UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
(RULE 14A-101)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.1a-11(c) or ss.240.1a-12
CRIMSON EXPLORATION INC.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing is calculated and state how it was
determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(4) Date Filed:
CRIMSON EXPLORATION INC.
480 N. Sam Houston Parkway E.
Suite 300
Houston, Texas 77060
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 12, 2006
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of
Crimson Exploration Inc. will be held on Friday, May 12, 2006 at 10:00 a.m. CDT,
at 480 N. Sam Houston Parkway E., Suite 300, Houston, Texas 77060, (281)
820-1919, for the following purposes:
(1) To elect five directors to hold office until the next annual
meeting of stockholders and until their successors are duly
elected and qualified.
(2) To ratify the appointment of Grant Thornton LLP as our independent
auditors for the fiscal year ending December 31, 2006; and
(3) To consider and act upon such other business as may properly come
before the meeting or any adjournments or postponement thereof.
The close of business on April 3, 2006 has been fixed as the record
date for determining stockholders entitled to notice of, and to vote at, the
meeting or any adjournments or postponement thereof. For at least 10 days prior
to the meeting, a complete list of stockholders entitled to vote at the meeting
will be open to any stockholder's examination during ordinary business hours at
our offices at 480 N. Sam Houston Parkway E., Suite 300, Houston, Texas 77060.
A proxy for the meeting and a proxy statement with information
concerning the matters to be acted upon is enclosed herewith.
By Order of the Board of Directors
-------------------------------------
Allan D. Keel
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Houston, Texas
April 12, 2006
YOUR VOTE IS IMPORTANT NO MATTER HOW LARGE OR SMALL YOUR HOLDINGS MAY BE. IF YOU
DO NOT EXPECT TO BE PRESENT AT THE MEETING IN PERSON, YOU ARE URGED TO
IMMEDIATELY COMPLETE, DATE, SIGN, DETACH AND RETURN THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
CRIMSON EXPLORATION INC.
480 N. Sam Houston Parkway E.
Suite 300
Houston, Texas 77060
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 12, 2006
The Board of Directors (the "BOARD") of Crimson Exploration Inc. (the
"COMPANY" or "CRIMSON") is furnishing this proxy statement to stockholders
beginning on or about April 12, 2006 in connection with a solicitation of
proxies for use at the annual meeting of stockholders to be held on Friday, May
12, 2006, at 10:00 a.m. CDT, at 480 N. Sam Houston Parkway E., Suite 300,
Houston, Texas 77060, (281) 820-1919, and at all adjournments or postponements
thereof (the "ANNUAL MEETING"), for the purposes set forth in the attached
Notice of Annual Meeting of Stockholders.
All shares represented by a valid proxy, properly executed, duly
returned to us and not revoked will be voted in accordance with the instructions
contained therein. The shares represented by executed but unmarked proxies will
be voted (i) FOR the nominees for election as directors named herein under
"Election of Directors", and (ii) FOR the ratification of the appointment of
Grant Thornton LLP as our independent auditors for the fiscal year ending
December 31, 2006, and at the discretion of the person named as proxy with
regard to any other matter that may properly come before the Annual Meeting.
Executing a proxy given in response to this solicitation will not
affect a stockholder's right to attend the Annual Meeting and to vote in person.
Presence at the Annual Meeting of a stockholder who has signed a proxy does not
in itself revoke a proxy. Any stockholder giving a proxy may revoke it at any
time by giving written notice thereof to Crimson Exploration Inc., 480 N. Sam
Houston Parkway E., Suite 300, Houston, Texas 77060, Attention: Stephen W.
Schoppe.
RECORD DATE AND VOTING SECURITIES
The record date for determining the stockholders entitled to vote at
the Annual Meeting is the close of business on April 3, 2006 (the "RECORD
DATE"). On that date, 33,093,832 shares of our Common Stock, par value $.001 per
share ("COMMON STOCK"), were outstanding and entitled to vote. In deciding all
questions and other matters, a holder of Common Stock on the Record Date may
cast one vote for each share of Common Stock registered in his or her name.
Shares of our Series G Convertible Preferred Stock, par value $.01 per share
(the "SERIES G PREFERRED STOCK"), and shares of our Series H Convertible
Preferred Stock, par value $.01 per share (the "SERIES H PREFERRED STOCK"), may
vote on an as converted basis with the Common Stock with respect to matters on
which approval of our stockholders may be required. However, with respect to the
election of directors, the Series G Preferred Stock is entitled to elect a
majority of our directors, but not the remaining directors, which the holders of
the Common Stock and Series H Preferred Stock are entitled to elect. On the
Record Date, 81,000 shares of Series G Preferred Stock, representing the voting
power of 48,909,600 shares of Common Stock, and 5,250 shares of Series H
Preferred Stock, representing the voting power of 7,500,000 shares of Common
Stock, were outstanding. Our Series D Preferred Stock (the "SERIES D PREFERRED
STOCK") and Cumulative Convertible Preferred Stock, Series E (the "SERIES E
PREFERRED STOCK"), $.01 par value per share, of which 8,000 and 9,000 shares,
respectively, are outstanding, do not have voting rights unless required by law
or as set forth in their respective Statements of Resolution.
A significant portion of our capital stock's voting power is held by
one investor and by our management. See "Security Ownership of Certain
Beneficial Owners and Management."
QUORUM AND VOTING
To be validly approved by the stockholders, two of the director
nominees (as indicated in Proposal No. 1) must be elected by a plurality of
votes cast by holders of the Common Stock and Series H Preferred Stock entitled
to vote at the Annual Meeting; the remaining three director nominees (as
indicated in Proposal No. 1) must be elected by a majority of votes cast by
holders of the Series G Preferred Stock entitled to vote at the Annual Meeting.
The proposal to ratify our appointment of Grant Thronton LLP for the fiscal year
ended December 31, 2006 must be approved by the affirmative vote of a majority
of votes that are actually voted at the Annual Meeting in respect of the shares
of Common Stock, Series G Preferred Stock and Series H Preferred Stock. Each
share of Common Stock is entitled to one vote per share. Each share of Series G
Preferred Stock votes on an as converted basis with the Common Stock on the
second proposal, the ratification of Grant Thornton LLP as our independent
auditors for the fiscal year ending December 31, 2006. With respect to the first
proposal regarding the election of directors, each share of Series G Preferred
Stock is not entitled to vote except as a separate class for the three Series G
Preferred Stock director nominees (as indicated in Proposal No. 1), in which
case each share is entitled to one vote. The Series G Preferred Stock currently
has a conversion price of $.90 a share; on a fully converted basis the 81,000
shares of Series G Preferred Stock (including accrued and unpaid dividends to
April 1) would convert into 48,909,600 shares of Common Stock. Each share of
Series H Preferred Stock votes on an as converted basis with the Common Stock on
the proposals described in this statement. The Series H Preferred Stock
currently has a conversion price of $.35 a share; on a fully converted basis the
5,250 shares of Series H Preferred Stock would convert into 7,500,000 shares of
Common Stock.
2
Only votes cast "for" a matter constitute affirmative votes. A majority
of the issued and outstanding shares of Common Stock and Series G Preferred
Stock and Series H Preferred Stock (on an as converted basis) are necessary to
constitute a quorum to transact business. Each share represented at the Annual
Meeting in person or by Proxy will be counted towards a quorum. Votes "withheld"
or abstaining from voting are counted for quorum purposes.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board consists of five directors, a majority of which the Series G
Preferred Stock, voting as a class, is entitled to elect. The two director
nominees indicated below which the holders of the Common Stock and Series H
Preferred Stock are entitled to vote on as a single class (the "COMMON/SERIES H
NOMINEES") have been nominated by the Board for re-election to serve until the
next Annual Meeting of Stockholders and until their successors have been elected
and qualified. The three director nominees indicated below which the holders of
the Series G Preferred Stock are entitled to vote on as a class (the "SERIES G
NOMINEES"; cumulatively, the "NOMINEES") have been nominated by the Board
members elected by holders of the Series G Preferred Stock at our last annual
meeting for re-election to serve until the next Annual Meeting of Stockholders
and until their successors have been elected and qualified.
It is expected that the five Nominees named below will be able to
accept such nominations. If any Nominee for any reason is unable or is unwilling
to serve at the time of the Annual Meeting, the Proxy holder may vote the Proxy
for a substitute nominee or nominees to the extent such holder is entitled to
vote on such nominee. The following sets forth information as to the five
Nominees for election at the Annual Meeting, including their ages, present
principal occupations, other business experience during the last five years, and
directorships in other publicly-held companies.
THE BOARD RECOMMENDS THE STOCKHOLDERS VOTE "FOR" THE ELECTION
OF EACH OF THE NOMINEES LISTED BELOW.
DIRECTORS AND NOMINEES
SERIES G NOMINEES
-----------------
YEAR FIRST
ELECTED
NAME AGE POSITION DIRECTOR
---------------------------------------------------------------------------------------------------------------
Allan D. Keel 46 President, Chief Executive 2005
Officer and Director
B. James Ford 37 Director 2005
Skardon F. Baker 36 Director 2005
3
COMMON/SERIES H NOMINEES
------------------------- YEAR FIRST
ELECTED
NAME AGE POSITION DIRECTOR
---------------------------------------------------------------------------------------------------------------
Lee B. Backsen 65 Director 2005
Lon McCain 58 Director 2005
ALLAN D. KEEL was appointed Chief Executive Officer and President and
joined the Company's board of directors on February 28, 2005. Before joining
Crimson, Mr. Keel was Vice President/General Manager of Westport Resources,
Houston office, during 2004. In this role he was responsible for Westport
Resources' Gulf of Mexico operations including acquisitions, development and
exploration. In 2003, Mr. Keel served as a consultant to both domestic and
international companies in building their presence in the Gulf of Mexico. From
mid 2000 until mid 2001, Mr. Keel served as a Vice President at Enron Energy
Finance where he worked on private equity transactions and volumetric production
payments. From mid 2001 through 2002, Mr. Keel served as President and CEO of
Mariner Energy Company, a majority owned affiliate of Enron. Subsequent to
Enron's bankruptcy and its decision to sell Mariner, Mr. Keel partnered with
Oaktree Capital Management, LLC in an effort to acquire the company. From 1996
until mid-2000, Mr. Keel was Vice President/General Manager for Westport
Resources, where he built the Gulf of Mexico division from a grassroots effort.
From 1984 to 1996, Mr. Keel was with Energen Resources where he directed the
company's exploration, joint venture and acquisition activities. He received BS
and MS degrees in geology from the University of Alabama and an MBA from the
Owen School of Management at Vanderbilt University. Mr. Keel was appointed
pursuant to the terms of the Series G Preferred Stock, the majority of which is
held by OCM GW Holdings, LLC whose ultimate parent is Oaktree Capital
Management, LLC.
