SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant X
-----
Filed by a Party other than the Registrant _____
Check the appropriate box:
X Preliminary Proxy Statement _____ Confidential, For Use of the
----- Commission Only (as
permitted by Rule 14a-6(e)(2))
____ Definitive Proxy Statement
____ Definitive Additional Materials
____ Soliciting Material Under Rule 14a-12
TREMISIS ENERGY ACQUISITION CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
___ No fee required.
_X_ 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:
Common stock of Tremisis Energy Acquisition Corporation
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(2) Aggregate number of securities to which transaction applies:
25,600,000
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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 fee is
calculated and state how it was determined):
Average of high and low prices for common stock on November 30, 2005
($5.45)
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(4) Proposed maximum aggregate value of transaction:
$169,520,000
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(5) Total fee paid:
$33,904
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[X] Fee paid previously with preliminary materials:
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___ 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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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Tremisis Energy Acquisition Corporation
1755 Broadway, Suite 604
New York, New York 10019
To the Stockholders of Tremisis Energy Acquisition Corporation:
You are cordially invited to attend a special meeting of the stockholders
of Tremisis Energy Acquisition Corporation ("Tremisis"), relating to the
proposed merger of our subsidiary, RAM Energy Acquisition, Inc., into RAM
Energy, Inc., and related matters. The meeting will be held at 10:00 a.m.,
eastern time, on ____________, 2006, at the offices of Graubard Miller,
Tremisis' counsel, at 405 Lexington Avenue, 19th Floor, New York, New York
10174.
At this meeting, you will be asked to consider and vote upon the following
proposals:
(1) to adopt the Agreement and Plan of Merger, dated as of October 20,
2005, as amended on November 11, 2005, among Tremisis, RAM Energy Acquisition,
Inc., a Delaware corporation and wholly owned subsidiary of Tremisis ("Merger
Sub"), RAM Energy, Inc., a Delaware corporation ("RAM"), and the stockholders of
RAM and the transactions contemplated thereby - we refer to this proposal as the
merger proposal;
(2) to approve an amendment to the certificate of incorporation of
Tremisis to change the name of Tremisis from "Tremisis Energy Acquisition
Corporation" to "RAM Energy Resources, Inc." - we refer to this proposal as the
name change amendment;
(3) to approve an amendment to the certificate of incorporation of
Tremisis to increase the number of authorized shares of Tremisis common stock
from 30,000,000 to 100,000,000 - we refer to this proposal as the capitalization
amendment;
(4) to approve an amendment to the certificate of incorporation of
Tremisis to remove the preamble and sections A through D, inclusive, of Article
Sixth from the certificate of incorporation from and after the closing of the
merger, as these provisions that will no longer be applicable to Tremisis, and
to redesignate section E of Article Sixth as Article Sixth - we refer to this
proposal as the Article Sixth amendment; and
(5) to approve the 2006 Long-Term Incentive Plan (an equity-based
incentive compensation plan) - we refer to this proposal as the incentive
compensation plan proposal.
The affirmative vote of the holders of a majority of the outstanding
shares of Tremisis common stock on the record date is required to approve each
of the merger proposal, the name change amendment, the capitalization amendment
and the Article Sixth Amendment. The approval of the incentive compensation plan
will require the affirmative vote of the holders of a majority of the shares of
Tremisis' common stock represented in person or by proxy and entitled to vote
at the meeting.
The adoption of the merger proposal is conditioned on the adoption of the
name change amendment and the capitalization amendment, and neither the name
change amendment nor the capitalization amendment will be presented to the
meeting for adoption unless the merger is approved. The adoption of the Article
Sixth amendment and the incentive compensation plan proposal are not conditions
to the merger proposal or to the adoption of either of the name change amendment
or the capitalization amendment, but if the merger is not approved, neither will
be presented at the meeting for adoption.
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Each Tremisis stockholder who holds shares of common stock issued in
Tremisis' initial public offering ("IPO") has the right to vote against the
merger proposal and at the same time demand that Tremisis convert such
stockholder's shares into cash equal to a pro rata portion of the funds held in
the trust account into which a substantial portion of the net proceeds of
Tremisis' IPO was deposited. On _________, the record date for the meeting of
stockholders, the conversion price was approximately $___ in cash for each share
of Tremisis common stock. These shares will be converted into cash only if the
merger agreement is consummated. However, if the holders of 1,265,000 or more
shares of common stock issued in Tremisis' IPO vote against the merger proposal
and demand conversion of their shares, Tremisis will not consummate the merger.
Prior to exercising conversion rights, Tremisis stockholders should verify the
market price of Tremisis' common stock as they may receive higher proceeds from
the sale of their common stock in the public market than from exercising their
conversion rights. Shares of Tremisis' common stock are quoted on the
Over-the-Counter Bulletin Board under the symbol TEGY. On the record date, the
last sale price of Tremisis' common stock was $______.
Tremisis' initial stockholders who purchased their shares of common stock
prior to its IPO and presently own an aggregate of approximately 17.9% of the
outstanding shares of Tremisis common stock, have agreed to vote all of their
shares on the merger proposal in accordance with the vote of the majority of the
votes cast by the holders of shares issued in connection with the IPO. The
initial stockholders have also indicated that they intend to vote "FOR" the
adoption of the name change amendment, the capitalization amendment, the Article
Sixth amendment and the incentive compensation plan proposal.
After careful consideration, Tremisis' board of directors has determined
that the merger proposal is fair to and in the best interests of Tremisis and
its stockholders. Tremisis' board of directors has also determined that the
name change amendment, the capitalization amendment, the Article Sixth amendment
and the incentive compensation plan proposal are in the best interests of
Tremisis' stockholders. Tremisis' board of directors unanimously recommends
that you vote or give instruction to vote "FOR" the adoption of the merger
proposal, the name change amendment proposal, the capitalization amendment
proposal, the Article Sixth amendment proposal and the incentive compensation
plan proposal.
Enclosed is a notice of special meeting and proxy statement containing
detailed information concerning the merger proposal and the transactions
contemplated thereby, as well as detailed information concerning the name change
amendment, the capitalization amendment, the Article Sixth amendment and the
incentive compensation plan proposal. Whether or not you plan to attend the
special meeting, we urge you to read this material carefully.
Your vote is important. Whether you plan to attend the special meeting or
not, please sign, date and return the enclosed proxy card as soon as possible in
the envelope provided.
I look forward to seeing you at the meeting.
Sincerely,
Lawrence S. Coben
Chairman of the Board and
Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has determined if this proxy statement is truthful or complete. Any
representation to the contrary is a criminal offense.
SEE "RISK FACTORS" BEGINNING ON PAGE 36 FOR A DISCUSSION OF VARIOUS
FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH THE MERGER.
This proxy statement is dated , 2006 and is first being mailed to
Tremisis stockholders on or about , 2006.
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Tremisis Energy Acquisition Corporation
1775 Broadway, Suite 604
New York, New York 10019
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON __________ __, 2006
TO THE STOCKHOLDERS OF TREMISIS ENERGY ACQUISITION CORPORATION:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Tremisis
Energy Acquisition Corporation ("Tremisis"), a Delaware corporation, will be
held at 10:00 a.m. eastern time, on ________, 2006, at the offices of Graubard
Miller, Tremisis' counsel, at 405 Lexington Avenue, 19th Floor, New York, New
York 10174 for the following purposes:
(1) to consider and vote upon the adoption of the Agreement and Plan of
Merger, dated as of October 20, 2005, as amended on November 11, 2005, among
Tremisis, RAM Energy Acquisition, Inc., a Delaware corporation and wholly owned
subsidiary of Tremisis ("Merger Sub"), RAM Energy, Inc., a Delaware corporation
("RAM"), and the stockholders of RAM (the "RAM stockholders"), and the
transactions contemplated thereby. RAM's board of directors and stockholders
have already approved and adopted the merger agreement;
(2) to consider and vote upon an amendment to the certificate of
incorporation of Tremisis to change the name of Tremisis from "Tremisis Energy
Acquisition Corporation" to "RAM Energy Resources, Inc.;"
(3) to consider and vote upon an amendment to the certificate of
incorporation of Tremisis to increase the number of authorized shares of
Tremisis common stock from 30,000,000 to 100,000,000;
(4) to consider and vote upon an amendment to the certificate of
incorporation of Tremisis to remove the preamble and sections A through D,
inclusive, of Article Sixth from the certificate of incorporation from and after
the closing of the merger, as these provisions will no longer be applicable to
Tremisis, and to redesignate section E of Article Sixth as Article Sixth; and
(5) to consider and vote upon the approval of the 2006 Long-Term Incentive
Plan (an equity-based incentive compensation plan).
These items of business are described in the attached proxy statement,
which we encourage you to read in its entirety before voting. Only holders of
record of Tremisis' common stock at the close of business on ___________ __,
2006 are entitled to notice of the special meeting and to vote at the special
meeting and any adjournments or postponements of the special meeting. Only the
holders of record of Tremisis common stock on that date are entitled to have
their votes counted at the Tremisis special meeting and any adjournments or
postponements of it. Tremisis will not transact any other business at the
special meeting except for business properly brought before the special meeting
or any adjournment or postponement of it by Tremisis' board of directors.
A complete list of Tremisis stockholders of record entitled to vote at the
special meeting will be available for 10 days before the special meeting at the
principal executive offices of Tremisis for inspection by stockholders during
ordinary business hours for any purpose germane to the special meeting.
Your vote is important regardless of the number of shares you own. The
first, second, third and fourth proposals must be approved by the holders of a
majority of the outstanding shares of Tremisis
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common stock. The fifth proposal must be approved by the holders of a majority
of the shares of Tremisis common stock present in person or represented by proxy
and entitled to vote at the meeting.
All Tremisis stockholders are cordially invited to attend the special
meeting in person. However, to ensure your representation at the special
meeting, you are urged to complete, sign, date and return the enclosed proxy
card as soon as possible. If you are a stockholder of record of Tremisis common
stock, you may also cast your vote in person at the special meeting. If your
shares are held in an account at a brokerage firm or bank, you must instruct
your broker or bank on how to vote your shares. If you do not vote or do not
instruct your broker or bank how to vote, it will have the same effect as voting
against the merger, the name change amendment, the capitalization amendment and
the Article Sixth amendment.
The board of directors of Tremisis unanimously recommends that you vote
"FOR" each of the proposals, which are described in detail in the accompanying
proxy statement.
By Order of the Board of Directors
Lawrence S. Coben
Chairman of the Board and
Chief Executive Officer
____________________, 2006
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TABLE OF CONTENTS
Section Heading Page
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SUMMARY OF MATERIAL TERMS OF THE MERGER ................................. 9
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS ............................... 11
SUMMARY OF THE PROXY STATEMENT .......................................... 19
The Parties ....................................................... 19
The Merger ........................................................ 21
Tremisis' Recommendations to Stockholders;
Reasons for the Merger .......................................... 21
The Certificate of Incorporation Amendments ....................... 22
The Proposed Tremisis 2006 Long-Term Incentive Plan ............... 22
Management of Tremisis and RAM .................................... 22
Voting Agreement .................................................. 23
Tremisis Inside Stockholders ...................................... 23
Merger Consideration .............................................. 23
Pre-Closing RAM Dividends/Redemption .............................. 23
Escrow Agreement - Indemnification of Tremisis .................... 24
Lock-Up Agreement ................................................. 24
Registration Rights Agreement ..................................... 24
Date, Time and Place of Special Meeting of
Tremisis' Stockholders .......................................... 24
Voting Power; Record Date ......................................... 24
Approval of the RAM stockholders .................................. 25
Quorum and Vote of Tremisis Stockholders .......................... 25
Relation of Proposals ............................................. 25
Conversion Rights ................................................. 26
Appraisal Rights .................................................. 26
Proxies ........................................................... 26
Interests of Tremisis Directors and Officers in the Merger ........ 26
Conditions to the Closing of the Merger ........................... 27
Termination, Amendment and Waiver ................................. 28
Quotation or Listing .............................................. 29
Tax Consequences of the Merger .................................... 29
Accounting Treatment .............................................. 30
Regulatory Matters ................................................ 30
Risk Factors ...................................................... 30
SELECTED SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION ................................................. 30
Tremisis' Selected Historical Financial Information ............... 33
Selected Unaudited Pro Forma Combined Financial
Information of Tremisis and RAM ................................. 33
Comparative Per Share Data ........................................ 34
Market Price and Dividend Data for Tremisis Securities ............ 35
Holders ........................................................... 36
Dividends ......................................................... 36
RISK FACTORS ............................................................ 36
Risks Related to our Business and Operations
Following the Merger with RAM ................................... 36
Risks Related to the Merger ....................................... 40
FORWARD-LOOKING STATEMENTS .............................................. 41
5
SPECIAL MEETING OF TREMISIS STOCKHOLDERS ................................ 43
General ........................................................... 43
Date, Time and Place .............................................. 43
Purpose of the Tremisis Special Meeting ........................... 43
Recommendation of Tremisis Board of Directors ..................... 43
Record Date; Who is Entitled to Vote .............................. 44
Quorum ............................................................ 44
Abstentions and Broker Non-Votes .................................. 44
Vote of Our Stockholders Required ................................. 44
Voting Your Shares ................................................ 45
Revoking Your Proxy ............................................... 45
Who Can Answer Your Questions About Voting Your Shares ............ 46
No Additional Matters May Be Presented at the
Special Meeting ................................................. 46
Conversion Rights ................................................. 46
Appraisal Rights .................................................. 46
Proxy Solicitation Costs .......................................... 47
Tremisis Inside Stockholders ...................................... 47
Tremisis Fairness Opinion ......................................... 47
THE MERGER PROPOSAL ..................................................... 48
General Description of the Merger ................................. 48
Pre-Closing RAM Dividends/Redemption .............................. 48
Background of the Merger .......................................... 48
Tremisis' Board of Directors' Reasons for the
Approval of the Merger .......................................... 50
Recommendation of Tremisis' Board of Directors .................... 52
Fairness Opinion .................................................. 52
Material Federal Income Tax Consequences of the Merger ............ 57
Anticipated Accounting Treatment .................................. 59
Regulatory Matters ................................................ 59
THE MERGER AGREEMENT .................................................... 59
General; Structure of Merger ...................................... 59
Closing and Effective Time of the Merger .......................... 60
Name; Headquarters; Stock Symbols ................................. 60
Merger Consideration .............................................. 60
Pre-Closing RAM Dividends/Redemption .............................. 60
Escrow Agreement .................................................. 60
Lock-Up Agreement ................................................. 61
Employment Agreement .............................................. 61
Election of Directors; Voting Agreement ........................... 61
Registration Rights Agreement ..................................... 61
Representations and Warranties .................................... 62
Covenants ......................................................... 62
Conditions to Closing of the Merger ............................... 66
Indemnification ................................................... 68
Termination ....................................................... 69
Effect of Termination ............................................. 70
Fees and Expenses ................................................. 70
Confidentiality; Access to Information ............................ 70
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Amendment ......................................................... 70
Extension; Waiver ................................................. 71
Public Announcements .............................................. 71
Arbitration ....................................................... 71
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ......... 71
NAME CHANGE AMENDMENT PROPOSAL .......................................... 80
CAPITALIZATION AMENDMENT PROPOSAL ....................................... 81
ARTICLE SIXTH AMENDMENT PROPOSAL ........................................ 82
2006 LONG-TERM INCENTIVE PLAN PROPOSAL .................................. 83
Background ........................................................ 83
Stock Subject to the 2006 Plan .................................... 83
Administration .................................................... 83
Types of Awards ................................................... 84
Transferability ................................................... 86
Change of Control Event ........................................... 86
Termination of Employment/Relationship ............................ 86
Dilution; Substitution ............................................ 87
Amendment of the 2006 Plan ........................................ 87
Accounting Treatment .............................................. 87
Tax Treatment ..................................................... 88
Recommendation and Vote Required .................................. 89
OTHER INFORMATION RELATED TO TREMISIS ................................... 90
Business of Tremisis .............................................. 90
Offering Proceeds Held in Trust ................................... 90
Fair Market Value of Target Business .............................. 90
Stockholder Approval of Business Combination ...................... 90
Liquidation If No Business Combination ............................ 90
Facilities ........................................................ 91
Employees ......................................................... 91
Periodic Reporting and Audited Financial Statements ............... 91
Legal Proceedings ................................................. 92
Plan of Operations ................................................ 92
Off-Balance Sheet Arrangements .................................... 93
BUSINESS OF RAM ......................................................... 93
General ........................................................... 93
Principal Properties .............................................. 94
Other Properties .................................................. 99
Development, Exploration and Exploitation Programs ................ 99
Oil and Natural Gas Reserves ...................................... 100
Net Production, Unit Prices and Costs ............................. 102
Acquisition, Development and Exploration
Capital Expenditures ............................................ 102
Producing Wells ................................................... 103
Acreage ........................................................... 103
Drilling Activities ............................................... 103
Oil and Natural Gas Marketing and Hedging ......................... 104
Competition ....................................................... 104
Title to Properties ............................................... 105
Facilities ........................................................ 105
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Regulation ........................................................ 105
Legal Proceedings ................................................. 106
Employees ......................................................... 107
RAM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......................... 107
DIRECTORS AND EXECUTIVE OFFICERS OF TREMISIS
FOLLOWING THE MERGER .................................................. 123
Meetings and Committees of the Board of
Directors of Tremisis ........................................... 125
Independence of Directors ......................................... 125
Audit Committee ................................................... 126
Code of Ethics .................................................... 127
Compensation Committee Information ................................ 127
Nominating Committee Information .................................. 127
Election of Directors; Voting Agreement ........................... 127
Executive Compensation ............................................ 128
Employment Agreement .............................................. 128
BENEFICIAL OWNERSHIP OF SECURITIES ...................................... 129
Security Ownership of Certain Beneficial
Owners and Management ........................................... 129
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS .................... 131
Tremisis Related Party Transactions ............................... 131
RAM Related Party Transactions .................................... 132
Section 16(a) Beneficial Ownership Reporting Compliance ........... 133
DESCRIPTION OF TREMISIS COMMON STOCK AND OTHER SECURITIES ............... 133
General ........................................................... 133
Common Stock ...................................................... 133
Preferred Stock ................................................... 134
Warrants .......................................................... 134
PRICE RANGE OF TREMISIS SECURITIES AND DIVIDENDS ........................ 136
Holders ........................................................... 136
Dividends ......................................................... 136
APPRAISAL RIGHTS ........................................................ 137
STOCKHOLDER PROPOSALS ................................................... 137
EXPERTS ................................................................. 137
WHERE YOU CAN FIND MORE INFORMATION ..................................... 137
GLOSSARY ................................................................ 138
INDEX TO FINANCIAL STATEMENTS ........................................... F-1
ANNEXES
A. Agreement and Plan of Merger
B. Amendment to Agreement and Plan of Merger
C. Amended and Restated Certificate of Incorporation
D. Form of Tremisis 2006 Long-Term Incentive Plan
E. Fairness Opinion issued to Tremisis
F. Amended and Restated Voting Agreement
G. Form of Escrow Agreement
H. Form of Employment Agreement
I. Form of Registration Rights Agreement
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SUMMARY OF THE MATERIAL TERMS OF THE MERGER
o The parties to the merger are Tremisis Energy Acquisition Corporation, RAM
Energy, Inc., and RAM Acquisition, Inc, which was formed by Tremisis to
effect the merger and is referred to as "Merger Sub". See the section
entitled "The Merger Proposal" on page 48 of the proxy statement.
o RAM is an independent oil and gas company engaged in the acquisition,
exploration, exploitation and development of oil and natural gas
properties and the production of oil and natural gas. Its properties are
located principally in Texas, Louisiana and Oklahoma. See the section
entitled "Business of RAM" on page 93 of the proxy statement.
o On closing of the merger, the Merger Sub will merge into RAM and RAM will
become a wholly owned subsidiary of Tremisis. See the section entitled
"The Merger Proposal" on page 48 of the proxy statement.
o In return for all of their stock in RAM, the stockholders of RAM will
receive from Tremisis 25,600,000 shares of Tremisis common stock and cash
equal to $30,000,000 or such lesser amount as may be available from
Tremisis' trust fund after payments to Tremisis stockholders who vote
against the merger and demand that their shares be converted into cash.
Also, RAM will pay its stockholders a one-time extraordinary dividend or
redeem a portion of its outstanding stock immediately prior to the merger,
in an aggregate amount of up to the difference between $40,000,000 and the
amount of cash they receive from Tremisis. See the section entitled "The
Merger Agreement - Merger Consideration" beginning on page 60 of the proxy
statement.
o As a result of the merger and assuming that no Tremisis stockholder
demands that Tremisis convert its shares to cash, as permitted by
Tremisis' certificate of incorporation, the stockholders of RAM will own
approximately 77% of the outstanding Tremisis common stock and the present
stockholders of Tremisis (or their transferees) will own approximately 23%
of the outstanding Tremisis common stock. See the section entitled "The
Merger Agreement - Merger Consideration" beginning on page 60 of the proxy
statement.
o 12.5% of the Tremisis shares to be received by the RAM stockholders will
be placed in escrow until June 30, 2007 as a fund for the payment of
indemnification claims that may be made by Tremisis as a result of
breaches of RAM's covenants, representations and warranties in the merger
agreement and a lawsuit to which RAM is a party. See the section entitled
"The Merger Agreement - Escrow Agreement" beginning on page 60 of the
proxy statement.
o In addition to voting on the merger, the stockholders of Tremisis will
vote on proposals to change its name to RAM Energy Resources, Inc., to
increase the
9
number of shares of common stock it is authorized to issue to 100,000,000
from 30,000,000, to amend its charter to delete certain provisions that
will no longer be applicable after the merger and to approve a long term
incentive plan. See the sections entitled "Name Change Amendment
Proposal", "Capitalization Amendment Proposal", "Article Sixth Amendment
Proposal" and "2006 Long-Term Incentive Plan Proposal" on pages 80, 81,
82, and 83, respectively, of the proxy statement.
o The stockholders of RAM have agreed not to sell any of the shares of
Tremisis common stock they receive in the merger for six months and no
more than 50% of the shares they receive for a further six months, subject
to certain exceptions. Tremisis has agreed to register their shares with
the SEC on request in certain circumstances. See the section entitled "The
Merger Agreement - Lock-Up Agreement" on page 61 of the proxy statement.
o None of Tremisis' present officers and directors will continue in such
positions after the merger. After the merger, the directors of Tremisis
will be three persons who have been designated by the RAM stockholders and
one person who has been designated by Lawrence S. Coben, chairman and
chief executive officer of Tremisis, and Isaac Kier, secretary, treasurer
and a director of Tremisis. The stockholders of RAM and Messrs. Coben and
Kier have agreed to vote their shares of Tremisis stock in favor of their
respective designees to serve as directors of Tremisis through the annual
meeting of stockholders of Tremisis to be held in 2008. See the section
entitled "The Merger Agreement - Election of Directors; Voting Agreement"
on page 61 of the proxy statement.
o After the merger, all of the officers of Tremisis will be persons who
presently hold similar positions with RAM. Larry E. Lee, RAM's president
and chief executive officer, will enter into a three-year employment
agreement with Tremisis, effective upon the merger, pursuant to which he
will hold similar positions with Tremisis. See the section entitled "The
Merger Agreement - Employment Agreement" on page 61 of the proxy
statement.
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q. Why am I receiving A. Tremisis and RAM have agreed to a business
this proxy combination under the terms of the Agreement and
statement? Plan of Merger dated October 20, 2005, as amended
on November 11, 2005, that is described in this
proxy statement. This agreement is referred to as
the merger agreement. Copies of the merger
agreement and the amendment are attached to this
proxy statement as Annexes A and B, which we
encourage you to review.
In order to complete the merger, Tremisis
stockholders must vote to approve (i) the merger
agreement, (ii) an amendment to Tremisis'
certificate of incorporation to change the name of
Tremisis from "Tremisis Energy Acquisition
Corporation" to "RAM Energy Resources, Inc.," and
(iii) an amendment to Tremisis' certificate of
incorporation to increase the number of shares of
authorized common stock from 30,000,000 to
100,000,000. Tremisis stockholders will also be
asked to vote to approve (i) an amendment to
Tremisis' certificate of incorporation to make
certain modifications to Article Sixth thereof and
(ii) the incentive compensation plan, but such
approvals are not conditions to the merger. The
incentive compensation plan has been approved by
Tremisis' board of directors and will be
effective upon consummation of the merger, but
stockholder approval is necessary to obtain
incentive stock option tax treatment. Tremisis'
amended and restated certificate of incorporation,
as it will appear if all amendments to its
certificate of incorporation are approved, is
annexed as Annex C hereto. The incentive
compensation plan is annexed as Annex D hereto.
Tremisis will hold a meeting of its stockholders
to obtain these approvals. This proxy statement
contains important information about the proposed
merger, the other proposals and the special
meeting of Tremisis stockholders. You should read
it carefully.
Your vote is important. We encourage you to vote
as soon as possible after carefully reviewing this
proxy statement.
11
Q. Why is Tremisis A. Tremisis was organized to effect a merger, capital
proposing the merger? stock exchange, asset acquisition or other similar
business combination with an operating business in
either the energy or the environmental industry
and their related infrastructures. RAM is an
independent oil and gas company engaged in the
acquisition, exploration, exploitation and
development of oil and gas properties and the
production of oil and gas. Tremisis believes that
RAM, with its estimated net proved reserves of
19.7 million barrels of oil equivalent, or Boe, at
September 30, 2005 and its interests in
approximately 2,900 wells, is positioned for
significant growth in present and future energy
markets and believes that a business combination
with RAM will provide Tremisis stockholders with
an opportunity to participate in a company with
significant growth potential.
Q. What is being A. There are five proposals on which the Tremisis
voted on? stockholders are being asked to vote. The first
proposal is to adopt and approve the merger
agreement and the transactions contemplated
thereby. We refer to this proposal as the merger
proposal.
The second proposal is to approve an amendment to
the certificate of incorporation to change the
name of Tremisis from "Tremisis Energy Acquisition
Corporation" to "RAM Energy Resources, Inc." We
refer to this proposal as the name change
amendment.
The third proposal is to approve an amendment to
the certificate of incorporation to increase the
number of authorized shares of Tremisis common
stock from 30,000,000 to 100,000,000. We refer to
this proposal as the capitalization amendment.
The fourth proposal is to approve an amendment to
the certificate of incorporation to remove the
preamble and sections A through D, inclusive, of
Article Sixth from the Certificate of
Incorporation from and after the closing and to
redesignate section E of Article Sixth as Article
Sixth. The items being removed will no longer be
operative upon consummation of the merger;
therefore, this amendment is being proposed to
revise the certificate of incorporation on a
going-forward basis. We refer to this proposal as
the Article Sixth amendment.
The fifth proposal is to approve Tremisis' 2006
Long-Term Incentive Plan. We refer to this
proposal as the incentive compensation plan
proposal.
12
Q. What vote is A. The approval of the merger will require the
required in order to affirmative vote of holders of a majority of the
adopt the merger outstanding shares of Tremisis' common stock. If
proposal? the holders of 20% or more of the shares of the
common stock issued in Tremisis' initial public
offering (the "IPO") pursuant to its prospectus,
dated May 12, 2004, vote against the merger and
demand that Tremisis convert their shares into a
pro rata portion of Tremisis' trust account as of
the record date, then the merger will not be
consummated. No vote of the holders of Tremisis'
warrants is necessary to adopt the merger proposal
or other proposals and Tremisis is not asking the
warrant holders to vote on the merger proposal or
the other proposals. Tremisis will not consummate
the merger transaction unless both the name change
amendment and the capitalization amendment are
also approved. The approvals of the Article Sixth
amendment and the incentive compensation plan
proposal are not conditions to the consummation of
the merger. The incentive compensation plan has
been approved by Tremisis' Board of Directors and
will be effective upon consummation of the merger,
subject to stockholder approval of the plan. If
the merger proposal is not approved, none of the
other proposals will be presented for approval.
Q. What vote is A. The approval of the name change amendment will
required in order to require the affirmative vote of the holders of a
adopt the name majority of the outstanding shares of Tremisis'
change amendment? common stock. The approval of the name change
amendment is a condition to the consummation of
the merger.
Q. What vote is A. The approval of the capitalization amendment
required in order to will require the affirmative vote of the holders
adopt the of a majority of the outstanding shares of
capitalization Tremisis' common stock. The approval of the
amendment? capitalization amendment is a condition to the
consummation of the merger.
Q. What vote is A. The approval of the Article Sixth amendment
required in order to will require the affirmative vote of the holders
adopt the Article of a majority of the outstanding shares of
Sixth amendment? Tremisis' common stock. The approval of the
Article Sixth amendment is not a condition to the
consummation of the merger or to the effectuation
of the name change amendment or the capitalization
amendment.
Q. What vote is A. The approval of the incentive compensation plan
required in order to proposal will require the affirmative vote of the
adopt the incentive holders of a majority of the shares of Tremisis
compensation plan? common stock represented in person or by proxy and
entitled to vote at the special meeting. The
approval of the long-term incentive plan is not a
condition to the approval of the merger or to the
effectuation of the name change amendment or the
capitalization amendment.
13
Q. Why is Tremisis A. Tremisis is proposing the incentive
proposing the compensation plan to enable it to attract, retain
incentive and reward its directors, officers, employees and
compensation plan? consultants using equity-based incentives. The
incentive compensation plan has been approved by
Tremisis' Board of Directors and will be
effective upon consummation of the merger, subject
to stockholder approval of the plan.
Q. Does the Tremisis A. Yes. After careful consideration of the terms and
board recommend conditions of the merger agreement, the
voting in favor of certificate of incorporation and the incentive
the merger, the name compensation plan, the board of directors of
change amendment, Tremisis has determined that the merger and the
the capitalization transactions contemplated thereby, each
amendment, the certificate of incorporation amendment and the
Article Sixth incentive compensation plan are fair to and in the
amendment and the best interests of Tremisis and its stockholders.
incentive The Tremisis board of directors recommends that
compensation plan? Tremisis stockholders vote FOR each of (i) the
merger, (ii) the name change amendment, (iii) the
capitalization amendment, (iv) the Article Sixth
amendment and (v) the incentive compensation plan
proposal. The members of Tremisis' board of
directors have interests in the merger that are
different from, or in addition to, your interests
as a stockholder. For a description of such
interests, please see the section entitled
"Summary of the Proxy Statement - Interests of
Tremisis Directors and Officers in the Merger" on
page 26.
For a description of the factors considered by
Tremisis' board of directors in making its
determination, see the section entitled "Tremisis
Board of Directors' Reasons for Approval of the
Merger" beginning on page 50.
Tremisis has obtained an opinion from Gilford
Securities Incorporated that the merger is fair,
from a financial perspective, to the stockholders
of Tremisis. For a description of the fairness
opinion and the assumptions made, matters
considered and procedures followed by Gilford
Securities Incorporated in rendering such opinion,
see the section entitled "Fairness Opinion"
beginning on page 52.
