipment carrying values do not purport to represent replacement or market values.
Proved Oil and Gas Reserves
In accordance with Rule 4-10(a) of SEC Regulation S-X, proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalation based upon future conditions.
| (i) | Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation tests. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contracts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. |
| (ii) | Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the “proved” classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. |
Proved Oil and Gas Reserves
| (iii) | Estimates of proved reserves do not include the following: |
| (A) | oil that may become available from known reservoirs but is classified separately as “indicated additional reserves”; |
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 2 — Summary of Significant Accounting Policies - (continued)
| (B) | crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; |
| (C) | crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and |
| (D) | crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. |
Ceiling Test
Under the full cost method of accounting, a ceiling test is performed each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test determines a limit, on a country-by-country basis, on the book value of oil and gas properties. Currently, all of Tandem’s operations are located in the United States. The capitalized costs of proved oil and gas properties, net of accumulated DD&A and the related deferred income taxes, may not exceed the estimated future net cash flows from proved oil and gas reserves, excluding future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, generally using prices in effect at the end of the period held flat for the life of production and including the effect of derivative instruments that qualify as cash flow hedges, discounted at 10%, net of related tax effects, plus the cost of unevaluated properties and major development projects excluded from the costs being amortized. If capitalized costs exceed this limit, the excess is charged to expense and reflected as additional accumulated DD&A.
Asset Retirement Obligation
Tandem follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires Tandem to recognize a liability for the present value of all legal obligations associated with the retirement of tangible, long-lived assets and capitalize an equal amount as a cost of the asset. The cost of the abandonment obligations, less estimated salvage values, is included in the computation of depreciation, depletion and amortization.
Income Taxes
Tandem follows the asset and liability method prescribed by SFAS No. 109, Accounting for Income Taxes. Under this method of accounting for income taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in enacted tax rates is recognized in income in the period that includes the enactment date.
Environmental Expenditures
Tandem is subject to extensive federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require Tandem to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed.
Liabilities for expenditures of a non-capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component is fixed or reliably determinable.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 2 — Summary of Significant Accounting Policies - (continued)
Hedging Activities
From time to time, Tandem may utilize derivative instruments, consisting of swaps, floors and collars, to attempt to reduce its exposure to changes in commodity prices and interest rates. Tandem accounts for its derivatives in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 requires that all derivative instruments be recognized as assets or liabilities in the balance sheet, measured at fair value. The accounting for changes in the fair value of a derivative depends on both the intended purpose and the formal designation of the derivative. Designation is established at the inception of a derivative, but subsequent changes to the designation are permitted. Tandem has elected not to designate any of its derivative financial contracts as accounting hedges and, accordingly, has accounted for these derivative financial contracts using mark-to-market accounting. Changes in fair value of derivative instruments which are not designated as cash flow hedges are recorded in other income (expense) as changes in fair value of derivatives.
Cash and Cash Equivalents
Tandem considers all cash and highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration of Credit Risk — Cash
Tandem maintains its cash balances at a single major financial institution. Certain balances may at times exceed the federally insured limits established by the Federal Deposit Insurance Corporation. Tandem has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
Inventory
Inventory consists primarily of tubular goods and other well equipment which Tandem plans to utilize in its ongoing exploration and development activities and is carried at the lower of cost or market value.
Investment in Partnership
Tandem uses the equity method to account for its non-operating 33-1/3% interest in a real estate partnership.
Real Estate Held for Development
Tandem’s real estate held for development is at cost and relates to undeveloped land located near Tomball, Texas.
Debt Financing Costs
As discussed in Note 4, certain financing costs related to Tandem’s revolving line of credit have been capitalized. The deferred debt financing costs are being amortized over the term of the financing.
Stock-Based Compensation
Tandem has not issued any stock-based compensation to employees for the nine months ended September 30, 2006 and 2007.
Revenue Recognition and Gas Balancing
Tandem utilizes the sales method of accounting for oil, natural gas and natural gas liquids revenues whereby revenues, net of royalties, are recognized as the production is sold to purchasers. The amount of gas sold may differ from the amount to which Tandem is entitled based on its revenue interests in the properties. Tandem did not have any significant gas imbalance positions at September 30, 2007 or December 31, 2006.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 2 — Summary of Significant Accounting Policies - (continued)
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, established standards for reporting and displaying comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. There were no differences between net income and comprehensive income for the three months ended September 30, 2007 and 2006.
Concentration Risks
Tandem sells its oil and natural gas production to various customers, serves as operator in the drilling, completion and operation of oil and gas wells, and from time to time enters into derivatives with various counterparties. When management deems appropriate, Tandem may obtain letters of credit to secure amounts due from its significant oil and gas purchasers and follow other procedures to monitor credit risk from joint owners and derivatives counterparties.
Accounts Receivable and Allowance for Doubtful Accounts
Tandem’s trade receivables consist of receivables from non-operators who own an interest in properties which Tandem operates. Tandem has the ability and the right to withhold oil and gas revenues from any owner who is delinquent in their payments. At September 30, 2007 and December 31, 2006, all trade receivables were collectable; therefore, the allowance for doubtful accounts was zero.