B. JAMES FORD became a member of the Company's board of directors on
February 28, 2005. Mr. Ford is a Managing Director of Oaktree Capital
Management, LLC. Before joining Oaktree in June 1996, Mr. Ford was a consultant
with McKinsey & Co., and a financial analyst in the Investment Banking
Department of PaineWebber Incorporated. Mr. Ford earned a Bachelor of Arts in
Economics from the University of California at Los Angeles and an MBA from the
Stanford University Graduate School of Business. He currently serves as a
director of Cebridge Connections, LLC and National Mobile Television. Mr. Ford
was appointed pursuant to the terms of the Series G Preferred Stock, the
majority of which is held by OCM GW Holdings, LLC whose ultimate parent is
Oaktree Capital Management, LLC.
SKARDON F. BAKER became a member of the Company's board of directors on
February 28, 2005. Mr. Baker is a Senior Vice President of Oaktree Capital
Management, LLC's Principal Activities Group. Prior to joining Oaktree in 2004,
Mr. Baker spent four years at J.P. Morgan Chase & Co. and its predecessor
organizations, serving most recently as a Vice President in the Mergers and
Acquisitions group responsible for identifying and executing leveraged
transactions for the firm's financial sponsor client base. During his time at
J.P. Morgan Chase, Mr. Baker worked on several advisory assignments in Asia and
also served as Executive Aide to Geoff Boisi and Don Layton, co-CEOs of JP
Morgan's Global Investment Banking operations. Prior to J.P. Morgan Chase, Mr.
Baker was a Director and Associate at The Beacon Group, LLC, a merger advisory
and private investment firm. Mr. Baker received an MBA from Harvard Business
School and a JD from the University of Texas School of Law, where he was
Associate Editor of The Texas Law Review. Prior to graduate school, Mr. Baker
served as Chief Speechwriter and Special Assistant for the Office of Governor
George W. Bush. Prior to that, he was a Lieutenant in the United States Army.
Mr. Baker received an A.B. degree in Government magna cum laude from Harvard
University. Mr. Baker was appointed to the Board of the Company pursuant to the
terms of the Series G Preferred Stock, the majority of which is held by OCM GW
Holdings, LLC whose ultimate parent is Oaktree Capital Management, LLC.
4
LEE B. BACKSEN became a member of the Company's board of directors on
June 1, 2005. Mr. Backsen is Vice President - Exploration for Andex Resources,
LLC, a private oil and gas producing company, with responsibility for sourcing
exploration joint ventures. From 2000 until joining Andex in 2004, Mr. Backsen
was a consulting geologist for Continental Land & Fur Co., Inc. and Grant
Geophysical, Inc., for whom he screened exploratory prospects in the Texas and
Louisiana Gulf Coast Basins. Prior to establishing his consulting practice in
2000, Mr. Backsen spent over 35 years in the industry in senior exploration
management positions with Burlington Resources Inc., UMC Petroleum Corporation,
General Atlantic Gulf Coast Inc., Kerr McGee Corporation, Pelto Oil Company,
Spectrum Oil and Gas Company and Shell Oil Company. Mr. Backsen earned Bachelor
of Science degree and Masters of Science degree in Geology from Iowa State
University.
LON MCCAIN became a member of the Company's board of directors on June
1, 2005. Mr. McCain was Vice President, Treasurer and Chief Financial Officer of
Westport Resources Corporation, a large, publicly traded exploration and
production company, from 2001 until the sale of that company to Kerr McGee
Corporation in 2004. From 1992 until joining Westport, Mr. McCain was Senior
Vice President and Principal of Petrie Parkman & Co., an investment banking firm
specializing in the oil and gas industry. From 1978 until joining Petrie
Parkman, Mr. McCain held senior financial management positions with Presidio Oil
Company and Petro-Lewis Corporation and Ceres Capital. He currently serves as a
director of Transzap Inc. and Continental Resources, Inc. Mr. McCain received a
B.S. of Business Administration and a Masters of Business Administration/Finance
from the University of Denver. Mr. McCain has also been an Adjunct Professor of
Finance at the University of Denver since 1982.
Directors are elected annually and hold office until the next annual
meeting or until their successors are duly elected and qualified. The Board met
four times during 2005. No director during the last fiscal year attended fewer
than 75% of the total number of meetings of boards and committees on which that
director served during that year.
Stockholders desiring to communicate with the Board should do so by
sending regular mail to Board of Directors, 480 N. Sam Houston Parkway E., Suite
300, Houston, Texas 77060. We believe our responsiveness to stockholder
communications to the Board has been excellent.
The Company encourages, but does not require, directors to attend
annual meetings of stockholders. At the Company's 2005 stockholder meeting, all
members of the board at the time of the meeting attended.
5
CODE OF ETHICS
The Board has adopted a "code of ethics" as defined by the applicable
rules of the SEC, and has been posted on our Internet website,
http://www.crimsonexploration.com.
BOARD MEETINGS AND COMMITTEES
Our Board has established an audit committee and a compensation
committee. Although our board has not made a formal determination on the matter,
under current Nasdaq listing standards (which we are not currently subject to),
we believe that Skardon F. Baker, Lee B. Backsen and Lon McCain would be
considered independent directors.
The audit committee was established to review and appraise the audit
efforts of our independent auditors, and monitor our accounts, procedures and
internal controls. Our audit committee consists of Mr. McCain and Mr. Baker. The
committee met four times in 2005. The Board has determined that Mr. McCain is an
"audit committee financial expert" as defined under applicable SEC rules and
regulations.
The function of the compensation committee is to fix the annual
salaries and other compensation for our officers and key employees. Our
compensation committee consists of Mr. Ford and Mr. Backsen. The committee met
once in 2005.
The Board does not have a nominating committee. We believe that the
entire board is able to fulfill the functions of a nominating committee. In any
event, the directors elected solely by the Series G Preferred Stock,
constituting a majority of directors, are entitled to nominate the directors to
be elected by the holders of the Series G Preferred Stock or, if there are no
such directors, holders of a majority of the Series G Preferred Stock may
nominate the nominees for election as such directors, and the following
discussion is so qualified by the rights of the holders of the Series G
Preferred Stock and their elected directors. We do not have a charter addressing
director nominations.
The Board believes that candidates for director should have certain
minimum qualifications, including being able to read and understand financial
statements and having the highest personal integrity and ethics. The Board also
considers such factors as relevant expertise and experience, ability to devote
sufficient time to the affairs of the Company, demonstrated excellence in his or
her field, the ability to exercise sound business judgment and the commitment to
rigorously represent the long-term interests of the Company's stockholders.
Candidates for director will be reviewed in the context of the current
composition of the Board, the operating requirements of the Company and the
long-term interests of stockholders.
The Board does not have a formal process for identifying and evaluating
nominees for directors. Instead, it uses its network of contacts to identify
potential candidates. The Board will conduct any appropriate and necessary
inquiries into the backgrounds and qualifications of possible candidates after
considering the function and needs of the board. The Board will meet to discuss
and consider such candidates' qualifications and then select a nominee for
recommendation to the Board by majority vote, subject to the rights of the
holders of the Series G Preferred Stock and their elected directors to nominate
and elect a majority of directors.
6
The Board has not established procedures for considering nominees
recommended by stockholders.
COMPENSATION OF DIRECTORS
The stockholders approved an amended and restated Employee Stock Option
Plan on May 28, 1998, which was further amended and restated effective April 1,
2001 to increase the number of authorized shares to 2 million (and terminated on
February 11, 2004), which included a provision for the payment of reasonable
fees in cash or stock to directors. Effective July 15, 2004 the Board
established a 2004 Stock Option and Compensation Plan in which directors were
eligible to participate. The Board approved a 2005 Stock Incentive Plan
effective February 28, 2005, which includes directors as eligible participants
under the plan. On June 1, 2005, the Board approved a compensation plan for
non-employee directors providing for a $10,000 annual retainer, with a $2,000
($1,000 if by telephone) meeting attendance fee, for a maximum of $8,000 per
director per year, with an additional fee payable for attendance of committee
meetings held on days other than those on which the board meets. The chairman of
the audit and compensation committee is entitled to receive an annual retainer
of $5,000 and $2,500, respectively. Under the Plan, effective June 1, 2005, each
non-employee director was entitled to receive $15,000 of restricted stock, with
a two year vesting schedule, and upon re-election is entitled to receive $10,000
in restricted stock, with a one year vesting schedule. The number of shares are
determined based on the fair market value of the Company's common stock on the
date of grant. In addition, the Plan provides for reimbursement of expenses for
all directors in the performance of their duties, including reasonable travel
expenses incurred attending meetings. At the June 1, 2005 meeting, each
non-employee director, B. James Ford, Skardon F. Baker, Lee B. Backsen and Lon
McCain, in accordance with the Plan, was granted a restricted stock award
representing 17,045 shares of the Company's common stock. The shares of common
stock underlying the awards will become transferable and non-forfeitable two
years from the date of grant, and are forfeitable in the event a director
resigns before the end of the two year period. However, B. James Ford and
Skardon F. Baker elected not to receive such awards and they were subsequently
rescinded by the board of directors.
EXECUTIVE OFFICERS
The following table sets forth information on our executive officers, except
for Allan D. Keel whose information is included with the information regarding
our directors above:
YEAR FIRST ELECTED
NAME AGE POSITION OFFICER
----------------------------------------------------------------------------------------------------------------
E. Joseph Grady 53 Senior Vice President and Chief 2005
Financial Officer
Thomas R. Kaetzer 47 Senior Vice President of 1998
Operations
Tracy Price 47 Senior Vice President - 2005
Land/Business Development
Thomas H. Atkins 47 Senior Vice President - 2005
Exploration
Jay S. Mengle 52 Senior Vice President - 2005
Engineering
Richard L. Creel 57 Vice President of Finance and 1998
Controller
7
E. JOSEPH GRADY was appointed Vice President and Chief Financial
Officer on February 28, 2005. E. Joseph Grady is managing director of Vision
Fund Advisors, Inc., a financial advisory firm he co-founded in 2001. Mr. Grady
has over twenty-five years of financial, operational and administrative
experience, including seventeen years in the oil and gas industry. He was
formerly Senior Vice President - Finance and Chief Financial Officer of Texas
Petrochemicals Holdings, Inc. from April 2003 to July 2004 and Vice President -
Chief Financial Officer and Treasurer of Forcenergy Inc. from 1995 to 2001.