Q. What will happen A. As a consequence of the merger, a wholly owned
in the proposed subsidiary of Tremisis will be merged with and
merger? into RAM and RAM will continue as the surviving
corporation, becoming a wholly owned subsidiary of
Tremisis. Stockholders of RAM will become
stockholders of Tremisis and will own at least 77%
of the shares of Tremisis common stock outstanding
after the merger.
Q. How do the A. All of the Tremisis insiders (including all of
Tremisis insiders Tremisis' officers and directors) have agreed to
intend to vote their vote the shares held by them that they acquired
shares? prior to the IPO on the merger proposal in
accordance with the vote of the majority of the
shares of common stock issued in the IPO. They
have indicated that they will vote the shares held
by them in favor of the certificate of
incorporation amendments and the incentive
compensation plan.
Q. What will I A. Tremisis stockholders will receive nothing in
receive in the the merger. Tremisis stockholders will continue to
proposed merger? hold the shares of Tremisis common stock that they
owned prior to the merger.
14
Q. What will RAM A. The RAM stockholders, including a holder of an
security holders option to purchase shares of common stock of RAM
receive in the (the only outstanding securities exercisable or
proposed merger? convertible into shares of common stock of RAM)
who has agreed to exercise such option prior to
the consummation of the merger, will receive
25,600,000 shares of Tremisis common stock and
$30.0 million in cash, or such lesser amount as
may be available in the trust account after
payment to the holders of Tremisis common stock
voting against the merger and demanding
conversion. Of the shares to be issued to the RAM
stockholders, 3,200,000 shares, or 12.5%, will be
placed in escrow to secure Tremisis' indemnity
rights under the merger agreement. The merger
agreement authorizes RAM, prior to the
consummation of the merger, to either declare a
one-time extraordinary dividend, or redeem a
portion of its outstanding stock, in an aggregate
amount of up to the difference between $40 million
and the amount of cash consideration to be
received by the RAM stockholders from Tremisis in
the merger. Subject to the availability of
distributable funds, RAM intends to effect such
payment. See the section entitled "Merger
Consideration" beginning on page 60.
Q. How much of A. After the merger, if no Tremisis stockholder
Tremisis will demands that Tremisis convert its shares into a
existing Tremisis pro rata portion of the trust account, then
stockholders own existing Tremisis' stockholders will own
after the merger? approximately 23% of the outstanding common stock
of Tremisis. Existing Tremisis stockholders would
own less than that percentage of shares if one or
more Tremisis stockholders vote against the merger
proposal and demand conversion of their shares
into a pro rata portion of the trust account.
Q. Do I have A. If you hold shares of common stock issued in
conversion rights? Tremisis' IPO, then you have the right to vote
against the merger proposal and demand that
Tremisis convert such shares into a pro rata
portion of the trust account in which a
substantial portion of the net proceeds of
Tremisis' IPO are held. We sometimes refer to
these rights to vote against the merger and demand
conversion of the shares into a pro rata portion
of the trust account as conversion rights.
Q. How do I exercise A. If you wish to exercise your conversion rights,
my conversion you must vote against the merger proposal and at
rights? the same time demand that Tremisis convert your
shares into cash. You may exercise your conversion
rights either by checking the box on the proxy
card or by submitting your request in writing to
Tremisis at the address listed below. You may
remedy an improperly executed demand for
conversion at any time until the stockholder
meeting. If, notwithstanding your negative vote,
the merger is completed, then you will be entitled
to receive a pro rata portion of the trust
account, including any interest earned thereon
through the record date. As of the record date,
there was approximately $ _______ in trust, so you
will be entitled to convert each share of common
stock that you hold into approximately $________.
If you exercise your conversion rights, then you
will be exchanging your shares of Tremisis common
stock for cash and will no longer own these
shares. You will be entitled to receive cash for
these shares only if you continue to hold these
shares through the closing of the merger and then
tender your stock certificate. Exercise of your
conversion rights does not result in either the
conversion or a loss of your warrants. Your
warrants will continue to be outstanding and
exercisable following a conversion of your common
stock.
Q. What if I object A. Tremisis Stockholders do not have appraisal
to the proposed rights in connection with the merger under the
merger? Do I have General Corporation Law of the State of Delaware
appraisal rights? ("DGCL").
15
Q. What happens to A. Upon consummation of the merger, Tremisis
the funds deposited stockholders electing to exercise their conversion
in the trust account rights will receive their pro rata portion of the
after consummation funds in the trust account. The balance of the
of the merger? funds in the trust account will be released to
Tremisis for payment of merger consideration to
the RAM stockholders, with the remainder, if any,
to be used for working capital.
Q. Who will manage A. Larry E. Lee, Gerald R. Marshall and John M.
Tremisis? Reardon, currently members of the board of
directors of RAM, and Sean P. Lane, will be
appointed to serve on Tremisis' board of
directors after the merger. After the merger,
Larry E. Lee will serve as the chairman, president
and chief executive officer of Tremisis, John M.
Longmire will serve as its senior vice president
and chief financial officer, Larry G. Rampey will
serve as its senior vice president, Drake N.
Smiley will serve as its senior vice president and
John L. Cox will serve as its vice president,
secretary and treasurer. Each of Messrs. Lee,
Longmire, Rampey, Smiley and Cox currently is an
executive officer of RAM and will continue in
such position after the merger. None of
Tremisis' current officers and directors will
continue in his position after the merger.
Q. What happens if A. Tremisis must liquidate if it does not
the merger is not consummate a business combination by May 18, 2006.
consummated? In any liquidation, the funds held in the trust
account, plus any interest earned thereon,
together with any remaining out-of-trust net
assets, will be distributed pro rata to the
holders of Tremisis' common stock acquired in
Tremisis' IPO. Holders of Tremisis common stock
acquired prior to the IPO, including all of
Tremisis' officers and directors, have waived any
right to any liquidation distribution with respect
to those shares.
Q. When do you A. It is currently anticipated that the merger
expect the merger to will be consummated promptly following the
be completed? Tremisis special meeting on _________, 2006.
For a description of the conditions to completion
of the merger, see the section entitled
"Conditions to the Closing of the Merger"
beginning on pages 27 and 66.
Q. What do I need to A. Tremisis urges you to read carefully and
do now? consider the information contained in this proxy
statement, including the annexes, and to consider
how the merger will affect you as a stockholder of
Tremisis. You should then vote as soon as possible
in accordance with the instructions provided in
this proxy statement and on the enclosed proxy
card.
16
Q. How do I vote? A. If you are a holder of record of Tremisis
common stock, you may vote in person at the
special meeting or by submitting a proxy for the
special meeting. You may submit your proxy by
completing, signing, dating and returning the
enclosed proxy card in the accompanying
pre-addressed postage paid envelope. If you hold
your shares in "street name," which means your
shares are held of record by a broker, bank or
nominee, you must provide the record holder of
your shares with instructions on how to vote your
shares.
Q. What will happen A. An abstention or failure to vote by a Tremisis
if I abstain from stockholder will have the same effect as a vote
voting or fail to against the merger, but will not have the effect
vote? of converting your shares of common stock into a
pro rata portion of the trust account. An
abstention or failure to vote will also have the
effect of voting against the certificate of
incorporation amendments. An abstention will have
the effect of voting against the incentive
compensation plan proposal, but failures to vote
will have no effect on the incentive compensation
plan proposal.
Q. If my shares are A. No. Your broker, bank or nominee cannot vote
held in "street your shares unless you provide instructions on how
name," will my to vote in accordance with the information and
broker, bank or procedures provided to you by your broker, bank or
nominee nominee.
automatically vote
my shares for me?
Q. Can I change my A. Yes. Send a later-dated, signed proxy card to
vote after I have Tremisis' secretary at the address of Tremisis'
mailed my signed corporate headquarters prior to the date of the
proxy or direction special meeting or attend the special meeting in
form? person and vote. You also may revoke your proxy by
sending a notice of revocation to Tremisis'
secretary.
Q. Do I need to send A. No. Tremisis stockholders who do not elect to
in my stock have their shares converted into the pro rata
certificates? share of the trust account should not submit their
stock certificates now or after the merger,
because their shares will not be converted or
exchanged in the merger.
Q. What should I do A. You may receive more than one set of voting
if I receive more materials, including multiple copies of this proxy
than one set of statement and multiple proxy cards or voting
voting materials? instruction cards. For example, if you hold your
shares in more than one brokerage account, you
will receive a separate voting instruction card
for each brokerage account in which you hold
shares. If you are a holder of record and your
shares are registered in more than one name, you
will receive more than one proxy card. Please
complete, sign, date and return each proxy card
and voting instruction card that you receive in
order to cast a vote with respect to all of your
Tremisis shares.
17
Q. What are the The merger will qualify as a reorganization within
federal income tax the meaning of Section 368(a) of the Internal
consequences of the Revenue Code and no gain or loss will be
merger? recognized by Tremisis or RAM as a result of the
merger.
A RAM stockholder who receives both Tremisis
common stock and cash in the merger will not
recognize any gain or loss upon receipt of the
common stock, but will recognize gain with respect
to the cash received. Such gain will be taxed as a
dividend to the extent RAM has accumulated
earnings and profits and as capital gain to the
extent RAM does not have accumulated earnings and
profits.
A stockholder of Tremisis who exercises conversion
rights and effects a termination of the
stockholder's interest in Tremisis will generally
be required to recognize capital gain or loss upon
the exchange of that stockholder's shares of
common stock of Tremisis for cash, if such shares
were held as a capital asset on the date of the
merger. Such gain or loss will be measured by the
difference between the amount of cash received and
the tax basis of that stockholder's shares of
Tremisis common stock.
No gain or loss will be recognized by
non-converting stockholders of Tremisis.
For a description of the material federal income
tax consequences of the merger, please see the
information set forth in "Material Federal Income
Tax Consequences of the Merger" beginning on page
57.
Q. Who can help A. If you have questions about the merger or if
answer my questions? you need additional copies of the proxy statement
or the enclosed proxy card you should contact:
Lawrence S. Coben
Tremisis Energy Acquisition Corporation
1755 Broadway, Suite 604
New York, New York 10019
Tel: (212) 397-1464
You may also obtain additional information about
Tremisis from documents filed with the SEC by
following the instructions in the section entitled
"Where You Can Find More Information" beginning on
page 137.
18
SUMMARY OF THE PROXY STATEMENT
This summary highlights selected information from this proxy statement and
does not contain all of the information that is important to you. To better
understand the merger, you should read this entire document carefully, including
the merger agreement and the amendment thereto attached as Annexes A and B to
this proxy statement. We encourage you to read the merger agreement carefully.
It is the legal document that governs the merger and the other transactions
contemplated by the merger agreement. It is also described in detail elsewhere
in this proxy statement.
The Parties
Tremisis
Tremisis is a blank check company organized as a corporation under the
laws of the State of Delaware on February 5, 2004. It was formed to effect a
business combination with an unidentified operating business in either the
energy or the environmental industry and their related infrastructures. On May
18, 2004, it consummated an IPO of its equity securities from which it derived
net proceeds of approximately $34,163,000. The Tremisis common stock, warrants
to purchase common stock and units (each unit consisting of one share of common
stock and two warrants to purchase common stock) are quoted on the
Over-the-Counter Bulletin Board (OTCBB) under the symbols TEGY for the common
stock, TEGYW for the warrants and TEGYU for the units. Approximately $33,143,000
of the net proceeds of the IPO were placed in a trust account. Such funds, with
the interest earned thereon, will be released to Tremisis upon consummation of
the merger, and used to pay the cash portion of the merger consideration to the
RAM stockholders and payments owed to Tremisis stockholders who exercise
conversion rights, with the balance being used for working capital for the
post-merger entity.
The balance of the net proceeds of the IPO, or approximately $1,020,000,
has been and will be used by Tremisis to pay the expenses incurred in its
pursuit of a business combination. As of December 31, 2005, Tremisis had spent
approximately $______ of such amount. Other than its IPO and the pursuit of a
business combination, Tremisis has not engaged in any business to date. If
Tremisis does not consummate a business combination by May 18, 2006, then,
pursuant to Article Sixth of its certificate of incorporation, Tremisis'
officers must take all actions necessary to dissolve and liquidate Tremisis
within 60 days of such date.
The mailing address of Tremisis' principal executive office is Tremisis
Energy Acquisition Corporation, 1775 Broadway, Suite 604, New York, New York
10019, and its telephone number is (212) 397-1464.
RAM Acquisition, Inc.
RAM Acquisition, Inc. was organized as a corporation under the laws of the
State of Delaware on October 5, 2005. It was formed to effect a merger with RAM
and is a wholly owned subsidiary of Tremisis. We sometimes refer to RAM
Acquisition, Inc. as the Merger Sub.
RAM
RAM is a privately owned, independent, oil and gas company. RAM's business
strategy is to acquire, explore, develop, exploit, produce and manage oil and
gas properties, primarily in Texas, Louisiana and Oklahoma. RAM has been active
in these core areas since its inception in 1987. RAM's management team has
extensive technical and operating expertise in all areas of its geographic
focus.
At September 30, 2005, RAM's estimated net proved reserves were 19.7
million barrels of oil equivalent, or Boe, of which approximately 60% were crude
oil, 29% were natural gas, and 11% were natural gas liquids. The present value
of future net revenue from RAM's estimated net proved reserves, calculated
before applicable income taxes, discounted at 10%, which we refer to as PV-10
Value, was approximately $445.0 million, based on prices RAM was receiving as of
September 30, 2005 which were $63.62 per barrel, or Bbl, of oil, $39.21 per Bbl
of natural gas liquids, or NGLs, and $12.70 per thousand cubic feet, or Mcf, of
natural gas, without regard to financial hedges or hedging activities. At
September 30, 2005, based on the methodology provided in Statement of Financial
Accounting Standard No. 69, the standardized measure of the discounted value of
future cash flows related to RAM's estimated proved oil and natural gas reserves
was $299.8 million. For further information regarding the standardized measure,
please see "Business of RAM - Oil and Natural Gas Reserves" and note R of the
notes to RAM's financial statements for the year ended December 31, 2004,
appearing elsewhere in this proxy statement. At September 30, 2005, RAM's proved
developed reserves comprised 70.8% of its total proved reserves and the
estimated reserve life for RAM's total proved reserves was approximately 14
years. At December 31, 2005, RAM was receiving $58.63 per Bbl of oil, $35.89 per
Bbl of NGLs and $9.14 per Mcf of natural gas.
19
The following table presents certain information with respect to RAM's oil
and natural gas production, prices and costs attributable to all oil and natural
gas properties owned by RAM for the periods shown. Average realized prices
reflect the actual realized prices received by RAM, excluding the results of
RAM's hedging activities.
Nine
Months Ended
Year Ended December 31, September 30,
------------------------------------------- -------------
2002 2003 2004 2005
------- ------ ------ ------
Production volumes:
Oil and condensate (MBbls) .......................... 202 277 178 595
Natural gas liquids (MBbls) ......................... 3 5 12 130
Natural gas (MMcf) .................................. 1,760 2,334 2,084 1,819
Total (MBoe) ..................................... 499 671 538 1,028
Average realized prices:
Oil and condensate (per Bbl) ........................ $24.79 $29.47 $37.63 $53.23
Natural gas liquids (per Bbl) ....................... $ 3.32 $16.94 $26.41 $35.35
Natural gas (per Mcf) ............................... $ 2.92 $ 5.06 $ 5.26 $ 6.52
Total per Boe .................................... $20.38 $29.89 $33.44 $46.80
Expenses (per Boe):
Oil and natural gas production taxes ................ $ 2.09 $ 2.10 $ 2.35 $ 2.39
Oil and natural gas production expenses ............. $ 6.06 $ 5.26 $ 6.70 $11.14
Amortization of full-cost pool ...................... $ 5.48 $ 5.64 $ 5.55 $ 8.68
General and administrative .......................... $11.74 $ 9.44 $12.28 $ 6.11
RAM owns interests in approximately 2,900 wells and is the operator of
leases upon which approximately 1,900 of these wells are located. The PV-10
Value attributable to RAM's interests in the properties operated by RAM
represented approximately 89% of RAM's aggregate PV-10 Value as of September 30,
2005. In addition, RAM has positioned itself for participation in two emerging
resource plays: (1) the on-going Barnett Shale play located in Jack and Wise
Counties, Texas, where RAM owns interests in approximately 27,700 gross acres
(6,800 net acres) and (2) an exploratory Barnett and Woodford Shale play located
in Reeves County, Texas, where RAM owns interests in approximately 70,000 gross
acres (11,000 net acres). RAM also owns interests in various gathering systems
and a natural gas processing plant that serves its producing properties.
RAM has grown principally through acquisitions of producing properties and
the further development of these acquired properties. Since 1987, RAM has
arranged and managed over 20 acquisitions of producing oil and gas properties
and related assets for an aggregate purchase price approximating $400 million.
The most recent of these acquisitions, which closed in December 2004, was RAM's
purchase of WG Energy Holdings, Inc. for $82.5 million, following which WG
Energy's name was changed to RWG Energy, Inc., or RWG. RWG's estimated proved
reserves at December 31, 2004 included 9.5 million Bbls of oil, 2.1 million Bbls
of NGLs, and 10.0 billion cubic feet, or Bcf, of natural
20
gas, or a total of 13.2 million Boe. The cost of the acquisition on a per barrel
basis was approximately $6.25 per barrel.
From 1997 through December 31, 2004, RAM's reserve replacement percentage,
through discoveries, extensions, revisions and acquisitions, but excluding
dispositions, was 323%. From 1989 through December 31, 2005, RAM drilled or
participated in the drilling of 465 oil and natural gas wells, of which 92% were
completed and produced hydrocarbons in commercial quantities, which RAM
considers to be their "success rate." Since 1997, RAM's historical average
finding cost from all sources, exclusive of acquisitions, has been $6.11 per
Boe.
RAM owns or has access to 2-D seismic data covering approximately 3,285
square miles and 3-D seismic information covering approximately 108 square miles
in its core areas. RAM is actively engaged in re-interpreting and re-processing
such data in an effort to identify additional exploration and exploitation
targets across RAM's owned acreage. RAM regularly reviews prospects proposed by
other operators and from time to time participates in exploration plays within
its core areas.
During 2005, RAM drilled or participated in the drilling of 67 wells on
its oil and gas properties, 60 of which were successfully completed as producing
wells and seven of which were either still drilling or awaiting completion at
year end. Through December 31, 2005, RAM's capital expenditures in connection
with the drilling and completion of these 67 wells aggregated approximately $7.6
million. One of the wells drilled during 2005 was an exploratory well in which
RAM owns a 25% non-operating working interest, and the remaining 66 wells were
development wells, 57 of which were drilled and are being operated by RAM. In
addition, RAM conducted or participated in recompletion operations on 22 of its
existing wells, resulting in the reestablishment or enhancement of production
from 21 of these wells, with one well remaining shut in at year end. RAM's
capital expenditures in connection with its 2005 recompletion operations
aggregated approximately $1.7 million.
RAM was organized as a corporation under the laws of the State of Delaware
on September 28, 1987. The mailing address of RAM's principal executive offices
is 5100 E. Skelly Drive, Suite 650, Tulsa, Oklahoma 74135, and its telephone
number is (918) 663-2800.
The Merger
The merger agreement provides for a business combination transaction by
means of a merger of Merger Sub with and into RAM in which RAM will be the
surviving entity and become a wholly owned subsidiary of Tremisis. This will be
accomplished through an exchange of all the issued and outstanding shares of
capital stock of RAM for cash and shares of common stock of Tremisis. Shares of
Tremisis common stock, representing 12.5% of the shares of Tremisis common stock
to be issued to the RAM stockholders, will be placed in escrow as the sole
remedy for Tremisis' rights to indemnity set forth in the merger agreement.
Tremisis and RAM plan to complete the merger promptly after the Tremisis
special meeting, provided that:
o Tremisis' stockholders have approved the merger agreement, the name
change amendment and capitalization amendment;
o holders of 20% or more of the shares of common stock issued in
Tremisis' IPO have not voted against the merger proposal and
demanded conversion of their shares into cash; and
o the other conditions specified in the merger agreement have been
satisfied or waived.
Tremisis' Recommendations to Stockholders; Reasons for the Merger
After careful consideration of the terms and conditions of the merger
agreement, the certificate of incorporation amendments and the incentive
compensation plan, the board of directors of Tremisis has determined that the
merger and the transactions contemplated thereby, each certificate of
incorporation amendment and the incentive compensation plan are fair to and in
the best interests of Tremisis and its
21
stockholders. In reaching its decision with respect to the merger and the
transactions contemplated thereby, the board of directors of Tremisis reviewed
various industry and financial data and the due diligence and evaluation
materials provided by RAM in order to determine that the consideration to be
paid to the RAM stockholders was reasonable. Further, Tremisis has received an
opinion from Gilford Securities Incorporated that, in its opinion, the merger
and the transactions contemplated thereby are fair to Tremisis' stockholders
from a financial point of view. Accordingly, Tremisis' board of directors
recommends that Tremisis stockholders vote:
o FOR the merger proposal;
o FOR the name change amendment;
o FOR the capitalization amendment;
o FOR the Article Sixth amendment; and
o FOR the incentive compensation plan proposal.
The Certificate of Incorporation Amendments
The amendments to Tremisis' certificate of incorporation are being
proposed, upon consummation of the merger, to change Tremisis' name, increase
the number of shares of common stock it is authorized to issue, and eliminate
certain provisions that are applicable to Tremisis only prior to its completion
of a business combination. As a result of the amendments, after the merger,
Tremisis will be named "RAM Energy Resources, Inc.," the number of shares of
common stock it will be authorized to issue will be increased from 30 million to
100 million and Article Sixth of its certificate of incorporation will address
only its classified board of directors, with existing provisions that relate to
it as a blank check company being deleted.
The Proposed Tremisis 2006 Long-Term Incentive Plan
The Tremisis 2006 Long-Term Incentive Plan reserves 2,400,000 shares of
Tremisis common stock for issuance in accordance with the plan's terms. The
purpose of the plan is to create incentives designed to motivate our employees
to significantly contribute toward our growth and profitability, to provide
Tremisis executives, directors and other employees and persons who, by their
position, ability and diligence are able to make important contributions to our
growth and profitability, with an incentive to assist us in achieving our
long-term corporate objectives, to attract and retain executives and other
employees of outstanding competence and to provide such persons with an
opportunity to acquire an equity interest in Tremisis. The plan is attached as
Annex D to this proxy statement. We encourage you to read the plan in its
entirety.
Management of Tremisis and RAM
Tremisis
As a result of the merger, Merger Sub will be merged with and into RAM and
will cease to survive. RAM and Tremisis will both survive the merger, with RAM
becoming a wholly owned subsidiary of Tremisis.
After the consummation of the merger, the board of directors of Tremisis
will consist of Larry E. Lee and Sean P. Lane (each in the class to stand for
election in 2006), Gerald R. Marshall (in the class to stand for election in
2007), and John M. Reardon (in the class to stand for election in 2008). Messrs.
Lee, Marshall and Reardon are currently directors of RAM and are designees of
RAM's stockholders under the voting agreement. Mr. Lane is a designee of Messrs.
Coben and Kier under the voting agreement.
After the consummation of the merger, the executive officers of Tremisis
will be Larry E. Lee, chairman, president and chief executive officer, John M.
Longmire, senior vice president and chief financial officer, Larry G. Rampey,
senior vice president, Drake N. Smiley, senior vice president and John L. Cox,
vice president, secretary and treasurer, each of whom currently is an executive
officer of RAM. None of Tremisis' current officers and directors will continue
in his position after the merger.
22
RAM
After the consummation of the merger, the board of directors of RAM will
be Larry E. Lee, Sean P. Lane, Gerald R. Marshall and John M. Reardon. The
officers of RAM will be Larry E. Lee, chairman, president and chief executive
officer, John M. Longmire, senior vice president and chief financial officer,
Larry G. Rampey, senior vice president, Drake N. Smiley, senior vice president
and John L. Cox, vice president, secretary and treasurer.
Voting Agreement
The RAM stockholders, certain stockholders of Tremisis and Tremisis
entered into a voting agreement dated as of October 20, 2005. After
consummation of the merger, the parties to the voting agreement will own
approximately 80.5% of Tremisis' outstanding stock. The voting agreement
provides that each individual party will vote for the respective designees of
the individual parties affiliated with each of Tremisis and RAM as directors of
Tremisis until immediately following the election that will be held in 2008.
Tremisis will be obligated to provide for its board of directors to be comprised
of four members and to enable the election to the board of directors of the
persons designated by the parties to the voting agreement. The voting agreement
is attached as Annex F hereto. We encourage you to read the voting agreement in
its entirety.
Tremisis Inside Stockholders
On the record date, directors and executive officers of Tremisis and their
affiliates (the "Tremisis Inside Stockholders") beneficially owned and were
entitled to vote 1,375,000 shares or approximately 17.9% of Tremisis'
outstanding common stock. In connection with its IPO, Tremisis and
EarlyBirdCapital, Inc., the managing underwriter of the IPO, entered into
agreements with each of the Tremisis Inside Stockholders pursuant to which each
Tremisis Inside Stockholder agreed to vote his shares of Tremisis common stock
on the merger proposal in accordance with the majority of the votes cast by the
holders of shares issued in connection with the IPO. The Tremisis Inside
Stockholders also agreed, in connection with the IPO, to place their shares in
escrow until May 12, 2007.
Merger Consideration
The holders of the outstanding shares of common stock of RAM immediately
before the merger will receive from Tremisis 25,600,000 shares of Tremisis
common stock and $30 million in cash, or such lesser amount as may be available
in the trust account after payment to the owners of Tremisis common stock voting
against the merger and demanding conversion. Immediately following the Merger,
the RAM stockholders will own approximately 77% of the total issued and
outstanding Tremisis common stock, assuming that no Tremisis stockholders seek
conversion of their Tremisis stock into their pro rata share of the trust fund.
Of the shares to be issued to the RAM stockholders, 3,200,000 shares, or 12.5%,
will be placed in escrow to secure Tremisis' indemnity rights under the merger
agreement.
Pre-Closing RAM Dividends/Redemption
The merger agreement authorizes RAM, prior to the consummation of the
merger, to pay its normal quarterly dividend for the fourth quarter of 2005.
Also, because Tremisis did not have sufficient funds in its trust account to
permit payment of $40.0 million in cash merger consideration to the RAM
stockholders, it was agreed that, prior to the consummation of the merger, in
addition to its $500,000 normal quarterly dividend, RAM would be authorized to
declare and pay a one-time extraordinary dividend, or make a redemption of
outstanding RAM common stock, in an amount which, when added to the cash merger
consideration received from Tremisis, would permit the RAM stockholders to
receive an aggregate $40.0 million in cash. Accordingly, the merger agreement
provides that, prior to the closing of the merger, RAM is authorized to declare
and pay one normal $500,000 quarterly dividend to its stockholders, and to
either declare a one-time extraordinary dividend, or redeem a portion of its
outstanding common stock, in an aggregate amount up to the difference between
$40.0 million and the amount of the cash consideration to be received by the RAM
stockholders in the merger. It is anticipated that the RAM stockholders will
receive $30.0 million of cash merger consideration from Tremisis and, therefore,
that the RAM extraordinary dividend/redemption will be $10.0 million. If after
giving effect to payments by Tremisis to the holders of Tremisis common stock
who vote against the merger and demand conversion, and after payment of
Tremisis' expenses incurred in connection with the merger, less than $30.0
million remains in the Tremisis trust account for payment of cash merger
consideration to the RAM stockholders, the amount of the authorized RAM dividend
or redemption payment will be increased as necessary to permit the aggregate
amount received by the RAM stockholders, both as cash merger consideration and
as a dividend or redemption payment, to equal $40.0 million.
The amount of the dividend/redemption payments actually made by RAM will
depend upon the amount of cash available to RAM for making such payments.
Accordingly, it may be necessary for RAM to amend its existing credit facility
or enter into a new credit facility with a higher credit limit prior to the
closing. The merger agreement specifically authorizes RAM to enter into a new
credit facility to replace its existing senior secured credit facility, and to
draw funds under the new credit facility for purposes of making the
dividend/redemption payments, subject only to an aggregate indebtedness
limitation outstanding at the closing. In the event RAM does not have sufficient
funds to make the full amount of the pre-closing dividend/redemption payments
authorized by the terms of the merger agreement, the dividend/redemption
payments actually made will be limited to the funds available for making such
payments and neither RAM nor Tremisis will have any obligation to make any
additional payments to the RAM stockholders after the closing with respect to
any shortfall.
23
Escrow Agreement - Indemnification of Tremisis
As the sole remedy for the obligation of the stockholders of RAM to
indemnify and hold harmless Tremisis for any damages, whether as a result of any
third party claim or otherwise, and which arise as a result of or in connection
with the breach of representations and warranties and agreements and covenants
of RAM or in connection with an identified, existing legal action involving
certain of RAM's subsidiaries and affiliates, at the closing, there will be
deposited in escrow, until June 30, 2007, 12.5% of the shares of Tremisis common
stock to be issued to the RAM stockholders upon consummation of the merger. The
RAM stockholders shall have the right to substitute for the escrow shares that
otherwise would be paid in satisfaction of a claim, cash in an amount equal to
the fair market value of the shares to be paid for a claim. For purposes of
satisfying an indemnification claim, shares of Tremisis common stock will be
valued at the average reported last sales price for the ten trading days ending
on the last day prior to the day that the claim is paid. The escrow agreement is
attached as Annex G hereto. We encourage you to read the escrow agreement in its
entirety.
The determination to assert a claim for indemnification by Tremisis
against the escrow shares will be made by Lawrence S. Coben, who is a current
member of Tremisis' board of directors. Larry E. Lee has been designated under
the merger agreement to represent the interests of the stockholders of RAM with
respect to claims for indemnification by Tremisis against such shares.
Lock-Up Agreement
The RAM stockholders have entered into a lock-up agreement that provides
that they not sell or otherwise transfer any of the shares of common stock of
Tremisis that they receive in the merger until the six-month anniversary of the
consummation of the merger, and no more than 50% of such shares during the
following six months, subject to certain exceptions. The lock-up agreement was
entered into to ensure that the shares of Tremisis common stock received by the
RAM stockholders in the merger will not offer the potential to impact upon the
market price during the periods the restrictions apply.
Registration Rights Agreement
Upon consummation of the merger, Tremisis and the RAM stockholders shall
enter into a registration rights agreement to provide the RAM stockholders with
certain "piggy back" and demand rights relating to the registration of shares of
Tremisis common stock that they will receive as a result of the merger. The form
of registration rights agreement is attached as Annex I hereto. We encourage you
to read the registration rights agreement in its entirety.