Recent Accounting Pronouncements
SFAS 155 — In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 permits an entity to measure at fair value any financial instrument that contains an embedded derivative that otherwise would require bifurcation. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will adopt SFAS 155 as of January 1, 2007. Adoption should have no effect on our financial position or results of operations.
SFAS 156 — In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets,” (“SFAS 156”) which amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 156 requires the initial recognition at fair value of a servicing asset or servicing liability when an obligation to service a financial asset is undertaken by entering into a servicing contract. The adoption of SFAS 156 effective January 1, 2007 should not affect our financial position or results of operations.
SFAS 157 — In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”), which establishes a single authoritative definition of fair value based upon the assumptions market participants would use when pricing an asset or liability and creates a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, additional disclosures are required, including disclosures of fair value measurements by level within the fair value hierarchy. SFAS 157 is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We will adopt SFAS 157 as of January 1, 2008. Adoption should have no effect on our financial position or results of operations.
SFAS 159 — In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. We are currently evaluating the provisions of SFAS 159 and assessing the impact it may have on our financial position and results of operations.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 2 — Summary of Significant Accounting Policies - (continued)
FASB Staff Position AUG AIR-1 — FASB Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities” (“FSP AUG AIR-1”), prohibits companies from accruing as a liability in annual and interim periods the future costs of periodic major overhauls and maintenance of plant and equipment (the “accrue-in-advance method”). Other previously acceptable methods of accounting for planned major overhauls and maintenance (the direct expense, built-in overhaul and deferral methods) will continue to be permitted. The new requirements apply to entities in all industries for fiscal years beginning after December 15, 2006, and must be retrospectively applied. We will adopt FSP AUG AIR-1 as of January 1, 2007. Adoption should have no effect on our financial position or results of operations.
FIN 48 — In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective January 1, 2007. However, the FASB is in the process of issuing Proposed FSP FIN 48-a, “Implementation Guidance on Interpretation 48”. The guidance will provide conditions for determining when a tax position is considered to be effectively settled through examination. Although the final amount of our adoption adjustment will depend on the guidance issued, we do not expect the final impact of adoption to have a material effect on our financial position.
Note 3 — Common Stock and Significant Transactions
The following is a description of Tandem’s common stock transactions and other significant events:
Date | | Description of Transaction | | Issuance (Cancellation) of Shares of Common Stock | |
| February 2005(1) | | | Acquisition of control of Pacific | | | | | | 16,322 | |
| March 1, 2005(2) | | | Proposed acquisitions of TEC and Shamrock by Tandem Energy Holdings, Inc. (Texas) | | | | | | | |
| March 7, 2005(1) | | | Shares issued to sole officer and director (Mortensen) | | | | | | 20,000,000 | |
| March 8, 2005(3) | | | Shares issued to third parties | | | | | | 2,000,000 | |
| March 16, 2005(3) | | | Shares issued to third parties | | | | | | 250,000 | |
| March 17, 2005(4) | | | Cancellation of shares issued to Mortensen | | | | | | (20,000,000 | ) |
| March 17, 2005(4) | | | Issuance of shares to TEC/Shamrock control group and former director Mortensen | | | | | | 20,000,000 | |
| May 31, 2005(5) | | | Original TEC and Shamrock purchase agreements terminated | | | | | | — | |
| June 1, 2005(5) | | | Cancellation of shares issued to TEC/Shamrock control group and former director Mortensen | | | | | | (20,000,000 | ) |
| June 1, 2005(6) | | | Restated acquisition agreements of TEC and Shamrock | | | | | | — | |
| June 1, 2005(7) | | | Issuance of shares to Tandem management as compensation | | | 9,143,000 | | | | |
| June 8, 2005(8) | | | Acquisition and retirement of Tandem treasury stock | | | — | | | | |
| June 8, 2005(9) | | | Shares issued for acquisition of Shamrock assets | | | 7,500,000 | | | | |
| June 8, 2005(10) | | | Shares issued for acquisition of TEC stock | | | 3,000,000 | | | | |
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 3 — Common Stock and Significant Transactions - (continued)
Date | | Description of Transaction | | Issuance (Cancellation) of Shares of Common Stock | |
| June 14, 2005(7) | | | Shares issued to related party | | | 100,000 | | | | |
| June-July 2005(7) | | | Shares issued for compensation | | | 257,000 | | | | |
| | | | | | | | | | 20,000,000 | |
| June 14, 2005(11) | | | Shares issued in connection with private placement offering | | | | | | 1,533,000 | |
| September, 2007(12) | | | Acquisition and retirement of common stock, at cost, 10,000 shares on September 7, 2007 and 12,000 shares on September 11, 2007 | | | | | | (22,000 | ) |
| | | | Total shares outstanding | | | | | | 23,777,322 | |
1. Acquisition of Control of Pacific
In mid-March 2005, a group of promoters, including Mr. Lyle Mortensen (“Mortensen”), claimed to have acquired control of Pacific Medical Group, which in February 2005 had changed its name to Tandem and declared a 1 for 500 reverse stock split resulting in 16,322 shares of common stock outstanding. Mr. Mortensen was named sole officer and director, and on March 7, 2005, he issued himself 20,000,000 shares of common stock.