THOMAS R. KAETZER was appointed Senior Vice President and Chief
Operating Officer of the Company on September 15, 1998. From December 21, 1998
to February 28, 2005 he served as President and a director. Effective April 1,
2005, he was appointed as Senior Vice President of Operations. He was Chief
Executive Officer from March 20, 2001 until May 12, 2004. Prior to joining
Crimson, Mr. Kaetzer had 17 years experience in the oil and gas industry,
including 14 years with Texaco Inc., which involved the evaluation, exploitation
and management of oil and gas assets. He has both onshore and offshore
experience in operations and production management, asset acquisition,
development, drilling and workovers in the continental U.S., Gulf of Mexico,
North Sea, Colombia, Saudi Arabia, China and West Africa. Mr. Kaetzer has a
Masters Degree in Petroleum Engineering from Tulane University and a Bachelor of
Science Degree in Civil Engineering from the University of Illinois.
TRACY PRICE was appointed Senior Vice President - Land/Business
Development on April 1, 2005. Mr. Price joined the Company after serving as the
Senior Vice President - Land/Business Development for The Houston Exploration
Company from 2001 until joining the Company. Prior to his tenure at The Houston
Exploration Company, Mr. Price served as Manager of Land and Business
Development for Newfield Exploration Company between 1990 and 2001. From 1986 to
1990 Mr. Price was Land Manager for Apache Corporation. Prior to Apache, Mr.
Price has also served in similar land management capacities at Challenger
Minerals Inc. and Phillips Petroleum Company. Mr. Price received his BBA in
Petroleum Land Management from the University of Texas.
THOMAS H. ATKINS was appointed Senior Vice President - Exploration on
April 1, 2005. Mr. Atkins joined the Company after serving as the General
Manager - Gulf of Mexico for Newfield Exploration Company where he was employed
from 1998 until joining the Company. Prior to his tenure at Newfield, Mr. Atkins
served in various exploration capacities with EOG Resources and its predecessor
companies from 1984 to 1998, including prospect generator, development geologist
and finally as Exploration Manager. Mr. Atkins also worked at the Superior Oil
Company from 1981 through 1984. Mr. Atkins received a BS in Geology from the
University of Oklahoma.
JAY S. MENGLE was appointed Senior Vice President - Engineering on
April 1, 2005 after serving as the Shelf Asset Manager - Gulf of Mexico for Kerr
McGee Corporation subsequent to the 2004 merger with Westport Resources. Mr.
Mengle was with Westport Resources from 1998 to 2004, where he started
Westport's Gulf Coast/Gulf of Mexico drilling and production operations. Prior
to joining Westport, Mr. Mengle also served in various drilling, production and
marketing management capacities at Norcen Energy Resources, Kirby Exploration
and Mobil Oil Corp. Mr. Mengle received his BS in Petroleum Engineering from the
University of Texas.
8
RICHARD L. CREEL has served as controller of the Company since May 1,
1997 and was elected vice president of finance on May 28, 1998. Prior to joining
the Company, Mr. Creel served as Branch Manager of the Nashville, Tennessee
office of Management Reports and Services, Inc. He has also served as controller
of TLO Energy Corp. He has extensive experience in general accounting, petroleum
accounting and financial consulting and income tax preparation.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid
to our chief executive officers and our five most highly compensated executive
officers whose total annual compensation was $100,000 or more during the last
fiscal year ended December 31, 2005.
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
-------------------------------------------------------- ----------------------------------------
OTHER
ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK COMPEN-
NAME AND PRINCIPAL POSITION YEAR END SALARY($) BONUS($)(1)(2) SATION($)(3) AWARDS($)(2) OPTIONS(#) SATION($)
------------------------------ ----------- ----------- --------------- ------------- -------------- --------------- ---------
Allan D. Keel(4) 2005 $200,000 $60,000 -- $ 60,000 12,150,000 --
Chief Executive Officer and
President
2004 -- -- -- -- -- --
2003 -- -- -- -- -- --
John E. Loehr((3)) 2005 -- -- -- -- -- --
Former Chief Executive Officer
2004 -- -- -- -- -- --
2003 -- -- -- -- -- --
E. Joseph Grady(6) 2005 $180,000 $55,000 $33,077 $ 55,000 4,050,000 --
Senior Vice President and
Chief Financial Officer
2004 -- -- -- -- -- --
2003 -- -- -- -- -- --
Thomas R. Kaetzer ((7)) 2005 $175,618 -- -- -- 1,000,000 --
Senior Vice President -
Operations
2004 $150,000 -- $25,000 -- 210,000(5) --
2003 $150,000 -- $25,000 -- -- --
Tracy Price(8) 2005 $138,750 $27,750 -- $ 27,750 2,700,000 --
Senior Vice President -
Land/Business Development
2004 -- -- -- -- -- --
2003 -- -- -- -- -- --
Jay S. Mengle(9) 2005 $135,000 $27,000 -- $ 27,000 1,350,000 --
Senior Vice President -
Engineering
2004 -- -- -- -- -- --
2003 -- -- -- -- -- --
Thomas H. Atkins(10) 2005 $135,000 $27,000 -- $ 27,000 1,150,000 --
Senior Vice President -
Exploration
2004 -- -- -- -- -- --
2003 -- -- -- -- -- --
9
---------------------------------------
(1) Messrs. Keel and Grady elected to take half of their guaranteed cash bonus
for 2005 of $120,000 and $110,000, respectively, in restricted stock that
vests in one year from the date of grant.
(2) Aggregate value of restricted stock on March 1, 2006, awarded as
compensation for 2005, was $196,750, or 262,334 shares. Bonus compensation
was paid 50% in cash on March 15, 2006 and 50% in restricted common stock
of the Company with the vesting of the common stock to occur on March 1,
2007. Should any officer receiving the restricted stock leave the employ of
the Company prior to vesting then the stock award will be forfeited. The
fair market value of the common stock was determined to be $0.75/share (the
closing price of the stock on the OTC Bulletin Board) on the date of grant.
(3) Prerequisites that are less than the lesser of $50,000 or 10% of the
executive's salary and bonus have not been disclosed in the table in
accordance with SEC rules and regulations.
(4) Mr. Keel was appointed Chief Executive Officer and President of the Company
on February 28, 2005.
(5) Mr. Loehr, a former director, served as Chief Executive Officer from May
12, 2004 to February 28, 2005. He received no compensation for his services
as Chief Executive Officer.
(6) Mr. Grady was appointed Senior Vice President and Chief Financial Officer
of the Company of February 28, 2005. Pursuant to his employment contract,
Mr. Grady was reimbursed in 2005 for commuting costs prior to his planned
relocation to Houston, Texas in 2006.
(7) Mr. Kaetzer has held various other positions with the Company since his
employment in 1998. He was appointed Senior Vice President and Chief
Operating Officer of the Company on September 15, 1998. From December 21,
1998 to February 28, 2005 he served as President and as a director. He was
Chief Executive Officer from March 20, 2001 until May 12, 2004. Effective
April 1, 2005, he was appointed as Senior Vice President of Operations. In
2003 and 2004, he received a base salary of $150,000, plus a $25,000 annual
contribution to a life insurance savings account paid monthly. In his
employment agreement, Mr. Kaetzer was entitled to receive 5-year warrants
to purchase 300,000 shares of Common Stock to be issued 100,000 each year
over a three year period, beginning in 2002. After receiving warrants to
purchase 100,000 shares of Common Stock in 2002, Mr. Kaetzer elected to
receive options rather than warrants. In 2003, Mr. Kaetzer elected to defer
receipt of options to purchase 100,000 shares of Common Stock until 2004.
(8) Mr. Price was appointed Senior Vice President - Land/Business Development
on April 1, 2005.
(9) Mr. Mengle was appointed Senior Vice President - Engineering on
April 1, 2005.
(10) Mr. Atkins was appointed Senior Vice President - Exploration on
April 1, 2005.
OPTION GRANTS DURING 2005
The following table sets forth certain information concerning stock
options granted to the named executive officers during the year ended December
31, 2005.
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO GRANT DATE
UNDERLYING EMPLOYEES EXERCISE OR PRESENT
OPTIONS IN FISCAL BASE PRICE EXPIRATION VALUE ($)
NAME GRANTED (#) YEAR ($/SHARE) DATE (1)
-------------------------- ------------ ------------ ------------- ------------ ------------
Allan D. Keel 12,150,000 54.24% $.97/1.25/1.70(2) 2/28/2015 (2)
E. Joseph Grady 4,050,000 18.08% $.97/1.25/1.70(3) 2/28/2015 (3)
Thomas R. Kaetzer 1,000,000 4.46% $1.16/$1.70(4) 4/01/2015 (4)
Tracy Price 2,700,000 12.05% $1.16/$1.70(5) 4/01/2015 (5)
Jay S. Mengle 1,350,000 6.03% $1.16/$1.70(6) 4/01/2015 (6)
Thomas H. Atkins 1,150,000 5.13% $1.16/$1.70(7) 4/01/2015 (7)
---------------------------------------
(1) Present value for this option was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: (1) risk
free interest rate 2005- 3.0%; (2) weighted average expected life 2005-
6.0; (3) expected volatility of 2005- 92.75%; and (4) no expected
dividends. The present value of stock options granted is based on a
theoretical option-pricing model. In actuality, because the company's
employee stock options are not traded on an exchange, optionees can receive
no value nor derive any benefit from holding stock options under these
plans without an increase in the market price of the company's stock. Such
an increase in stock price would benefit all stockholders commensurately.
10
(2) Upon joining the Company, Mr. Keel received options to purchase 2,700,000
shares of the Company's Common Stock at an exercise price of $0.97 per
share, options to purchase 4,050,000 shares of the Company's Common Stock
at an exercise price of $1.25 per share, and options to purchase 5,400,000
shares of the Company's Common Stock at an exercise price of $1.70 per
share. Present value of these options as of December 31, 2005 are estimated
to be $1,809,000, $2,592,000 and $3,240,000, respectively.
(3) Upon joining the Company, Mr. Grady received options to purchase 900,000
shares of the Company's Common Stock at an exercise price of $0.97 per
share, options to purchase 1,350,000 shares of the Company's Common Stock
at an exercise price of $1.25 per share, and options to purchase 1,800,000
shares of the Company's Common Stock at an exercise price of $1.70 per
share. Present value of these options as of December 31, 2005 are estimated
to be $603,000, $864,000 and $1,080,000, respectively.
(4) Upon the February 2005 recapitalization, Mr. Kaetzer received options to
purchase 333,333 shares of the Company's Common Stock at an exercise price
of $1.16 per share and options to purchase 666,667 shares of the Company's
Common Stock at an exercise price of $1.70 per share. Present value of
these options as of December 31, 2005 are estimated to be $216,666 and
$400,000, respectively.