Date, Time and Place of Special Meeting of Tremisis' Stockholders
The special meeting of the stockholders of Tremisis will be held at 10:00
a.m., eastern time, on ___________, 2006, at the offices of Graubard Miller,
Tremisis' counsel, at 405 Lexington Avenue, 19th Floor, New York, New York,
10174 to consider and vote upon the merger proposal, the name change amendment,
the capitalization amendment, the Article Sixth amendment and the incentive
compensation plan proposal.
Voting Power; Record Date
You will be entitled to vote or direct votes to be cast at the special
meeting if you owned shares of Tremisis common stock at the close of business on
___________, 2006, which is the record date for the special meeting. You will
have one vote for each share of Tremisis common stock you owned at the close of
business on the record date. Tremisis warrants do not have voting rights. On the
record date, there were 7,700,000 shares of Tremisis common stock outstanding.
24
Approval of the RAM stockholders
All of the stockholders of RAM have approved the merger and the
transactions contemplated thereby by consent action for purposes of the DGCL.
Accordingly, no further action by the RAM stockholders is needed to approve the
merger.
Quorum and Vote of Tremisis Stockholders
A quorum of Tremisis stockholders is necessary to hold a valid meeting. A
quorum will be present at the Tremisis special meeting if a majority of the
outstanding shares entitled to vote at the meeting are represented in person or
by proxy. Abstentions and broker non-votes will count as present for the
purposes of establishing a quorum.
o The approval of the merger proposal will require the affirmative
vote of the holders of a majority of the outstanding shares of
Tremisis common stock on the record date. The merger will not be
consummated if the holders of 20% or more of the common stock issued
in Tremisis' IPO (1,265,000 shares or more) exercise their
conversion rights.
o The approval of the name change amendment will require the
affirmative vote of the holders of a majority of the outstanding
shares of Tremisis common stock on the record date.
o The approval of the capitalization amendment will require the
affirmative vote of the holders of a majority of the outstanding
shares of Tremisis common stock on the record date.
o The approval of the Article Sixth amendment will require the
affirmative vote of the holders of a majority of the outstanding
shares of Tremisis common stock on the record date.
o The approval of the incentive compensation plan will require the
affirmative vote of the holders of a majority of the shares of
Tremisis common stock represented in person or by proxy and entitled
to vote at the meeting.
Abstentions will have the same effect as a vote "AGAINST" the merger
proposal and the proposals to amend the certificate of incorporation and the
incentive compensation plan. Broker non-votes, while considered present for the
purposes of establishing a quorum, will have the effect of votes against the
merger proposal and the proposals to amend the certificate of incorporation, but
will have no effect on the incentive compensation plan. Please note that you
cannot seek conversion of your shares unless you affirmatively vote against the
merger.
Relation of Proposals
The merger will not be consummated unless each of the name change
amendment and the capitalization amendment is approved, and neither of the name
change amendment nor the capitalization amendment will be presented to the
meeting for adoption unless the merger is approved. The approvals of the Article
Sixth amendment and the incentive compensation plan proposal are not conditions
to the consummation of the merger or to the adoption of either of the name
change amendment or the capitalization amendment but, if the merger proposal is
not approved, neither will be presented at the meeting for adoption. The
incentive compensation plan has been approved by Tremisis' Board of Directors
and will take effect upon consummation of the merger, subject to stockholder
approval of the plan.
25
Conversion Rights
Pursuant to Tremisis' certificate of incorporation, a holder of shares of
Tremisis' common stock issued in its IPO may, if the stockholder votes against
the merger, demand that Tremisis convert such shares into cash. This demand must
be made in writing at the same time that the stockholder votes against the
merger proposal. If properly demanded, Tremisis will convert each share of
common stock into a pro rata portion of the trust account as of the record date.
This would amount to approximately $___ per share of Tremisis' common stock. If
you exercise your conversion rights, then you will be exchanging your shares of
Tremisis common stock for cash and will no longer own the shares. You will be
entitled to receive cash for these shares only if you continue to hold these
shares through the effective time of the merger and then tender your stock
certificate to Tremisis. If the merger is not completed, these shares will not
be converted into cash. However, if we are unable to complete the merger, we
will be forced to liquidate and all public stockholders will receive at least
the amount they would have received if they sought conversion of their shares
and we did consummate the merger.
The merger will not be consummated if the holders of 20% or more of the
common stock issued in Tremisis' IPO (1,265,000 shares or more) exercise their
conversion rights.
Appraisal Rights
Tremisis stockholders do not have appraisal rights in connection with the
merger under the DGCL.
Proxies
Proxies may be solicited by mail, telephone or in person.
If you grant a proxy, you may still vote your shares in person if you
revoke your proxy before the special meeting.
Interests of Tremisis Directors and Officers in the Merger
When you consider the recommendation of Tremisis' board of directors in
favor of adoption of the merger proposal, you should keep in mind that
Tremisis' executive officers and members of Tremisis' board have interests in
the merger transaction that are different from, or in addition to, your
interests as a stockholder. These interests include, among other things:
o if the merger is not approved, Tremisis will be required to
liquidate. In such event, the 1,375,000 shares of common stock held
by Tremisis' officers and directors that were acquired prior to the
IPO will be worthless because Tremisis' initial stockholders are not
entitled to receive any liquidation proceeds. Such shares had an
aggregate value of $_____ based on the last sale price of $____ on
the OTCBB on January __, 2006. Additionally, the 600,000 warrants
held by such persons (allowing the purchase of 600,000 shares of
Tremisis commmon stock) will expire without value in the event of
liquidation (as will such warrants held by all other persons); and
o if Tremisis liquidates prior to the consummation of a business
combination, Lawrence S. Coben, our current chairman of the board
and chief executive officer, will be personally liable to pay debts
and obligations, if any, to vendors and other entities that are owed
money by Tremisis for services rendered or products sold to
Tremisis, or to any target business, to the extent such creditors
bring claims that require payment from moneys in the trust fund.
This arrangement was entered into to ensure that, in the event of
liquidation, the trust fund is not reduced by claims of creditors.
26
Conditions to the Closing of the Merger
Consummation of the merger agreement and the related transactions is
conditioned on the Tremisis stockholders (i) adopting the merger proposal, (ii)
approving the name change amendment, and (iii) approving the capitalization
amendment. The Tremisis stockholders will also be asked to adopt the incentive
compensation plan and to approve the removal of all of the provisions of Article
Sixth of Tremisis' certificate of incorporation other than the paragraph
relating to Tremisis' staggered board of directors. The transaction is not
dependent on the approval of either of such actions. The incentive compensation
plan has been approved by our Board of Directors and will be effective upon
consummation of the merger if approved by the Tremisis stockholders. If
stockholders owning 20% or more of the shares sold in the IPO vote against the
transaction and exercise their right to convert their shares purchased in the
IPO into a pro-rata portion of the funds held in trust by Tremisis for the
benefit of the holders of shares purchased in the IPO, then the merger cannot be
consummated.
In addition, the consummation of the merger is conditioned upon the
following:
o no order, stay, judgment or decree being issued by any governmental
authority preventing, restraining or prohibiting in whole or in
part, the consummation of such transactions;
o the delivery by each party to the other party of a certificate to
the effect that the representations and warranties of the delivering
party are true and correct in all material respects as of the
closing and all covenants contained in the merger agreement have
been materially complied with by the delivering party;
o the receipt of necessary consents and approvals by third parties and
the completion of necessary proceedings; and
o Tremisis' common stock being quoted on the OTCBB or listed for
trading on Nasdaq.
RAM's Conditions to Closing of the Merger
The obligations of RAM to consummate the transactions contemplated by the
merger agreement, in addition to the conditions described above, are conditioned
upon each of the following, among other things:
o there shall have been no material adverse effect with respect to
Tremisis since the date of the merger agreement;
o RAM shall have received a legal opinion in an agreed form from
Graubard Miller, counsel to Tremisis;
o Tremisis shall have made appropriate arrangements with Continental
Stock Transfer & Trust Company to have the trust fund disbursed to
Tremisis immediately upon the Closing; and
o the registration rights agreement shall be in full force and effect.
27
Tremisis' Conditions to Closing of the Merger
The obligations of Tremisis to consummate the transactions contemplated by
the merger agreement, in addition to the conditions described above in the
second paragraph of this section, are conditioned upon each of the following,
among other things:
o at the closing, there shall have been no material adverse effect
with respect to RAM since the date of the merger agreement;
o an employment agreement between Tremisis and Larry E. Lee shall be
in full force and effect;
o Tremisis shall have received a legal opinion substantially in the
form annexed to the merger agreement, which is customary for
transactions of this nature, from McAfee & Taft A Professional
Corporation, counsel to RAM;
o Tremisis shall have received "comfort" letters from BDO Seidman, LLP
and UHY Mann Frankfort Stein & Lipp CPAs, LLP, dated the date of
distribution of this proxy statement and the date of consummation of
the merger in forms customary for transactions of this nature,
confirming that certain financial data in this proxy statement,
other than the numbers in the actual financial statements, are
accurate and/or derived from the financial statements; and
o the adjusted indebtedness of RAM and its subsidiaries for borrowed
money shall not exceed $125 million, excluding (i) any cash deposits
posted by RAM as security in connection with outstanding RAM hedging
contracts, (ii) the amount by which $30,000,000 exceeds the cash
portion of the merger consideration paid to the RAM stockholders,
and (iii) an amount up to $6.0 million for aggregate fees, costs and
expenses paid by RAM in connection with replacing, enhancing or
improving its existing credit facilities.
Termination, Amendment and Waiver
The merger agreement will terminate if the merger has not been consummated
by May 18, 2006. In addition, the merger agreement may be terminated at any
time, but not later than the closing, as follows:
o by mutual written consent of Tremisis and RAM;
o by either party if a governmental entity shall have issued an order,
decree or ruling or taken any other action, in any case having the
effect of permanently restraining, enjoining or otherwise
prohibiting the merger, which order, decree, ruling or other action
is final and nonappealable;
o by either party if this proxy statement has not been mailed to the
record owners of Tremisis common stock on or before February 14,
2006;
o by either party if the other party has breached any of its covenants
or representations and warranties in any material respect and has
not cured its breach within 30 days of the notice of an intent to
terminate, provided that the terminating party is itself not in
breach;
o by either Tremisis or RAM if they are unable to agree as to the
amount of adjustment to be made to the merger consideration with
respect to adverse title conditions or
28
environmental conditions that are not cured by the closing, as the
closing may be extended in such circumstances;
o by Tremisis if any RAM properties are damaged or destroyed by fire
or other casualty or are taken under the right of eminent domain and
as result thereon the aggregate value of the properties, in
Tremisis' good faith judgment, is reduced by an amount exceeding $1
million (net of insurance proceeds);
o by either party if, at the Tremisis stockholders' meeting, the
merger agreement and the transactions contemplated thereby shall
fail to be approved and adopted by the affirmative vote of the
holders of a majority of Tremisis' outstanding common stock; or
o by either party if the holders of 20% or more of the shares issued
in Tremisis' IPO exercise their conversion rights.
If Tremisis wrongfully fails or refuses to consummate the merger or RAM
terminates the merger agreement because of a material breach by Tremisis of its
covenants, representations or warranties that remains uncured 30 days after
receipt of a notice of intent to terminate from RAM and Tremisis consummates a
merger or other business combination with another entity on or before May 18,
2006, Tremisis will be obligated to pay RAM, concurrently with the consummation
of such other merger or business combination, a cash termination fee of
$7,500,000, payment of which shall be in full satisfaction of all other rights
of RAM for damages under the merger agreement or otherwise. In such event,
Tremisis would obtain the funds to make the termination payment from the moneys
in the trust fund when they are released upon the consummation of the other
business combination.
The merger agreement does not specifically address the rights of a party
in the event of a refusal or wrongful failure of the other party to consummate
the merger, except in the case described above in a situation where Tremisis
would be required to pay RAM the $7,500,000 termination fee. Other than in such
event, the non-wrongful party would be entitled to assert its legal rights for
breach of contract against the wrongful party.
If permitted under the applicable law, either RAM or Tremisis may waive
any inaccuracies in the representations and warranties made to such party
contained in the merger agreement and waive compliance with any agreements or
conditions for the benefit of itself or such party contained in the merger
agreement. We cannot assure you that any or all of the conditions will be
satisfied or waived.
Quotation or Listing
Tremisis' outstanding common stock, warrants and units are quoted on the
OTCBB. Tremisis and RAM will use their reasonable best efforts to obtain the
listing for trading on Nasdaq of Tremisis common stock, warrants and units. In
the event Tremisis' common stock, warrants and units are listed on Nasdaq at
the time of the closing of the merger, the symbols will change to ones
determined by the board of directors of Tremisis and Nasdaq that are reasonably
representative of the corporate name or business of Tremisis. If the listing on
Nasdaq is not approved, it is expected that the Tremisis' common stock,
warrants and units will continue to be quoted on the OTCBB.
Tax Consequences of the Merger
Tremisis and RAM have received opinions from their respective tax counsel
that, for federal income tax purposes, the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
and no gain or loss will be recognized by Tremisis or RAM as a result of the
merger.
Tremisis has also received an opinion of its counsel that:
o A stockholder of Tremisis who exercises conversion rights and
effects a termination of the stockholder's interest in Tremisis will
generally be required to recognize capital gain or loss upon the
exchange of that stockholder's shares of common stock of Tremisis
for cash, if such shares were held as a
29
capital asset on the date of the merger. Such gain or loss will be
measured by the difference between the amount of cash received and
the tax basis of that stockholder's shares of Tremisis common stock;
and
o No gain or loss will be recognized by non-converting stockholders of
Tremisis.
In addition, RAM has received an opinion from its counsel that a RAM
stockholder who receives both Tremisis common stock and cash in the merger will
not recognize any gain or loss upon receipt of the common stock, but will
recognize gain with respect to the cash received. Such gain will be taxed as a
dividend to the extent RAM has accumulated earnings and profits and as capital
gain to the extent RAM does not have accumulated earnings and profits.
For a description of the material federal income tax consequences of the
merger, please see the information set forth in "Material Federal Income Tax
Consequences of the Merger" beginning on page 57.
Accounting Treatment
The merger will be accounted for under the purchase method of accounting
as a reverse acquisition in accordance with U.S. generally accepted accounting
principles for accounting and financial reporting purposes. Under this method of
accounting, Tremisis will be treated as the "acquired" company for financial
reporting purposes. In accordance with guidance applicable to these
circumstances, the merger will be considered to be a capital transaction in
substance. Accordingly, for accounting purposes, the merger will be treated as
the equivalent of RAM issuing stock for the net monetary assets of Tremisis,
accompanied by a recapitalization. The net monetary assets of Tremisis will be
stated at their fair value, essentially equivalent to historical costs, with no
goodwill or other intangible assets recorded. The accumulated earnings deficit
of RAM will be carried forward after the merger. Operations prior to the merger
will be those of RAM.
Regulatory Matters
The merger and the transactions contemplated by the merger agreement are
not subject to any additional federal or state regulatory requirement or
approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or
HSR Act, except for filings with the State of Delaware necessary to effectuate
the transactions contemplated by the merger agreement.
Risk Factors
In evaluating the merger proposal, the name change amendment, the
capitalization amendment, the Article Sixth amendment and the incentive
compensation plan proposal, you should carefully read this proxy statement and
especially consider the factors discussed in the section entitled "Risk
Factors."
SELECTED SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
We are providing the following selected financial information to assist
you in your analysis of the financial aspects of the merger. RAM's consolidated
balance sheet data as of December 31, 2004 and 2003 and the related consolidated
statement of operations data for the years ended December 31, 2004, 2003, and
2002 are derived from RAM's audited consolidated financial statements, which are
included elsewhere in this proxy statement. RAM's consolidated balance sheets
data as of December 31, 2000 and 2001 and the consolidated statements of
operations data for the years ended December 31, 2000 and 2001 are derived from
RAM's unaudited consolidated financial statements, which are not included in
this proxy statement.
RAM's condensed consolidated balance sheet as of September 30, 2005, and
the related consolidated statement of operations data for the nine months ended
September 30, 2004 and 2005 are derived from RAM's unaudited interim
consolidated financial statements which are included elsewhere in this proxy
statement. In the opinion of RAM's management, the unaudited interim
consolidated financial statements include all
30
adjustments (consisting of normal recurring adjustments) that are necessary for
a fair presentation of such consolidated financial statements. The results of
operations for the nine months ended September 30, 2005 are not necessarily
indicative of the results to be expected for the entire fiscal year or for any
future period.
The Tremisis historical financial data are derived from the Tremisis
financial statements included elsewhere in this proxy statement.
The selected financial information of RAM and Tremisis is only a summary
and should be read in conjunction with each company's historical consolidated
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained elsewhere herein.
The historical results included below and elsewhere in this proxy statement may
not be indicative of the future performance of RAM, Tremisis or the combined
company resulting from the merger. RAM's financial position and results of
operations for 2003 and 2004 may not be comparative to other periods as a result
of certain divestitures and acquisitions, as more fully described in RAM's
financial statements included elsewhere in this proxy statement.
31
RAM's Selected Historical Financial Information
(in thousands, except per share data)
Nine Months
Year Ended December 31, Ended September 30,
-------------------------------------------------------------- ------------------------
2000 2001 2002 2003 2004 2004 2005
--------- --------- ------- ------- --------- ---------- ---------
Revenues and other
operating income $ 40,035 $ 25,614 $10,183 $20,020 $ 29,659 $ 23,854 $ 29,209
Net (loss) income $ (4,428) $ 3,751 $ 2,086 $(2,007) $ 6,076 $ 6,811 $ (5,681)
Net loss per share
attributable to common
stockholders - basic $(1,623.76) $1,375.50 $764.93 ($735.97) $2,383.67 $ 2,578.95 ($2,499.34)
Cash dividends per share $ 0.00 $ 0.00 $ 0.00 $294.83 $ 470.77 $ 454.37 $ 396.04
As of December 31, As of September 30,
-------------------------------------------------------------- ------------------------
2000 2001 2002 2003 2004 2005
--------- --------- ------- ------- --------- ---------
Total assets $ 132,836 $ 98,322 $ 62,038 $ 45,908 $ 140,324 $ 141,125
Long-term debt, including
current portion $ 127,580 $ 91,400 $ 56,267 $ 46,057 $ 117,344 $ 117,301
Stockholder's deficit $ (24,098) $ (20,347) $(18,342) $(19,653) $ (19,912) $ (26,493)
32
Tremisis' Selected Historical Financial Information
(in thousands, except per share data)
For the Period From For the Period From
February 5, 2004 Nine Months February 5, 2004
(inception) to Ended (Inception) to
December 31, September 30, September 30,
2004 2005 2005
------------ ------------- -------------
Revenue $ -- $ -- $ --
Interest income $308 $682 $990
Net income $ 65 $217 $282
Accretion of Trust Fund
related to common
stock subject to
possible conversion $ 60 $135 $195
Net income attributable
to common stockholders $ 5 $ 82 $ 87
Net income per share $.00 $.01
As of As of
December 31, 2004 September 30, 2005
----------------- ------------------
Total assets (including US $34,305 $34,723
Government Securities deposited
in Trust Fund)
Common stock subject to $ 6,685 $ 6,820
possible conversion
Stockholders' equity $27,567 $27,650
Selected Unaudited Pro Forma Combined Financial Information of Tremisis and RAM
The merger will be accounted for as a reverse acquisition under the
purchase method of accounting. RAM will be treated as the continuing reporting
entity for accounting purposes. The assets and liabilities of Tremisis will be
recorded, as of completion of the merger, at the fair value, which is considered
to approximate historical cost and added to those of RAM. Since Tremisis had no
operations, the merger has been accounted for as a Recapitalization of RAM. For
a more detailed description of purchase accounting, see "The Merger
Proposal--Anticipated Accounting Treatment" on page 59.
We have presented below the unaudited pro forma combined financial
information that reflects the merger as a Recapitalization of RAM. The following
selected unaudited pro forma combined financial information has been derived
from, and should be read in conjunction with, the
33
unaudited pro forma condensed combined balance sheet and related notes thereto
included elsewhere in this proxy statement.
At September 30, 2005
---------------------------------
Assuming Assuming
No Maximum
Conversions(1) Conversions(2)
-------------- --------------
(in thousands)
Total assets $140,478 $140,478
Long-term debt 126,431 133,251
Other liabilities 50,570 50,570
Common stock subject to conversion 0 0
Stockholders' deficit (36,523) (43,343)
-------- --------
$140,478 $140,478
======== ========
Notes:
(1) Assumes that no Tremisis stockholders seek conversion of their Tremisis
stock into their pro rata share of the trust fund.
(2) Assumes that 1,264,368 shares of Tremisis common stock were converted into
their pro rata share of the trust fund.
Comparative Per Share Data
The following table sets forth selected historical information of RAM and
Tremisis and unaudited pro forma combined per share ownership information of RAM
and Tremisis after giving effect to the merger, assuming both no conversions and
maximum conversions by Tremisis stockholders. You should read this information
in conjunction with the selected summary historical financial information,
included elsewhere in this proxy statement, and the historical financial
statements of RAM and Tremisis and related notes that are included elsewhere in
this proxy statement. The unaudited RAM and Tremisis pro forma combined per
share information is derived from, and should be read in conjunction with, the
unaudited pro forma condensed combined balance sheets and related notes included
elsewhere in this proxy statement.
34
The unaudited pro forma combined book value per share information below
does not purport to represent what the value of RAM and Tremisis would have been
had the companies been combined.
In thousands, except per share data
-----------------------------------
Combined
RAM Tremisis Company
--------- -------- -------
Number of shares of common stock
outstanding upon consummation
of the merger:
Assuming no conversions 25,600 7,700 33,300
Assuming maximum conversions 25,600 6,436 32,036
Book value -- historical
September 30, 2005 $(26,493) $27,650
Book value -- pro forma
September 30, 2005
No conversions $(36,523)
Maximum conversions $(43,343)
Book value per share--pro forma
September 30, 2005
No conversions $ (1.10)
Maximum conversions $ (1.35)
Market Price and Dividend Data for Tremisis Securities
Tremisis consummated its IPO on May 18, 2004. In the IPO, Tremisis sold
6,325,000 units, which include all of the 825,000 units that were subject to the
underwriters' over allotment option. Each unit consists of one share of the
Company's common stock and two redeemable common stock purchase warrants, each
to purchase one share of Tremisis' common stock. Tremisis common stock,
warrants and units are quoted on the OTCBB under the symbols TEGY, TEGYW and
TEGYU, respectively. Tremisis' units commenced public trading on May 13, 2004,
and its common stock and warrants commenced separate public trading on May 24,
2004. The closing price for each share of common stock, warrant and unit of
Tremisis on October 19, 2005, the last trading day before announcement of the
execution of the merger agreement, as amended, was $5.43, $0.80 and $6.75,
respectively.
Tremisis and RAM will use their reasonable best efforts to obtain the
listing for trading on Nasdaq of Tremisis common stock, warrants and units. In
the event Tremisis' common stock, warrants and units are listed on Nasdaq at
the time of the closing of the merger, the symbols will change to ones
determined by Tremisis and Nasdaq that are reasonably representative of the
corporate name or business of Tremisis. Tremisis' management anticipates that
the Nasdaq listing will be concurrent with the consummation of the merger. If
the listing on Nasdaq is not approved, it is expected that the common stock,
warrants and units will continue to be quoted on the OTCBB.
35
Holders
As of _____, 2006, there were ____holders of record of the units, _____
holders of record of the common stock and ______holders of record of the
warrants. Tremisis believes the beneficial holders of the units, common stock
and warrants to be in excess of ____ persons each.
Dividends
Tremisis has not paid any cash dividends on its common stock to date and
does not intend to pay dividends prior to the completion of the merger. It is
the present intention of the board of directors to retain all earnings, if any,
for use in the business operations, and accordingly, the board does not
anticipate declaring any dividends in the foreseeable future. The payment of any
dividends subsequent to the merger will be within the discretion of the then
board of directors and will be contingent upon revenues and earnings, if any,
capital requirements and general financial condition subsequent to completion of
a business combination.
RISK FACTORS
You should carefully consider the following risk factors, together with
all of the other information included in this proxy statement, before you decide
whether to vote or instruct your vote to be cast to adopt the merger proposal.
Risks Related to our Business and Operations Following the Merger with RAM
The value of your investment in Tremisis following consummation of the
merger will be subject to the significant risks inherent in the oil and natural
gas business. You should carefully consider the risks and uncertainties
described below and other information included in this proxy statement. If any
of the events described below occur, Tremisis post-merger business and financial
results could be adversely affected in a material way. This could cause the
trading price of its common stock to decline, perhaps significantly, and you
therefore may lose all or part of your investment.
The volatility of oil and natural gas prices due to factors beyond RAM's control
greatly affects its profitability.
RAM's revenues, operating results, profitability, future rate of growth
and the carrying value of RAM's oil and natural gas properties depend primarily
upon the prevailing prices for oil and natural gas. Historically, oil and
natural gas prices have been volatile and are subject to fluctuations in
response to changes in supply and demand, market uncertainty and a variety of
additional factors that are beyond RAM's control. The spot prices for crude oil
and natural gas used for calculating RAM's PV-10 Value at December 31, 2004 were
$40.25 per Bbl of oil, $6.02 per Mcf of natural gas, and $27.56 per Bbl of NGLs
and at September 30, 2005 were $63.62 per Bbl of oil, $12.70 per Mcf of natural
gas and $39.21 per Bbl of NGLs. Any substantial decline in the price of oil and
natural gas will likely have a material adverse effect on RAM's operations,
financial condition and level of expenditures for the development of its oil and
natural gas reserves, and may result in writedowns of RAM's investments as a
result of RAM's use of the full cost accounting method it uses for its oil and
natural gas properties.
RAM's management believes that, as of September 30, 2005, a $1.00 per Boe
decrease in the price of oil, natural gas and NGLs would have resulted in a
reduction of the PV-10 Value of RAM's proved reserves of $8.2 million; a $5.00
per Boe decrease in the price of oil, natural gas and NGLs would have resulted
in a reduction of the PV-10 Value of RAM's proved reserves of $44.7 million, and
a $10.00 per Boe decrease in the price of oil, natural gas and NGLs would have
resulted in a reduction of the PV-10 Value of RAM's proved reserves of $89.6
million; and within those price ranges the estimated quantities of its proved
reserves would not materially decrease solely as a result of changes in the
prices of production. At December 31, 2005, the prices RAM was receiving were
$58.63 per Bbl of oil, $35.89 per Bbl of NGLs and $9.14 per Mcf of natural gas.
36
Wide fluctuations in oil and natural gas prices may result from relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and other factors that are beyond RAM's control, including:
o worldwide and domestic supplies of oil and natural gas;
o weather conditions;
o the level of consumer demand;
o the price and availability of alternative fuels;
o the availability of drilling rigs and completion equipment;
o the availability of pipeline capacity;
o the price and level of foreign imports;
o domestic and foreign governmental regulations and taxes;
o the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and
production controls;
o political instability or armed conflict in oil-producing regions;
and
o the overall economic environment.
These factors and the volatility of the energy markets make it extremely
difficult to predict future oil and natural gas price movements with any
certainty. Declines in oil and natural gas prices would not only reduce revenue,
but could reduce the amount of oil and natural gas that RAM can produce
economically and, as a result, could have a material adverse effect on its
financial condition, results of operations and reserves.
RAM's success depends on acquiring or finding additional reserves.
RAM's future success depends upon its ability to find, develop or acquire
additional oil and natural gas reserves that are economically recoverable. RAM's
proved reserves will generally decline as reserves are produced, except to the
extent that RAM conducts successful exploration or development activities or
acquires properties containing proved reserves, or both. To increase reserves
and production, RAM must commence exploratory drilling, undertake other
replacement activities or utilize third parties to accomplish these activities.
There can be no assurance, however, that RAM will have sufficient resources to
undertake these actions, that RAM's exploratory projects or other replacement
activities will result in significant additional reserves or that RAM will have
success drilling productive wells at low finding and development costs.
Furthermore, although RAM's revenues may increase if prevailing oil and natural
gas prices increase significantly, RAM's finding costs for additional reserves
could also increase.
In accordance with customary industry practice, RAM relies on independent
third party service providers to provide most of the services necessary to drill
new wells, including drilling rigs and related equipment and services,
horizontal drilling equipment and services, trucking services, tubulars, fracing
and completion services and production equipment. The industry has experienced
significant price
37
increases for these services during the last year and this trend is expected to
continue into the future. These cost increases could in the future significantly
increase RAM's development costs and decrease the return possible from drilling
and development activities, and possibly render the development of certain
proved undeveloped reserves uneconomical.
Estimates of oil and natural gas reserves are uncertain and may vary
substantially from actual production.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
expenditures, including many factors beyond RAM's control. The reserve
information set forth in this proxy statement represents only estimates based on
reports prepared as of September 30, 2005 by Williamson Petroleum Consultants
and Forrest A. Garb & Associates, independent petroleum engineers. Petroleum
engineering is not an exact science. Information relating to the RAM's proved
oil and natural gas reserves is based upon engineering estimates. Estimates of
economically recoverable oil and natural gas reserves and of future net cash
flows necessarily depend upon a number of variable factors and assumptions, such
as historical production from the area compared with production from other
producing areas, future site restoration and abandonment costs, the assumed
effects of regulations by governmental agencies and assumptions concerning
future oil and natural gas prices, future operating costs, severance and excise
taxes, capital expenditures and workover and remedial costs, all of which may in
fact vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers at different times may
vary substantially. Actual production, revenues and expenditures with respect to
RAM's reserves will likely vary from estimates, and such variances may be
material.
Operating hazards and uninsured risks may result in substantial losses.
RAM's operations are subject to all of the hazards and operating risks
inherent in drilling for and the production of oil and natural gas, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases. The occurrence of any of these events could result in
substantial losses to RAM due to injury or loss of life, severe damage to or
destruction of property, natural resources and equipment, pollution or other
environmental damage, clean-up responsibilities, regulatory investigation and
penalties and suspension of operations. In accordance with customary industry
practice, RAM maintains insurance against some, but not all, of these risks.
There can be no assurance that any insurance will be adequate to cover any
losses or liabilities. RAM cannot predict the continued availability of
insurance, or its availability at premium levels that justify its purchase. In
addition, RAM may be liable for environmental damage caused by previous owners
of properties purchased by RAM, which liabilities would not be covered by RAM's
insurance. RAM is currently unaware of any material liability it may have for
environmental damages caused by previous owners of properties purchased by RAM.
RAM's operations are subject to various governmental regulations that require
compliance that can be burdensome and expensive.