2. Proposed Acquisitions of TEC and Shamrock
In February 2005, Mr. Mortensen had incorporated a new privately held Texas corporation (Tandem, Texas) to facilitate the acquisition of TEC and the Shamrock Assets. It was intended that Tandem, Texas would then be rolled up into Tandem.
On March 1, 2005, Tandem (Texas) entered into agreements to purchase the common stock of TEC and certain oil and gas properties owned by Shamrock to be completed no later than May 31, 2005. See the discussion below under the captions “ 9 — Acquisition of Shamrock Assets by Tandem” and “ 10 — Acquisition of TEC.”
3. Shares Issued to Third Parties
In conjunction with its formation, on March 8, 2005 and March 16, 2005, Tandem issued 2,000,000 and 250,000 shares, respectively, to third parties and recorded compensation expense of $2,680,000 and $335,000, respectively, ($1.34 per share) based on Tandem’s average closing trading price on the OTC Pink Sheet system two days before and two days after the transaction (the “average trading price”).
4. March 17, 2005 Cancellation and Issuance of Common Stock
On March 17, 2005, in anticipation of the fulfillment of the March 1, 2005 proposed TEC and Shamrock acquisitions, Mortensen cancelled the 20,000,000 shares issued to himself on March 7, 2005, and on March 17, 2005, Mortensen, as sole officer and director, issued 20 million restricted shares of common stock to a group comprised of Mortensen, principals of Tandem and Shamrock (Tim Culp, Dyke Culp and Jack Chambers) and others.
On March 30, 2005, Mortensen appointed certain TEC and Shamrock owners and management members as officers and directors of Tandem and immediately resigned as officer and director.
5. Termination of Original TEC/Shamrock Acquisition Agreements and Cancellation of Stock
On May 31, 2005, the original TEC/Shamrock acquisition agreements terminated due to the inability to secure the necessary financing. As a result of the terminations, on June 1, 2005, Tandem’s new board of directors cancelled all 20 million shares of common stock issued on March 17, 2005, for lack of consideration, and that they were issued in connection with the fulfillment of the acquisition of Tandem, Texas by Tandem, which never occurred.
All of the cancelled 20 million shares were subsequently returned to Tandem, except for 2.878 million shares controlled by Mortensen. Management of TEC believes that all of the shares controlled by Mortensen are null and void. See the additional discussion below under the captions “ 7 — Compensation Shares” with respect to any resolution of Mortensen’s 2.878 million shares.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 3 — Common Stock and Significant Transactions - (continued)
6. Revised TEC/Shamrock Purchase Agreements
On June 1, 2005, after the May 31, 2005 termination of the original TEC/Shamrock purchase agreements, management of TEC revised and restated the TEC/Shamrock purchase agreements.
7. Compensation Shares
On June 1, 2005, Tandem issued to Tandem’s management team and other related parties 9,143,000 compensation shares valued at $33,554,810 ($3.67 per share) and, on June 14, 2005, 100,000 compensation shares to others valued at $300,000 ($3.00 per share), based on the average trading price at date of issuance. All management shares were restricted and subject to a voting agreement.
Mortensen is contesting Tandem’s cancellation of his 2.878 million shares of common stock. Although management believes Mortensen’s claim is without merit, if Mortensen is partially or completely successful, certain members of Tandem’s management team have agreed to reduce their compensation shares for any Mortensen shares and to reimburse Tandem for any related expense. Accordingly, any resolution of the Mortensen’s shares will have no effect on Tandem’s total shares outstanding or its results of operations.
In addition, during June-July 2005, TEC issued 257,000 compensation shares valued at $735,920 (ranging from $1.96-$3.67 per share), based on the average trading price at date of issuance.
The following is a summary of TEC’s compensation share expense for the year ended December 31, 2005:
| | | | Date Issued | | | Shares | | | Expense | |
Third parties (3) | | | March 8, 2005 | | | 2,250,000 | | $ | 3,015,000 | |
| Management | | | June 1, 2005 | | | 9,143,000 | | | 33,554,810 | |
| Related party | | | June 14, 2005 | | | 100,000 | | | 300,000 | |
| Others | | | June-July 2005 | | | 257,000 | | | 735,920 | |
| Total | | | | | | 11,750,000 | | $ | 37,605,730 | |
8. Acquisition and Retirement of TEC Treasury Stock
Historically, TEC was owned equally by Joe C. Bullard and Tim G. Culp, who served as its president and vice president, respectively. Prior to 2002, the spouses of Culp and Bullard also owned shares. Under a stock redemption agreement executed in 2002, the spouses redeemed their shares for notes which required annual payments until the notes were satisfied. These notes were paid in full during the second quarter of 2005.