(5) Upon joining the Company, Mr. Price received options to purchase 900,000
shares of the Company's Common Stock at an exercise price of $1.16 per
share and options to purchase 1,800,000 shares of the Company's Common
Stock at an exercise price of $1.70 per share. Present value of these
options as of December 31, 2005 are estimated to be $585,000 and
$1,080,000, respectively.
(6) Upon joining the Company, Mr. Mengle received options to purchase 450,000
shares of the Company's Common Stock at an exercise price of $1.16 per
share and options to purchase 900,000 shares of the Company's Common Stock
at an exercise price of $1.70 per share. Present value of these options as
of December 31, 2005 are estimated to be $292,500 and $540,000,
respectively.
(7) Upon joining the Company, Mr. Atkins received options to purchase 383,000
shares of the Company's Common Stock at an exercise price of $1.16 per
share and options to purchase 767,000 shares of the Company's Common Stock
at an exercise price of $1.70 per share. Present value of these options as
of December 31, 2005 are estimated to be $248,950 and $460,200,
respectively.
11
OPTION EXERCISES DURING 2005 AND
YEAR END OPTION VALUES
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT FY
OPTIONS AT FY END(1) END(2) ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
-------------------------------------------------------------------------------
Allan D. Keel 0/12,150,000 -
John E. Loehr(3) 20,000/0 $3,000/0
E. Joseph Grady 0/4,050,000 -
Thomas R. Kaetzer 210,000/1,000,000 $64,500/0
Tracy Price 0/2,700,000 -
Jay S. Mengle 0/1,350,000 -
Thomas H. Atkins 0/1,150,000 -
---------------------------------------
(1) No shares were acquired or value realized upon the exercise of options
since no options were exercised by the named executive officers in 2005.
(2) A market price of $0.90 a share was used based on the closing price of our
Common Stock at December 30, 2005, the last day of the fiscal year on which
a closing price for our common stock was reported.
(3) Does not include 270,000 warrants held by Mr. Loehr at December 31, 2005
exercisable for $.75 a share.
12
The following table shows the Company's stockholder approved and
non-stockholder approved equity compensation plans as of December 31, 2005:
NUMBER OF
SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN
PLAN CATEGORY (A))
------------------------------------ ------------------------- ---------------------- ---------------------
(a) (b) (c)
Equity compensation plans approved 24,110,000 $1.36 4,303,576
by security holders
Equity compensation plans not 1,620,000 $.74 0
approved by security holders
Total 25,730,000 $1.32 4,303,576
Our three equity compensation plans with outstanding options that have
been approved by security holders to date is our amended and restated 1994
Employee Stock Option Plan, which terminated in February 2004, our 2004 Stock
Option and Compensation Plan and our 2005 Stock Incentive Plan. Although we
sought and obtained stockholder approval of the 2004 Stock Option and
Compensation Plan, neither the plan itself nor the outstanding grants were
contingent on stockholder approval. We have issued 22,400,000 options at a
weighted-average exercise price of $1.42 under the 2005 Stock Incentive Plan
("2005 Plan") (see "Executive Compensation"). The aggregate number of shares of
our Common Stock that may be issued and outstanding pursuant to the exercise of
awards under the 2005 Plan may not exceed 28,525,000 shares, reduced by
1,525,000, the number of shares of underlying options and awards granted under
the 2004 Plan, of which 1,362,000 are currently outstanding.
Since 1996 we have occasionally issued warrants to employees,
consultants and directors as additional compensation. These warrants have
exercise prices at $.75 per share and entitle the warrant holders to purchase up
to 690,000 shares of Common Stock. The warrants exercisable for Common Stock
contain certain anti-dilution provisions and have expiration dates from May 1,
2006 to December 1, 2006.
Additionally, warrants have occasionally been issued to lenders or
guarantors on loans to us as additional consideration for entering into the
loans or guaranties. These warrants have an exercise price ranging from $.01 to
$.75 per warrant and entitle the warrant holders to purchase up to 930,000
shares of Common Stock. The warrants having an exercise price of $0.01 per share
are applicable to 30,000 shares only. A former director of the Company has
625,000 of these warrants. The warrants contain certain anti-dilution provisions
and have expiration dates ranging from May 1, 2006 to January 10, 2008.
The weighted-average exercise price of our outstanding warrants and
outstanding options under the amended and restated 1994 Employee Stock Option
Plan and 2004 Stock Option and Compensation Plan is $.74 and $.56, respectively.
13
EMPLOYMENT AGREEMENTS
Effective February 28, 2005, we entered into employment agreements with
two officers, Allan D. Keel (President and Chief Executive Officer) and E.
Joseph Grady (Senior Vice President and Chief Financial Officer). Each agreement
has a term of three years with automatic yearly extensions unless we or the
officer elects not to extend the agreement. Each agreement provides for a base
salary and, starting in calendar year 2006 and thereafter, an annual
discretionary bonus of 0% to 100% of each officer's base salary to be
established by our Board or a duly authorized committee. Mr. Keel received a
base salary of $240,000 per year and a first year bonus of $120,000 for the year
ending December 31, 2005. Mr. Grady received a base salary of $220,000 per year
and a first year bonus of $110,000 for the year ending December 31, 2005.
Effective April 1, 2005, we entered into employment agreements with
three newly appointed officers: Tracy Price (Senior Vice President -
Land/Business Development); Thomas H. Atkins (Senior Vice President -
Exploration); and Jay S. Mengle (Senior Vice President - Engineering). In
addition, on April 1, 2005 the Company entered into an Employment Agreement with
Thomas R. Kaezter as Senior Vice President of Operations. Each agreement has a
term of two years with automatic yearly extensions unless we or the officer
elects not to extend the agreement. Each agreement provides for a base salary
and, starting in calendar year 2006 and thereafter, an annual discretionary
bonus of 0% to 70% of each officer's base salary to be established by our Board
or a duly authorized committee. Mr. Price will receive a base salary of $185,000
per year and Mr. Kaetzer, Mr. Atkins and Mr. Mengle will each receive a base
salary of $180,000 per year.
Each of these agreements provides for severance and change-in-control
payments in the event we terminate an officer's employment "without Cause" or if
the officer terminates for "Good Reason." "Cause" and "Good Reason" are narrowly
defined. "Change of Control" is deemed to occur when less than 10% of our Common
Stock is beneficially owned by Oaktree Capital Management, LLC and its
affiliates. If an officer is terminated by us "without Cause" or the officer
resigns for "Good Reason" then that officer will receive (A) a cash amount equal
to the greater of (i) two times the sum of the calendar year's base salary and
the prior year's discretionary bonus and (ii) $600,000 (or $500,000, in the case
of Mr. Price, Mr. Mengle, Mr. Atkins and Mr. Kaetzer) and (B) health insurance
benefits for two years from the termination date. If an officer is terminated by
us "without Cause" or the officer resigns for "Good Reason" within 90 days
before or 12 months after a Change of Control, payment of the entire cash
severance amount will be made in a lump sum on the earlier of the date on which
the Change of Control occurs and the officer's effective date of termination.
Otherwise, upon termination by us "without Cause" or by the officer for "Good
Reason", the officer will receive half of the cash severance amount in a lump
sum within 15 days of termination. The remainder of the cash severance payment
will be made when the officer gives 30 days' notice to us prior to the
conclusion of the 12 month period following the termination date agreeing to
comply with non-compete and non-solicitation provisions for an additional 12
months.
On February 28, 2005, the Company entered into Stock Option Agreements
with Mr. Keel and Mr. Grady. Mr. Grady received options to purchase 900,000
shares of the Company's Common Stock at an exercise price of $0.97 per share,
options to purchase 1,350,000 shares of the Company's Common Stock at an
exercise price of $1.25 per share, and options to purchase 1,800,000 shares of
the Company's Common Stock at an exercise price of $1.70 per share. Mr. Keel
received options to purchase 2,700,000 shares of the Company's Common Stock at
an exercise price of $0.97 per share, options to purchase 4,050,000 shares of
the Company's Common Stock at an exercise price of $1.25 per share, and options
to purchase 5,400,000 shares of the Company's Common Stock at an exercise price
of $1.70 per share.
14
On April 1, 2005, the Company entered into Stock Option Agreements with
Mr. Price, Mr. Mengle, Mr. Atkins and Mr. Kaetzer. Mr. Price received options to
purchase 900,000 shares of the Company's Common Stock at an exercise price of
$1.16 per share and options to purchase 1,800,000 shares of the Company's Common
Stock at an exercise price of $1.70 per share. Mr. Mengle received options to
purchase 450,000 shares of the Company's Common Stock at an exercise price of
$1.16 per share and options to purchase 900,000 shares of the Company's Common
Stock at an exercise price of $1.70 per share. Mr. Atkins received options to
purchase 383,000 shares of the Company's Common Stock at an exercise price of
$1.16 per share and options to purchase 767,000 shares of the Company's Common
Stock at an exercise price of $1.70 per share. Mr. Kaetzer received options to
purchase 333,333 shares of the Company's Common Stock at an exercise price of
$1.16 per share and options to purchase 666,667 shares of the Company's Common
Stock at an exercise price of $1.70 per share.
Each set of options granted will become vested and exercisable with
respect to 15% of the shares on the first anniversary of the date granted and
thereafter at the end of each full succeeding year from the date granted
according to the following: 25% on the second anniversary, an additional 25% on
the third anniversary and 35% on the fourth anniversary at which time each set
of granted options will be vested and exercisable.
REPORT OF THE BOARD ON EXECUTIVE COMPENSATION
In June 2005, the Board established a Compensation Committee and
authorized it to develop and administer an executive compensation system, which
should enable us to attract and retain qualified executives. Compensation for
the President and Chief Executive Officer, and other executive officers for
2005, to the extent not preapproved by the Board prior to the appointment of the
Compensation Committee in June 2005, was determined by the Compensation
Committee which functions under the philosophy that compensation of executive
officers, specifically including that of the President and Chief Executive
Officer, should be directly and materially linked to the Company's performance.
From February 2005 until June 2005 when Mr. Ford and Mr. Backsen were appointed
to the Compensation Committee, the Board performed the functions of the
Compensation Committee, although B. James Ford and Skardon F. Baker acted as the
interim Compensation Committee from time to time as necessary to comply with
requirements for action by a committee of two or more outside directors with
respect to compensation matters pertaining to our named executive officers
(prior to that time, two directors who did not stand for reelection at our 2005
Annual Meeting of Stockholders served on the Compensation Committee).