RAM's oil and natural gas operations are subject to various federal, state
and local governmental regulations that may be changed from time to time in
response to economic and political conditions. Matters subject to regulation
include discharge from drilling operations, drilling bonds, reports concerning
operations, the spacing of wells, unitization and pooling of properties and
taxation. From time to time, regulatory agencies have imposed price controls and
limitations on production by restricting the rate of flow of oil and natural gas
wells below actual production capacity to conserve supplies of oil and natural
gas. In addition, the production, handling, storage, transportation and disposal
of oil and natural gas, by-products thereof and other substances and materials
produced or used in connection with oil and
38
natural gas operations are subject to regulation under federal, state and local
laws and regulations primarily relating to protection of human health and the
environment. These laws and regulations have continually imposed increasingly
strict requirements for water and air pollution control and solid waste
management, and compliance with these laws may cause delays in the additional
drilling and development of RAM's properties. Significant expenditures may be
required to comply with governmental laws and regulations applicable to RAM. RAM
believes the trend of more expansive and stricter environmental legislation and
regulations will continue. While historically RAM has not experienced any
material adverse effect from regulatory delays, there can be no assurance that
such delays will not occur in the future.
RAM's method of accounting for investments in oil and natural gas properties may
result in impairment of asset value, which could affect RAM's stockholder equity
and net profit or loss.
RAM uses the full cost method of accounting for its investment in oil and
natural gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and natural gas reserves are
capitalized into a "full cost pool." Capitalized costs in the pool are depleted
and charged to operations using the units-of-production method based on the
ratio of current production to total proved oil and natural gas reserves. To the
extent that such capitalized costs, net of depletion and amortization, exceed
the PV-10 Value of proved oil and natural gas reserves at any reporting date,
such excess costs are charged to operations. Once incurred, a write down of oil
and natural gas properties is not reversible at a later date, even if the PV-10
value of the oil and natural gas reserves increases as a result of an increase
in oil or natural gas prices.
Properties that RAM acquires may not produce as projected, and RAM may be unable
to identify liabilities associated with the properties or obtain protection from
sellers against them
As part of its business strategy, RAM continually seeks acquisitions of
gas and oil properties. The most recent of these acquisitions, which closed in
December 2004, was RAM's purchase of WG Energy Holdings, Inc. The successful
acquisition of oil and natural gas properties requires assessment of many
factors, which are inherently inexact and may be inaccurate, including the
following:
o future oil and natural gas prices;
o the amount of recoverable reserves;
o future operating costs;
o future development costs;
o failure of titles to properties;
o costs and timing of plugging and abandoning wells; and
o potential environmental and other liabilities.
RAM's assessment will not necessarily reveal all existing or potential problems,
nor will it permit RAM to become familiar enough with the properties to assess
fully their capabilities and deficiencies. With respect to properties on which
there is current production, RAM may not inspect every well location, every
potential well location, or pipeline in the course of its due diligence.
Inspections may not reveal structural and environmental problems such as
pipeline corrosion or groundwater contamination. RAM may not be able to obtain
or recover on contractual indemnities from the seller for liabilities that it
created. RAM may be required to assume the risk of the physical condition of the
properties in addition to the risk that the properties may not perform in
accordance with RAM's expectations.
39
Risks Related to the Merger
There will be a substantial number of shares of Tremisis' common stock
available for sale in the future that may increase the volume of common stock
available for sale in the open market and may cause a decline in the market
price of our common stock.
The consideration to be issued in the merger to the RAM stockholders will
include 25,600,000 shares of Tremisis common stock. These shares are initially
not being registered and will be held by Messrs. Larry E. Lee and David Stinson
and Danish Knights, A Limited Partnership, so they will be restricted. Such
shares cannot be sold publicly until the expiration of the restricted periods
set out in the lock-up agreement (a maximum of one year after the closing) and
under Rule 144 promulgated under the Securities Act of 1933. However, the
holders of such shares will have certain registration rights and will be able to
sell their shares in the public market prior to such times if registration is
effected. The presence of this additional number of shares of common stock
eligible for trading in the public market may have an adverse effect on the
market price of our common stock.
Our outstanding warrants may be exercised in the future, which would increase
the number of shares eligible for future resale in the public market and result
in dilution to our stockholders.
Outstanding redeemable warrants to purchase an aggregate of 12,650,000
shares of common stock issued in the IPO will become exercisable after the
consummation of the merger. These will be exercised only if the $5.00 per share
exercise price is below the market price of our common stock. To the extent they
are exercised, additional shares of our common stock will be issued, which will
result in dilution to our stockholders and increase the number of shares
eligible for resale in the public market. Sales of substantial numbers of such
shares in the public market could adversely affect the market price of such
shares.
Our working capital will be reduced if Tremisis stockholders exercise their
right to convert their shares into cash. This would reduce our cash reserve
after the merger.
Pursuant to our certificate of incorporation, holders of shares issued in
our IPO may vote against the merger and demand that we convert their shares, as
of the record date, into a pro rata share of the trust account where a
substantial portion of the net proceeds of the IPO are held. We and RAM will not
consummate the merger if holders of 1,265,000 or more shares of common stock
issued in our IPO exercise these conversion rights. To the extent the merger is
consummated and holders have demanded to so convert their shares, there will be
a corresponding reduction in the amount of funds available to the combined
company following the merger. As of _____________, 2006, the record date,
assuming the merger proposal is adopted, the maximum amount of funds that could
be disbursed to our stockholders upon the exercise of their conversion rights is
approximately $____________, or approximately 20% of the funds then held in the
trust account. Any payment upon exercise of conversion rights will reduce our
cash after the merger, which may limit our ability to implement our business
plan.
40
If we are unable to obtain a listing of our securities on Nasdaq or any stock
exchange, it may be more difficult for our stockholders to sell their
securities.
Tremisis' units, common stock and warrants are currently traded in the
over-the-counter market and quoted on the OTCBB. We have applied for listing on
Nasdaq. Generally, Nasdaq requires that a company applying for listing on the
Nasdaq SmallCap Market have stockholders' equity of not less than $5.0 million
or a market value of listed securities of $50 million or net income for
continuing operations of not less than $750,000, at least 1,000,000 publicly
held shares, and a minimum bid price of $4.00 with over 300 round lot
shareholders. There is no assurance that such listing will be obtained and
listing is not a condition to closing the merger. If we are unable to obtain a
listing or approval of trading of its securities on Nasdaq, then it may be more
difficult for stockholders to sell their securities.
Our current directors and executive officers have interests in the merger that
are different from yours because if the merger is not approved the securities
held by them will become worthless.
In considering the recommendation of our board of directors to vote for
the proposal to adopt the merger agreement and other proposals, you should be
aware that members of our board are parties to agreements or arrangements that
provide them with interests that differ from, or are in addition to, those of
our stockholders generally. Our executives and directors are not entitled to
receive any of the net proceeds of our IPO that may be distributed upon our
liquidation. Therefore, if the merger is not approved and we are forced to
liquidate, the shares held by our officers and directors will be worthless.
Additionally, such persons purchased 580,000 warrants in the aftermarket after
our IPO. These warrants cannot be sold by them prior to the consummation of the
merger and will be worthless unless the merger is consummated.
Also, if Tremisis liquidates prior to the consummation of a business
combination, Lawrence S. Coben, our current chairman of the board and chief
executive officer, will be personally liable to pay debts and obligations, if
any, to vendors and other entities that are owed money by Tremisis for services
rendered or products sold to Tremisis, or to any target business, to the extent
such creditors bring claims that would otherwise require payment from the trust
fund. This arrangement was entered into to ensure that, in the event of
liquidation, the trust fund is not reduced by claims of creditors.
Voting control by our executive officers, directors and other affiliates may
limit your ability to influence the outcome of director elections and other
matters requiring stockholder approval.
Upon consummation of the merger, the persons who are parties to the voting
agreement, Lawrence S. Cohen, Isaac Kier, Larry E. Lee, David Stinson and Danish
Knights, A Limited Partnership, will own approximately 80.5% of our voting
stock. These persons have agreed to vote for each other's designees to our board
of directors through director elections in 2008. Accordingly, they will be able
to control the election of directors and, therefore, our policies and direction
during the term of the voting agreement. This concentration of ownership and
voting agreement could have the effect of delaying or preventing a change in our
control or discouraging a potential acquirer from attempting to obtain control
of us, which in turn could have a material adverse effect on the market price of
our common stock or prevent our stockholders from realizing a premium over the
market price for their shares of common stock.
FORWARD-LOOKING STATEMENTS
We believe that some of the information in this proxy statement
constitutes forward-looking statements within the definition of the Private
Securities Litigation Reform Act of 1995. However, the safe-harbor provisions of
that act do not apply to statements made in this proxy statement. You can
identify these statements by forward-looking words such as "may," "expect,"
"anticipate," "contemplate," "believe," "estimate," "intends," and "continue" or
similar words. You should read statements that contain these words carefully
because they:
o discuss future expectations;
o contain projections of future results of operations or financial
condition; or
o state other "forward-looking" information.
We believe it is important to communicate our expectations to our
stockholders. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors and
cautionary language discussed in this proxy statement provide examples of risks,
41
uncertainties and events that may cause actual results to differ materially from
the expectations described by us or RAM in such forward-looking statements,
including among other things:
o the number and percentage of our stockholders voting against the
merger proposal and seeking conversion;
o outcomes of government reviews, inquiries, investigations and
related litigation;
o continued compliance with government regulations;
o legislation or regulatory environments, requirements or changes
adversely affecting the business in which RAM is engaged;
o fluctuations in customer demand;
o management of rapid growth;
o general economic conditions;
o RAM's business strategy and plans;
o the actual quantities of RAM's reserves of oil and natural gas;
o the future levels of production of oil and natural gas by RAM;
o future prices of and demand for oil and natural gas;
o the results of RAM's future exploration, development and
exploitation activities;
o future operating and development costs of RAM's oil and natural gas
properties; and
o the results of future financing efforts.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this proxy statement.
All forward-looking statements included herein attributable to any of us,
RAM or any person acting on either party's behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section. Except to the extent required by applicable laws and regulations,
Tremisis and RAM undertake no obligations to update these forward-looking
statements to reflect events or circumstances after the date of this proxy
statement or to reflect the occurrence of unanticipated events.
Before you grant your proxy or instruct how your vote should be cast or
vote on the adoption of the merger agreement, you should be aware that the
occurrence of the events described in the "Risk Factors" section and elsewhere
in this proxy statement could have a material adverse effect on Tremisis and/or
RAM.
42
SPECIAL MEETING OF TREMISIS STOCKHOLDERS
General
We are furnishing this proxy statement to Tremisis stockholders as part of
the solicitation of proxies by our board of directors for use at the special
meeting of Tremisis stockholders to be held on ________ __, 2006, and at any
adjournment or postponement thereof. This proxy statement is first being
furnished to our stockholders on or about _________ __, 2006 in connection with
the vote on the proposed merger, the certificate of incorporation amendments
and incentive compensation plan. This document provides you with the information
you need to know to be able to vote or instruct your vote to be cast at the
special meeting.
Date, Time and Place
The special meeting of stockholders will be held on ________ __, 2006, at
______ a.m., eastern standard time at the offices of Graubard Miller, Tremisis'
counsel, at 405 Lexington Avenue, 19th Floor, New York, New York 10174.
Purpose of the Tremisis Special Meeting
At the special meeting, we are asking holders of Tremisis common stock to:
o approve the merger agreement and the transactions contemplated
thereby (merger proposal);
o approve an amendment to our certificate of incorporation to change
our name from "Tremisis Energy Acquisition Corporation" to "RAM
Energy Resources, Inc." (name change amendment);
o approve an amendment to our certificate of incorporation to increase
the number of authorized shares of our common stock from 30,000,000
to 100,000,000 (capitalization amendment);
o approve an amendment to our certificate of incorporation to remove
the preamble and sections A through D, inclusive, of Article Sixth
from the certificate of incorporation from and after the closing of
the merger, as these provisions will no longer be applicable to us,
and to redesignate section E of Article Sixth, which relates to the
staggered board, as Article Sixth (Article Sixth amendment); and
o approve the adoption of the 2006 Long-Term Incentive Plan (incentive
compensation plan proposal).
Recommendation of Tremisis Board of Directors
Our board of directors:
o has unanimously determined that each of the merger proposal, the
name change amendment, the capitalization amendment, the Article
Sixth amendment and the incentive compensation plan proposal is fair
to and in the best interests of us and our stockholders;
43
o has unanimously approved the merger proposal, the name change
amendment, the capitalization amendment, the Article Sixth amendment
and the incentive compensation plan proposal;
o unanimously recommends that our common stockholders vote "FOR" the
merger proposal;
o unanimously recommends that our common stockholders vote "FOR" the
proposal to adopt the name change amendment;
o unanimously recommends that our common stockholders vote "FOR" the
proposal to adopt the capitalization amendment;
o unanimously recommends that our common stockholders vote "FOR" the
proposal to adopt the Article Sixth amendment; and
o unanimously recommends that our common stockholders vote "FOR" the
proposal to approve the incentive compensation plan proposal.
Record Date; Who is Entitled to Vote
We have fixed the close of business on ___________ __, 2006, as the
"record date" for determining Tremisis stockholders entitled to notice of and to
attend and vote at the special meeting. As of the close of business on _______
__, 2006, there were 7,700,000 shares of our common stock outstanding and
entitled to vote. Each share of our common stock is entitled to one vote per
share at the special meeting.
Pursuant to agreements with us, the 1,375,000 shares of our common stock
held by stockholders who purchased their shares of common stock prior to our IPO
will be voted on the merger proposal in accordance with the majority of the
votes cast at the special meeting.
Quorum
The presence, in person or by proxy, of a majority of all the outstanding
shares of common stock constitutes a quorum at the special meeting.
Abstentions and Broker Non-Votes
Proxies that are marked "abstain" and proxies relating to "street name"
shares that are returned to us but marked by brokers as "not voted" will be
treated as shares present for purposes of determining the presence of a quorum
on all matters. The latter will not be treated as shares entitled to vote on the
matter as to which authority to vote is withheld by the broker. If you do not
give the broker voting instructions, under the rules of the NASD, your broker
may not vote your shares on the merger proposal, the name change amendment, the
capitalization amendment, the Article Sixth amendment and the incentive
compensation plan proposal.
Vote of Our Stockholders Required
The approval of the adoption of the merger, the name change amendment, the
capitalization amendment and the Article Sixth amendment will require the
affirmative vote of the holders of a majority of Tremisis common stock
outstanding on the record date. Because each of these proposals requires the
affirmative vote of a majority of the shares of common stock outstanding and
entitled to vote, abstentions
44
and shares not entitled to vote because of a broker non-vote will have the same
effect as a vote against these proposals.
In order to consummate the merger, each of the name change amendment and
the capitalization amendment proposals must be approved by the stockholders. For
both of the name change amendment and the capitalization amendment to be
implemented, the merger proposal must be approved by the stockholders.
The approval of the incentive compensation plan will require the
affirmative vote of the holders of a majority of our common stock represented
and entitled to vote at the meeting. Abstentions are deemed entitled to vote on
the proposals. Therefore, they have the same effect as a vote against the
proposal. Broker non-votes are not deemed entitled to vote on the proposal and,
therefore, they will have no effect on the vote on the proposal.
Voting Your Shares
Each share of Tremisis common stock that you own in your name entitles you
to one vote. Your proxy card shows the number of shares of our common stock that
you own.
There are two ways to vote your shares of Tremisis common stock at the
special meeting:
o You can vote by signing and returning the enclosed proxy card. If
you vote by proxy card, your "proxy," whose name is listed on the
proxy card, will vote your shares as you instruct on the proxy card.
If you sign and return the proxy card but do not give instructions
on how to vote your shares, your shares will be voted as recommended
by our board "FOR" the adoption of the merger proposal, the name
change amendment, the capitalization amendment, the Article Sixth
amendment and the incentive compensation plan proposal.
o You can attend the special meeting and vote in person. We will give
you a ballot when you arrive. However, if your shares are held in
the name of your broker, bank or another nominee, you must get a
proxy from the broker, bank or other nominee. That is the only way
we can be sure that the broker, bank or nominee has not already
voted your shares.
IF YOU DO NOT VOTE YOUR SHARES OF OUR COMMON STOCK IN ANY OF THE WAYS
DESCRIBED ABOVE, IT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE ADOPTION OF
THE MERGER PROPOSAL, BUT WILL NOT HAVE THE EFFECT OF A DEMAND FOR CONVERSION OF
YOUR SHARES INTO A PRO RATA SHARE OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL
PORTION OF THE PROCEEDS OF OUR IPO ARE HELD.
Revoking Your Proxy
If you give a proxy, you may revoke it at any time before it is exercised
by doing any one of the following:
o you may send another proxy card with a later date;
45
o you may notify Lawrence S. Coben, our chairman and chief executive
officer, in writing before the special meeting that you have revoked
your proxy; or
o you may attend the special meeting, revoke your proxy, and vote in
person, as indicated above.
Who Can Answer Your Questions About Voting Your Shares
If you have any questions about how to vote or direct a vote in respect of
your shares of our common stock, you may call Lawrence S. Coben, our chairman
and chief executive officer, at (212) 397-1464.
No Additional Matters May Be Presented at the Special Meeting
This special meeting has been called only to consider the adoption of the
merger proposal, the name change amendment, the capitalization amendment, the
Article Sixth amendment and the incentive compensation plan proposal. Under our
by-laws, other than procedural matters incident to the conduct of the meeting,
no other matters may be considered at the special meeting if they are not
included in the notice of the meeting.
Conversion Rights
Any of our stockholders holding shares of Tremisis common stock issued in
our IPO who votes against the merger proposal may, at the same time, demand that
we convert his shares into a pro rata portion of the trust account as of the
record date. If demand is made and the merger is consummated, we will convert
these shares into a pro rata portion of funds held in a trust account plus
interest, as of the record date.
The closing price of our common stock on ____________, 2006 (the record
date) was $______ and the per-share, pro-rata cash held in the trust account on
that date was approximately $___________. Prior to exercising conversion rights,
our stockholders should verify the market price of our common stock as they may
receive higher proceeds from the sale of their common stock in the public market
than from exercising their conversion rights if the market price per share is
higher than the conversion price.
If the holders of at least 1,265,000 or more shares of common stock issued
in our IPO (an amount equal to 20% or more of those shares), vote against the
merger and demand conversion of their shares, we will not be able to consummate
the merger.
If you exercise your conversion rights, then you will be exchanging your
shares of our common stock for cash and will no longer own those shares. You
will be entitled to receive cash for these shares only if you continue to hold
those shares through the effective time of the merger and then tender your stock
certificate to us. If you hold the shares in street name, you will have to
coordinate with your broker to have your shares certificated.
Appraisal Rights
Stockholders of Tremisis do not have appraisal rights in connection the
merger under the DGCL.
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Proxy Solicitation Costs
We are soliciting proxies on behalf of our board of directors. This
solicitation is being made by mail but also may be made by telephone or in
person. We and our directors, officers and employees may also solicit proxies in
person, by telephone or by other electronic means.
We have hired Morrow & Co., Inc. to assist in the proxy solicitation
process. We will pay Morrow & Co., Inc. a fee of approximately $7,500. Such fee
will be paid with non-trust funds.
We will ask banks, brokers and other institutions, nominees and
fiduciaries to forward its proxy materials to their principals and to obtain
their authority to execute proxies and voting instructions. We will reimburse
them for their reasonable expenses.
Tremisis Inside Stockholders
At the close of business on the record date, Lawrence S. Coben, Isaac
Kier, David A. Preiser and Jon Schotz, who we collectively refer to as the
Tremisis Inside Stockholders, beneficially owned and were entitled to vote
1,375,000 shares or approximately 17.9% of the then outstanding shares of our
common stock, which includes all of the shares held by our directors and
executive officers and their affiliates. Mr. Coben is currently our chairman of
our board of directors and our chief executive officer, Mr. Kier is currently
our secretary, treasurer and a director, Mr. Preiser is currently a director,
and Mr. Schotz is currently a director. All our stockholders prior to our IPO
have agreed to vote their shares on the merger proposal in accordance with the
majority of the votes cast by the holders of shares issued in our IPO. The
Tremisis Inside Stockholders also agreed, in connection with the IPO, to place
their shares in escrow until May 12, 2007.
Tremisis Fairness Opinion
Pursuant to an engagement letter dated August 31, 2005, we engaged Gilford
Securities Incorporated to render an opinion that our merger with RAM on the
terms and conditions set forth in the merger agreement is fair to our
stockholders from a financial perspective and that the fair market value of RAM
is at least equal to 80% of our net assets. Gilford is an investment banking
firm that, as part of its investment banking business, regularly is engaged in
the evaluation of businesses and their securities in connection with mergers,
acquisitions, corporate restructurings, private placements, and for other
purposes. Our board of directors determined to use the services of Gilford
because it is a recognized investment banking firm that has substantial
experience in similar matters. The engagement letter provides that we will pay
Gilford a fee of $75,000, of which $50,000 has been paid to date with the
remaining balance due upon consummation of the merger, and will reimburse
Gilford for its reasonable out-of-pocket expenses, including attorneys' fees. If
the merger is not consummated, the $25,000 balance of the fee due to Gilford is
not payable. We have also agreed to indemnify Gilford against certain
liabilities that may arise out of the rendering of the opinion.
Gilford delivered its written opinion to our board of directors on
September 22, 2005, which stated that, as of such date, and based upon and
subject to the assumptions made, matters considered, and limitations on its
review as set forth in the opinion, (i) the consideration to be paid by us in
the merger is fair to our stockholders from a financial point of view, and (ii)
the fair market value of RAM is at least equal to 80% of our net assets. The
amount of such consideration was determined pursuant to negotiations between us
and RAM and not pursuant to recommendations of Gilford. The full text of
Gilford's written opinion, attached hereto as Annex E, is incorporated by
reference into this proxy statement. You are urged to read the Gilford opinion
carefully and in its entirety for a description of the assumptions made, matters
considered, procedures followed and limitations on the review undertaken by
Gilford in rendering its opinion. The summary of the Gilford opinion set forth
in this proxy statement is qualified in its entirety
47
by reference to the full text of the opinion. Gilford's opinion is addressed to
our board of directors only and does not constitute a recommendation to any of
our stockholders as to how such stockholders should vote with respect to the
merger proposal and the transactions contemplated thereby.
THE MERGER PROPOSAL
The discussion in this document of the merger and the principal terms of
the merger agreement, dated as of October 20, 2005, as amended on November 11,
2005, by and among Tremisis, RAM, Merger Sub and the RAM stockholders is subject
to, and is qualified in its entirety by reference to, the merger agreement.
Copies of the merger agreement and the amendment are attached as Annexes A and B
to this proxy statement and are incorporated in this proxy statement by
reference.
General Description of the Merger
Pursuant to the merger agreement, Merger Sub, a wholly owned subsidiary of
Tremisis, will merge with and into RAM and RAM will be the surviving entity and
a wholly owned subsidiary of Tremisis. The separate corporate existence of
Merger Sub shall cease. Tremisis will be renamed RAM Energy Resources, Inc.
after completion of the merger. Holders of all the issued and outstanding shares
of common stock of RAM will receive 25,600,000 shares of Tremisis common stock
and $30 million in cash, or such lesser amount as may be available in the trust
account after payment to the owners of Tremisis common stock voting against the
merger and demanding conversion. After the completion of the merger, the RAM
stockholders will own approximately 77% of Tremisis' common stock, assuming
that no Tremisis stockholders seek conversion of their Tremisis stock into their
pro rata share of the trust fund.
Pre-Closing RAM Dividends/Redemption
The merger agreement authorizes RAM, prior to the consummation of the
merger, to pay its normal $500,000 quarterly dividend for the fourth quarter of
2005. Also, because Tremisis did not have sufficient funds in its trust account
to permit payment of $40.0 million in cash merger consideration to the RAM
stockholders, it was agreed that, prior to the consummation of the merger, in
addition to its normal quarterly dividend, RAM would be authorized to declare
and pay a one-time extraordinary dividend, or redeem a portion of the
outstanding share of RAM common stock stock, in an amount which, when added to
the cash merger consideration received from Tremisis, would permit the RAM
stockholders to receive an aggregate $40.0 million in cash. Accordingly, the
merger agreement provides that, prior to the closing of the merger, RAM is
authorized to declare and pay its normal fourth quarter dividend of $500,000 to
its stockholders, and to either declare a one-time extraordinary dividend, or
redeem a portion of its outstanding common stock, in an aggregate amount up to
the difference between $40.0 million and the amount of the cash consideration to
be received by the RAM stockholders in the merger. It is anticipated that the
cash merger consideration to be received from Tremisis will be $30.0 million
and, therefore, that the RAM extraordinary dividend/redemption will be an amount
of $10.0 million. However, if after payments by Tremisis to the holders of
Tremisis common stock who vote against the merger and demand conversion, and
after payment of Tremisis' expenses incurred in connection with the transaction,
less than $30.0 million remains in the Tremisis trust account for payment of
cash merger consideration to the RAM stockholders, the amount of the authorized
RAM dividend or redemption payment will be increased to permit the aggregate
amount received by the RAM stockholders, both as merger consideration and as a
dividend or redemption payment, to equal $40.0 million.
The amount of the dividend/redemption payments actually made by RAM will
depend upon the amount of cash available to RAM for making such payment. In
order to have sufficient availability for making such payment, it may be
necessary for RAM to amend its existing credit facility or enter into a new
credit facility with a higher credit limit prior to the closing. The merger
agreement authorizes RAM to amend its existing credit facility or enter into a
new credit facility to replace its existing credit facility, and to draw funds
under the amended or new credit facility for purposes of making the
dividend/redemption payment, subject only to an aggregate indebtedness
limitation outstanding at the closing. In the event RAM does not have sufficient
funds to make the full amount of the pre-closing dividend/redemption payment
authorized by the terms of the merger agreement, the dividend/redemption payment
actually made will be limited to the funds available for making such payments
and neither RAM nor Tremisis will have any obligation to make any additional
payments to the RAM stockholders after the closing with respect to any
shortfall.
Background of the Merger
The terms of the merger agreement are the result of arm's-length
negotiations between representatives of Tremisis and RAM. The following is a
brief discussion of the background of these negotiations, the merger agreement
and related transactions.
Tremisis was formed on February 5, 2004 to effect a merger, capital stock
exchange, asset acquisition or other similar business combination with an
operating business in either the energy or the environmental industry and their
related infrastructures. Tremisis completed its IPO on May 18, 2004, raising net
proceeds of approximately $34,163,000. Of these net proceeds, $33,143,000 were
placed in a trust account immediately following the IPO and, in accordance with
Tremisis' certificate of incorporation, will be released either upon the
consummation of a business combination or upon the liquidation of Tremisis.
Tremisis must liquidate unless it has consummated a business combination by May
18, 2006. As of September 30, 2005, approximately $34,117,691 was held in
deposit in the trust account.
Promptly following Tremisis' IPO, we contacted several investment
bankers, private equity firms, consulting firms, legal and accounting firms and
other firms specializing in our target industries, as
48
well as current and former senior executives of energy and environmental
companies with whom we have worked in the past. Through these efforts, we
identified and reviewed information with respect to more than 50 merger
opportunities.
By June 2005, we had entered into substantial discussions with a few
companies, including discussions regarding the type and amount of consideration
to be provided relative to a potential transaction. One of these companies was
provided with a preliminary letter of intent, which included specified levels of
merger consideration. The recipient responded with a counter-proposal that
included higher levels of merger consideration. We continued negotiations but
were not able to reach agreement with that company and the proposal was not
presented to our board of directors for consideration. Throughout the course of
our discussions and negotiations with other targets, similar issues arose with
the companies being considered, including an inability to agree on valuation,
unfavorable issues identified in our due diligence process, lack of progress on
the anticipated growth of the target company, perceived issues with the overall
structure of the transaction, as well as accounting and regulatory issues.
Accordingly, none of these opportunities proved to be a satisfactory candidate
for a merger and no proposals were submitted to our board for consideration
other than with respect to the RAM merger.
In late February 2005, Ronald D. Ormand, an investment banker with
considerable experience representing clients in the energy industry, met in New
York City with Mr. Coben, our chairman and CEO, and discussed Tremisis'
interests in a business combination with an oil and gas company. In the ordinary
course of his investment banking activities, Mr. Ormand had become aware of
Tremisis as a specified purpose acquisition company dedicated to engaging in a
business combination with an established operating company in either the energy
or environmental industry. Mr. Ormand had no relationship or acquaintance with
Tremisis or Mr. Coben prior to the February 2005 meeting. Mr. Ormand was a
longtime business acquaintance of Mr. Larry Lee, President and CEO of RAM, and
from time to time would contact Mr. Lee to suggest a particular business
strategy or present a particular business opportunity for consideration by RAM;
however, prior to the pending transaction with Tremisis, RAM had not engaged Mr.
Ormand or his investment banking firm to represent RAM in connection with any
transaction. In early March 2005, Mr. Ormand contacted Mr. Lee, provided
information concerning Tremisis and suggested a structure for a proposed
transaction between RAM and Tremisis. Mr. Lee indicated an interest in exploring
the possibility of a transaction with Tremisis and advised Mr. Ormand that Mr.
Lee would be in New York for an industry conference during the third week of
April. Soon thereafter Mr. Ormand, now representing WestLB, contacted Mr. Coben
and arranged a meeting with Mr. Lee. Prior to that time, none of Tremisis'
officers or directors knew of RAM or was aware that RAM's owners were interested
in some type of business combination. At Mr. Ormand's suggestion, on April 14,
2005, a confidentiality agreement was executed and a substantial amount of
information was exchanged between the two companies for review in advance of
their initial meeting. On April 19, 2005, Mr. Coben and Mr. Kier, our Treasurer,
met in Tremisis' New York City office with Mr. Ormand and Mr. Lee. Both Tremisis
and RAM described their respective companies.
On June 13, 2005, Messrs. Coben and Kier met with Messrs. Lee and Ormand
as well as other senior executives and advisors of RAM at RAM's headquarters in
Tulsa, Oklahoma. During this meeting, Mr. Coben and Mr. Lee discussed the
valuation parameters of a potential transaction. Shortly following this meeting,
Tremisis retained certain advisors who are specialists in the oil and gas
exploration and production industry to assist in its due diligence of RAM, which
commenced in late June 2005. These due diligence efforts accelerated after
receipt of June 30th financial results and updated reserve report. We and our
advisors continued to gather, review and evaluate due diligence information.
Numerous telephone conversations were held between Tremisis and RAM and their
advisors, and certain of Tremisis' advisors visited the RAM headquarters in
Tulsa in August 2005. On August 25, 2005, we entered into a letter of intent
with RAM and commenced negotiation of a definitive merger agreement.