On June 8, 2005, in conjunction with the revised and restated TEC/Shamrock purchase agreements and pursuant to a share redemption agreement, TEC repurchased and retired as treasury stock one-half of its outstanding common shares owned by Bullard for $13.0 million and cancelled a $15,000 note receivable, funded by proceeds of the revolving line of credit discussed in Note 6 to the Consolidated Financial Statements. As a result, Tim Culp became the sole shareholder of TEC.
9. Acquisition of Shamrock Assets by Tandem
Historically, Shamrock was owned equally by Tim Culp, his brother Dyke Culp, and Jack Chambers. At date of acquisition, TEC’s then sole stockholder owned or controlled a two-thirds interest in Shamrock, the other one-third interest was owned or controlled by an unrelated third party. Accordingly, the acquisition of the two-thirds Shamrock interest has been accounted for as a combination of entities under common control using carryover historical costs, and the acquisition of the remaining one-third Shamrock interest has been accounted for as a purchase in accordance with SFAS No. 141, Business Combinations.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 3 — Common Stock and Significant Transactions - (continued)
The following is a summary of the combination of entities under common control related to the two-thirds Shamrock interest:
| Consideration paid to predecessor shareholder: | | | |
| Cash paid | | $ | 5.3 million | |
| Issuance of note payable | | | 6.0 million | |
| Repayment of certain debt | | | 3.2 million | |
| Issuance of 3.5 million shares valued at average trading price of $3.00 per share | | | 10.5 million | |
| Total consideration paid | | | 25.0 million | |
| Less historic cost basis of net assets acquired | | | 2.8 million | |
| Distribution to predecessor shareholder | | $ | 22.2 million | |
The following is a summary of the purchase of the one-third Shamrock interest:
| Cash paid | | $ | 2.6 million | |
| Issuance of note payable | | | 3.0 million | |
| Repayment of certain debt | | | 1.6 million | |
| Issuance of 4.0 million shares valued at average trading price of $3.00 per share | | | 12.0 million | |
| Total purchase price | | $ | 19.2 million | |
The following is a summary of the Shamrock acquisition transactions:
| Cost basis of assets acquired: | | | |
| Two-thirds interest | | $ | 2.8 million | |
| One-third interest | | | 19.2 million | |
| Total assets acquired | | | 22.0 million | |
| Distribution to predecessor shareholder | | | 22.2 million | |
| Total consideration paid | | $ | 44.2 million | |
The results of operations of Shamrock’s oil and gas properties have been recorded in TEC’s consolidated financial statements since the June 1, 2005 acquisition date.
10. Acquisition of TEC
On June 8, 2005, pursuant to a restated purchase agreement, Tandem acquired the remaining 500 shares of capital stock outstanding in TEC from Tim Culp in exchange for 3.0 million shares of Tandem common stock and a note payable of $12.0 million. The 3.0 million shares of Tandem common stock were valued at the historic cost basis of the 500 shares of TEC common stock and the $12.0 million note payable is reflected as a distribution to the Tandem shareholder.
Since TEC was owned 100% by Tim Culp, and since Culp controlled more than 50% of Tandem, the acquisition of TEC by Tandem has been accounted for as a combination of entities under common control using Tandem’s and TEC’s carryover historical cost basis.
Since the business combination is accounted for as a combination of entities under common control, no purchase value adjustment for Tandem or TEC is appropriate or necessary. Consequently, the consolidated financial statements presented herein are the historical results of operations of both TEC and Tandem.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 3 — Common Stock and Significant Transactions - (continued)
11. Private Placement Offering
On March 30, 2005, in contemplation of original March 1, 2005 proposed TEC and Shamrock acquisitions, Tandem began a 2,000,000 private placement offering at $1.00 per share. On June 14, 2005, Tandem closed the private placement offering and issued 1,533,000 shares of common stock and received net proceeds of approximately $1.5 million. The net proceeds are being used for general operating purposes.
12. Stock Purchased and Retired
On September 7, 2007 and September 11, 2007, Tandem purchased 10,000 and 12,000 shares of Common Stock, respectively, from third parties in private transactions for $44,500. These shares have been retired and are no longer carried as outstanding at September 30, 2007.
Note 4 — Other Current Assets
Financing costs totaling $800,000 relating to Tandem’s revolving line of credit, as discussed in Note 6, were capitalized during 2005. Tandem is amortizing these costs to expense over the term of the financing; the portion scheduled to be amortized in the twelve months ended September 30, 2008 ($177,775) is included in other current assets.