The overall compensation policy of the Company is to maximize
stockholder return by combining annual and long-term compensation to executives
based upon corporate and individual performance. Annual compensation was
generally paid in the form of base salary, which during fiscal year 2005 was
based upon the Compensation Committee's (or Board's, prior to June 2005)
recommendations and taking into account competitive factors and the historic
salary structure for various levels of responsibility within the Company, as
well as level and scope of responsibility, salaries paid for comparable
positions at similarly situated companies and individual and corporate
performance, and also taking into account senior management's recommendation as
to appropriate compensation for members of management reporting to them.
Long-term compensation to executives is built around the Company's stock option
programs. In 2005 the Board determined to enter into employment agreements with
our president and Chief Executive Officer and other key executive officers
providing for a set base salary with an annual discretionary bonus component to
award and encourage corporate and individual performance based on the factors
described above. Except for mandatory first year bonuses of $120,000 and
$110,000 paid to Messrs. Keel and Grady, respectively, for 2005, half of which
they voluntarily elected to receive in restricted stock with terms consistent
with those described below with respect to restricted stock awarded as bonus
compensation to our other executive officers, bonus compensation is determined
at the discretion of the Board or the compensation committee and will not be
considered "performance based compensation" under Section 162(m) of the Internal
Revenue Code. Based on our officer's current compensation levels it is unlikely
that deduction of such compensation will be limited under Section 162(m) and,
thus, the Board determined that it was appropriate to retain discretion to
determine compensation within the contractual parameters. Annual bonuses were
paid to other executive officers for services rendered in 2005. Mr. Price was
paid $55,500 and Messrs. Mengle and Atkins were each paid $54,000. These bonuses
were paid one-half in cash and one-half in restricted shares of common stock of
the Company valued as of the date of grant (i.e. March 1, 2006). The restricted
stock will vest one year following the date of grant and continuous employment
must be maintained during this period or the stock awards will be forfeited. The
individual bonuses paid for 2005 were determined by the Compensation Committee
in recognition of individual performance in satisfying corporate goals and
objectives.
15
The Company effects stock option grants from time-to-time as a
mechanism for providing long-term, non-cash compensation to executives. The
Board believes that stock options are an effective incentive for executives and
managers to create value for the Company and its stockholders since the value of
an option bears a direct relationship to appreciation in the Company's stock
price. By using stock-based compensation, the Company can focus much-needed cash
flow, which would otherwise be paid out as compensation, back into the daily
operations of the business. Individual stock option grants are subjectively
determined based upon a number of factors, including individual and Company
performance and prior year's grants. During 2005 there were options issued to
purchase 22,400,000 shares of our Common Stock, all of which were issued to
executive officers. Grants under our 2005 Stock Incentive Plan are intended to
qualify as "performance based compensation" and thus not subject to the limits
of Section 162(m).
All option grants were made at an exercise price equal to or greater
than the fair market value of the underlying stock on the date of grant.
Currently, approximately 22,400,000 outstanding options have an exercise price
greater than $0.90, the closing price of the underlying Common Stock on December
30, 2005.
This report is submitted by the members of the Compensation Committee:
B. James Ford
Lee B. Backsen
16
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In June 2005, B. James Ford and Lee B. Backsen were appointed to the
Compensation Committee; from February 2005 until June 2005 the Board performed
the functions of the Compensation Committee, although B. James Ford and Skardon
F. Baker acted as the interim Compensation Committee from time to time as
necessary. Prior to that time, two directors who did not stand for reelection at
our 2005 Annual Meeting of Stockholders served on the Compensation Committee
until February of that year. During fiscal year 2005 no interlocking
relationship existed between any member of the Board or Compensation Committee
and any member of the Board or Compensation Committee of any other company.
Allan D. Keel, a board member, is also our President and Chief Executive Officer
and, as described under "Certain Relationships and Related Transactions," lent
the Company approximately $120,000 in exchange for warrants to purchase common
stock prior to joining us (which was repaid in February 2005) and, concurrent
with the closing of our February 2005 recapitalization in which a subsidiary of
Oaktree Capital Management, LLC gained a controlling interest in us, received
$300,000, which was used to invest in the Company. Further, as described under
"Certain Relationships and Related Transactions," B. James Ford and Skardon F.
Baker are associated with Oaktree Capital Management, LLC, the parent of our
controlling stockholder as a result of the February 2005 transactions, which
entity was also a lender of $1 million dollars (subsequently repaid). Further,
one of our former directors and current beneficial owner of more than 5% of our
Common Stock who served on the Compensation Committee prior to the Oaktree
transaction was a partial owner of a company that received payments from us
pursuant to the exercise of a redemption option to purchase oil and gas leases,
also described under "Certain Relationships and Related Transactions".
17
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
On February 28, 2005, OCM GW Holdings, LLC purchased 81,000 shares of
our Series G Preferred Stock and 2,000 shares of our subsidiary's, GulfWest Oil
& Gas Company's, Series A Preferred Stock for $42 million. In addition, on May
17, 2005, we executed a promissory note for the benefit of OCM GW Holdings, in
the principal amount of $1 million, payable on the earlier of July 17, 2005 and
the day on which we are able to make draws under a credit facility under which
greater than $1 million may be borrowed. Interest on the unpaid principal
accrued at 4.59% per annum. We repaid the note in full on July 19, 2005 from
borrowings under our new $100 million senior secured revolving credit facility.
Skardon F. Baker, a director, is a senior vice president of, and B. James Ford,
also a director, is a managing director of, Oaktree Capital Management, LLC, the
ultimate parent of OCM GW Holdings, LLC.
We exercised a redemption option to purchase certain oil and gas leases
from an entity partially controlled by J. Virgil Wagonner, a beneficial owner of
greater than 5% of our Common Stock and a former director, for $1,275,353 at the
closing of the February 2005 offering described above.
As part of the closing of the February 2005 offering, the investor and
the Company agreed to pay certain legal, accounting and other due diligence
costs and, also certain closing fees which totaled approximately $3.75 million.
Of this amount, OCM GW Holdings, LLC received $1,000,000 and Mr. Keel received
$300,000 (used to invest in the Series G Preferred Stock). In January 2005,
Allan D. Keel and another individual lent an aggregate of $200,000, $120,000 of
which is attributable to Mr. Keel, to the Company, which was repaid in full out
of the proceeds of the sale of the Series G Preferred Stock described above. Mr.
Keel received warrants to purchase 30,000 shares of Common Stock at $0.01 share
in connection with this transaction.
VOTE REQUIRED AND BOARD RECOMMENDATION
Each of the two Common/Series H Nominees must be elected by a plurality
of votes cast by holders of the Common Stock and Series H Preferred Stock
entitled to vote at the Annual Meeting.
Each of the three Series G Nominees must be elected by a majority of
votes cast by holders of the Series G Preferred Stock entitled to vote at the
Annual Meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE RE-ELECTION OF THE FIVE NOMINEES
TO THE BOARD OF DIRECTORS. PROXY CARDS EXECUTED AND RETURNED WILL BE SO VOTED
UNLESS CONTRARY INSTRUCTIONS ARE INDICATED THEREON.
18
PROPOSAL 2
RATIFICATION OF THE APPOINTMENT OF OUR INDEPENDENT AUDITORS
With authority granted by our Board of Directors, the Audit Committee
of our Board of Directors has appointed Grant Thornton LLP as our independent
auditors to audit our consolidated financial statements for the fiscal year
ending December 31, 2006, and our Board of Directors recommends that our
stockholders vote "FOR" ratification of such appointment. Grant Thornton LLP was
originally appointed as our independent public accountants on July 19, 2005,
when we retained the firm to perform the annual audit of our financial
statements for the fiscal years ending December 31, 2005 and December 31, 2004.
The Audit Committee of the Board of Directors recommended and approved
the selection of Grant Thornton LLP to replace the firm of Weaver and Tidwell,
L.L.P. as the Company's independent accountants. Weaver and Tidwell did not
resign or decline to stand for reelection, but was dismissed effective July 19,
2005, to allow the appointment of Grant Thornton LLP as the Company's principal
accountants as of the same date. Weaver and Tidwell's opinion regarding the
financial statements of the Company for the last two fiscal years did not
contain an adverse opinion or disclaimer of opinion, nor was qualified or
modified as to uncertainty, audit scope or accounting principles, except its
report dated March 19, 2004, included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003, raised substantial doubt regarding
the Company's ability to continue as a going concern. The Company is not aware
of any disagreements with the Company's former accountant during the past two
most recent fiscal years and the subsequent interim period up to the date of
dismissal on any matter of accounting principals or practices, financial
statement disclosure or auditing scope or procedure which disagreements, if not
resolved to the satisfaction of Weaver and Tidwell, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report. Additionally, there were no reportable events pursuant to Item 304(a)(v)
of Regulation S-K under the Securities Act of 1933.
During the Company's last two fiscal years and the subsequent interim
period up to the date of engagement, the Company did not consult with Grant
Thornton regarding (i) the application of accounting principles to a specific
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements, in each case where
written or oral advice was provided, that Grant Thornton concluded was an
important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue or (ii) any matter that was
either the subject of a disagreement or reportable event, as those terms are
described in Item 304(a)(iv) and Item 304(a)(v), respectively, of Regulation S-K
under the Securities Act of 1933.
The Company has provided Weaver and Tidwell with a copy of the
disclosures the Company is making, which was previously included in a Form 8-K
filed on July 21, 2005 in response to the disclosures required by Regulation
S-K, Item 304(a), under the Securities Act of 1933. The former accountant was
provided an opportunity to furnish the Company with a letter addressed to the
Securities and Exchange Commission stating its agreement and absence of any
disagreement with the statements made by the Company in response to the
disclosure in such Form 8-K, which was attached as an exhibit thereto.
19
A representative of Grant Thornton LLP is expected to be present at the
Annual Meeting, will have an opportunity to make a statement if he or she so
desires and is expected to be available to respond to appropriate questions from
our stockholders.
Weaver and Tidwell's fees for professional services totaled $32,026 for
2005 and $66,080 in 2004. Weaver and Tidwell's fees for professional services
included the following:
o AUDIT SERVICES - fees for audit services, which relate to the fiscal
year consolidated audit, quarterly reviews, registration statements,
comfort letters, statutory and regulatory audits, accounting
consultations, and Sarbanes-Oxley Section 404 attest services, were
$8,200 in 2005. The aggregate fees billed by Weaver & Tidwell for
professional services rendered for audit of our annual financial
statements and reviews of the financial statements included in our
quarterly reports on Form 10-Q for the fiscal year 2004 were $61,280.
o AUDIT-RELATED SERVICES - fees for audit-related services, consisting
of reviews of registration statements, audits in connection with
proposed or consummated dispositions, benefit plan audits, other
subsidiary audits, special reports, and accounting consultations, were
$23,826 in 2005. The aggregate fees billed by Weaver & Tidwell for
professional services rendered for audit related fees were $4,800 for
2004. These fees were incurred in connection with their review of our
Registration Statement on Form S-1 filed for the benefit of certain
selling stockholders, initially filed in June 2004.
o TAX SERVICES - there were no tax services or other fees billed by
Weaver & Tidwell in the fiscal year 2005 or 2004.