On June 13, 2005, Messrs. Coben and Kier met with Messrs. Lee and Ormand
as well as other senior executives and advisors of RAM at RAM's headquarters in
Tulsa, Oklahoma. During this meeting, Mr. Coben and Mr. Lee discussed the
valuation parameters of a potential transaction. Shortly following this meeting,
Tremisis retained certain advisors who are specialists in the oil and gas
exploration and production industry to assist in its due diligence of RAM, which
commenced in late June 2005. Tremisis' advisors were Mr. William Anderson, of
Anderson Oil & Gas, Inc., who coordinated all of the due diligence and analysis
efforts; Netherland Sewell & Associates, Inc., who performed due diligence on
RAM's oil and gas reserves; Mr. Jon Nelson, who provided land and title
services; Mr. Jack Roach, who is an oil and gas attorney; Arkwood Engineering
Incorporated, who performed environmental due diligence; and Chandra Wisniewski,
who provided oil lease and partnership accounting services. These due diligence
efforts accelerated after receipt of June 30th financial results and updated
reserve report. We and our advisors continued to gather, review and evaluate due
diligence information. Numerous telephone conversations were held between
Tremisis and RAM and their advisors, and certain of Tremisis' advisors visited
the RAM headquarters in Tulsa in August 2005. On August 25, 2005, we entered
into a letter of intent with RAM and commenced negotiation of a definitive
merger agreement.
The merger consideration was negotiated during the course of discussions
and negotiations regarding the letter of intent. The final consideration was
determined to be a minimum of 25,600,000 shares of Tremisis common stock and $30
million in cash, or such lesser amount as may be available in the trust account
after payment to the owners of Tremisis common stock voting against the merger
and demanding conversion. It was also agreed that, prior to closing, RAM would
be authorized to declare and pay one normal quarterly dividend to its
stockholders in the amount of $500,000 and to either declare a one-time
extraordinary dividend or redeem a portion of its outstanding common stock in an
aggregate amount equal to the difference between $40.0 million and the amount of
cash consideration to be received by the RAM stockholders in the merger. In
addition, it was also recognized that RAM, which will survive the merger as a
wholly owned subsidiary of Tremisis, will remain liable for its outstanding
debt, which is estimated to be approximately $125 million at closing. Counsel
for Tremisis did not participate in the determination of the consideration to be
paid by Tremisis in the merger.
During the course of the negotiations leading to the letter of intent, and
thereafter through the negotiations regarding the merger agreement, the officers
and directors of Tremisis, together with their advisors, conducted a variety of
valuation analyses of RAM, including comparable sale transactions, public
company comparables and discounted cash flows. These analyses were substantially
similar to those conducted by Gilford in connection with the rendering of its
fairness opinion.
Within days of executing the letter of intent, we delivered to RAM an
extensive due diligence request list. Simultaneously, we worked with our counsel
to prepare a first draft of the merger agreement. We also retained Gilford
Securities to render an opinion that the consideration to be paid in the merger
is fair to our stockholders, and to opine that the fair market value of RAM is
at least 80% of our net assets.
A meeting was held in RAM's Tulsa offices on September 14, 2005 among Mr.
Coben, Mr. Lee and the late William Talley, then Chairman of RAM, and RAM's
advisors. On September 15, 2005, Messrs. Coben, Lee and Larry Rampey, a RAM
Senior Vice President, traveled to see certain of RAM's properties. In
mid-September, we delivered the first draft of the merger agreement to RAM,
which resulted in additional discussions and negotiations of various aspects of
the proposed business combination. Succeeding drafts of the transaction
documents were prepared in response to comments and suggestions of the parties
and their counsel, with management and counsel for both companies engaging in
numerous telephonic conferences and negotiating sessions. Included in the
various transaction documents were an Escrow Agreement, Voting Agreement,
Lock-Up Agreement, Registration Rights Agreement and an Employment Agreement for
Mr. Lee.
During August, September and October 2005, Mr. Coben contacted our other
three directors on numerous occasions both individually and jointly on
telephonic conference calls to discuss the transaction and to describe the
status of negotiations. On September 22, 2005, we held a formal meeting of our
board of directors to discuss the proposed business combination with RAM.
Messrs. Coben, Kier, Jon Schotz and David Preiser, constituting all of our
directors, were present at the meeting. Also present, by invitation, were Noah
Scooler (in person) and David Miller (telephonically) of Graubard Miller, our
general counsel. Prior to the meeting, copies of the most recent drafts of the
significant transaction documents were delivered to the directors in connection
with their consideration of the proposed business
49
combination with RAM, including the Agreement and Plan of Merger, Escrow
Agreement, Voting Agreement, Lock-Up Agreement, the Registration Rights
Agreement and the Employment Agreement for Mr. Lee. The directors had also been
given copies of the various schedules to the merger agreement in their then
current forms, including RAM's disclosure schedule. A presentation regarding due
diligence of RAM's properties was made by William Anderson, an advisor to the
company on matters relating to the oil and gas exploration and production
industry. Mr. Robert Maley of Gilford Securities made a presentation regarding
the fairness of the consideration to be paid in the merger. Our board asked
numerous questions of Mr. Anderson and Mr. Maley, each of whom was present only
during their respective presentations. The board also discussed the proposed
charter amendments and stock option plan.
On October 3, 2005, a formal telephonic meeting of the board of directors
was held. All directors attended, as did, by invitation, David Miller and Brian
Ross of Graubard Miller. Prior to the meeting, copies of the most recent drafts
of the significant transaction documents, in substantially final form, were
delivered to the directors. Mr. Anderson made another presentation regarding the
due diligence of RAM's properties. Mr. Maley advised the board that it was the
opinion of Gilford Securities that the consideration to be paid in the merger
was fair to our stockholders, and that the fair market value of RAM is at least
80% of our net assets. Mr. Maley detailed for the board the analysis performed
by Gilford and made a presentation concerning how Gilford had arrived at its
opinion. Mr. Maley discussed at length with our board the different analyses
used to determine whether or not the merger consideration to be paid by us was
fair from a financial point of view to our stockholders, as well as to determine
the fair market value of RAM. Our board asked numerous questions of Mr. Anderson
and Mr. Maley, each of whom was present only during their respective
presentations. Our board of directors then had considerable discussion
concerning the merger. After considerable review and discussion, the merger
agreement and related documents were unanimously approved, subject to final
negotiations and modifications, and the board determined to recommend the
approval of the merger agreement, the charter amendments and the incentive
compensation plan to the stockholders. For a more detailed description of the
Gilford Securities fairness opinion, see "The Merger Proposal - Fairness
Opinion" on page 52.
A few more telephonic meetings among Tremisis, RAM and their advisors were
conducted in early and mid October 2005 to finalize the transaction documents.
The merger agreement was signed on October 20, 2005. Immediately
thereafter, Tremisis issued a press release and, on October 26, 2005, filed a
Current Report on Form 8-K announcing the execution of the merger agreement and
discussing the terms of the merger agreement.
On November 11, 2005, the merger agreement was amended to fix the number
of Tremisis shares to be issued to the RAM stockholders in the merger at
25,600,000 and to exclude from the limitation on indebtedness for borrowed money
at closing certain expenses incurred by RAM in refinancing its existing credit
facility. Immediately thereafter, Tremisis issued a press release and, on
November 14, 2005, filed a Current Report on Form 8-K announcing the amendment
to the merger agreement, discussing the terms of the amendment and announcing
RAM's third quarter operating results and proved reserves as of September 30,
2005.
Tremisis' Board of Directors' Reasons for the Approval of the Merger
The final agreed-upon consideration in the merger agreement was determined
by several factors. Tremisis' board of directors reviewed various industry and
financial data, including certain valuation analyses and metrics compiled by
members of the board in order to determine that the consideration to be paid to
RAM was reasonable and that the merger was in the best interests of Tremisis'
stockholders.
Tremisis conducted a due diligence review of RAM that included an industry
analysis, a description of RAM' existing business model, a valuation analysis
and financial projections in order to
50
enable the board of directors to ascertain the reasonableness of this range of
consideration. During its negotiations with RAM, Tremisis did not receive
services from any financial advisor.
The Tremisis board of directors concluded that the merger agreement with
RAM is in the best interests of Tremisis' stockholders. The Tremisis board of
directors obtained a fairness opinion prior to approving the merger agreement.
The Tremisis board of directors considered a wide variety of factors in
connection with its evaluation of the merger. In light of the complexity of
those factors, the Tremisis board of directors did not consider it practicable
to, nor did it attempt to, quantify or otherwise assign relative weights to the
specific factors it considered in reaching its decision. In addition, individual
members of the Tremisis board may have given different weight to different
factors.
In considering the merger, the Tremisis board of directors gave
considerable weight to the following factors:
RAM's attractive stable asset base and high potential for future growth
Important criteria to Tremisis' board of directors in identifying an
acquisition target were that the company have established business operations,
that it was generating current revenues and EBITDA, and that it have what the
board believes to be a potential to experience rapid additional growth.
Tremisis' board of directors believes that RAM's diverse and long-lived
portfolio of proven developed reserves, its inventory of proved undeveloped
drilling locations, and its acreage position in emerging resource plays in the
Barnett and Woodford shales in Texas made RAM an attractive merger candidate.
The experience of RAM's management
Another important criteria to Tremisis' board of directors in identifying
an acquisition target was that the company have a seasoned management team with
specialized knowledge of the markets within which it operates and the ability to
lead a company in a rapidly changing environment. Tremisis' board of directors
believes that RAM's management has significant experience in the oil and gas
exploration and production industry, as demonstrated by RAM's ability to develop
new and profitable business opportunities and operations.
RAM's ability to execute its business plan after the merger using its own
available cash resources since the cash held in our trust account will be used
to pay a part of the merger consideration to the RAM stockholders and to
Tremisis' public stockholders who vote against the merger and exercise their
conversion rights
Tremisis' board of directors considered the fact that a majority of the
cash in its trust account will be paid to the RAM stockholders in the merger and
to Tremisis' stockholders who exercise their conversion rights and will not be
available to fund working capital requirements following the merger. Tremisis'
board of directors believes that RAM has the financial capabilities to execute
its business plan after the merger using its own available cash resources.
Satisfaction of 80% Test
It is a requirement that any business acquired by Tremisis have a fair
market value equal to at least 80% of Tremisis' net assets at the time of
acquisition, which assets shall include the amount in the trust account. Based
on the financial analysis of RAM generally used to approve the transaction, the
Tremisis board of directors determined that this requirement was met. The board
determined that consideration being paid in the merger, which amount was
negotiated at arms-length, was fair to and in
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the best interests of Tremisis and its stockholders and appropriately reflected
RAM's value. The Tremisis board of directors believes, because of the financial
skills and background of several of its members, it was qualified to conclude
that the acquisition of RAM met this requirement. However, Tremisis has also
received an opinion from Gilford Securities Incorporated that the 80% test has
been met.
Interest of Tremisis' directors and officers in the merger
In considering the recommendation of the board of directors of Tremisis to
vote for the proposals to approve the merger agreement, the certificate of
incorporation amendments and the equity compensation plan proposal, you should
be aware that certain members of the Tremisis board have agreements or
arrangements that provide them with interests in the merger that differ from, or
are in addition to, those of Tremisis stockholders generally. In particular:
o if the merger is not consummated by May 18, 2006, Tremisis will be
liquidated. In such event, the 1,375,000 shares of common stock held
by Tremisis' directors and officers that were acquired before the
IPO would be worthless because Tremisis' directors and officers are
not entitled to receive any of the liquidation proceeds. Such shares
had an aggregate market value of $_____, based upon the last sale
price of $_____ on the OTCBB on January __, 2006. Moreover, the
Tremisis officers and directors have purchased 600,000 warrants in
the public market, all of which will become worthless if the merger
is not consummated; and
o if Tremisis liquidates prior to the consummation of a business
combination, Mr. Lawrence S. Coben, Tremisis' Chairman and Chief
Executive Officer, will be personally liable to pay debts and
obligations to vendors and other entities that are owed money by
Tremisis for services rendered or products sold to Tremisis, or to
any target business, to the extent such debts and obligations are
not covered by Tremisis' assets, excluding amounts in the trust
fund.
Recommendation of Tremisis' Board of Directors
After careful consideration, Tremisis' board of directors determined
unanimously that each of the merger agreement, the name change amendment, the
capitalization amendment, the Article Sixth amendment and the incentive
compensation plan is fair to and in the best interests of Tremisis and its
stockholders. Tremisis' board of directors has approved and declared advisable
the merger, the name change amendment, the capitalization amendment, the Article
Sixth amendment and the incentive compensation plan and unanimously recommends
that you vote or give instructions to vote "FOR" each of the proposals to adopt
the merger, the name change amendment, the capitalization amendment, the Article
Sixth amendment and the incentive compensation plan.
The foregoing discussion of the information and factors considered by the
Tremisis board of directors is not meant to be exhaustive, but includes the
material information and factors considered by the Tremisis board of directors.
Fairness Opinion
In connection with its determination to approve the merger, Tremisis'
board of directors engaged Gilford Securities Incorporated to provide it with a
"fairness opinion" as to whether the merger consideration to be paid by Tremisis
is fair, from a financial point of view, to Tremisis' stockholders. Gilford,
which was founded in 1979 and maintains offices in New York City and elsewhere
in the United States, is a private national investment banking firm whose senior
officers and other employees are highly experienced in the evaluation of
companies and other elements of finance and investment banking. The board
selected Gilford on the basis of Gilford's experience, recommendations from
other companies that had engaged Gilford for similar purposes, its ability to do
the research and provide the fairness opinion within the required timeframe and
the competitiveness of its fee, which was specified by Gilford in its proposal
to the board.
o Gilford made a presentation to our board of directors on September
22, 2005 and subsequently delivered its written opinion to the board
of directors, which stated that, as of September 22, 2005, and based
upon and subject to the assumptions made, matters considered, and
limitations on its review as set forth in the opinion, (i) the
merger consideration is fair, from a financial point of view, to our
stockholders, and (ii) the fair market value of RAM is at least
equal to 80% of our net assets. Gilford has consented to the use of
its written opinion in this proxy statement. The amount of the
merger consideration was determined pursuant to negotiations between
us and RAM and not pursuant to recommendations of Gilford. The full
text of the written opinion of
52
Gilford is attached as Annex D and is incorporated by reference into
this proxy statement. You are urged to read the Gilford opinion
carefully and in its entirety for a description of the assumptions
made, matters considered, procedures followed and limitations on the
review undertaken by Gilford in rendering its opinion. The summary
of the Gilford opinion set forth in this proxy statement is
qualified in its entirety by reference to the full text of the
opinion.
o The Gilford opinion is not intended to be and does not constitute a
recommendation to you as to how you should vote or proceed with
respect to the merger.
o Gilford was not requested to opine as to, and the opinion does not
in any manner address, the relative merits of the merger as compared
to any alternative business strategy that might exist for us, our
underlying business decision to proceed with or effect the merger,
and other alternatives to the merger that might exist for us.
In arriving at its opinion, Gilford took into account an assessment of
general economic, market and financial conditions, as well as its experience in
connection with similar transactions and securities valuations generally. In so
doing, among other things, Gilford:
o reviewed the merger agreement;
o reviewed publicly available financial information and other data
with respect to Tremisis, including the Annual Report on Form 10-KSB
for the year ended December 31, 2004, the Form 10-QSBs filed on May
16 and August 15, 2005, and the Registration Statement on Form S-1
filed on March 12, 2004, and amendments thereto;
o reviewed financial and other information with respect to RAM,
including its annual report for the year 2004, which included
financial statements for the years ended December 31, 2003 and 2004,
the Pro Forma Combined Statements of Operations for the years ended
December 31, 2003 and 2004 taking into account the acquisition of WG
Energy Holdings, Inc, the draft unaudited financial statements for
the six months ended June 30, 2004, the RAM reserve reports as of
June 30, 2005 and other financial information and projections
prepared by RAM management and its advisors;
o considered the historical financial results and present financial
condition of both Tremisis and RAM;
o reviewed and analyzed certain financial characteristics of companies
that were deemed to have characteristics comparable to RAM; and
o reviewed and analyzed the cash flows of RAM and prepared a
discounted cash flow analysis.
Gilford also performed such other analyses and examinations as it deemed
appropriate and held discussions with Tremisis and RAM's senior management in
relation to certain financial and operating information furnished to Gilford,
including financial analyses with respect to their respective businesses and
operations.
In arriving at its opinion, Gilford relied upon and assumed the accuracy
and completeness of all of the financial and other information that was made
available to Gilford without assuming any responsibility for any independent
verification of any such information. Further, Gilford relied upon the
assurances of Tremisis and RAM's management that they were not aware of any
facts that would make any such information inaccurate or misleading. With
respect to the financial information and projections
53
utilized, Gilford assumed that such information has been reasonably prepared on
a basis reflecting the best currently available estimates and judgments, and
that such information provides a reasonable basis upon which it could make an
analysis and form an opinion. Gilford did not make a physical inspection of the
properties and facilities of Tremisis and RAM and did not make or obtain any
evaluations or appraisals of either company's assets and liabilities (contingent
or otherwise). In addition, Gilford did not attempt to confirm whether Tremisis
and RAM had good title to their respective assets. Gilford assumed that the
merger will be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, and all other applicable federal and state
statues, rules and regulations. Gilford assumed that the merger will be
consummated substantially in accordance with the terms set forth in the merger
agreement, without any further amendments thereto, and that any amendments,
revisions or waivers thereto will not be detrimental to our stockholders.
Gilford's opinion is necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of, September 22, 2005.
Accordingly, although subsequent developments may affect its opinion, Gilford
has not assumed any obligation to update, review or reaffirm its opinion.
In connection with rendering its opinion, Gilford performed certain
financial, comparative and other analyses as summarized below. Each of the
analyses conducted by Gilford was carried out to provide a different perspective
on the merger, and to enhance the total mix of information available. Gilford
did not form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to the fairness, from a
financial point of view, of the merger consideration to our stockholders.
Further, the summary of Gilford's analyses described below is not a complete
description of the analyses underlying Gilford's opinion. The preparation of a
fairness opinion is a complex process involving various determinations as to the
most appropriate and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore, a fairness
opinion is not readily susceptible to partial analysis or summary description.
In arriving at its opinion, Gilford made qualitative judgments as to the
relevance of each analysis and factor that it considered. In addition, Gilford
may have given various analyses more or less weight than other analyses, and may
have deemed various assumptions more or less probable than other assumptions, so
that the range of valuations resulting from any particular analysis described
above should not be taken to be Gilford's view of the value of RAM's assets. The
estimates contained in Gilford's analyses and the ranges of valuations resulting
from any particular analysis are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. In addition, analyses relating to the value of
businesses or assets neither purports to be appraisals nor do they necessarily
reflect the prices at which businesses or assets may actually be sold.
Accordingly, Gilford's analyses and estimates are inherently subject to
substantial uncertainty. Gilford believes that its analyses must be considered
as a whole and that selecting portions of its analyses or the factors it
considered, without considering all analyses and factors collectively, could
create an incomplete and misleading view of the process underlying the analyses
performed by Gilford in connection with the preparation of its opinion.
The analyses performed were prepared solely as part of Gilford's analysis
of the fairness, from a financial point of view, of the merger consideration to
our stockholders, and were provided to our board of directors in connection with
the delivery of Gilford's opinion. The opinion of Gilford was just one of the
many factors taken into account by our board of directors in making its
determination to approve the merger, including those described elsewhere in this
proxy statement.
54
Valuation Overview
Based upon a review of the historical and projected financial data and
certain other qualitative data for RAM, Gilford utilized several valuation
methodologies and analyses to determine ranges of values. Gilford utilized the
comparable company, discounted cash flow and the comparable transaction analyses
(all of which are discussed in more detail below) for the valuation of RAM.
Gilford equally weighted the three approaches and arrived at an indicated
equity value range for RAM of approximately $295.3 million to approximately
$372.1 million.
Valuation Range
(in millions of $)
------------------
Valuation Method High Low
----- -----
Comparabe Company Analysis 429.3 338.7
Discounted Cash Flow Analysis
DCF Case #1 364.3 287.3
DCF Case #2 398.7 316.0
Transaction Analysis 2005 296.3 239.1
Weighted Average of Analysis 372.1 295.3
===== =====
Gilford noted that the proposed acquisition consideration of approximately
$300 million for RAM was at the low end of the indicated equity value range for
RAM of approximately $295.3 million to approximately $372.1 million.
Comparable Company Analysis
Gilford utilized the selected comparable company analysis, a market
valuation approach, for the purposes of compiling guidelines or comparable
company statistics and developing valuation metrics based on prices at which
stocks of similar companies are trading in a public market.
The selected comparable company analysis is based on a review and
comparison of the trading multiples of publicly traded companies that are
similar with respect to business model, operating sector, size and target
market. Gilford located 10 companies in the oil and natural gas exploration and
production sector that it deemed comparable to RAM with respect to their
industry sector, geographic location of projects, and operating model. All of
the comparable companies engage in the exploration, development and production
of onshore domestic oil and natural gas properties.
Gilford reviewed the trading multiples of the following 10 selected
publicly held companies in the oil and natural gas exploration and production
sector:
o Brigham Exploration Company
o Carrizo Oil & Gas Inc.
o Clayton Williams Energy Inc.
o Delta Petroleum Corporation
o Edgepetroleum Corporation
o Goodrich Petroleum Corporation
o KCS Energy Inc.
o Petrohawk Energy Corporation
o Swift Eneergy Company
o Whiting Petroleum Corporation
The financial information included market capitalization, total enterprise
value ("TEV"), revenue, earnings before interest taxes depreciation and
amortization ("EBITDA"), earnings per share ("EPS") and present value discounted
at 10% ("PV - 10") reserves. The trading multiples included TEV/revenue,
TEV/EBITDA, price/earnings and TEV/PV - 10 reserves.
Multiples for Selected Companies
Mean
Total Enterprise Value as Multiple of: High Low Mean (excld. High & Low)
---- --- ---- -------------------
Revenue Estimate CY 2005 9.8x 2.7x 5.7x 5.6x
Revenue Estimate CY 2006 7.2x 2.5x 4.3x 4.1x
EBITDA Estimate CY 2005 14.5x 3.7x 8.3x 8.1x
EBITDA Estimate CY 2006 11.1x 3.7x 6.3x 6.0x
PV-10 Reserves 3.3x 0.8x 1.8x 1.7x
Price to Earnings Multiple
Estimate CY 2005 88.4x 9.2x 27.0x 21.6x
Estimate CY 2006 37.2x 9.9x 17.2x 15.4x
o 2005 & 2006 reported financial industry estimates were utilized as
the most comparable based on RAM's WG Energy Holdings acquisition in
December 2004 and the rapid pace of change of valuations in the oil
& gas exploration & production sector.
o The average of all the mean trading multiples (excluding high & low)
implied a valuation of $383.79 million for RAM.
o Removing the outliers from the mean trading multiples (excluding
high & low) indicates a valuation range of $338.8 million
(TEV/EBITDA 2005 multiple of 8.1x) to $429.30 million (TEV/EBITDA
2006 multiple of 6.0x).
Discounted Cash Flow Analysis
A discounted cash flow, or DCF, analysis estimates value based upon a
company's projected future free cash flow discounted at a rate reflecting risks
inherent in its business and capital structure. Unlevered free cash flow
represents the amount of cash generated and available for principal, interest
and dividend payments after providing for ongoing business operations.
55
Utilizing projections provided by RAM management and their advisors,
Gilford determined the net present value of the unlevered free cash flows for
the years ended 2005-2019 to determine the enterprise value for RAM.
To arrive at a present value, Gilford used discount rates ranging from
10.0%, 12.5% and 15.0%. This was based on an estimated weighted average cost of
capital, or WACC, of 9.5%. Gilford used the remaining net present value of cash
flows from proven reserves provided by consultants to Tremisis to determine a
terminal value.
Two DCF cases were analyzed using different commodity price assumptions.
o DCF Case #1 - utilized flat commodity prices of $60.00 per Bbl of
oil, $8.50 per Mcf of natural gas and $45.00 per Bbl of NGLs. This
resulted in a DCF valuation for RAM of $364.3 million using a 10%
discount rate; $321.8 million using a 12.5% discount rate; and
$287.3 million using a 15% discount rate.
o DCF Case #2 - utilized a percentage of the five year strip prices as
of September 1, 2005, 98% per Bbl of oil, 90% per Mcf of natural gas
and 70% per Bbl of NGLs. This resulted in a DCF valuation for RAM of
$398.8 million using a 10% discount rate; $353.1 million using a
12.5% discount rate; and $316.04 million using a 15% discount rate.
Discount Rate
---------------------------------------
Discouted Cash Flow Analysis 10.0% 12.5% 15.0%
---- ---- ----
PV (in millions)
DCF Case #1 364.3 321.8 287.3
DCF Case #2 398.7 353.1 316.0
Comparable Transaction Analysis
A comparable transaction analysis is based on a review of merger,
acquisition and asset purchase transactions involving target companies that are
in related industries to RAM. The comparable transaction analysis generally
provides the widest range of value due to the varying importance of an
acquisition to a buyer (i.e., a strategic buyer willing to pay more than a
financial buyer) in addition to the potential differences in the transaction
process (i.e., competitiveness among potential buyers).
Gilford located eight transactions announced since May 2004 involving
target companies in the oil & gas exploration and production sector that it
deemed comparable to RAM with respect to their total transaction value,
geographic location of projects (the "Comparable Transactions") and for which
financial information was available.
Gilford noted the following with respect to the Comparable Transactions:
o Giflord reviewed reported mergers and acquisitions activity in the
oil and natural gas exploration and production industry, during 2004
and through September 1, 2005, with target companies located in
Texas, Louisiana, New Mexico and Oklahoma and transactions having
a total transaction value between $200 million and $700 million.
o Gilford reviewed eight transactions in order to compare the total
transaction value to the proved reserves on Bcfe basis of the
respective acquired companies. Gilford also reviewed a subset of
three transactions from 2005 to analize the time sensitivity. The
multiples were applied to RAM`s proved reserves on Bcfe basis for
both the base and time adjusted cases.
o Gilford determined that the ratio of the total transaction values to
proved reserves from the three transactions from 2005 better
reflected the trend of the mergers and acquisitions market in the
oil and natural gas exploration and production industry in general
and in this region specifically. The range of valuations for the
transaction analysis was between $296.3 million (high) to $239.1
million (low) with a mean valuation of $268.3 million.
56
o The average price of oil (West Texas Immitedate Crude, or WTI) for
the third quarter of 2005 was 63.31 per Bbl of oil compared to
$50.03 in first quarter 2005 and $53.22 in the second quarter of
2005, an increase of 27% and 19%, respectively. The average price of
natural gas (NYMEX Henry Hub) in the third quarter of 2005 was $9.73
per Mmbtu compared to $6.50 in the first quarter of 2005 and $6.95
in the second quarter of 2005, an increase of 50% and 40%,
respectively. (Source: Bloomberg, FirstEnergy)
o Gilford believes that based on the increase in oil and natural gas
prices (outlined in bullet point above) if these transactions were
to take place in the current pricing environment, it is reasonable
to assume the reserve multiples would realize a portion of the 20%
to 50% increase.
Implied Valuation of RAM Proved
Total Transaction Value Multiples Reserves (in millions)
as a Multiple of: --------------------------------- --------------------------------
High Low Mean High Low Mean
---- --- ---- ---- --- ----
Proved Reserves
Selected 2004-05 transactions 2.4x 1.7x 2.0x 296.3 239.1 268.3
Selected 2005 transactions 2.4x 1.9x 2.2x 296.3 206.3 249.2
80% Test
Tremisis' initial business combination must be with a target business
whose fair market value is at least equal to 80% of Tremisis' net assets at the
time of such acquisition.
Gilford reviewed and estimated Tremisis' net assets at the close of the
merger in comparison to RAM's indicated range of fair market value. Gilford
noted that the fair market value of RAM exceeds 80% of Tremisis' net asset
value. For the purposes of this analysis, Gilford assumed that fair market value
is equivalent to equity value.
For the purposes of the 80% test, Gilford utilized the stockholders'
equity of Tremisis as of June 30, 2005 and expects that there will be no
increase in this figure until the close of the merger.
Based on the information and analyses set forth above, Gilford delivered
its written opinion to our board of directors, which stated that, as of
September 22, 2005, based upon and subject to the assumptions made, matters
considered, and limitations on its review as set forth in the opinion, (i) the
merger consideration is fair, from a financial point of view, to our
stockholders, and (ii) the fair market value of RAM is at least equal to 80% of
our net assets. Gilford will receive a fee of $75,000 in connection with the
preparation and issuance of its opinion, of which $50,000 has been paid and
$25,000 will be paid upon the occurrence of the closing, and we will reimburse
Gilford for its reasonable out-of-pocket expenses, including attorneys' fees. In
addition, we have agreed to indemnify and hold Gilford harmless from and against
any losses, claims, damages or liabilities (or actions, including securityholder
actions, in respect thereof) related to or arising out of Gilford's engagement
to provide its opinion and will reimburse Gilford for all expenses (including
disbursements and reasonable legal fees) as incurred by Gilford in connection
with investigating, preparing for or defending any such action or claim.
Tremisis will not be responsible, however, for any claims, liabilities, losses,
damages or expenses that are finally judicially determined to have resulted
primarily from the bad faith or gross negligence of Gilford. Tremisis has also
agreed that Gilford will not have any liability to Tremisis for or in connection
with such engagement except for losses, claims, damages, liabilities or expenses
incurred by Tremisis that result primarily from the bad faith or gross
negligence of Gilford. Gilford does not beneficially own any interest in either
Tremisis or RAM and has not provided either company with any other services.
Material Federal Income Tax Consequences of the Merger
The following section is a summary of the material United States federal
income tax consequences of the merger to holders of Tremisis common stock and to
holders of RAM common stock. This discussion addresses only those Tremisis and
RAM security holders that hold their securities as a capital asset within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
Code), and does not address all the United States federal income tax
consequences that may be relevant to particular holders in light of their
individual circumstances or to holders that are subject to special rules, such
as:
o financial institutions;
o investors in pass-through entities;
o tax-exempt organizations;
57
o dealers in securities or currencies;
o traders in securities that elect to use a mark to market method of
accounting;
o persons that hold Tremisis or RAM common stock as part of a
straddle, hedge, constructive sale or conversion transaction;
o persons who are not citizens or residents of the United States; and
o stockholders who acquired their shares of RAM common stock through
the exercise of an employee stock option or otherwise as
compensation.
The following is based upon the Code, applicable treasury regulations
thereunder, published rulings and court decisions, all as currently in effect as
of the date hereof, and all of which are subject to change, possibly with
retroactive effect. Tax considerations under state, local and foreign laws, or
federal laws other than those pertaining to the income tax, are not addressed.
Neither Tremisis nor RAM intends to request any ruling from the Internal
Revenue Service as to the United States federal income tax consequences of the
merger.
Tax Consequences of the Merger to RAM stockholders.