Note 5 — Asset Retirement Obligation
The following table summarizes the changes in the Tandem’s asset retirement obligation for the nine months ended September 30, 2007 and 2006 as follows:
| | | | 2007 | | | 2006 | |
| Beginning of period: | | $ | 1,855,707 | | | 1,640,940 | |
| Additional abandonment obligations from new wells | | | — | | | 34,264 | |
| Revisions of previous estimates | | | (57,536 | ) | | — | |
| Accretion expense | | | 110,011 | | | 107,280 | |
| End of period: | | $ | 1,908,182 | | | 1,782,484 | |
TEC’s long-term debt at September 30, 2007 and December 31, 2006 consisted of the following:
| | | | 2007 | | | 2006 | |
| Revolving line of credit | | $ | 20,750,000 | | | 21,000,000 | |
| Notes to former TEC and Shamrock owners | | | 21,000,000 | | | 21,000,000 | |
| Total long-term debt | | | 41,750,000 | | | 42,000,000 | |
| Less current portion of long-term debt | | | (20,750,000 | ) | | (1,750,000 | ) |
| Long-term debt, net of current portion | | $ | 21,000,000 | | | 40,250,000 | |
Revolving Line of Credit
On June 8, 2005, TEC entered into a revolving line of credit agreement with a bank to provide an initial borrowing base of up to $23.0 million. The borrowing base is reduced by payments of $250,000 each month beginning July 1, 2005, and the lender may redetermine the borrowing base at its discretion. The revolving line of credit expires June 8, 2008. Under the terms of the third amendment to the credit agreement, dated September 21, 2006, and in anticipation of the impending asset sale referred to in Note 12, the borrowing base was set at $21.35 million and the mandatory principal reduction requirement was waived until December 1, 2006. The December 1, 2006 principle reduction requirement was waived. On June 1, 2007, under the terms of the fourth amendment to the credit agreement, the new borrowing base was set at $21.1 million with mandatory principle reduction requirements of $250,000 per month beginning October 1, 2007. Since the revolving line of credit is due on June 8, 2008, TEC has reclassed the entire $20,750,000 as current as of September 30, 2007. As discussed more fully in Note 12, the sale of the assets of TEC to Platinum Energy Resources, Inc., (Platinum) was consummated on October 26, 2007. TEC assigned all rights and obligations under the credit facility to Platinum. Pursuant to the amended credit facility, a new borrowing base was set at $5,000,000. All outstanding borrowings under the Credit Agreement were paid off at the closing of the Acquisition. Accordingly there are currently no outstanding borrowings under the Credit Agreement.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 6 — Long-Term Debt - (Continued)
The revolving line of credit is secured by Tandem’s oil and gas properties. The proceeds from the initial borrowings under the revolving line of credit were used primarily for the Shamrock acquisition in 2005 and in conjunction with the stock redemption agreement with one of TEC’s predecessor stockholders in the amount of $13.0 million also in 2005.
The revolving line of credit bears interest at either the bank’s base rate or LIBOR, plus a margin which varies with the ratio of Tandem’s outstanding borrowings to a defined borrowing base. Tandem can choose periodically to change the interest rate base which applies to outstanding borrowings. As of September 30, 2007, $20.25 million due under the revolving line of credit bears interest payable at LIBOR plus 2.25% (8.05%), and $500,000 due under a floating rate loan bears interest at prime (7.75%).
Under the terms of revolving line of credit agreement, Tandem must maintain certain financial ratios, must repay any amounts due in excess of the borrowing base, and may not declare any dividends or enter into any transactions resulting in a change in control, without the lender’s consent. In connection with the revolving line of credit, Tandem entered into crude oil and natural gas derivative swaps, puts and calls discussed in Note 8.
Notes to Former TEC and Shamrock Owners
As discussed in Note 3, Tandem issued a note payable to the sole stockholder of TEC as part of the overall consideration for the share exchange. Such note, in the principle amount of $12.0 million, bears interest at a national bank’s prime rate (7.75% at September 30, 2007) payable monthly. Interest only is due through May 31, 2009, at which point the note and any unpaid interest is due in full.
As discussed in Note 3, TEC issued notes payable to three individuals as part of the overall consideration for the acquisition of the Shamrock properties. Such notes, in the aggregate totaling $9.0 million, bear interest at a national bank’s prime rate (7.75% at September 30, 2007) payable monthly. Interest is due through May 31, 2009, at which point the note and any unpaid interest is due in full.
Scheduled Maturities
Annual maturities of TEC’s long-term debt for the periods ended September 30, are as follows:
| 2008 | | $ | 20,750,000 | |
| 2009 (1) | | | 21,000,000 | |
Note 7 — Income Taxes
Tandem had no deferred taxes or liabilities as of September 30, 2007 and December 31, 2006 as a result of the utilization of net operating losses.
Income tax benefit (expense) for the nine months ended September 30, 2007 and 2006, differs from the expected amount based on Tandem’s income (loss) before income taxes computed at the federal statutory income tax rate as follows:
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 7 — Income Taxes - (continued)
| | | | 2007 | | | 2006 | |
| Income tax benefit (expense) computed at statutory rate | | $ | (31,328 | ) | | (2,068,442 | ) |
| Nondeductible expenses and other | | | 400 | | | — | |
| Utilization (carryover) of net operating losses | | | 30,928 | | | 2,068,442 | |
| Total income tax benefit (expense) | | $ | — | | | — | |
At September 30, 2007, Tandem’s future financial and tax net operating loss carryforward benefits were approximately $5.4 million and $1.0 million, respectively, and are available to reduce future income taxes. If not utilized, the carryforwards will expire in 2025.