Grant Thornton LLP's fees for professional services totaled $257,456
for 2005. As Grant Thornton LLP was retained in 2005, no fees were incurred
during 2004. Grant Thornton LLP's fees for professional services included the
following:
o AUDIT SERVICES - fees for audit services, which relate to the fiscal
year consolidated audit, quarterly reviews, registration statements,
comfort letters, statutory and regulatory audits, accounting
consultations, and Sarbanes-Oxley Section 404 attest services, were
$257,456 in 2005. These fees include audit fees for the performance of
annual audits of our financial statements for both the fiscal years
ending December 31, 2005 and December 31, 2004.
o AUDIT-RELATED SERVICES - no fees for audit-related services were
incurred in 2005.
o TAX SERVICES - no fees for tax services were incurred in 2005.
The Audit Committee has considered whether the non-audit services
provided to the Company by Grant Thornton LLP impaired the independence of Grant
Thornton LLP and concluded that they did not.
All of Grant Thornton LLP's and Weaver & Tidwell's fees for 2005 and
2004 were pre-approved by the Audit Committee through formal engagement letters
with those entities. The audit committee's or the board's, as applicable, policy
is to pre-approve all services by the Company's independent accountants. The
Audit Committee has adopted a pre-approval policy that provides guidelines for
the audit, audit-related, tax and other non-audit services that may be provided
by Grant Thornton LLP to the Company. The policy (a) identifies the guiding
principles that must be considered by the Audit Committee in approving services
to ensure that Grant Thornton LLP's independence is not impaired; (b) describes
the audit, audit-related, tax and other services that may be provided and the
non-audit services that are prohibited; and (c) sets forth pre-approval
requirements for all permitted services. Under the policy, all services to be
provided by Grant Thornton LLP must be pre-approved by the Audit Committee.
20
VOTE REQUIRED AND BOARD RECOMMENDATION
Stockholder ratification of the appointment of our independent auditors
is not required by the Company's bylaws or otherwise. However, we are submitting
this proposal to the stockholders as a matter of good corporate practice.
Approval of this proposal requires the affirmative vote of a majority of the
votes cast on the proposal. If the appointment of Grant Thornton LLP is not
ratified, the Audit Committee will reconsider the appointment. Even if the
appointment is ratified, the Audit Committee in its discretion may direct the
appointment of a different independent audit firm at any time during the year if
it is determined that such change would be in best interests of the Company and
its stockholders.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT OF
GRANT THORNTON LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE YEAR 2006.
21
REPORT REGARDING AUDITED FINANCIAL STATEMENTS
The Board adopted a written Audit Committee Charter on August 22, 2005.
We have attached a copy of that Charter as APPENDIX A.
The Audit Committee has reviewed and discussed with management, and our
independent auditors, our audited financial statements contained in our Annual
Report on Form 10-K for the year ended December 31, 2005.
The Audit Committee has received and reviewed the written disclosures
and the letter from our independent auditors required by Independence Standards
Board Standard No. 1 (titled, "Independence Discussions with Audit Committees").
Our independent auditors do not perform any non-audit services for us. The Audit
Committee has discussed with the independent auditors the matters to be
discussed by SAS 61 (Codification of Statements of Auditing Standards AU ss.
380), and has discussed with the independent account thE independent account's
independence.
Based on the review and discussions referred to above, the Audit
Committee has determined that the audited financial statements be included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2005,
filed with the SEC.
Lon McCain
Skardon F. Baker
22
STOCK PERFORMANCE CHART
The following chart compares the yearly percentage change in the
cumulative total stockholder return on our Common Stock during the five years
ended December 31, 2005 with the cumulative total return of the Standard and
Poor's 500 Stock Index and an index composed of all publicly traded oil and gas
companies identifying themselves by primary Standard Industrial Classification
(SIC) Code 1311 (Crude Petroleum and Natural Gas). The comparison assumes $100
was invested on December 31, 2000 in our Common Stock and in each of the
foregoing indices and assumes reinvestment of dividends. We paid no dividends on
our Common Stock during such five-year period.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG CRIMSON, S&P 500 INDEX AND SIC CODE INDEX
[GRAPHIC OMITTED]
-------------------------------------------------------------------------------
S&P 500 SIC Code
Crimson Index Index
-------------------------------------------------------------------------------
December 31, 2000 $100.00 $100.00 $100.00
-------------------------------------------------------------------------------
December 31, 2001 $55.61 $88.11 $94.25
-------------------------------------------------------------------------------
December 31, 2002 $36.52 $68.64 $82.75
-------------------------------------------------------------------------------
December 31, 2003 $34.86 $88.33 $104.86
-------------------------------------------------------------------------------
December 31, 2004 $75.53 $97.94 $135.09
-------------------------------------------------------------------------------
December 31, 2005 $74.70 $102.75 $158.91
-------------------------------------------------------------------------------
23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 3, 2006
regarding the beneficial ownership of Common Stock by each person known to us to
own beneficially 5% or more of the outstanding Common Stock, each director, each
director nominee, certain named executive officers, and the directors and
executive officers as a group. The persons named in the table have sole voting
and investment power with respect to all shares of Common Stock owned by them,
unless otherwise noted.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For the purpose of calculating the number of
shares beneficially owned by a stockholder and the percentage ownership of that
stockholder, shares of Common Stock subject to options that are currently
exercisable or exercisable within 60 days of the date of this prospectus by that
stockholder are deemed outstanding.
NAME AND ADDRESS OF TITLE OF AMOUNT AND NATURE OF
BENEFICIAL OWNER CLASS BENEFICIAL OWNERSHIP PERCENT %
----------------------------------------- -------------- ---------------------------- ----------------
Allan D. Keel(1,2) Common 2,334,794 6.61
Series G 600 *
E. Joseph Grady(2,3) 680,834 2.02
Thomas R. Kaetzer(2, (11)) 608,852 1.82
Tracy Price(2, 12) 442,000 1.32
Thomas H. Atkins(2, 13) 208,500 *
Jay S. Mengle(2, 14) 251,000 *
B. James Ford(4,5) Skardon F. Baker(4,5)
Lee B. Backsen(2, 15) 17,045 *
Lon McCain(2, 15) 17,045 *
All current directors and officers Common 4,239,718 11.61
as a group (11 persons)(6) Series G 600 *
Oaktree Capital Management, LLC(3,4,(7)) Common 49,256,975 59.88
Series G 76,700 94.69
Series H 2,000 38.09
J. Virgil Waggoner(8,9) Common 16,860,746 41.53
Series H 3,000 57.14
Gregory P. Pipkin (10) Common 3,611,492 10.81
Series G 500 *
---------------------------------------
* Denotes less than 1% of class beneficially owned
1. Reported common stock includes 120,000 shares held directly, 362,294 shares
underlying convertible preferred stock, 30,000 shares underlying warrants
to purchase common stock and options to acquire 1,822,500 shares of common
stock that vested on February 28, 2006.
2. Shareholder's address is 480 N. Sam Houston Parkway East, Suite 300,
Houston, Texas 77060.
3. Reported common stock includes 73,334 shares held directly and options to
acquire 607,500 shares of common stock that vested on
February 28, 2006.
4. Excludes shares held by OCM GW Holdings, LLC, of which they disclaim
beneficial ownership.
5. Shareholder's address is c/o Oaktree Capital Management, LLC, 333 South
Grand Avenue, Los Angeles, California 90071.
6. Includes 3,550,000 shares subject to currently exercisable warrants and
options and 362,294 shares underlying convertible preferred stock.
24
7. Reported common stock includes 49,170,308 shares underlying Series G and
Series H convertible preferred stock (including accrued dividends on the
Series G Preferred Stock) and 86,667 shares held directly, in each case
held directly by OCM GW Holdings, LLC. The reported shares are owned
directly by OCM GW Holdings, LLC. OCM Principal Opportunities Fund III,
L.P. ("Fund") and OCM Principal Opportunities Fund IIIA, L.P. ("Fund IIIA")
are the direct beneficial owners of Holdings. Fund is the managing member
of Holdings and Oaktree Capital Management LLC ("Oaktree") is the managing
member of OCM Principal Opportunities Fund III GP, LLC ("Fund GP"), the
general partner of the Fund and Fund IIIA. Although each of Fund, Fund
IIIA, Fund GP and Oaktree may be deemed an indirect beneficial owner of the
securities, each of them disclaims beneficial ownership of those shares
except to the extent of its pecuniary interest in them.
8. Reported common stock includes 9,353,729 held directly, 4,285,715 shares
underlying Series H convertible preferred stock, 2,576,302 shares
underlying Series E convertible preferred stock (including accrued
dividends thereon), 625,000 shares subject to currently exercisable
warrants, and 20,000 shares subject to currently exercisable options.
Shareholder granted OCM GW Holdings, LLC an irrevocable proxy and entered
into Share Restriction Agreement on February 28, 2005, which currently
applies only to class votes of the Series H Preferred Stock.
9. Shareholder's address is 6605 Cypresswood Drive, Suite 250 Spring, Texas
77379.
10. Shareholder's address is 11227 Smithdale Road, Houston, Texas 77024.
Reported common stock includes 3,277,224 shares held directly, 301,912
shares of Common Stock that may be received upon conversion of Series G
Convertible Preferred Stock beneficially owned by the reporting person,
including shares of Common Stock that may be received upon conversion of
accrued and unpaid dividends on the Series G Convertible Preferred Stock,
and 32,356 shares of Common Stock owned by Core Natural Resources GP, LLC,
of which reporting person is the sole member.
11. Reported common stock includes 296,226 shares held directly by Mr. Kaetzer,
a total of 2,626 held by his wife (IRA Account), and 310,000 shares subject
to currently exercisable options and warrants.
12. Reported common stock includes 37,000 shares held directly and 405,000
shares subject to options that vested on April 1, 2006. 13. Reported common
stock includes 36,000 shares held directly and 172,500 shares subject to
options that vested on April 1, 2006. 14. Reported common stock includes
38,500 shares directly held by Mr. Mengle, 10,000 shares held by his wife
and 202,500 shares
subject to options that vested on April 1, 2006.