The merger will qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code. As a consequence:
o no gain or loss will be recognized by stockholders of RAM who
receive shares of Tremisis common stock in the merger, except that
with respect to the cash received by stockholders of RAM, such cash
will be taxed as a dividend to the extent RAM has accumulated
earnings and profits and as capital gain to the extent RAM has no
accumulated earnings and profits for federal income tax purposes;
o the aggregate tax basis of the Tremisis common stock received in the
merger will be equal to the aggregate tax basis of the RAM common
stock for which it is exchanged; and
o the holding period of Tremisis common stock received by the RAM
stockholders in the merger will include the holding period of the
RAM common stock for which it is exchanged. Thus, in determining
whether a RAM stockholder will have held his or her Tremisis stock
more than one year so as to qualify for long-term gain tax
treatment, the period the RAM stockholder held his or her RAM stock
prior to the consummation of the merger will be added to the
post-merger holding period of the Tremisis common stock received by
the RAM stockholder in the merger.
Tax Consequences of the Merger to Tremisis stockholders.
No gain or loss will recognized by stockholders of Tremisis if their
conversion rights are not exercised.
A stockholder of Tremisis who exercises conversion rights and effects a
termination of the stockholder's interest in Tremisis will generally be required
to recognize gain or loss upon the exchange of that stockholder's shares of
common stock of Tremisis for cash. Such gain or loss will be measured by the
difference between the amount of cash received and the tax basis of that
stockholder's shares of Tremisis common stock. This gain or loss will generally
be a capital gain or loss if such shares were held as a capital asset on the
date of the merger and will be a long-term capital gain or loss if the holding
period for the share of Tremisis common stock is more than one year.
58
Tax Consequences of the Merger Generally to Tremisis and RAM.
No gain or loss will be recognized by Tremisis or RAM as a result of the
merger.
This discussion is intended to provide only a general summary of the
material United States federal income tax consequences of the merger, and is not
a complete analysis or description of all potential United States federal tax
consequences of the merger. This discussion does not address tax consequences
which may vary with, or are contingent on, your individual circumstances. In
addition, the discussion does not address any non-income tax or any foreign,
state or local tax consequences of the merger. Accordingly, you are strongly
urged to consult with your tax advisor to determine the particular United States
federal, state, local or foreign income or other tax consequences to you of the
merger.
Anticipated Accounting Treatment
The merger will be accounted for under the purchase method of accounting
as a reverse acquisition in accordance with U.S. generally accepted accounting
principles for accounting and financial reporting purposes. Under this method of
accounting, Tremisis will be treated as the "acquired" company for financial
reporting purposes. In accordance with guidance applicable to these
circumstances, the merger will be considered to be a capital transaction in
substance. Accordingly, for accounting purposes, the merger will be treated as
the equivalent of RAM issuing stock for the net monetary assets of Tremisis,
accompanied by a recapitalization. The net monetary assets of Tremisis will be
stated at their fair value, essentially equivalent to historical costs, with no
goodwill or other intangible assets recorded. The accumulated deficit of RAM
will be carried forward after the merger. Operations prior to the merger will be
those of RAM.
Regulatory Matters
The merger and the transactions contemplated by the merger agreement are
not subject to any additional federal or state regulatory requirement or
approval, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or
HSR Act, except for filings with the State of Delaware necessary to effectuate
the transactions contemplated by the merger proposal.
THE MERGER AGREEMENT
The following summary of the material provisions of the merger agreement
is qualified by reference to the complete text of the merger agreement, and the
amendment to the merger agreement, copies of which are attached as Annexes A and
B to this proxy statement, and are incorporated by reference. All stockholders
are encouraged to read the merger agreement in its entirety for a more complete
description of the terms and conditions of the merger.
General; Structure of Merger
On October 20, 2005, Tremisis entered into a merger agreement with RAM and
the RAM stockholders. The merger agreement was amended on November 11, 2005.
Merger Sub, a wholly owned subsidiary of Tremisis, formed to effectuate the
merger by merging with and into RAM, is also a party to the merger agreement.
RAM will be the surviving corporation in the merger and, as a result, will be a
wholly owned subsidiary of Tremisis through an exchange of all the issued and
outstanding shares of capital stock of RAM for cash and shares of common stock
of Tremisis.
The RAM stockholders approved and adopted the merger agreement, as
amended, and the transactions contemplated thereby by virtue of the execution of
the merger agreement and the
59
amendment. Accordingly, no further action is required to be taken by RAM
stockholders to approve the merger.
Closing and Effective Time of the Merger
The closing of the merger will take place promptly following the
satisfaction of the conditions described below under "The Merger Agreement -
Conditions to the Closing of the Merger," unless Tremisis and RAM agree in
writing to another time. The merger is expected to be consummated in the first
quarter of 2006.
Name; Headquarters; Stock Symbols
After completion of the merger:
o the name of Tremisis will be RAM Energy Resources, Inc.;
o the corporate headquarters and principal executive offices will be
located at 5100 E. Skelly Drive, Suite 650, Tulsa, Oklahoma 74135,
which is RAM's corporate headquarters; and
o Tremisis and RAM will cause the common stock, warrants and units
outstanding prior to the merger, which are traded on the OTCBB, to
continue trading on the OTCBB or quoted on Nasdaq. In the event
Tremisis' common stock, warrants and units are quoted on Nasdaq at
the time of the closing, the symbols will change to ones determined
by the board of directors and the trading medium that are reasonably
representative of the corporate name or business of Tremisis.
Merger Consideration
Pursuant to the merger agreement, the holders of securities of RAM
outstanding immediately before the merger will receive, in exchange for such
securities, 25,600,000 shares of Tremisis common stock and $30 million in cash,
or such lesser amount as may be available in the trust account after payment to
the owners of Tremisis common stock voting against the merger and demanding
conversion. In addition, RAM, which will survive the merger as a wholly owned
subsidiary of Tremisis, will remain liable for its outstanding debt, which is
estimated to be approximately $125.0 million at closing. Immediately following
the merger, the RAM stockholders will own approximately 77% of the total issued
and outstanding Tremisis common stock, assuming that no Tremisis stockholders
seek conversion of their Tremisis stock into their pro rata share of the trust
fund. Unless otherwise indicated, this proxy statement assumes that 25,600,000
shares are issued in the merger.
Pre-Closing RAM Dividends/Redemption
The merger agreement provides that prior to the closing of the merger, RAM
is authorized to declare and pay one normal quarterly dividend to its
stockholders in the amount of $500,000, and to either declare a one-time
extraordinary dividend, or redeem a portion of its outstanding common stock, in
an aggregate amount up to the difference between $40 million and the amount of
cash consideration to be received by the RAM stockholders in the merger. The
payment and amount of the pre-closing dividend/redemption will be dependent on
the amount of cash available to RAM for making such payments.
Escrow Agreement
Of the shares to be issued to the RAM stockholders, 3,200,000 shares, or
12.5%, will be placed in escrow to secure the indemnity rights of Tremisis
under the merger agreement and will be governed by
60
the terms of an escrow agreement. The escrow agreement is attached as Annex G
hereto. We encourage you to read the escrow agreement in its entirety.
Lock-Up Agreement
The RAM stockholders have entered into a lock-up agreement to not sell or
otherwise transfer any of the shares of common stock of Tremisis that they
receive in the merger until the six-month anniversary of the consummation of the
merger, and no more than 50% of such shares during the following six months,
subject to certain exceptions. In addition, if any shares held by the Tremisis
Inside Stockholders that were placed in escrow in connection with the IPO are
released on an accelerated basis from such escrow, the shares subject to the
lock-up agreement will be released from the restrictions thereof on the same
accelerated schedule.
Employment Agreement
A condition to the closing of the merger agreement is that Larry E. Lee,
RAM's current president and chief executive officer, shall enter into employment
agreement with Tremisis upon the consummation of the merger. The employment
agreement is attached as Annex H hereto. For a summary of the employment
agreement, see the section entitled "Employment Agreement" beginning on page
128. We encourage you to read the employment agreement in its entirety.
Election of Directors; Voting Agreement
The RAM stockholders, on the one hand, and Lawrence S. Coben and Isaac
Kier of Tremisis, on the other hand, have entered into a voting agreement
pursuant to which they have agreed to vote for the other's designees to
Tremisis' board of directors through the election in 2008 as follows:
o in the class to stand for reelection in 2006 - - Larry E. Lee and
Sean P. Lane;
o in the class to stand for reelection in 2007 - - Gerald R. Marshall;
o in the class to stand for reelection in 2008 - - John M. Reardon.
Pursuant to the merger agreement, the RAM stockholders will designate
three directors and Messrs. Coben and Kier will designate one director. Messrs
Lee, Marshall and Reardon are currently directors of RAM and are designees of
the RAM stockholders. Mr. Lane is the designee of Messrs. Coben and Kier. The
voting agreement is attached as Annex F hereto. We encourage you to read the
voting agreement in its entirety.
Tremisis' directors do not currently receive any cash compensation for
their services as members of the board of directors. However, in the future,
non-employee directors may receive certain cash fees and stock awards that the
Tremisis board of directors may determine to pay.
Registration Rights Agreement
Pursuant to the merger agreement, Tremisis and the RAM stockholders will
enter into a registration rights agreement to provide the RAM stockholders with
certain rights relating to the registration of shares of Tremisis common stock
that they will receive upon consummation of the merger. Under the registration
rights agreements, the RAM stockholders are afforded both demand and piggyback
registration rights. The registration rights agreement is attached as Annex I
hereto. We encourage you to read the registration rights agreement in its
entirety.
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Representations and Warranties
The merger agreement contains representations and warranties of each of
RAM and Tremisis relating, among other things, to:
o proper corporate organization and similar corporate matters;
o capital structure of each constituent company;
o the authorization, performance and enforceability of the merger
agreement;
o licenses and permits;
o taxes;
o financial information and absence of undisclosed liabilities;
o holding of leases and ownership of other properties, including
intellectual property;
o accounts receivable;
o inventory;
o contracts;
o title to properties, including all oil and gas properties, and
environmental condition thereof;
o title to and condition of other assets;
o absence of certain changes;
o employee matters;
o compliance with laws, including environmental laws applicable to oil
and gas properties and activities thereon;
o absence of litigation; and
o compliance with applicable provisions of securities laws.
The RAM stockholders have represented and warranted, among other things,
as to their accredited investor status.
Covenants
Tremisis and RAM have each agreed to take such actions as are necessary,
proper or advisable to consummate the merger. They have also agreed, subject to
certain exceptions, to continue to operate their respective businesses in the
ordinary course prior to the closing and not to take the following actions
without the prior written consent of the other party:
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o waive any stock repurchase rights, accelerate, amend or (except as
specifically provided for in the merger agreement) change the period
of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock
plans or authorize cash payments in exchange for any options granted
under any of such plans;
o grant any severance or termination pay to any officer or employee
except pursuant to applicable law, written agreements outstanding,
or policies, or adopt any new severance plan, or amend or modify or
alter in any manner any severance plan, agreement or arrangement;
o transfer or license to any person or otherwise extend, amend or
modify any material rights to any intellectual property of RAM or
Tremisis, as applicable, or enter into grants to transfer or license
to any person future patent rights, other than in the ordinary
course of business consistent with past practices provided that in
no event will RAM or Tremisis license on an exclusive basis or sell
any intellectual property of the RAM or Tremisis, as applicable;
o declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or
property) in respect of any capital stock or split, combine or
reclassify any capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution
for any capital stock, except that RAM is entitled to declare its
regularly quarterly dividend to the RAM stockholders (approximately
$500,000 for the quarter ending December 31, 2005) and a one-time
extraordinary dividend, or to redeem a portion of its outstanding
common stock, in an aggregate amount of up to the difference between
$40 million and the amount of cash consideration to be received by
the RAM stockholders in the merger;
o purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of RAM and Tremisis, as applicable,
including repurchases of unvested shares at cost in connection with
the termination of the relationship with any employee or consultant
pursuant to stock option or purchase agreements in effect on the
date hereof; to issue, deliver, sell, authorize, pledge or otherwise
encumber, or agree to any of the foregoing with respect to, any
shares of capital stock or any securities convertible into or
exchangeable for shares of capital stock, or subscriptions, rights,
warrants or options to acquire any shares of capital stock or any
securities convertible into or exchangeable for shares of capital
stock, or enter into other agreements or commitments of any
character obligating it to issue any such shares or convertible or
exchangeable securities except as provided in current outstanding
warrants;
o amend its certificate of incorporation or bylaws;
o except for routine acquisitions by RAM of oil and gas leases and
related properties in the ordinary course of business, which
includes acquisitions for a purchase price up to $20 million,
acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or
by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of Tremisis or
RAM, as applicable, or enter into any joint ventures, strategic
partnerships or alliances or other arrangements that
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provide for exclusivity of territory or otherwise restrict such
party's ability to compete or to offer or sell any products or
services;
o except for routine dispositions by RAM of oil and gas properties,
which includes dispositions of properties having proved reserves
with a present value of up to $20 million, sell, lease, license,
encumber or otherwise dispose of any properties or assets, except
(i) sales of services and licenses of software in the ordinary
course of business consistent with past practice, (ii) sales of
inventory in the ordinary course of business consistent with past
practice, and (iii) the sale, lease or disposition (other than
through licensing) of property or assets that are not material,
individually or in the aggregate, to the business of such party;
o except with respect to advances under (i) RAM's existing senior
secured credit facility, (ii) an overline facility obtained for the
specific purpose of funding margin calls to secure RAM's hedging
obligations, or (iii) any senior secured credit facility that
replaces RAM's existing senior secured credit facility, incur any
indebtedness for borrowed money in excess of $25,000 in the
aggregate (other than purchase money debt in connection with the
acquisition by RAM of vehicles, office equipment and operating
equipment not exceeding $500,00 in the aggregate) or guarantee any
such indebtedness of another person, issue or sell any debt
securities or options, warrants, calls or other rights to acquire
any debt securities of Tremisis or RAM, as applicable, enter into
any "keep well" or other agreement to maintain any financial
statement condition or enter into any arrangement having the
economic effect of any of the foregoing;
o adopt or amend any employee benefit plan, policy or arrangement, any
employee merger or employee incentive compensation plan, or enter
into any employment contract or collective bargaining agreement
(other than offer letters and letter agreements entered into in the
ordinary course of business consistent with past practice with
employees who are terminable "at will"), pay any special bonus or
special remuneration to any director or employee, or increase the
salaries or wage rates or fringe benefits (including rights to
severance or indemnification) of its directors, officers, employees
or consultants, except in the ordinary course of business consistent
with past practices;
o pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent
or otherwise), or litigation (whether or not commenced prior to the
date of this Agreement) other than the payment, discharge,
settlement or satisfaction, in the ordinary course of business
consistent with past practices or in accordance with their terms, or
liabilities previously disclosed in financial statements to the
other party in connection with the merger agreement or incurred
since the date of such financial statements, or waive the benefits
of, agree to modify in any manner, terminate, release any person
from or knowingly fail to enforce any confidentiality or similar
agreement to which the RAM is a party or of which the RAM is a
beneficiary or to which Tremisis is a party or of which Tremisis is
a beneficiary, as applicable;
o except in the ordinary course of business consistent with past
practices, modify, amend or terminate any material contract of RAM
or Tremisis, as applicable, or waive, delay the exercise of, release
or assign any material rights or assign any material rights or
claims thereunder;
o except as required by U.S. GAAP, revalue any of its assets or make
any change in accounting methods, principles or practices;
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o except in the ordinary course of business consistent with past
practices, incur or enter into any agreement, contract or commitment
requiring such party to pay in excess of $100,000 in any 12 month
period;
o engage in any action that could reasonably be expected to cause the
merger to fail to qualify as a "reorganization" under Section 368(a)
of the Code;
o make or rescind any tax elections that, individually or in the
aggregate, could be reasonably likely to adversely affect in any
material respect the tax liability or tax attributes of such party,
settle or compromise any material income tax liability or, except as
required by applicable law, materially change any method of
accounting for tax purposes or prepare or file any return in a
manner inconsistent with past practice;
o form, establish or acquire any subsidiary except as contemplated by
the merger agreement;
o permit any person to exercise any of its discretionary rights under
any plan to provide for the automatic acceleration of any
outstanding options, the termination of any outstanding repurchase
rights or the termination of any cancellation rights issued pursuant
to such plans;
o make capital expenditures except in accordance with prudent business
and operational practices consistent with prior practice;
o make or omit to take any action which would be reasonably
anticipated to have a material adverse effect;
o enter into any transaction with or distribute or advance any assets
or property to any of its officers, directors, partners,
stockholders or other affiliates; or
o agree in writing or otherwise agree, commit or resolve to take any
of the foregoing actions.
The merger agreement also contains additional covenants of the parties,
including covenants providing for:
o Tremisis to make or cause to be made at its expense such examination
as it may desire of the title of RAM to any mineral property or
owned real property;
o the right of Tremisis, at its sole risk and expense, but with the
cooperation and assistance of RAM to (i) enter all or any portion of
RAM's mineral properties, its owned real properties or leased real
properties and, individually, to inspect, inventory, test,
investigate, study and examine the properties in any manner Tremisis
reasonably determines to be warranted to verify the accuracy of
certain of RAM's representations, (ii) conduct air, water or soil
tests on the environmental properties and make such samples and
borings and analysis as Tremisis may consider necessary and
appropriate, (iii) conduct such other independent inspections,
investigations, studies or examinations as may be necessary or
appropriate in the sole judgment of Tremisis for the preparation of
health, safety, environmental or other reports or assessments
relating to the operation, use, maintenance, condition or status of
the environmental properties, and their compliance with all
applicable laws, regulations, ordinances, permits and license, and
(iv)
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conduct an independent assessment of the extent of any possible
existing or contingent liabilities due or related to the operation,
use, maintenance, condition or status of the environmental
properties;
o the parties to use commercially reasonable efforts to obtain all
necessary approvals from stockholders, governmental agencies and
other third parties that are required for the consummation of the
transactions contemplated by the merger agreement;
o RAM to maintain insurance polices providing insurance coverage for
its business and its assets in the amounts and against the risks as
are commercially reasonable for the businesses and risks covered;
o the protection of confidential information of the parties and,
subject to the confidentiality requirements, the provision of
reasonable access to information;
o Tremisis to prepare and file this proxy statement;
o the RAM stockholders to release and forever discharge RAM and its
directors, officers, employees and agents, from any and all rights,
claims, demands, judgments, obligations, liabilities and damages
arising out of or resulting from such stockholder's status as a
holder of an equity interest in RAM, and employment, service,
consulting or other similar agreement entered into with RAM prior to
the consummation of the merger agreement;
o RAM and the RAM stockholders to waive their rights to make claims
against Tremisis to collect from the trust fund established for the
benefit of the Tremisis stockholders who purchased their securities
in Tremisis' IPO for any moneys that may be owed to them by
Tremisis for any reason whatsoever, including breach by Tremisis of
the merger agreement or its representations and warranties therein;
o each officer and director of RAM and the RAM stockholders to agree
that he or it shall not, prior to the day that is one (1) year after
the consummation of the merger, sell, transfer or otherwise dispose
of an interest in any of the shares of Tremisis common stock he or
it receives as a result of the merger other than as permitted
pursuant to the lock-up agreement; and
o Tremisis and RAM to use their reasonable best efforts to obtain the
listing for trading on Nasdaq of Tremisis common stock and warrants.
If such listing is not obtainable by the closing of the merger,
Tremisis and RAM will continue to use their best efforts after
closing of the merger to obtain such listing.
Conditions to Closing of the Merger
General Conditions
Consummation of the merger agreement and the related transactions is
conditioned on the Tremisis stockholders, at a meeting called for these
purposes, (i) adopting the merger agreement and approving the merger, (ii)
approving the change of Tremisis' name, and (iii) approving the increase of the
authorized shares of Tremisis' common stock from 30,000,000 to 100,000,000. The
Tremisis stockholders will also be asked to adopt the incentive compensation
plan and to approve the removal of all of the provisions of Article Sixth of
Tremisis' certificate of incorporation other than the paragraph
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relating to Tremisis' staggered board of directors. The consummation of the
merger is not dependent on the approval of either of such actions.
In addition, the consummation of the transactions contemplated by the
merger agreement is conditioned upon normal closing conditions in a transaction
of this nature, including:
o no order, stay, judgment or decree being issued by any governmental
authority preventing, restraining or prohibiting in whole or in
part, the consummation of such transactions;
o Tremisis' stockholders have approved the merger agreement, the name
change amendment and capitalization amendment;
o holders of twenty percent (20%) or more of the shares of Tremisis
common stock issued in Tremisis' IPO and outstanding immediately
before the consummation of the merger shall not have exercised their
rights to convert their shares into a pro rata share of the Trust
Fund in accordance with Tremisis' certificate of incorporation;
o the delivery by each party to the other party of a certificate to
the effect that the representations and warranties of the delivering
party are true and correct in all material respects as of the
closing and all covenants contained in the merger agreement have
been materially complied with by the delivering party;
o the receipt of necessary consents and approvals by third parties and
the completion of necessary proceedings; and
o Tremisis' common stock being quoted on the OTCBB or approved for
quotation on Nasdaq.
RAM's Conditions to Closing
The obligations of RAM to consummate the transactions contemplated by the
merger agreement, in addition to the conditions described above, are conditioned
upon each of the following, among other things:
o there shall have been no material adverse effect with respect to
Tremisis since the date of the merger agreement;
o RAM shall have received a legal opinion from Graubard Miller,
counsel to Tremisis;
o Tremisis shall have made appropriate arrangements with Continental
Stock Transfer & Trust Company to have the Trust Fund disbursed to
Tremisis immediately upon the Closing; and
o the registration rights agreement shall be in full force and effect.
Tremisis' Conditions to Closing
The obligations of Tremisis to consummate the transactions contemplated by
the merger agreement, in addition to the conditions described above in the
second paragraph of this section, are conditioned upon each of the following,
among other things:
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o there shall have been no material adverse effect with respect to RAM
since the date of the merger agreement;
o an employment agreement between Tremisis and Larry E. Lee shall be
in full force and effect;
o Tremisis shall have received a legal opinion in an agreed form from
McAfee & Taft A Professional Corporation, counsel to RAM;
o Tremisis shall have received "comfort" letters from BDO Seidman, LLP
and UHY Mann Frankfort Stein & Lipp CPAs, LLP dated the date of
distribution of this proxy statement and the date of consummation of
the merger in forms customary for transactions of this nature,
confirming that certain financial data in this proxy statement,
other than the numbers in the actual financial statements, are
accurate and/or derived from the financial statements; and
o the adjusted indebtedness of RAM, including certain of its
subsidiaries, for borrowed money shall not exceed $125 million,
excluding (i) any cash deposits posted by RAM as security in
connection with outstanding RAM hedging contracts, (ii) the amount
by which $30,000,000 exceeds the cash portion of the merger
consideration paid to the RAM stockholders, and (iii) an amount up
to $6.0 million for aggregate fees, costs and expenses paid by RAM
in connection with replacing, enhancing or improving its existing
credit facilities.
Indemnification
As the sole remedy for the obligation of the RAM stockholders to indemnify
and hold harmless Tremisis for any damages, whether as a result of any third
party claim or otherwise, and which arise as a result of or in connection with
the breach of representations and warranties and agreements and covenants of RAM
or in connection with an identified, existing action involving certain of RAM's
subsidiaries and affiliates, there will deposited in escrow, until June 30,
2007, 3,200,000 shares (12.5% ) of the shares of Tremisis common stock issued to
the RAM stockholders upon consummation of the merger. Any indemnification
payments shall be paid solely from the escrow shares, although RAM stockholders
shall have the right to substitute for the escrow shares that otherwise would be
paid in satisfaction of a claim, cash in an amount equal to the fair market
value of the shares to be paid for a claim. For purposes of satisfying an
indemnification claim, shares of Tremisis common stock will be valued at the
average reported last sales price for the ten trading days ending on the last
day prior to the day that the claim is paid. Claims for indemnification may be
asserted by Tremisis once the damages exceed $1,000,000 and are indemnifiable to
extent that damages exceed $1,000,000; provided that claims for indemnification
with respect to damages to Tremisis or RAM (post-merger) resulting from an
identified, existing action involving certain of RAM's subsidiaries and
affiliates, shall not be subject to such threshold. Claims arising from title
defects or environmental issues relating to RAM's properties will not be
indemnifiable since there is a mechanism provided by the merger agreement to
reduce the consideration being paid to the RAM stockholders in the merger for
material title defects and adverse environmental conditions that are discovered
prior to consummation of the merger.
The board of directors of Tremisis has appointed Lawrence Coben to take
all necessary actions and make all decisions pursuant to the escrow agreement
regarding Tremisis' right to indemnification under the merger agreement. If Mr.
Coben ceases to so act, the board shall appoint as a successor a person who was
a director of Tremisis prior to the closing who would qualify as an
"independent" director of Tremisis and who had no relationship with RAM prior to
the closing. Mr. Coben, and any successor, is charged with making determinations
whether Tremisis may be entitled to indemnification, and may make a claim for
indemnification by giving notice to Larry E. Lee, as representative of the RAM
stockholders, with a copy to the escrow agent, specifying the details of the
claim. Mr. Lee, or his successor, who may be appointed by him, or by the board
of Tremisis, acting through its members who were directors of RAM prior to the
closing, from among those of its members who was a former stockholder of RAM, or
such other person as such members may designate, may accept the claim or dispute
it. If the claim is disputed by Mr. Lee and not ultimately resolved by
negotiation, it shall be determined by arbitration. Upon a claim and its value
becoming established by the parties or through arbitration, it is payable from
the shares placed in escrow or cash substituted therefor.
Any shares of Tremisis common stock remaining in escrow on June 30, 2007
shall be released to the RAM stockholders, except those shares reserved against
any claims arising prior to that date, including in connection with an
identified, existing action involving certain of RAM's subsidiaries and
affiliates if the claim has not been adjudicated, settled, dismissed or
otherwise resolved in its entirety prior to such date, in such amounts and
manner as prescribed in the escrow agreement.
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Termination
The merger agreement may be terminated at any time, but not later than the
closing as follows:
o by mutual written consent of Tremisis and RAM;
o by either party if a governmental entity shall have issued an order,
decree or ruling or taken any other action, in any case having the
effect of permanently restraining, enjoining or otherwise
prohibiting the merger, which order, decree, ruling or other action
is final and nonappealable;
o by either party if the proxy statement has not been mailed to the
record owners of Tremisis common stock on or before February 14,
2006;
o by either party if the other party has breached any of its covenants
or representations and warranties in any material respect and has
not cured its breach within 30 days of the notice of an intent to
terminate, provided that the terminating party is itself not in
breach;
o by either Tremisis or RAM if they are unable to agree as to the
amount of adjustment to be made to the merger consideration with
respect to adverse title conditions or environmental conditions that
are not cured by the closing, as the closing may be extended in such
circumstances;
o by Tremisis if any RAM properties are damaged or destroyed by fire
or other casualty or are taken under the right of eminent domain and
as result thereon the aggregate value of the properties, in
Tremisis' good faith judgment, is reduced by an amount exceeding $1
million (net of insurance proceeds); or
o by either party if, at the Tremisis stockholder meeting, the merger
agreement and the transactions contemplated thereby shall fail to be
approved and adopted by the affirmative vote of the holders of
Tremisis' common stock, or the holders of 20% or more of the shares
issued in Tremisis' IPO exercise their conversion rights.
In any event, the merger agreement will terminate if the merger has not
been consummated by May 18, 2006.
If Tremisis wrongfully fails or refuses to consummate the merger or RAM
terminates the merger agreement because of a material breach by Tremisis of its
covenants, representations or warranties that remains uncured 30 days after
receipt of a notice of intent to terminate from RAM, and Tremisis consummates a
merger or other business combination with another entity on or before May 18,
2006, Tremisis will be obligated to pay RAM, concurrently with the consummation
of such other merger or business combination, a cash termination fee of
$7,500,000, payment of which shall be in full satisfaction of all other rights
of RAM for damages under the merger agreement or otherwise. In such event,
Tremisis would obtain the funds to make the termination payment from the moneys
in the trust fund, when they are released upon the consummation of the other
business combination.
If permitted under the applicable law, either RAM or Tremisis may waive
any inaccuracies in the representations and warranties made to such party
contained in the merger agreement and waive compliance with any agreements or
conditions for the benefit of itself or such party contained in the merger
agreement. We cannot assure you that all of the conditions will be satisfied or
waived.
The merger agreement does not specifically address the rights of a party in the
event of a refusal or wrongful failure of the other party to consummate the
merger, except in the case described above in a situation where Tremisis would
be required to pay RAM the $7,500,000 million termination fee. Other than in
such event, the non-wrongful party would be entitled to assert is legal rights
for breach of contract against the wrongful party.
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Effect of Termination
In the event of proper termination by either Tremisis or RAM, the merger
agreement will become void and have no effect, without any liability or
obligation on the part of Tremisis or RAM, except that:
o the confidentiality obligations set forth in the merger agreement
will survive;
o the waiver by RAM and the RAM stockholders of all rights against
Tremisis to collect from the trust account any moneys that may be
owed to them by Tremisis for any reason whatsoever, including but
not limited to a breach of the merger agreement, and the
acknowledgement that neither RAM nor the RAM stockholders will seek
recourse against the trust account for any reason whatsoever, will
survive;
o the rights of the parties to bring actions against each other for
breach of the merger agreement will survive;
o the fees and expenses incurred in connection with the merger
agreement and the transactions contemplated thereby will be paid by
the party incurring such expenses; and
o in the event of Tremisis' failure or wrongful refusal to close, or
termination by RAM because of a breach by Tremisis, the requirement
of Tremisis to pay to RAM a cash termination fee of $7,500,000 if
Tremisis thereafter consummates another business combination on or
before May 18, 2006, will survive.
Fees and Expenses
All fees and expenses incurred in connection with the merger agreement and
the transactions contemplated thereby will be paid by the party incurring such
expenses whether or not the merger agreement is consummated.
RAM entered into a Financial Advisory Mandate Letter dated August 25, 2005
with WestLB AG, whereby RAM engaged WestLB to serve as its exclusive financial
advisor in connection with the merger. Under the terms of the Financial Advisory
Mandate Letter, WestLB agreed to provide RAM with financial advice and
assistance in connection with the proposed transaction with Tremisis, including
advice and assistance in defining strategic and financial objectives and
assisting RAM in the negotiation of the financial terms and structure of the
transaction. In consideration of the services to be provided under the Mandate
Letter, RAM agreed to pay WestLB a transaction fee in an amount equal to 1.5% of
the value of the Tremisis stock and cash received by the RAM stockholders in
connection with the transaction, but in no event less than $3.0 million. No
separate compensation or additional fees are payable to Mr. Ormand. The
transaction fee is payable in installments, with the first such installment of
$100,000 paid upon execution of the merger agreement, and the second
installment, in the amount of $2.9 million, to be paid upon closing of the
transaction. In addition, RAM agreed to reimburse WestLB for its reasonable
out-of-pocket costs and expenses incurred in connection with providing services
under the Mandate Letter, and to indemnify WestLB from any liability incurred by
WestLB or its representatives in connection with providing services under the
Mandate Letter, except to the extent such liability is determined to have
resulted from the gross negligence or willful misconduct of WestLB or its
representatives. Tremisis has no contractual relationship with or obligation of
any kind to WestLB or Mr. Ormand in connection with the transaction.