Note 8 — Price, Interest Rate and Credit Risk Management Activities
Price and Interest Rate Risks
Tandem engages in price risk management activities from time to time. These activities are intended to manage Tandem’s exposure to fluctuations in commodity prices for natural gas and crude oil. Tandem utilizes derivative financial instruments, primarily price collars, puts and calls, as the means to manage this price risk. In addition to these financial transactions, Tandem is a party to various physical commodity contracts for the sale of hydrocarbons that cover varying periods of time and have varying pricing provisions. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137, 138 and 149, these various physical commodity contracts qualify for the normal purchases and normal sales exception and therefore, are not subject to hedge accounting or mark-to-market accounting. The financial impact of these various physical commodity contracts is included in revenues at the time of settlement, which in turn affects average realized hydrocarbon prices.
During 2006 and 2005, as discussed in Note 6, Tandem’s revolving line of credit required Tandem to execute various crude oil and natural gas swaps, collars, puts and calls (derivative financial instruments). Tandem has elected not to designate any of its derivative financial contracts as accounting hedges and, accordingly, has accounted for these derivative financial contracts using mark-to-market accounting. For the nine months ended September 30, 2007 and 2006, Tandem recognized a ($1.1) million loss and a $2.9 million gain associated with the change in the fair value of derivatives.
Tandem has not entered into any additional crude oil or natural gas financial derivative contracts since December 31, 2006. Tandem accounts for its financial derivative contracts using mark-to-market accounting.
Presented below are summaries of Tandem’s crude oil and natural gas derivative financial contracts at September 30, 2007 and December 31, 2006, with crude oil prices expressed in dollars per barrels of crude oil and notional crude oil volumes in barrels of crude oil per year; and natural gas prices expressed in dollars per million British thermal units ($/MMBtu) and notional natural gas volumes in million British thermal units per year (MMBtuy). As indicated, Tandem does not have any financial derivative contracts that extend beyond December 2009.
The total fair value of the crude oil and natural gas financial derivative contracts at September 30, 2007, was a liability of approximately $2.1 million as follows:
| Period Ended September 30, | | Instrument Type | | Total Volumes (MMBTU/BBL) | | Weighted Average (Floor/Ceiling) | | Fair Value Asset/ (Liability) (Stated in Thousands) | |
| 2008 | | | Gas Collar | | | 504,000 | | $ | 5.00/11.02 | | $ | (59 | ) |
| | | | Gas Call Option Sold | | | 504,000 | | | 9.10 | | | (252 | ) |
| | | | Gas Call Option Purchased | | | 504,000 | | | 12.00 | | | 88 | |
| | | | Gas Put Option Sold | | | 504,000 | | | 5.00 | | | (29 | ) |
| | | | Gas Put Option Purchased | | | 504,000 | | | 6.00 | | | 100 | |
| | | | Oil Collar | | | 136,336 | | | 40.00/72.10 | | | (1,088 | ) |
| | | | Oil Call Option Sold | | | 150,000 | | | 67.00 | | | (1,140 | ) |
| | | | Oil Call Option Purchased | | | 150,000 | | | 72.10 | | | 589 | |
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 8 — Price, Interest Rate and Credit Risk Management Activities - (continued)
| Period Ended September, 30 | | | Instrument Type | | | Total Volumes (MMBTU/BBL) | | | Weighted Average (Floor/Ceiling) | | | Fair Value Asset/ (Liability) (Stated in Thousands) | |
| 2009 | | | Oil Swaps | | | 90,000 | | | 71.00 | | | (236 | ) |
| 2010 | | | Oil Swaps | | | 30,000 | | | 71.00 | | | (52 | ) |
| | | | Total fair value liability | | | | | | | | $ | (2,079 | ) |
The fair value of Tandem’s financial derivative contracts at September 30, 2007 are shown in the accompanying financial statements as follows (in thousands):
| Fair value of commodity derivative: | | | |
| Current portion | | $ | (1,791 | ) |
| Long-term portion | | | (288 | ) |
| Total fair value liability | | $ | (2,079 | ) |
The total fair value of the crude oil and natural gas financial derivative contracts at December 31, 2006, was a liability of approximately $1.1 million as follows:
| Period | | | Instrument Type | | | Total Volumes (MMBTU/BBL) | | | Weighted Average (Floor/Ceiling) | | | Fair Value Asset/ (Liability) (Stated in Thousands) | |
| 2007 | | | Gas Collar | | | 504,000 | | $ | 5.00/11.02 | | $ | (44 | ) |