15. Reported common stock includes 17,045 shares held directly.
CHANGE OF CONTROL
On February 28, 2005, OCM GW Holdings, LLC purchased 81,000 shares of
our Series G Preferred Stock and 2,000 shares of our subsidiary's Series A
Preferred Stock for $42 million. As a result of the transactions OCM GW Holdings
acquired over 50% of the voting power of our outstanding capital stock and is
entitled to elect a majority of our Board. Currently OCM GW Holdings, LLC
beneficially owns 60% of our Common Stock.
25
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors, and persons who own more than 10% of a
registered class of our equity securities, to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission
(the "SEC"). Such persons are required by SEC regulation to furnish us with
copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us
with respect to 2005, or written representations from certain reporting persons,
we believe that our officers, directors and persons who own more than 10% of a
registered class of our equity securities have complied with all applicable
filing requirements, except that Mr. Waggoner was late in filing for two
transactions, one involving the exchange of convertible preferred stock of a
subsidiary of the Company to convertible preferred stock of the Company and
another involving the sale of Common Stock, OCM GW Holdings, LLC and its
affiliates were late in filing for two transactions, one involving the exchange
of convertible preferred stock referred to above and another involving the sale
of convertible preferred stock of the Company, Mr. Kaetzer, Mr. Price, Mr.
Mengle and Mr. Atkins were each late in filing for one transaction involving the
acquisition of options to purchase Common Stock upon joining the Company and Mr.
Price, Mr. Mengle and Mr. Atkins were each late in filing for another such
transaction, Mr. Backsen, Mr. McCain, Mr. Baker and Mr. Ford were each late in
filing for one transaction involving the acquisition of restricted Common Stock
and Mr. Ford and Mr. Baker were each late in filing for the rescission of such
transaction. Late filings by our current executive officers during 2005 were no
more than one or two business days late; other late filings (except one) were
filed within eight business days of the SEC-imposed deadline.
STOCKHOLDERS' PROPOSALS
Stockholders may submit proposals on matters appropriate for
stockholder action at our subsequent annual meetings consistent with Rule 14a-8
promulgated under the Securities Exchange Act of 1934, as amended. For such
proposals to be considered in the Proxy Statement and Proxy relating to the 2007
Annual Meeting of Stockholders they must be received by us not later than
December 13, 2006. Such proposals should be directed to Crimson Exploration
Inc., 480 N. Sam Houston Parkway E., Suite 300, Houston, Texas 77060, Attn:
Secretary.
OTHER BUSINESS
The Board knows of no matter other than those described herein that
will be presented for consideration at the Annual Meeting. However, should any
other matters properly come before the Meeting or any adjournments thereof, it
is the intention of the person(s) named in the accompanying Proxy to vote in
accordance with their best judgment in the interest of the Company.
26
MISCELLANEOUS
We will bear all costs incurred in the solicitation of Proxies. In
addition to solicitation by mail, our officers and employees may solicit Proxies
by telephone, telegraph or personally, without additional compensation. We may
also make arrangements with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation materials to the beneficial
owners of shares of Common Stock held of record by such persons, and we may
reimburse such brokerage houses and other custodians, nominees and fiduciaries
for their out-of-pocket expenses incurred in connection therewith. We have not
engaged a proxy solicitor.
The SEC has adopted rules that permit companies and intermediaries such
as brokers to satisfy delivery requirements for proxy statements with respect to
two or more stockholders sharing the same address by delivering a single proxy
statement addressed to those stockholders. This process, which is commonly
referred to as "householding," potentially provides extra convenience for
stockholders and cost savings for companies. The Company and some brokers may
household proxy materials, delivering a single proxy statement to multiple
stockholders sharing an address unless contrary instructions have been received
from the affected stockholders. Once you have received notice from your broker
or the Company that they or the Company will be householding materials to your
address, householding will continue until you are notified otherwise or until
you revoke your consent. If, at any time, you no longer wish to participate in
householding and would prefer to receive a separate proxy statement, please
notify your broker if your shares are held in a brokerage account or the Company
if you hold registered shares. You can notify the Company by sending a written
request to Jim C. Bigham, secretary of the Company, 480 N. Sam Houston Parkway
E., Suite 300, Houston, Texas 77060, by registered, certified or express mail.
Our Annual Report to Stockholders, including financial statements for
the year ended December 31, 2005, accompanies this Proxy Statement. The Annual
Report is not to be deemed part of this Proxy Statement.
Houston, Texas
April 12, 2006 By Order of the Board of Directors
/s/ Allen D. Keel
----------------------------------------------------
Allen D. Keel, PRESIDENT AND CHIEF EXECUTIVE OFFICER
27
APPENDIX A
AUDIT COMMITTEE CHARTER
CRIMSON EXPLORATION INC.
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
PURPOSE
The purpose of the Audit Committee (the "Audit Committee") of the Board
of Directors (the "Board") of Crimson Exploration Inc. ("Crimson") is to serve
as an independent and objective party to:
o oversee the quality and integrity of the financial statements and
other financial information Crimson provides to any governmental body
or the public;
o oversee Crimson's compliance with legal and regulatory requirements;
o oversee the independent auditor's qualifications and independence;
o oversee the performance of Crimson's internal audit function and
independent auditors;
o oversee Crimson's system of internal controls regarding finance,
accounting, legal compliance and ethics that management and the Board
have established;
o provide an open avenue of communication among the independent auditor,
financial and senior management, the internal auditor, if any, and the
Board, always emphasizing that the independent auditor is accountable
to the Audit Committee;
o oversee the receipt, retention and treatment of the complaints
regarding Crimson's accounting, internal controls and other accounting
matters; and
o such other duties as are directed by the Board
Consistent with this purpose, the Audit Committee should encourage
continuous improvement of, and should foster adherence to, Crimson's policies,
procedures and practices at all levels.
The Audit Committee shall prepare annually a report meeting the
requirements of any applicable regulations of the Securities Exchange Commission
("SEC") to be included in Crimson's proxy statement relating to its annual
meeting of stockholders.
COMPOSITION
The Audit Committee will be appointed annually by the Board based on
the recommendation of the entire Board and shall serve until their successors
shall be duly elected and qualified. A majority of the Audit Committee shall
elect the chairman of the Audit Committee. Any member of the Audit Committee may
be removed by a vote of the majority of the Board.
Until such time as otherwise required by guidelines prescribed by the
exchange, if any, upon which the common shares of Crimson are traded, the Audit
Committee will be comprised of at least two directors. Unless approved by a
majority of disinterested directors, no member of the Audit Committee may
receive any consulting, advisory or other compensation fee from Crimson other
than the fees paid to such member of the Audit Committee in his or her capacity
as a member of the Board, the Audit Committee or any other committee of the
Board (including such additional fees as may be paid for serving as chairman of
a committee of the Board). Each member of the Audit Committee shall meet such
independence standards as may be required by any listing standards Crimson may
be subject to from time to time, by the Securities Exchange Act of 1934 (the
"Exchange Act") and by applicable regulations of the SEC, and shall meet any
other applicable independence and other requirements of the SEC. As such, the
Board shall affirmatively determine on annual basis whether each member of the
Audit Committee is free from any relationship that may interfere with his or her
independence from management and Crimson. No member shall serve on the audit
committee of more than two other public companies at any one time.
A-1
Members of the Audit Committee shall be financially literate or become
financially literate within a reasonable period of time after appointment to the
Audit Committee, and at least one member of the Audit Committee will be an audit
committee financial "expert", as defined by the SEC. The Audit Committee will
self-assess the financial literacy and other skills of the Audit Committee
members against those skills that are needed to fulfill the Audit Committee's
roles and responsibilities on an annual basis. The Audit Committee will solicit
feedback on the skill requirements and skill gaps of the Audit Committee and
assess the contribution and performance of the individual Audit Committee
members from the Board, management and independent auditor. The Audit Committee
shall continually monitor membership requirements.
Notwithstanding the foregoing membership requirements, no action of the
Audit Committee shall be invalid by reason of any such requirement not being met
at the time such action is taken.
PRINCIPAL FUNCTIONS
The Audit Committee's oversight role shall serve to provide reasonable
assurance that the following objectives are achieved:
o Financial Reporting Process - Crimson's financial statements and any
other financial information provided to any other governmental body or
the public fairly present in all material respects the financial
condition and results of operations of Crimson in conformity with
general accepted accounting principles.
o System of Internal Controls - Crimson's system of internal controls
regarding finance, accounting, legal and ethical compliance provides
reasonable assurance as to the reliability of financial statements and
the protection of assets from unauthorized acquisition, use or
disposition.
o Corporate compliance process - Crimson is in compliance with all
material laws and regulations, is conducting its affairs ethically and
is maintaining effective controls against employee conflict of
interest and fraud.
The Audit Committee shall have the authority to take all actions it
deems advisable to fulfill its responsibilities and duties. As such, the Audit
Committee will have direct access to financial, legal and other staff and
consultants of Crimson. Such advisors can assist the Audit Committee in defining
its role and responsibilities, consult with Audit Committee members regarding a
specific audit or other issue that may arise in the course of the Audit
Committee's duties and conduct independent investigations, studies or tests. The
Audit Committee has the authority to employ such other accountants, attorneys,
consultants or other outside advisors to assist the Audit Committee as it deems
necessary or advisable in its sole direction. The Audit Committee may request
any officer or employee of Crimson or any of its subsidiaries, Crimson's outside
legal counsel and Crimson's external auditors to meet with the Audit Committee,
any member of the Audit Committee or any consultant to the Audit Committee. The
Audit Committee will report to the Board on a regular basis, and the Board shall
provide an annual performance evaluation of the Audit Committee.
While the Audit Committee has the responsibility and powers set forth
in this Charter, it is not the duty of the Audit Committee to plan or conduct
audits, to determine that Crimson's financial statements are complete and
accurate or to determine that such statements are in accordance with generally
accepted accounting principles. Crimson's management is responsible for the
preparation of Crimson's financial statements in accordance with generally
accepted accounting principles and Crimson's internal control. Crimson's
independent auditor is responsible for the audit work on Crimson's financial
statements. It is also not the duty of the Audit Committee to conduct
investigations or to assure compliance with laws, regulations and Crimson's
policies and procedures.
A-2
FINANCIAL REPORTING PROCESS
The Audit Committee shall:
REGARDING THE ROLE OF THE INDEPENDENT AUDITOR:
o Annually select and engage (subject to the stockholder ratification)
the independent auditor retained to audit the financial statements of
Crimson, review and preapprove the compensation of the independent
auditor and evaluate the performance and on-going qualifications of
the independent auditor. Pre-approve all audit services (including
comfort letters) and all permitted non-audit services (including tax
services) to be performed by the independent auditor for Crimson.