Confidentiality; Access to Information
Tremisis and RAM will afford to the other party and its financial
advisors, accountants, counsel and other representatives prior to the completion
of the merger reasonable access during normal business hours, upon reasonable
notice, to all of their respective properties, books, records and personnel to
obtain all information concerning the business, including the status of product
development efforts, properties, results of operations and personnel, as each
party may reasonably request. Tremisis and RAM will maintain in confidence any
non-public information received from the other party, and use such non-public
information only for purposes of consummating the transactions contemplated by
the merger agreement.
Amendment
The merger agreement may be amended by the parties thereto at any time by
execution of an instrument in writing signed on behalf of each of the parties.
The merger agreement was amended on November 11, 2005 to fix the number of
Tremisis shares to be received by the RAM stockholders at 25,600,000 and to
exclude from the limitation on indebtedness for borrowed money at closing
certain expenses incurred by RAM in refinancing its existing credit facility.
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Extension; Waiver
At any time prior to the closing, any party to the merger agreement may,
in writing, to the extent legally allowed:
o extend the time for the performance of any of the obligations or
other acts of the other parties to the agreement;
o waive any inaccuracies in the representations and warranties made to
such party contained in the merger agreement or in any document
delivered pursuant to the merger agreement; and
o waive compliance with any of the agreements or conditions for the
benefit of such party contained in the merger agreement.
Public Announcements
Tremisis and RAM have agreed that until closing or termination of the
merger agreement, the parties will:
o cooperate in good faith to jointly prepare all press releases and
public announcements pertaining to the merger agreement and the
transactions governed by it; and
o not issue or otherwise make any public announcement or communication
pertaining to the merger agreement or the transaction without the
prior consent of the other party, which shall not be unreasonably
withheld by the other party, except as may be required by applicable
laws or court process.
Arbitration
Any disputes or claims arising under or in connection with merger
agreement or the transactions contemplated thereunder will be resolved by
binding arbitration. Arbitration will be commenced by the filing by a party of
an arbitration demand with the American Arbitration Association ("AAA"). The
arbitration will be governed and conducted by applicable AAA rules, and any
award and/or decision shall be conclusive and binding on the parties. Each party
consents to the exclusive jurisdiction of the federal and state courts located
in the State of Oklahoma, Oklahoma or Tulsa County, for such purpose. The
arbitration shall be conducted in Dallas, Texas. Each party shall pay its own
fees and expenses for the arbitration, except that any costs and charges imposed
by the AAA and any fees of the arbitrator shall be assessed against the losing
party.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet
combines the consolidated historical balance sheet of RAM and the historical
balance sheet of Tremisis as of September 30, 2005, giving effect to the merger
pursuant to the merger agreement as if the merger had been consummated on
September 30, 2005 and treated as a Recapitalization of RAM. Because the merger
is treated as a recapitalization, a pro forma statement of operations has not
been presented.
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. We derived this information
71
from the unaudited financial statements of RAM and Tremisis as of September 30,
2005. Neither RAM nor Tremisis assumes any responsibility for the accuracy or
completeness of the information provided by the other party. This information
should be read together with the RAM audited and unaudited financial statements
and related notes included elsewhere in this proxy statement and the Tremisis
audited and unaudited financial statements included elsewhere in this proxy
statement.
The following information should be read in conjunction with the pro forma
condensed consolidated financial statements:
o accompanying notes to the unaudited pro forma condensed balance
sheet;
o separate historical consolidated financial statements of RAM for the
year ended December 31, 2004 and as of and for the nine months ended
September 30, 2005 included elsewhere in this document; and
o separate historical financial statements of Tremisis for the year
ended December 31, 2004 and as of and for the nine months ended
September 30, 2005 included elsewhere in this document.
The unaudited pro forma condensed consolidated balance sheet at September
30, 2005 has been prepared using two different levels of assumptions with
respect to the Tremisis stockholders, as follows:
o Assuming No Conversions: This presentation assumes that no
stockholders of Tremisis seek to convert their shares into a pro
rata share of the trust account; and
o Assuming Maximum Conversions: This presentation assumes stockholders
of Tremisis owning 19.99% of the stock sold in the IPO seek
conversion.
The assets and liabilities of Tremisis have been presented at their
historical cost (which is considered to be the equivalent of estimated fair
value) with no goodwill or other intangible assets recorded and no increment in
stockholders' equity.
72
Unaudited Pro Forma Condensed Balance Sheet
Assuming No Conversions
At September 30, 2005
(In thousands)
Ram Tremisis Adjustments Pro forma
--- -------- ----------- ---------
Assets
------
Current assets
Cash and cash equivalents $ 1,753 $ 499 $ (1,167) (1) $ 1,085
US Gov't securities held in Trust Fund 34,060 (34,060) (1) --
Accrued interest receivable, Trust Fund 58 (58) (1) --
Other current assets 7,982 11 -- 7,993
--------- --------- --------- --------
Total current assets 9,735 34,628 (35,285) 9,078
Property and equipment, net 129,120 10 -- 129,130
Other assets 2,270 85 (85) (1) 2,270
--------- --------- --------- --------
Total assets $ 141,125 $ 34,723 $ (35,370) $140,478
========= ========= ========= ========
Liabilities and stockholders' (deficit) equity
----------------------------------------------
Total current liabilities, excluding current
portion of long-term debt $ 14,833 $ 253 $ -- $ 15,086
Long term debt, including current portion 117,301 -- 9,130 (1) 126,431
Deferred and other non-current income taxes 21,173 -- -- 21,173
Liability for asset retirement obligation 6,873 -- -- 6,873
Common stock subject to possible conversion 6,820 (6,820) (2) --
Derivative liability 5,432 -- -- 5,432
Other long term liabilities 2,006 -- -- 2,006
--------- --------- --------- --------
Total liabilities 167,618 7,073 2,310 177,001
--------- --------- --------- --------
Common stock 23 1 (20) (3) 4
Additional paid-in capital 73 27,367 (73) (3) --
6,820 (2)
(4,500) (1)
(29,687) (3)
29,687 (3)
Earnings accumulated during development stage 282 (282) (3) --
Accumulated (deficit) (26,589) -- (39,625) (3) (36,527)
--------- --------- --------- --------
Stockholders (deficit) equity (26,493) 27,650 (37,680) (36,523)
--------- --------- --------- --------
Total liabilities and stockholders
(deficit) equity $ 141,125 $ 34,723 $ (35,370) $140,478
========= ========= ========= ========
See notes to unaudited pro forma condensed consolidated balance sheets.
73
Unaudited Pro Forma Condensed Balance Sheet
Assuming Maximum Conversions
At September 30, 2005
(In thousands)
Ram Tremisis Adjustments Pro forma
--- -------- ----------- ---------
Assets
------
Current assets
Cash and cash equivalents $ 1,753 $ 499 $ (1,167) (4) $ 1,085
US Gov't securities held in Trust Fund 34,060 (34,060) (4) --
Accrued interest receivable, Trust Fund 58 (58) (4) --
Other current assets 7,982 11 -- 7,993
--------- --------- --------- ---------
Total current assets 9,735 34,628 (35,285) 9,078
Property and equipment, net 129,120 10 -- 129,130
Other assets 2,270 85 (85) (4) 2,270
--------- --------- --------- ---------
Total assets $ 141,125 $ 34,723 $ (35,370) $ 140,478
========= ========= ========= =========
Liabilities and stockholders' (deficit) equity
----------------------------------------------
Total current liabilities, excluding current
portion of long-term debt $ 14,833 $ 253 $ -- $ 15,086
Long term debt, including current portion 117,301 -- 15,950 (4) 133,251
Deferred and other non-current income taxes 21,173 -- -- 21,173
Liability for asset retirement obligation 6,873 -- -- 6,873
Common stock subject to possible conversion 6,820 (6,820) (4) --
Derivative liability 5,432 -- -- 5,432
Other long term liabilities 2,006 -- -- 2,006
--------- --------- --------- ---------
Total liabilities 167,618 7,073 9,310 183,821
--------- --------- --------- ---------
Common Stock 23 1 (20) (5) 4
Additional Paid-In Capital 73 27,367 (73) (5) --
(22,867) (5)
22,867 (5)
(4,500) (4)
Earnings accumulated during development stage 282 (282) (5) --
Accumulated (deficit) (26,589) -- (39,625) (5) (43,347)
--------- --------- --------- ---------
Stockholders (deficit) equity (26,493) 27,650 (44,500) (43,343)
--------- --------- --------- ---------
Total liabilities and stockholders'
(deficit) equity $ 141,125 $ 34,723 $ (35,370) $ 140,478
========= ========= ========= =========
See notes to unaudited pro forma condensed consolidated balance sheets.
74
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
Assuming no conversions
(1) $ 34,060 Conversion of US Government securities held in Trust Fund into
unrestricted cash.
58 Conversion of accrued interest receivable, Trust Fund into
unrestricted cash.
9,130 Schedule 4.1 to the merger agreement allows RAM to redeem any
number of its outstanding shares for an amount representing the
difference between $40.0 million and the aggregate cash paid as
part of the merger consideration. In order to accomplish this
redemption, additional indebtedness must be incurred.
(30,000) Payment for all outstanding shares of RAM, plus issuance of
25,600,000 shares to the RAM shareholders.
(10,000) Payment by RAM to its shareholders.
(4,415) Payment of fees to investment banker, attorneys, and accountants,
-------- net of $85 on Tremisis' books at September 30, 2005.
($1,167) Total adjustments to Cash
(34,060) Conversion of US Government securities held in Trust Fund into
unrestricted cash.
(58) Conversion of accrued interest receivable, Trust Fund into
unrestricted cash.
9,130 Additional indebtedness in order to accomplish redemption of RAM
shares.
(4,500) Reduction of additional paid-in capital for payment of fees to
investment banker, attorneys, and accountants.
(2) (6,820) Reclassification of common stock subject to possible conversion to
paid-in capital.
6,820 Reclassification of common stock subject to possible conversion to
paid-in capital.
(3) (20) Common stock
(73) Additional paid-in capital
(29,687) Reclassification of paid-in capital to accumulated deficit.
29,687 Reclassification of paid-in capital to accumulated deficit.
(39,625) Additional paid-in capital
(282) Transfer from earnings accumulated during development stage
--------
($40,000) Total payment to RAM stockholders
Assuming maximum conversions
(4) $ 34,060 Conversion of US Government securities held in Trust Fund into
unrestricted cash.
58 Conversion of accrued interest receivable, Trust Fund into
unrestricted cash.
(6,820) Conversion of dissenting shares.
15,950 Schedule 4.1 to the merger agreement allows RAM to redeem any
number of its outstanding shares for an amount representing the
difference between $40.0 million and the aggregate cash paid as
part of the merger consideration. In order to accomplish this
redemption, additional indebtedness must be incurred.
(30,000) Payment for all outstanding shares of RAM, plus issuance of
25,600,000 shares to the RAM shareholders.
(10,000) Payment by RAM to its shareholders.
(4,415) Payment of fees to investment banker, attorneys, and accountants,
-------- net of $85 on Tremisis' books at September 30, 2005.
($1,167) Total adjustments to Cash
(34,060) Conversion of US Government securities held in Trust Fund into
unrestricted cash.
(58) Conversion of accrued interest receivable, Trust Fund into
unrestricted cash.
15,050 Additional indebtedness in order to accomplish redemption of RAM
shares.
(4,500) Reduction of additional paid-in capital for payment of fees to
investment banker, attorneys, and accountants.
75
(6,820) Reduction of common stock subject to possible conversion.
(5) (20) Common stock
(73) Additional paid-in capital
(22,867) Reclassification of paid-in capital to accumulated deficit.
22,867 Reclassification of paid-in capital to accumulated deficit.
(39,625) Additional paid-in capital
(282) Transfer from earnings accumulated during development stage
--------
($40,000) Total payment to RAM stockholders
PRO FORMA EARNINGS (LOSS) PER SHARE
The following table sets forth unaudited pro forma combined per share
ownership information of RAM and Tremisis after giving effect to the merger,
assuming both no conversions and maximum conversions by Tremisis stockholders.
You should read this information in conjunction with the selected summary
historical financial information, included elsewhere in this proxy statement,
and the historical financial statements of RAM and Tremisis and related notes
that are included elsewhere in this proxy statement. The unaudited RAM and
Tremisis pro forma combined per share information is derived from, and should be
read in conjunction with, the unaudited pro forma condensed combined balance
sheets and related notes included elsewhere in this proxy statement.
In thousands
Combined
RAM Tremisis Company
Number of shares of common stock
outstanding upon consummation of the merger:
Assuming no conversions 25,600 7,700 33,300
Assuming maximum conversions 25,600 6,436 32,036
The unaudited pro forma consolidated statement of operations of RAM for
the year ended December 31, 2004 shows a net loss of $5.55 million. The
unaudited condensed consolidated statement of operations of RAM for the nine
months ended September 30, 2005 shows a net loss of $5.68 million.
Based on the pro forma number of shares shown in the table above, in the
column labeled "Combined Company," RAM's pro forma earnings (loss) per share
would be:
Earnings (loss)
Pro forma for the year ended December 31, 2004 per share
Assuming no conversions $(0.1667)
Assuming maximum conversions $(0.1733)
Earnings (loss)
Pro forma for the nine months ended September 30, 2005 per share
Assuming no conversions $(0.1706)
Assuming maximum conversions $(0.1773)
76
RAM ENERGY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following Pro Forma Consolidated Statement of Operations for the year ended
December 31, 2004 reflects RAM's historical results, adjusted to give effect to
each of the following transactions as though each had occurred on January 1,
2004:
o The Divestiture. On April 29, 2004, RAM completed the sale of all of
the outstanding capital stock of its wholly-owned subsidiary, RB
Operating Company, or RBOC, for $22.5 million, and recorded a gain
of $12.139 million on this sale. RAM applied approximately $17.9
million of the net sale proceeds to reduce the balance of its
existing secured credit facility.
o The Acquisition. On December 17, 2004, RAM acquired WG Energy
Holdings, Inc. for a final purchase price of $82.6 million, of which
$32.6 million was paid in cash, $24.5 million by the assumption of
WG Energy's long-term debt and $14.4 million for the settlement of
outstanding derivatives against WG's projected future production.
The remaining $11.0 million was placed in escrow to secure payment
of indemnity claims to which RAM may be entitled for any
subsequently determined breach of representations and warranties in
the merger agreement by WG Energy and for potential losses that may
arise in connection with WG Energy's pending litigation. RAM
financed the cash portion of the acquisition with funds obtained
under a new $90.0 million senior secured credit facility.
The pro forma adjustments are based upon assumptions that management believes
are reasonable. The Pro Forma Consolidated Statement of Operations does not
purport to represent the results of operations which would have occurred had
such transactions been consummated on the dates indicated or results of
operations for any future date or period. The pro forma information should be
read in conjunction with RAM'S financial statements included elsewhere in this
report.
77
RAM ENERGY, INC.
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 2004
(In thousands, except shares and per share data)
Historical Adjustments
RAM RWG Energy Divestiture Acquisition
Note A Note B Note C Note D Pro forma
OPERATING REVENUES:
Oil and natural gas sales $ 16,540 $ 31,995 ($2,302) (1) $ -- $ 46,233
Gain on sale of subsidiary or property 12,139 1,585 (12,139) -- 1,585
Other 338 228 -- -- 566
Realized and unrealized loss from
derivatives (793) (25,379) -- 14,412 (5) (11,760)
-------- -------- ------- --------- --------
Total operating revenues 28,224 8,429 (14,441) 14,412 36,624
-------- -------- ------- --------- --------
OPERATING EXPENSES:
Oil and natural gas production taxes 1,168 1,532 (214) (1) -- 2,483
Oil and natural gas production expenses 2,845 10,646 (100) (1) -- 13,391
Depreciation and amortization 2,928 3,265 (408) (1) 3,829 (6) 9,611
Accretion expense 78 -- (8) (1) -- 70
General and administrative expenses 6,542 2,412 (3) (1) -- 8,951
-------- -------- ------- --------- --------
Total operating expenses 13,555 17,855 (733) 3,829 34,506
-------- -------- ------- --------- --------
Operating income (loss) 14,669 (9,426) (13,708) 10,583 2,118
-------- -------- ------- --------- --------
OTHER INCOME (EXPENSE):
Interest expense net of interest income (5,031) (1,087) 358 (2) (5,311) (7) (11,071)
-------- -------- ------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES 9,638 (10,513) (13,350) (3) 5,272 (8,953)
-------- -------- ------- --------- --------
Income tax provision (benefit) 3,371 (962) (5,073) (4) (738) (8) (3,402)
-------- -------- ------- --------- --------
Net income (loss) $6,267 ($ 9,551) ($ 8,277) $ 6,010 $(5,551)
======== ======== ======= ========= ========
See notes to pro forma consolidated statement of operations on following page.
78
RAM ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Note A ---
The historical results of RAM are presented without benefit of the
activities of RWG Energy, Inc. (formerly WG Energy Holdings, Inc.) for the
period after acquisition on December 17, 2004 through December 31, 2004.
Note B ---
The historical results of RWG Energy, Inc. are for the full year ended
December 31, 2004.
Note C ---
Adjustments include:
(1) Reduction of RAM's historical consolidated oil and natural gas
revenues and related costs for periods prior to the sale of its
subsidiary, RBOC.
(2) Reduction of RAM's interest expense to reflect $17.9 million
reduction of indebtedness as of January 1, 2004.
(3) Elimination of gain on sale of subsidiary.
(4) Income tax effect of above adjustments to 38%.
Note D ---
Adjustments include:
(5) Elimination of realized future derivative losses paid at closing of
WG Acquisition.
(6) Adjustment of depreciation and amortization to reflect changes in
the asset values after acquisition:
Acquired basis ............................ $ 97,049
Historical basis .......................... 46,488
--------
Adjustment ................................ $ 50,561
(7) Interest expense adjustments due to acquisition.
79
Bank debt paid off as of January 1, 2004 .. $1,087
$81.5 additional indebtedness as of
January 1, 2004 ......................... (6,398)
-------
Total net incremental interest expense .... ($5,311)
=======
(8) Income tax effect of adjustments to
combined amounts at 38% ................. ($738)
=======
NAME CHANGE AMENDMENT PROPOSAL
Pursuant to the merger agreement, we will change our corporate name from
"Tremisis Energy Acquisition Corporation" to "RAM Energy Resources, Inc." upon
consummation of the merger. The merger will not be consummated unless the
proposal to change our name is approved at the meeting. If the merger is not
approved, the name change amendment will not be presented at the meeting.
In the judgment of our board of directors, the change of our corporate
name is desirable to reflect our merger with RAM. The RAM name has been a
recognized name in the oil and gas community for almost two decades.
The approval of the name change amendment will require the affirmative
vote of the holders of a majority of the outstanding shares of Tremisis common
stock on the record date.
Stockholders will not be required to exchange outstanding stock
certificates for new stock certificates if the amendment is adopted.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE NAME CHANGE AMENDMENT.
80
CAPITALIZATION AMENDMENT PROPOSAL
Pursuant to the merger agreement, we will increase the number of
authorized shares of Tremisis common stock from 30,000,000 to 100,000,000 upon
consummation of the merger. The merger will not be consummated unless the
proposal to increase our capitalization is approved at the meeting. If the
merger is not approved, the capitalization amendment will not be presented at
the meeting.
In the judgment of our board of directors, the increase in our
capitalization is desirable and in our stockholders' best interests. Currently,
we have 7,700,000 shares of our common stock outstanding and we will be issuing
an additional 25,600,000 shares of common stock upon consummation of the merger.
Additionally, we have reserved 13,475,000 shares of common stock issuable upon
exercise of warrants and a unit purchase option issued in our IPO. We will also
need to reserve 2,400,000 shares of common stock in connection with our
incentive compensation plan proposal discussed below. The authorization of
additional shares of common stock will enable us to have the flexibility to
authorize the issuance of shares of common stock in the future for financing our
business, for acquiring other businesses, for forming strategic partnerships and
alliances and for stock dividends and stock splits.
The approval of the capitalization amendment will require the affirmative
vote of the holders of a majority of the outstanding shares of Tremisis common
stock on the record date.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE CAPITALIZATION AMENDMENT.
81
ARTICLE SIXTH AMENDMENT PROPOSAL
Pursuant to the merger agreement, we will remove the preamble and sections
A through D, inclusive, of Article Sixth of Tremisis' certificate of
incorporation and to redesignate section E of Article Sixth as Article Sixth
upon consummation of the merger. If the merger is not approved, the Article
Sixth amendment will not be presented at the meeting.
In the judgment of our board of directors, the Article Sixth amendment is
desirable, as sections A through D relate to the operation of Tremisis as a
blank check company prior to the consummation of a business combination. Such
sections will not be applicable upon consummation of the merger.
The approval of the Article Sixth amendment will require the affirmative
vote of the holders of a majority of the outstanding shares of Tremisis common
stock on the record date.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE ARTICLE SIXTH AMENDMENT.
82
2006 LONG-TERM INCENTIVE PLAN PROPOSAL
Background
Tremisis' 2006 Long-Term Incentive Plan has been approved by Tremisis'
board of directors and the plan will take effect upon consummation of the
merger, subject to the approval of our stockholders.
The purposes of our 2006 Plan are to create incentives designed to
motivate our employees to significantly contribute toward our growth and
profitability, to provide our executives, directors and other employees, and
persons who, by their position, ability and diligence, are able to make
important contributions to our growth and profitability, with an incentive to
assist us in achieving our long-term corporate objectives, to attract and retain
executives and other employees of outstanding competence, and to provide such
persons with an opportunity to acquire an equity interest in us.
We may grant incentive and non-qualified stock options, stock appreciation
rights, performance units, restricted stock awards and performance bonuses, or
collectively, Awards, to our officers and key employees, and those of our
subsidiaries. In addition, the 2006 Plan authorizes the grant of non-qualified
stock options and restricted stock awards to our directors and to any
independent contractors and consultants who by their position, ability and
diligence are able to make important contributions to our future growth and
profitability. Generally, all classes of our employees are eligible to
participate in our 2006 Plan. No options, restricted stock or other awards under
the 2006 Plan have been made or committed to be made as of the date of this
proxy statement.
The following is a summary of the material provisions of our 2006 Plan and
is qualified in its entirety by reference to the complete text of our 2006 Plan,
a copy of which is attached to this proxy statement as Appendix D. We cannot
determine the benefits to be received by our directors or officers under the
2006 Plan, or the benefits that would have been received by our directors and
officers in 2005 had the 2006 Plan been in effect in 2005.
Stock Subject to the 2006 Plan
We have reserved a maximum of 2,400,000 shares of our authorized common
stock for issuance upon the exercise of Awards to be granted pursuant to our
2006 Plan. Each share issued under an option or under a restricted stock award
will be counted against this limit. Shares to be delivered at the time a stock
option is exercised or at the time a restricted stock award is made may be
available from authorized but unissued shares or from stock previously issued
but which we have reacquired and hold in our treasury.
In the event of any change in our outstanding common stock by reason of
any reorganization, recapitalization, stock split, stock dividend, combination
of shares, merger, consolidation, issuance of rights or other similar
transactions, the number of shares of our common stock which may be issued upon
exercise of outstanding options, and the exercise price of options previously
granted under our 2006 Plan, will be proportionally adjusted to prevent any
enlargement or dilution of the rights of holders of previously granted options
as may be appropriate to reflect any such transaction or event.
Administration
Our board will establish a compensation committee that, among other
duties, will administer the 2006 Plan. The compensation committee will be
composed of at least three members of the Board, a majority of whom will be
"non-employee directors" within the meaning of Securities and Exchange
Commission Rule 16b-3(b)(3). Members of our compensation committee will serve at
the pleasure of our
83
board. In connection with the administration of our 2006 Plan, the compensation
committee, with respect to Awards to be made to any person who is not one of our
directors, will:
o determine which employees and other persons will be granted Awards
under our 2006 Plan;
o grant the Awards to those selected to participate;
o determine the exercise price for options; and
o prescribe any limitations, restrictions and conditions upon any
Awards.
With respect to stock options or restricted stock awards to be made to any
of our directors, the compensation committee will make recommendations to our
Board of Directors as to:
o which of such persons should be granted stock options, restricted
stock awards, performance units or stock appreciation rights;
o the terms of proposed grants of Awards to those selected by our
Board of Directors to participate;
o the exercise price for options; and
o any limitations, restrictions and conditions upon any Awards.
Any grant of Awards to any of directors under our 2006 Plan must be approved by
our Board of Directors.
In addition, the compensation committee will:
o interpret our 2006 Plan; and
o make all other determinations and take all other action that may be
necessary or advisable to implement and administer our 2006 Plan.
Types of Awards
Our 2006 Plan permits the compensation committee to grant the following
types of Awards.
Stock Options. Stock options are contractual rights entitling an optionee
who has been granted a stock option to purchase a stated number of shares of our
common stock at an exercise price per share determined at the date of the grant.
Options are evidenced by stock option agreements with the respective optionees.
The exercise price for each stock option granted under our 2006 Plan will be
determined by the compensation committee at the time of the grant, but will not
be less than fair market value on the date of the grant. Our compensation
committee will also determine the duration of each option; however, no option
may be exercisable more than ten years after the date the option is granted.
Within the foregoing limitations, the compensation committee may, in its
discretion, impose limitations on exercise of all or some options granted under
our 2006 Plan, such as specifying minimum periods of time after grant during
which options may not be exercised. Options granted under our 2006 Plan will
vest at rates specified in the option agreement at the time of grant; however,
all options granted under our 2006 Plan will vest upon the occurrence of a
change of control, as defined in the Plan. Our 2006 Plan also contains
provisions for our compensation committee to provide in the participants' option
award agreements for accelerating the right of an individual employee to
exercise his or her stock option or restricted stock
84
award in the event of retirement or other termination of employment. No cash
consideration is payable to us in exchange for the grant of options.
Our 2006 Plan provides that the stock options may either be Incentive
Stock Options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or Non-Qualified Options, which are stock options other than
Incentive Stock Options within the meaning of Sections 422 of the Code.
Incentive Stock Options may be granted only to our employees or employees of our
subsidiaries, and must be granted at a per share option price not less than the
fair market value of our common stock on the date the Incentive Stock Option is
granted. In the case of an Incentive Stock Option granted to a stockholder who
owns shares of our outstanding stock of all classes representing more that 10%
of the total combined voting power of all of our outstanding stock of all
classes entitled to vote in the election of directors, the per share option
price must be not less than 110% of the fair market value of one share of our
common stock on the date the Incentive Stock Option is granted and the term of
such option may not exceed five years. As required by the Code, the aggregate
fair market value, determined at the time an Incentive Stock Option is granted,
of our common stock with respect to which Incentive Stock Options may be
exercised by an optionee for the first time during any calendar year under all
of our incentive stock option plans may not exceed $100,000.
The exercise price for Non-Qualified Options may not be less than the fair
market value of our common stock on the date the Non-Qualified Option is
granted. Non-Qualified Options are not subject to any of the restrictions
described above with respect to Incentive Stock Options.
The exercise price of stock options may be paid in cash, in whole shares
of our common stock, in a combination of cash and our common stock, or in such
other form of consideration as our board of directors or the compensation
committee may determine, equal in value to the exercise price. However, only
shares of our common stock which the option holder has held for at least six
months on the date of the exercise may be surrendered in payment of the exercise
price for the options. The maximum number of shares subject to stock options
that may be awarded in any fiscal year to any employee may not exceed 100,000
and the number of shares subject to stock options that may be awarded in any
fiscal year to any director may not exceed 10,000. In no event may a stock
option be exercised after the expiration of its stated term.
Stock Appreciation Rights. A stock appreciation right permits the grantee
to receive an amount (in cash, common stock, or a combination thereof) equal to
the number of stock appreciation rights exercised by the grantee multiplied by
the excess of the fair market value of our common stock on the exercise date
over the stock appreciation rights' exercise price. Stock appreciation rights
may or may not be granted in connection with the grant of an option. The
exercise price of stock appreciation rights granted under the 2006 Plan will be
determined by the compensation committee; provided, however, that such exercise
price cannot be less than the fair market value of a share of common stock on a
date the stock appreciation right is granted (subject to adjustments). A stock
appreciation right may be exercised in whole or in such installments and at such
times as determined by the compensation committee.
Restricted Stock. Restricted shares of our common stock may be granted
under our 2006 Plan subject to such terms and conditions, including forfeiture
and vesting provisions, and restrictions against sale, transfer or other
disposition as the compensation committee may determine to be appropriate at the
time of making the award. In addition, the compensation committee may direct
that share certificates representing restricted stock be inscribed with a legend
as to the restrictions on sale, transfer or other disposition, and may direct
that the certificates, along with a stock power signed in blank by the grantee,
be delivered to and held by us until such restrictions lapse. The compensation
committee, in its discretion, may provide in the award agreement for a
modification or acceleration of shares of restricted stock in the event of
permanent disability, retirement or other termination of employment or business
relationship with the grantee. The maximum number of restricted shares that may
be awarded under the
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2006 Plan to any employee may not exceed 100,000 shares and the number of
restricted shares that may be awarded in any fiscal year to any director may not
exceed 10,000 shares.
Performance Units. The 2006 Plan permits grants of performance units,
which are rights to receive cash payments equal to the difference (if any)
between the fair market value of our common stock on the date of grant and its
fair market value on the date of exercise of the award, except to the extent
otherwise provided by the compensation committee or required by law. Such awards
are subject to the fulfillment of conditions that may be established by the
compensation committee including, without limitation, the achievement of
performance targets based upon the factors described above relating to
restricted stock awards.
Performance Bonus. The 2006 Plan permits grants of performance bonuses,
which may be paid in cash, common stock or combination thereof as determined by
the compensation committee. The maximum value of performance bonus awards
granted under the 2006 Plan shall be established by the compensation committee
at the time of the grant. An employee's receipt of such amount will be
contingent upon achievement of performance targets during the performance period
established by the compensation committee. The performance targets will be
determined by the compensation committee based upon the factors described above
relating to restricted stock awards. Following the end of the performance
period, the compensation committee will determine the achievement of the
performance targets for such performance period. Payment may be made within 60
days of such determination. Any payment made in shares of common stock will be
based upon the fair market value of the common stock on the payment date. The
maximum amount of any performance bonus payable to a participant in any calendar
year is $500,000.
Transferability
With the exception of Non-Qualified Stock Options, Awards are not
transferable other than by will or by the laws of descent and distribution.
Non-Qualified Stock Options are transferable on a limited basis. Restricted
stock awards are not transferable during the restriction period.
Change of Control Event
The 2006 Plan provides for the acceleration of any unvested portion of any
outstanding Awards under the 2006 Plan upon a change of control event.