| | | | Gas Call Option Sold | | | 504,000 | | | 9.10 | | | (279 | ) |
| | | | Gas Call Option Purchased | | | 504,000 | | | 12.00 | | | 125 | |
| | | | Gas Put Option Sold | | | 504,000 | | | 5.00 | | | (81 | ) |
| | | | Gas Put Option Purchased | | | 504,000 | | | 6.00 | | | 220 | |
| | | | Oil Collar | | | 142,834 | | | 40.00/72.10 | | | (337 | ) |
| | | | Oil Call Option Sold | | | 150,000 | | | 67.00 | | | (629 | ) |
| | | | Oil Call Option Purchased | | | 150,000 | | | 72.10 | | | 392 | |
| 2008 | | | Gas Collar | | | 378,000 | | | 5.00/11.02 | | | (113 | ) |
| | | | Gas Call Option Sold | | | 378,000 | | | 9.10 | | | (361 | ) |
| | | | Gas Call Option Purchased | | | 378,000 | | | 12.00 | | | 186 | |
| | | | Gas Put Option Sold | | | 378,000 | | | 5.00 | | | (74 | ) |
| | | | Gas Put Option Purchased | | | 378,000 | | | 6.00 | | | 170 | |
| | | | Oil Collar | | | 102,085 | | | 40.00/72.10 | | | (433 | ) |
| | | | Oil Call Option Sold | | | 112,500 | | | 67.00 | | | (769 | ) |
| | | | Oil Call Option Purchased | | | 112,500 | | | 72.10 | | | 544 | |
| 2009 | | | Oil Swaps | | | 120,000 | | | 71.00 | | | 409 | |
| | | | Total fair value liability | | | | | | | | $ | (1,074 | ) |
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 8 — Price, Interest Rate and Credit Risk Management Activities - (continued)
The fair value of Tandem’s financial derivative contracts at December 31, 2006 are shown in the accompanying financial statements as follows (in thousands):
| Fair value of commodity derivative: | | | |
| Current portion | | $ | (633 | ) |
| Long-term portion | | | (441 | ) |
| Total fair value liability | | $ | (1,074 | ) |
The natural gas and crude oil prices shown in the above tables are based on the corresponding NYMEX index and have been valued using actively quoted prices and quotes obtained from the counterparties to the derivative agreements. The above prices represent a weighted average of several contracts entered into and are on a per MMBtu or per barrel basis for gas and oil derivatives, respectively. Total volumes shown for the crude oil collar reflect net volumetric positions with a single counterparty under which contracts provide for netting of all settlement amounts.
The following table summarizes the estimated fair value of financial instruments and related transactions at September 30, 2007 and December 31,2006 (in millions): (The carrying amount and the estimated fair value (1) are the same for each period reported.
| | | September 30, 2007 | | December 31, 2006 | |
| Long-Term Debt | | $ | 21.0 | | | 40.0 | |
| NYMEX-Related Commodity Derivative | | |
| Market Positions(1) | | $ | 2.1 | | | 1.1 | |
| | (1) | Estimated fair values have been determined by using available market data and valuation methodologies. Judgment is required in interpreting market data and the use of different market assumptions or estimation methodologies may affect the estimated fair value amounts. |
Note 9 — Commitments and Contingencies
Legal Proceedings
Except as discussed in Note 13, Tandem is not currently a defendant in any lawsuit arising in the ordinary course of business.
Note 10 — Related Party Transactions
During the nine months ended September 30, 2007, Mixon Drilling, Inc. , a wholly owned subsidiary of TEC, received approximately $49 thousand from a major shareholder to drill a well in southeast Texas. The shareholder is neither an employee nor a director of TEC, and the contract drilling rate was commensurate with third party rates.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 11 — Oil and Gas Properties
The following table sets forth changes in Tandem’s capitalized costs for oil and gas properties for the periods ended September 30, 2007 and December 31, 2006 and 2005:
| | | Intangible Costs | | Lease & Well Equipment | | Leasehold Cost | | Total | |
| Balance at December 31, 2005 | | $ | 5,278,087 | | | 10,498,577 | | | 13,299,370 | | | 29,076,034 | |
| Additions | | | 4,228,983 | | | 2,328,231 | | | 6,290 | | | 6,563,504 | |
| Balance at December 31, 2006 | | | 9,507,070 | | | 12,826,808 | | | 13,305,660 | | | 35,639,538 | |
| Additions | | | 421,224 | | | 696,292 | | | — | | | 1,117,516 | |
| Balance at September 30, 2007 | | $ | 9,928,294 | | | 13,523,100 | | | 13,305,660 | | | 36,757,054 | |
Note 12 — Subsequent Event - Sale of Tandem Assets
On January 26, 2006, Tandem announced that it had executed a definitive merger agreement (“Merger Agreement”) with Platinum, a publicly-owned entity, for the acquisition of 100% of the outstanding stock of Tandem for total cash consideration of approximately $102 million.