Dismiss the independent auditor if it determines, in its sole
discretion, that such action is necessary.
o Review the experience and qualifications of the senior members of the
independent auditor's team and the quality control procedures of the
independent auditor. Set guidelines for Crimson's hiring of employees
or former employees of the independent auditor.
o Evaluate the qualifications, performance and independence of the
independent auditor, including considering whether the independent
auditor's quality controls are adequate and the provisions of
permitted non-audit services is compatible with maintaining the
independent auditor's independence, and taking into account the
opinions of management and the internal auditor. Require that the
independent auditor rotate the lead audit partner and the reviewing
audit partner engaged on Crimson's account as required by law. The
Audit Committee shall also consider whether, in order to assure
continuing auditor independence, it is appropriate to adopt a policy
rotating the independent auditor on a regular basis.
o Periodically obtain and review a report by the independent auditor
regarding all relationships between independent auditors and Crimson
that may impact the independent auditor's objectivity and independence
and discuss such report with the independent auditor.
o At least annually, obtain and review a report by the independent
auditor describing such firm's internal quality-control procedures,
any material issues raised by the most recent internal quality control
review or peer review of the firm, or by any inquiring or
investigation by the governmental or professional authorities, within
the preceding five years, respecting one or more independent audits
carried out by the firm, and any steps taken to deal with any such
issues.
o Review with the independent auditor, prior to the initiation of the
annual auditor's process for identifying and responding to key audit
and internal control risks, and the scope and approach of the audit to
ensure completeness of coverage of key business controls and risk
areas.
o Serve as a channel of communication between the independent auditor
and the Board and/or management of Crimson. The independent auditor is
ultimately accountable to the Audit Committee of the Board
o Instruct the independent auditor to report directly to the Audit
Committee any problems or difficulties incurred in connection with the
audit, including any restrictions on the scope of activities or access
to required information, or any disagreements with management, and
resolve any disagreements between management and the independent
auditor regarding financial reporting.
o Review the financial statements and related footnotes to be included
in the annual report to stockholders and the Form 10-Q and Form 10-K
filings made with the SEC. In addition, review findings of any
examinations by regulatory agencies, such as the SEC.
A-3
REGARDING THE ANNUAL AUDIT OF FINANCIAL STATEMENTS:
o Review with management and the independent auditor at the completion
of the annual audit:
o The independent auditor's audit of the financial statements and its
report thereon.
o Any significant changes required in the independent auditor's audit
plan.
o The existence of significant estimates and judgments underlying the
financial statements, including the rationale behind those estimates
as well as the details of material accruals and reserves.
o The critical accounting policies used in the financial statements, an
analysis of the effect of alternative methods of applying generally
accepted accounting principles on Crimson's financial statements and a
description of any transactions as to which management obtained
Statement on Auditing Standards No. 50 letters.
o Insider affiliated party transactions and potential conflicts of
interest.
o Other matters related to the conduct of the audit, which are to be
communicated to the Audit Committee under generally accepted auditing
standards.
o Recommend to the Board whether or not to include Crimson's audited
financial statements in its annual report Form 10-K.
o And/or with outside legal counsel, any legal and regulatory matters,
compliance policies and any other material reports or inquiries
received from regulators or governmental agencies that may have a
material impact on Crimson's financial statements.
o Matters required to be discussed by Statement of Auditing Standards
No. 61 related to the conduct of the audit, including any problems or
difficulties encountered in the coarse of the audit work and the
management response, any restrictions on the scope of activities or
access to requested information and any significant disagreements with
management
REGARDING FINANCIAL DISCLOSURE TO THE PUBLIC:
o Review with management and the independent auditor regarding the
release of financial information to the public, including:
o the effect of new or pending regulatory and accounting initiatives, as
well as any off-balance sheet structures, contemplated by Crimson in
Crimson's financial statements.
o the disclosures made in the management's discussion and analysis of
financial condition section, and the footnotes to the financial
statements, in Crimson's reports on Form 8-K, 10-Q or 10-K, or in any
registration statements on Form S-1, S-3 or S-4.
o quarterly financial statements prior to the filing of its Form 10-Q,
including the results of the independent auditor's review of the
quarterly financial statements.
o earnings press releases, including the use of "pro forma" or
"adjusted" non-GAAP information, as well as financial information and
earnings guidance, if any, provided to analysts or rating agencies.
o Review with management and the independent auditor any correspondence with
regulators or governmental agencies, any employee complaints, or any
published reports that raise issues regarding Crimson's financial
statements or accounting policies.
A-4
SYSTEM OF INTERNAL CONTROLS
o Review and evaluate the effectiveness of Crimson's process of assessing
significant risks or exposures and the steps management has taken to
minimize such risks to Crimson. Consider in the review with management and
the independent auditor the following:
o The effectiveness of, or weaknesses in, Crimson's internal controls
including the adequacy of management information systems and other
information and the security thereof, the overall control environment
and accounting and financial controls.
o Any disclosures provided by the Chief Executive Officer or the Chief
Financial Officer to the Audit Committee regarding (i) significant
deficiencies in the design or operation of internal controls which
could adversely affect Crimson's ability to record, process, summarize
and report financial data and (ii) any fraud which involves management
or other employees who have a significant role in Crimson's internal
control; and
o Any related significant findings and recommendations of the
independent auditor, together with management's response thereto,
including the timetable for implementation of recommendations to
correct weaknesses in internal controls.
o Review with management, the internal auditor and the independent
auditor any significant transactions that are not a normal part of
Crimson's operations, and changes, if any, in Crimson's accounting
principles or their application.
o Assess internal processes for determining risks and exposures from
asserted and unasserted claims and litigation, non compliance with any
regulations and key financial statement risk areas.
CORPORATE COMPLIANCE PROCESS
o Approve for recommendation to the Board Crimson's polices and
procedures regarding compliance with laws and significant company
policies, including but not limited to, codes of conduct expressing
principles of business ethics, legal compliance, the Foreign Corrupt
Practices Act, environmental, health and safety issues and other
matters relating to business conduct and programs of legal compliance
designed to prevent and detect violations of law.
INTERNAL AUDIT FUNCTION
o Review and approve the strategy, scope and plan for the internal audit
function, including the appointment, performance and replacement of
the internal auditor, if any, the annual audit plan, if any, and the
annual budget for that function.
o Establish procedures for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls,
auditing matters and the confidential, anonymous submissions by
employees of concerns regarding accounting and auditing matters.
Monitor actions taken by Crimson in response to any letters or reports
to management provided by the internal auditor or independent
auditors.
o Monitor compliance with Crimson's code of conduct and approve any
waivers under the code of conduct.
o Review with Crimson's management, and other legal, tax or regulatory
advisors, matters that may have a material impact on Crimson's
operations and the financial statements, including related company
compliance policies and programs and any reports received from
regulators.
A-5
o Review policies and procedures with respect to officers' expense
accounts, including their use of corporate assets, and consider the
results of any review of these areas by the internal or independent
auditor.
MEETINGS
The Audit Committee will meet at least quarterly, or more frequently as
deemed necessary to carry out its responsibilities.
The audit committee will meet with management and the independent
public accountants prior to the release of Crimson's quarterly or annual
earnings to discuss the results of the quarterly review or audit as applicable.
All meetings of the Audit Committee shall be held pursuant to the
Bylaws of Crimson with the regard to notice and waiver thereof, and written
minutes of each meeting shall be duly filed in the records of the Audit
Committee. Reports of meetings of the Audit Committee, including committee
actions and recommendations, shall be made to the Board at its next regularly
scheduled meeting following the Audit Committee meeting.
OTHER AUDIT COMMITTEE RESPONSIBILITIES
The Audit Committee will review and reassess the adequacy of this
Charter on an annual basis, and will submit the charter to the Board for
approval. The Audit Committee Charter will be included in the proxy statement as
required under SEC regulations.
The Audit Committee will conduct an annual review and evaluation of its
own performance and will submit itself to the review and evaluation of the
Board.
The Audit Committee will prepare a report to the stockholders of
Crimson, to be included in the proxy statement on an annual basis as required by
the SEC. This report will specifically address the following activities carried
out by the Audit Committee during the year.
o The Audit Committee's review of the independence of its members.
o Confirmation of the annual review of this Charter.
o The Audit Committee's review of Crimson's audited financial statements
with management.
o The Audit Committee's discussion with the independent auditors of the
matters required to be communicated to audit committees.
A-6
CRIMSON EXPLORATION INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 12, 2006
The undersigned hereby appoints Stephen W. Schoppe proxy of the
undersigned, with power of substitution, to vote all shares held by the
undersigned which are entitled to be voted at the Annual Meeting of Stockholders
to be held May 12, 2006 and any adjournment(s) or postponement(s) thereof, as
effectively as the undersigned could do if personally present:
(1) To elect the following persons as directors, each to serve until the
next Annual Meeting of Stockholders, and until his successor is duly
elected and qualified, that the undersigned is entitled to vote for as
holder of common stock, Series G preferred stock or Series H preferred
stock, as applicable:
SERIES G NOMINEES COMMON/SERIES H NOMINEES
----------------- ------------------------
Allan D. Keel Lee B. Backsen
B. James Ford Lon McCain
Skardon F. Baker
--- FOR all persons listed that the undersigned may vote for as
holder of common stock, Series G preferred stock or Series H
preferred stock, as applicable (except as marked to the
contrary below)
Withhold authority to vote for all such nominees
---
--- FOR all such nominees, except withhold authority to vote for
such nominee(s) named below:
(2) To ratify the appointment of Grant Thornton LLP as our independent
auditors.
--- FOR ratification.
--- Withhold authority to vote for ratification.
(3) In the discretion of the Proxy holder, on any other matter that may
properly come before the meeting or any adjournments or postponements
thereof.
The shares represented by this Proxy will be voted as directed. WHERE
NO DIRECTION IS GIVEN, THE SHARES WILL BE VOTED FOR MATTERS (1 and 2) above.
The undersigned hereby revokes any proxy or proxies heretofore given to
vote or act with respect to the capital stock of the Company and hereby ratifies
and confirms all that the Proxy, or his substitutes, or any of them, may
lawfully do by virtue hereof.
Please sign below, date, detach and return this page promptly in the
enclosed envelope.
Dated:
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(Signature)
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(Printed Name)
IMPORTANT: Please date this Proxy and sign your
name exactly as it appears to the left. When
signing on behalf of a corporation, partnership,
estate, trust or in other representative
capacity, please sign name and title. Where
there is more than one owner, each owner must
sign.