On October 5, 2006, Platinum and Tandem announced that the proposed merger had been terminated, and announced a restructured transaction from a merger transaction to an acquisition of the assets of Tandem’s operating subsidiary TEC, pursuant to a plan of reorganization under Section 368(a)(1)(C) of the Internal Revenue Code. As a part of the new Asset Acquisition Agreement and Plan of Reorganization, dated October 4, 2006, Platinum Energy will acquire all of the assets and assume substantially all of the liabilities of TEC, including approximately $42 million of TEC’s debt, in exchange for the issuance of approximately 8 million Platinum shares to TEC shareholders.
On October 26, 2007, the sale of TEC’s assets to Platinum was consummated and closed. The total number of shares received by TEC was 7,692,308, based on $60 million divided by the per share cash value of the Platinum IPO trust account at the time of closing. The per share cash value was $7.80 as of the closing date. Under the terms of the agreement, TEC has liquidated and distributed its assets, consisting solely of the Platinum shares to Tandem, and Platinum has agreed to register such shares with the Securities and Exchange Commission. Once the registration of the shares is complete, Tandem will distribute the Platinum shares to Tandem’s shareholders.
Note 13 — Litigation
As discussed in Note 3, in early March, 2005, Tandem, whose board was comprised solely of one of its promoters, Lyle Mortensen, issued 20 million restricted shares of its common stock to Mr. Mortensen. Some of these shares were subsequently transferred by Mr. Mortensen to others including principals of TEC and Shamrock, Tim Culp, Dyke Culp and Jack Chambers, in late March, 2005. Concurrently, Mr. Mortensen resigned as a director and officer of Tandem. Tandem’s board cancelled all of the 20 million shares on the grounds that the stock was issued without consideration from Mr. Mortensen, in that the shares were originally issued in fulfillment of a planned acquisition of TEC/Shamrock by a Texas corporation formed by Mr. Mortensen to facilitate a contemplated merger of the new Texas corporation and Tandem. This contemplated merger never occurred. All of the cancelled shares were returned to Tandem, except for 2.878 million shares controlled by Mr. Mortensen. Management of Tandem believes that all of the shares controlled by Mr. Mortensen are null and void and has instructed its common stock transfer agent to place a hold on the Mr. Mortensen common stock certificates. On May 17, 2006, Tandem received notification from a third party claiming to be a “holder in due course” of a certificate representing 2.7 million shares of Tandem common stock controlled by Mr. Mortensen and a demand that certificate be reissued without a restrictive legend as 2.7 million free-trading shares. Management of Tandem has and will continue to vigorously contest the third party claim.
On May 23, 2006, Tandem filed a lawsuit in Nevada District Court against Tandem’s transfer agent, the third party and three other defendants. The third party, as well as the three other defendants, successfully challenged the jurisdiction of the Nevada court over them and were therefore able to be excluded from the lawsuit, which proceeded without them and resulted in the court rendering a judgment that the certificates evidencing the shares are invalid and void and directing Tandem’s transfer agent to void the certificates if presented for transfer, as well as enjoining the transfer agent from transferring the certificates if so presented.
TANDEM ENERGY HOLDINGS, INC.
(Successor to Tandem Energy Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007 and 2006
Note 13 — Litigation - (Continued)
The third party filed a competing lawsuit against Tandem and Platinum in the Florida Circuit court on or about June 14, 2006, seeking a declaration by the court that Tandem’s cancellation of the shares was improper and that the third party is the rightful owner of the shares, and an injunction prohibiting Tandem and Platinum from taking any action in detriment to his alleged rights in and to the shares. Tandem challenged the jurisdiction of the Florida court over it since it has had no contact with the state of Florida, and was successful in getting the judge in that lawsuit to enter an order dismissing the entire complaint filed by the third party on the grounds that the court did not have jurisdiction over the matter. The third party then sought approval of the court to file an amended complaint, but prior to any ruling by the court, the third party dismissed his lawsuit. On June 12, 2007, the third party filed a lawsuit in the United States District Court for the Western District of Texas, Midland-Odessa Division, against Tandem, TEC, and Messrs. Yocham, Culp, Chambers and Cunningham, and Tandem's transfer agent alleging conversion and conspiracy to convert with respect to the certificate representing the 2.7 million shares, and the Tandem, TEC and the other defendants in this lawsuit are vigorously contesting these allegations. Accordingly, based on SFAS No. 5, Accounting for Contingencies, no liability has been recorded in the accompanying consolidated financial statements.
On September 25, 2006, Tandem filed a lawsuit against Mr. Mortensen and Mr. Mortensen’s corporate affiliate in the Judicial District Court in Tarrant County, Texas, the domicile of Mr. Mortensen and his affiliate, seeking a declaration by the court that the certificates issued to Mr. Mortensen and subsequently transferred to his affiliate are void, that the certificates were properly cancelled by Tandem and that the transfer agent is authorized to cancel and destroy the certificates. In addition, Tandem is seeking a temporary and permanent injunction against Mr. Mortensen, his affiliate and any other person in possession of the certificates prohibiting any transfer or other disposition of the certificates and ordering that they be cancelled. An answer in this lawsuit was filed by Mr. Mortensen and his affiliate, and Tandem is now proceeding with a vigorous prosecution of this case.