Termination of Employment/Relationship
Awards granted under our 2006 Plan that have not vested will generally
terminate immediately upon the grantee's termination of employment or business
relationship with us or any of our subsidiaries for any reason other than
retirement with our consent, disability or death. The compensation committee may
determine at the time of the grant that an Award agreement should contain
provisions permitting the grantee to exercise the stock options for any stated
period after such termination, or for any period the compensation committee
determines to be advisable after the grantee's employment or business
relationship with us terminates by reason of retirement, disability, death or
termination without cause. Incentive Stock Options will, however, terminate no
more than three months after termination of the optionee's employment, twelve
months after termination of the optionee's employment due to disability and
three years after termination of the optionee's employment due to death. The
compensation committee may permit a deceased optionee's stock options to be
exercised by the optionee's executor or heirs during a period acceptable to the
compensation committee following the date of the optionee's death but such
exercise must occur prior to the expiration date of the stock option.
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Dilution; Substitution
As described above, our 2006 Plan will provide protection against
substantial dilution or enlargement of the rights granted to holders of Awards
in the event of stock splits, recapitalizations, mergers, consolidations,
reorganizations or similar transactions. New Award rights may, but need not, be
substituted for the Awards granted under our 2006 Plan, or our obligations with
respect to Awards outstanding under our 2006 Plan may, but need not, be assumed
by another corporation in connection with any merger, consolidation,
acquisition, separation, reorganization, sale or distribution of assets,
liquidation or like occurrence in which we are involved. In the event that our
2006 Plan is assumed, the stock issuable with respect to Awards previously
granted under our 2006 Plan shall thereafter include the stock of the
corporation granting such new option rights or assuming our obligations under
the 2006 Plan.
Amendment of the 2006 Plan
Our board may amend our 2006 Plan at any time. However, without
stockholder approval, our 2006 Plan may not be amended in a manner that would:
o increase the number of shares that may be issued under our 2006
Plan;
o materially modify the requirements for eligibility for participation
in our 2006 Plan;
o materially increase the benefits to participants provided by our
2006 Plan; or
o otherwise disqualify our 2006 Plan for coverage under Rule 16b-3
promulgated under the Securities Exchange Act of 1934.
Awards previously granted under our 2006 Plan may not be impaired or
affected by any amendment of our 2006 Plan, without the consent of the affected
grantees.
Accounting Treatment
Under generally accepted accounting principles with respect to the
financial accounting treatment of stock options used to compensate employees,
upon the grant of stock options under our 2006 Plan, the fair value of the
options will be measured on the date of grant and this amount will be recognized
as a compensation expense ratably over the vesting period. Stock appreciation
rights granted under the 2006 Plan must be settled in common stock. Therefore,
stock appreciation rights granted under the 2006 Plan will receive the same
accounting treatment as options. The cash we receive upon the exercise of stock
options will be reflected as an increase in our capital. No additional
compensation expense will be recognized at the time stock options are exercised,
although the issuance of shares of common stock upon exercise may reduce basic
earnings per share, as more shares of our common stock would then be
outstanding.
When we make a grant of restricted stock, the fair value of the restricted
stock award at the date of grant will be determined and this amount will be
recognized over the vesting period of the award. The fair value of a restricted
stock award is equal to the fair market value of our common stock on the date of
grant.
Due to consideration of the accounting treatment of stock options and
restricted stock awards by various regulatory bodies, it is possible that the
present accounting treatment may change.
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Tax Treatment
The following is a brief description of the federal income tax
consequences, under existing law, with respect to Awards that may be granted
under our 2006 Plan.
Incentive Stock Options. An optionee will not realize any taxable income
upon the grant or the exercise of an Incentive Stock Option. However, the amount
by which the fair market value of the shares covered by the Incentive Stock
Option (on the date of exercise) exceeds the option price paid will be an item
of tax preference to which the alternative minimum tax may apply, depending on
each optionee's individual circumstances. If the optionee does not dispose of
the shares of our common stock acquired by exercising an Incentive Stock Option
within two years from the date of the grant of the Incentive Stock Option or
within one year after the shares are transferred to the optionee, when the
optionee later sells or otherwise disposes of the stock, any amount realized by
the optionee in excess of the option price will be taxed as a long-term capital
gain and any loss will be recognized as a long-term capital loss. We generally
will not be entitled to an income tax deduction with respect to the grant or
exercise of an Incentive Stock Option.
If any shares of our common stock acquired upon exercise of an Incentive
Stock Option are resold or disposed of before the expiration of the prescribed
holding periods, the optionee would realize ordinary income, instead of capital
gain. The amount of the ordinary income realized would be equal to the lesser of
(i) the excess of the fair market value of the stock on the exercise date over
the option price; or (ii) in the case of a taxable sale or exchange, the amount
of the gain realized. Any additional gain would be either long-term or
short-term capital gain, depending on whether the applicable capital gain
holding period has been satisfied. In the event of a premature disposition of
shares of stock acquired by exercising an Incentive Stock Option, we would be
entitled to a deduction equal to the amount of ordinary income realized by the
optionee.
Non-Qualified Options. An optionee will not realize any taxable income
upon the grant of a Non-Qualified Option. At the time the optionee exercises the
Non-Qualified Option, the amount by which the fair market value at the time of
exercise of the shares covered by the Non-Qualified Option exceeds the option
price paid upon exercise will constitute ordinary income to the optionee in the
year of such exercise. We will be entitled to a corresponding income tax
deduction in the year of exercise equal to the ordinary income recognized by the
optionee. If the optionee thereafter sells such shares, the difference between
any amount realized on the sale and the fair market value of the shares at the
time of exercise will be taxed to the optionee as capital gain or loss, short-
or long-term depending on the length of time the stock was held by the optionee
before sale.
Restricted Stock Award. A recipient of restricted stock generally will not
recognize any taxable income until the shares of restricted stock become freely
transferable or are no longer subject to a substantial risk of forfeiture. At
that time, the excess of the fair market value of the restricted stock over the
amount, if any, paid for the restricted stock is taxable to the recipient as
ordinary income. If a recipient of restricted stock subsequently sells the
shares, he or she generally will realize capital gain or loss in the year of
such sale in an amount equal to the difference between the net proceeds from the
sale and the price paid for the stock, if any, plus the amount previously
included in income as ordinary income with respect to such restricted shares.
A recipient has the opportunity, within certain limits, to fix the amount
and timing of the taxable income attributable to a grant of restricted stock.
Section 83(b) of the Code permits a recipient of restricted stock, which is not
yet required to be included in taxable income, to elect, within 30 days of the
award of restricted stock, to include in income immediately the difference
between the fair market value of the shares of restricted stock at the date of
the award and the amount paid for the restricted stock, if any. The election
permits the recipient of restricted stock to fix the amount of income that must
be
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recognized by virtue of the restricted stock grant. We will be entitled to a
deduction in the year the recipient is required (or elects) to recognize income
by virtue of receipt of restricted stock, equal to the amount of taxable income
recognized by the recipient.
Section 162(m) of the Code. Section 162(m) of the Code precludes a public
corporation from taking a deduction for annual compensation in excess of $1.0
million paid to its chief executive officer or any of its four other
highest-paid officers. However, compensation that qualifies under Section 162(m)
of the Code as "performance-based" is specifically exempt from the deduction
limit. Based on Section 162(m) of the Code and the regulations thereunder, our
ability to deduct compensation income generated in connection with the exercise
of stock options or stock appreciation rights granted under the 2006 Plan should
not be limited by Section 162(m) of the Code. Further, we believe that
compensation income generated in connection with performance awards granted
under the 2006 Plan should not be limited by Section 162(m) of the Code. The
2006 Plan has been designed to provide flexibility with respect to whether
restricted stock awards or performance bonuses will qualify as performance-based
compensation under Section 162(m) of the Code and, therefore, be exempt from the
deduction limit. If the vesting restrictions relating to any such award are
based solely upon the satisfaction of one of the performance goals set forth in
the 2006 Plan, then we believe that the compensation expense relating to such an
award will be deductible by us if the awards become vested. However,
compensation expense deductions relating to such awards will be subject to the
Section 162(m) deduction limitation if such awards become vested based upon any
other criteria set forth in such award (such as the occurrence of a change in
control or vesting based upon continued employment with us).
Certain Awards Deferring or Accelerating the Receipt of Compensation.
Section 409A of the Internal Revenue Code, enacted as part of the American Jobs
Creation Act of 2004, imposes certain new requirements applicable to
"nonqualified deferred compensation plans." If a nonqualified deferred
compensation plan subject to Section 409A fails to meet, or is not operated in
accordance with, these new requirements, then all compensation deferred under
the plan may become immediately taxable. Stock appreciation rights and deferred
stock awards which may be granted under the plan may constitute deferred
compensation subject to the Section 409A requirements. It is our intention that
any award agreement governing awards subject to Section 409A will comply with
these new rules.
Recommendation and Vote Required
Approval of our incentive compensation plan will require the affirmative
vote of the holders of a majority of the outstanding shares of our common stock
represented in person or by proxy and entitled to vote at the meeting.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE
"FOR" THE APPROVAL OF THE 2006 LONG-TERM INCENTIVE PLAN.
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OTHER INFORMATION RELATED TO TREMISIS
Business of Tremisis
Tremisis was formed on February 5, 2004, to effect a merger, capital stock
exchange, asset acquisition or other similar business combination with an
unidentified operating business in either the energy or the environmental
industry and their related infrastructures. Prior to executing the merger
agreement with RAM, Tremisis' efforts were limited to organizational
activities, completion of its IPO and the evaluation of possible business
combinations.
Offering Proceeds Held in Trust
Tremisis consummated its IPO on May 18, 2004. The net proceeds of the
offering, after payment of underwriting discounts and expenses, were
approximately $34,163,000. Of that amount, $33,143,000 was placed in the trust
account and invested in government securities. The remaining proceeds have been
used by Tremisis in its pursuit of a business combination. The trust account
will not be released until the earlier of the consummation of a business
combination or the liquidation of Tremisis. The trust account contained
approximately $34,117,691 as of September 30, 2005 and $ ___________as of
____________, 2006, the record date. If the merger with the RAM is consummated,
the trust account will be released to Tremisis, less the amounts paid to
stockholders of Tremisis who do not approve the merger and elect to convert
their shares of common stock into their pro-rata share of the trust account.
Fair Market Value of Target Business
Pursuant to Tremisis' certificate of incorporation, the initial target
business that Tremisis acquires must have a fair market value equal to at least
80% of Tremisis' net assets at the time of such acquisition. Tremisis' board
of directors determined that this test was met in connection with its
acquisition of RAM. Further, Tremisis has received an opinion from Gilford
Securities Incorporated that this test has been met.
Stockholder Approval of Business Combination
Tremisis will proceed with the acquisition of RAM only if a majority of
all of the outstanding shares of Tremisis is voted in favor of each of the
merger, the name change amendment and the capitalization amendment. The Tremisis
Inside Stockholders have agreed to vote their common stock on the merger
proposal in accordance with the vote of holders of a majority of the outstanding
shares of Tremisis' common stock. If the holders of 20% or more of Tremisis'
common stock vote against the merger proposal and demand that Tremisis convert
their shares into their pro rata share of the trust account, then Tremisis will
not consummate the merger. In this case, Tremisis will be forced to liquidate.
Liquidation If No Business Combination
Tremisis' certificate of incorporation provides for mandatory liquidation
of Tremisis in the event that Tremisis does not consummate a business
combination within 18 months from the date of consummation of its IPO, or 24
months from the consummation of the IPO if certain extension criteria have been
satisfied. Such dates are November 18, 2005 and May 18, 2006, respectively.
Tremisis signed a letter of intent with RAM on August 25, 2005 and signed a
definitive merger agreement with RAM on October 20, 2005. As a result of having
signed the letter of intent, Tremisis satisfied the extension criteria and now
has until May 18, 2006 to complete the merger.
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If Tremisis does not complete the merger by May 18, 2006, Tremisis will be
dissolved and will distribute to all of its public stockholders, in proportion
to their respective equity interests, an aggregate sum equal to the amount in
the trust account, inclusive of any interest, plus any remaining net assets.
Tremisis' stockholders who obtained their Tremisis stock prior to Tremisis'
IPO have waived their rights to participate in any liquidation distribution with
respect to shares of common stock owned by them immediately prior to the IPO.
There will be no distribution from the trust account with respect to Tremisis'
warrants.
If Tremisis were to expend all of the net proceeds of the IPO, other than
the proceeds deposited in the trust account, the per-share liquidation price as
of ______________, 2006 would be approximately $________, or $_______ less than
the per-unit offering price of $6.00 in Tremisis' IPO. The proceeds deposited
in the trust account could, however, become subject to the claims of Tremisis'
creditors and there is no assurance that the actual per-share liquidation price
will not be less than $_______, due to those claims. If Tremisis liquidates
prior to the consummation of a business combination, Lawrence S. Coben, chairman
of the board and chief executive officer, will be personally liable to pay debts
and obligations to vendors and other entities that are owed money by Tremisis
for services rendered or products sold to Tremisis, or to any target business,
to the extent such debts and obligations are not covered by Tremisis' assets,
excluding amounts in the trust agreement. There is no assurance, however, that
he would be able to satisfy those obligations.
If Tremisis fails to complete the business combination with RAM by May 18,
2006, upon notice from Tremisis, the trustee of the trust account will commence
liquidating the investments constituting the trust account and will turn over
the proceeds to the transfer agent for distribution to the stockholders holding
shares acquired through the IPO.
The stockholders holding shares of Tremisis common stock issued in the IPO
will be entitled to receive funds from the trust account only in the event of
Tremisis' liquidation or if the stockholders seek to convert their respective
shares into cash and the merger is actually completed. In no other circumstances
shall a stockholder have any right or interest of any kind to or in the trust
account.
Facilities
Tremisis maintains executive offices at 1775 Broadway, Suite 604, New
York, New York 10019. The cost for this space is included in a $3,500 per-month
fee that First Americas Management LLC, an affiliate of Isaac Kier, one of our
current directors, charges Tremisis for general and administrative services.
Tremisis believes, based on rents and fees for similar services in the New York
metropolitan area, that the fees charged by First Americas Management LLC are at
least as favorable as Tremisis could have obtained from an unaffiliated person.
Tremisis considers its current office space adequate for current operations.
Employees
Tremisis has two executive officers and four directors. These individuals
are not obligated to contribute any specific number of hours per week and devote
only as much time as they deem necessary to our affairs. Tremisis does not
intend to have any full time employees prior to the consummation of a business
combination.
Periodic Reporting and Audited Financial Statements
Tremisis has registered its securities under the Securities Exchange Act
of 1934 and has reporting obligations, including the requirement to file annual
and quarterly reports with the SEC. In accordance with the requirements of the
Securities Exchange Act of 1934, Tremisis' annual reports contain financial
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statements audited and reported on by Tremisis' independent accountants.
Tremisis has filed with the Securities and Exchange Commission a Form 10-KSB
covering the fiscal year ended December 31, 2004 and its most recent Forms
10-QSB covering the fiscal quarters ended March 31, 2005, June 30, 2005 and
September 30, 2005.
Legal Proceedings
There are no legal proceedings pending against Tremisis.
Plan of Operations
The following discussion should be read in conjunction with Tremisis'
financial statements and related notes thereto included elsewhere in this proxy
statement.
Net income of $217,015 for the nine months ended September 30, 2005
consisted of interest income of $682,446 reduced by $31,500 for a monthly
administrative services agreement, $73,498 for professional fees, $43,941 for
officer liability insurance, $69,707 for travel, meals and entertainment
expenses, $23,275 for franchise fees, $198,550 for taxes and $24,960 for other
expenses.
Net income of $39,368 for the period from February 5, 2004 (inception) to
September 30, 2004 consisted of interest income of $163,242 reduced by $17,500
for a monthly administrative services agreement, $7,443 for professional fees,
$22,125 for officer liability insurance, $4,518 for travel, meals and
entertainment expenses, $21,200 for taxes and $51,088 for other expenses.
Net income was $64,525 for the period from February 5, 2004 (inception) to
December 31, 2004. Expenses consisted of $28,000 for a monthly administrative
services agreement, $19,486 for professional fees, $36,875 for officer liability
insurance, $23,000 for franchise fees, $5,429 for travel, $51,602 for other
expenses and $79,115 for taxes. Interest income for the period from February 5,
2004 (inception) to December 31, 2004 was $308,032.
Net income of $281,540 for the period from February 5, 2004 (inception) to
September 30, 2005 consisted of interest income of $990,478 reduced by $59,500
for a monthly administrative services agreement, $92,983 for professional fees,
$80,816 for officer liability insurance, $75,135 for travel, meals and
entertainment expenses, $46,275 for franchise fees, $277,665 for taxes and
$76,564 for other expenses.
We consummated our initial public offering on May 18, 2004. Gross proceeds
from our initial public offering, including the full exercise of the
underwriters' over-allotment option, were $37,950,100. After deducting offering
expenses of $1,510,000, including $990,000 evidencing the underwriters'
non-accountable expense allowance of 3% of the gross proceeds, and underwriting
discounts of $2,277,000, net proceeds were $34,163,100. As of September 30,
2005, there was approximately $34,117,691 (which includes accrued interest of
$57,699) held in trust. The remaining proceeds of our IPO are available to be
used to provide for business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses.
We are obligated to pay to First Americas Management LLC, an affiliate of
Isaac Kier, our secretary, treasurer and a member of our board of directors, a
monthly fee of $3,500 for general and administrative services. Through September
30, 2005, an aggregate of $59,500 has been incurred for such services. In
addition, in February and April 2004, Lawrence S. Coben advanced an aggregate of
$77,500 to us, on a non-interest bearing basis, for payment of offering expenses
on our behalf. This amount was repaid in May 2004 out of proceeds of our initial
public offering.
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Tremisis reimburses its officers and directors for any reasonable
out-of-pocket business expenses incurred by them in connection with certain
activities on Tremisis' behalf such as identifying and investigating possible
target businesses and business combinations. From Tremisis' inception in
February, 2004, through September 30, 2005, Tremisis reimbursed its officers and
directors in the aggregate amount of $90,756 for expenses incurred by them on
its behalf, including travel, meals and entertainment, telephone, dues and
subscriptions and office expense, furniture and equipment.
Tremisis intends to utilize its cash, including the funds held in the
trust account, and its capital stock to effect a business combination. Upon
consummation of the merger with RAM, $30,000,000 of the proceeds held in the
trust account (or such lesser amount as may be available after payments to the
owners of Tremisis common stock voting against the merger and demanding
conversion) will be paid to the RAM stockholders as part of the merger
consideration. The proceeds in the trust account will also be used to pay any
amount due to the Tremisis stockholders who exercise their conversion rights and
the expenses of the merger that are not covered by the working capital of
Tremisis held outside of the trust. At September 30, 2005, we had cash outside
of the trust account of $499,413, and total liabilities of $253,127, leaving
Tremisis with working capital of $246,286, excluding investments held in trust.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements during the period from
February 5, 2004 (inception) through December 31, 2004 or in the nine-month
period ended September 30, 2005, that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to Tremisis.
BUSINESS OF RAM
General
RAM is a privately-owned, independent oil and gas company engaged in the
acquisition, development, exploitation, exploration and production of oil and
natural gas properties, primarily in Texas, Louisiana and Oklahoma. RAM has been
active in these core areas since 1987. RAM's management team has extensive
technical and operating expertise in all areas of its geographic focus. Since
1987, RAM has managed and developed oil and gas properties while seeking
acquisition opportunities.
At September 30, 2005, RAM's estimated net proved reserves were 19.7
million Boe, of which approximately 60% were crude oil, 29% were natural gas,
and 11% were natural gas liquids, with a PV-10 Value of approximately $445.0
million, based on prices RAM was receiving as of September 30, 2005, which were
$63.62 per Bbl of oil, $39.21 per Bbl of NGLs and $12.70 per Mcf of natural gas.
At that date, RAM's proved developed reserves comprised 70.8% of its total
proved reserves and the estimated reserve life for RAM's total proved reserves
was approximately 14 years. RAM's management believes that, as of September 30,
2005, a $1.00 per Boe decrease in the price of oil, natural gas and NGLs would
have resulted in a reduction of the PV-10 Value of RAM's proved reserves of $8.2
million; a $5.00 per Boe decrease in the price of oil, natural gas and NGLs
would have resulted in a reduction of the PV-10 Value of RAM's proved reserves
of $44.7 million, and a $10.00 per Boe decrease in the price of oil, natural gas
and NGLs would have resulted in a reduction of the PV-10 Value of RAM's proved
reserves of $89.6 million; and within these price ranges, the estimated
quantities of its proved reserves would not materially decrease solely as a
result of such changes in prices of production. At December 31, 2005, the prices
RAM was receiving were $58.63 per Bbl of oil, $35.89 per Bbl of NGLs and $9.14
per Mcf of natural gas.
RAM owns interests in approximately 2,900 wells and is the operator of
leases upon which approximately 1,900 of these wells are located. The PV-10
Value attributable to RAM's interests in the properties it operates represented
approximately 89% of RAM's PV-10 Value as of September 30, 2005. In addition,
RAM has positioned itself for participation in two emerging resource plays: (1)
the on-going Barnett Shale play located in Jack and Wise Counties, Texas, where
RAM owns interests in approximately 27,700 gross acres (6,800 net acres) and (2)
an exploratory Barnett and Woodford Shale play located in Reeves County, Texas,
where RAM owns interests in approximately 70,000 gross acres (11,000 net acres).
RAM also owns interests in various gathering systems and a natural gas
processing plant that serves its producing properties.
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RAM has grown principally through acquisitions of producing properties and
the further development of these acquired properties. Since 1987, RAM has
arranged and managed over 20 acquisitions of producing oil and gas properties
and related assets for an aggregate purchase price approximating $400 million.
The most recent of these acquisitions, which closed in December 2004, was RAM's
purchase of WG Energy Holdings, Inc. for $82.5 million, following which WG
Energy's name was changed to RWG Energy, Inc., or RWG. RWG's estimated proved
reserves at December 31, 2004 included 9.5 million Bbls of oil, 2.1 million Bbls
of NGLs, and 10.0 Bcf of natural gas, or a total of 13.2 million Boe. The cost
of the acquisition on a per barrel basis was approximately $6.25 per barrel.
From 1997 through December 31, 2004, RAM's reserve replacement percentage,
through discoveries, extensions, revisions and acquisitions, but excluding
dispositions, was 323%. From 1989 through December 31, 2005, RAM drilled or
participated in the drilling of 465 oil and natural gas wells, of which 92% were
completed and produced hydrocarbons in commercial quantities, which RAM
considers to be their "success rate." Since 1997, RAM's historical average
finding cost from all sources, exclusive of acquisitions, has been $6.11 per
Boe. RAM believes that it has substantial additional acquisition, development
and exploitation opportunities in its core areas of operations.
During 2005, RAM drilled or participated in the drilling of 67 wells on
its oil and gas properties, 60 of which were successfully completed as producing
wells and seven of which were either still drilling or awaiting completion at
year end. Through December 31, 2005, RAM's capital expenditures in connection
with the drilling and completion of these 67 wells aggregated approximately $7.6
million. One of the wells drilled during 2005 was an exploratory well in which
RAM owns a 25% non-operating working interest, and the remaining 66 wells were
development wells, 57 of which were drilled and are being operated by RAM. In
addition, RAM conducted or participated in recompletion operations on 22 of its
existing wells, resulting in the reestablishment or enhancement of production
from 21 of these wells, with one well remaining shut in at year end. RAM's
capital expenditures in connection with its 2005 recompletion operations
aggregated approximately $1.7 million.
RAM owns or has access to 2-D seismic data covering approximately 3,285
square miles and 3-D seismic data covering approximately 108 square miles in its
core areas. RAM is actively engaged in re-interpreting and reprocessing such
data in an effort to identify additional exploration and exploitation targets
across RAM's owned acreage. RAM regularly reviews prospects proposed by other
operators and from time to time participates in exploration plays within its
core areas.
Principal Properties
RAM owns properties located in Oklahoma, Texas, Louisiana, Mississippi,
New Mexico, Wyoming and Arkansas, together with a small interest in an
undeveloped acreage block located offshore California. However, RAM's principal
fields/areas are as follows:
o Electra/Burkburnett Area, Wichita and Wilbarger Counties, Texas
o Egan Field, Acadia Parish, Louisiana
o Boonsville Area, Jack and Wise Counties, Texas
o Barnett Shale, Jack and Wise Counties, Texas
o Vinegarone Field, Val Verde County, Texas
The following is a complete description of each of these fields/areas,
together with a general description of RAM's miscellaneous and non-core
properties.
Electra/Burkburnett Area. RAM's properties in the Electra/Burkburnett Area
of North Texas include 26 leases covering 12,190 gross acres. As of December 31,
2005, RAM owned interests in approximately 1,600 wells in the
Electra/Burkburnett Area, of which 511 were active producing wells and 215 were
active injection wells.
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RAM, together with its recently acquired subsidiary, RWG, drilled more
than 70 wells in the Electra/Burkburnett Area from November 1, 2004 through
December 31, 2005, and 200 drilling locations are currently booked as proved
undeveloped locations.
Millions of barrels of crude oil have been produced from the Electra Field
over the past 80 years. RAM's wells currently active in the field produce
through secondary recovery (waterflood) operations. Well spacing has been
decreased to two to three acre spacing in most areas to permit the recovery of
bypassed oil and to improve waterflood operations.
Since January 1, 2002, a significant number of new infill and injection
wells have been drilled on RAM's Electra/Burkburnett Area leasehold, with a 99%
success rate.
RAM estimates the average infill wells remaining to be drilled in the
Electra/Burkburnett Area should have ultimate recoverable reserves of
approximately 22,000 Bbls of oil per well. RAM's average cost of drilling and
completing a producing well in the Electra/Burkburnett Area during 2005 was
approximately $110,000.
Approximately 30% of RAM's wells in the Electra/Burkburnett area are not
equipped to gather casinghead gas, and this gas is vented at the wellhead. The
remainder of RAM's produced casinghead gas is processed at RAM's 100% owned
Electra Gas Plant, which is located approximately three miles northwest of
Electra, Texas. The plant receives approximately 600 Mcf per day of casinghead
gas produced from RAM's properties in the area. The gas is processed in a 1,000
Mcf per day capacity refrigeration unit where approximately 140 Bbls of NGLs per
day, net to RAM's interest, are extracted and sold. Approximately 250 Mcf per
day of residue gas is used for compressor fuel at the plant and the remainder is
flared due to a lack of pipeline facilities in the area.
The largest single operating cost in the field historically has been
electricity. In an effort to substantially reduce this cost, RAM ordered two
natural gas powered field generators to provide electricity for lease
operations. The natural gas to be used to operate the generators will be RAM's
natural gas that presently is vented or flared, so the installation of the
generators will not reduce sales volumes or lease revenues or increase operating
costs. RAM estimates that with the two new generators in place, the resulting
savings in field electricity costs will be approximately $40,000 per month,
which should reduce the per Boe lease operating cost across the field for 2006
and thereafter.
On April 1, 2005, RAM purchased a drilling rig specifically for the
purpose of facilitating its ongoing drilling program in the Electra/Burkburnett
Area and expects to use its own crew and equipment to drill from six to eight
wells per month in the field. RAM also uses its own personnel and equipment to
perform routine maintenance on its properties and typically does not require
third party vendor services. RAM owns its own pulling units, earthmoving
equipment, acidizing trucks, tank trucks and other field equipment to ensure
availability and facilitate operations in the field. RAM employs approximately
60 field employees dedicated to its Electra/Burkburnett operations, all of which
work out of RAM's field office in the town of Electra.
RAM sells the crude oil produced from its Electra/Burkburnett Area
properties to Shell Trading (US) Company at the Koch WTI posted price, plus
Platt's trade-month P+ price minus $1.15. For the month of December 2005, the
sale price was $57.30 per Bbl.
During the nine months ended September 30, 2005, the aggregate net
production attributable to RAM's interest in the Electra/Burkburnett properties
was 492,798 Bbls of oil and 37,433 Bbls of NGLs,
95
or 530,231 Boe, and the average daily production for the period was 1,948 Bbls
of oil and 148 Bbls of NGLs, or 2,096 Boe per day.
During September 2005, the aggregate net production attributable to RAM's
interest in the Electra/Burkburnett properties was 53,045 Bbls of oil and 4,109
Bbls of NGLs, or 57,154 Boe, and the average daily production for the period was
1,768 Bbls of oil and 137 Bbls of NGLs, or 1,905 Boe per day. RAM did not
experience any property damage from Hurricanes Katrina and Rita. However, as a
result of these Hurricanes, RAM experienced a temporary loss of electric power
and purchasers of production from RAM's wells temporarily reduced their
purchases. As a result, production from RAM's Electra/Burkburnett properties
during the month of September 2005 was adversely affected.
Egan Field. RAM's Egan Field, located in Acadia Parish, Louisiana, covers
an area of approximately 4,400 acres. Over the past 60 years, more than 90 wells
have been drilled in the field at depths ranging from 9,000 feet to 12,400 feet.
The Egan Field is a geologically complex domal feature that produces from
a number of different formations that are dissected by extensive faulting. This
type of heavily faulted geology is typical of Acadia Parish, where a number of
similar fields have been productive for several decades.
Over the past five years, RAM has undertaken a recompletion program in the
Egan Field, conducting successful operations in 12 wells, and has identified
more than 10 additional recompletion opportunities in existing wellbores.
RAM owns interest in approximately 4,367 gross (2,633 net) leasehold acres
and 11 producing wells in the Egan Field, and is the operator of all such wells.
RAM's average working interest in the Egan Field properties is approximately
84%, with an average net revenue interest of 70%.
For the nine months ended September 30, 2005, the aggregate net production
attributable to RAM's interest in the Egan Field properties was 15,529 Bbls of
oil and 378 MMcf of natural gas, or 78,612 Boe, and average daily production for
the period was 311 Boe per day.
During September 2005, aggregate net production attributable to RAM's
interest in the Egan Field properties was 1,273 Bbls of oil and 30 MMcf of
natural gas, or 6,271 Boe, and RAM's average daily production for the period was
42 Bbls of oil and 1,000 Mcf of natural gas, or 209 Boe per day. RAM did not
experience any property damage from Hurricanes Katrina and Rita. However, as a
result of these Hurricanes, RAM experienced a temporary loss of electric power
and purchasers of production from RAM's wells temporarily reduced their
purchases. As a result, production from RAM's Egan Field properties during
September 2005 was adversely affected.
RAM owns or has licensed over 41 miles of 2-D and 3-D seismic covering its
Egan Field properties. As the result of recent and ongoing analysis of this
data, RAM expects to have a new inventory of additional drilling and
recompletion prospects on its Egan Field properties for exploitation and
development over the next several years.
Boonsville Area. The Boonsville Area is located in the Fort Worth Basin of
North Central Texas in Jack and Wise Counties. As with the Electra/Burkburnett
Area, RAM's properties in the Boonsville Area are owned by RWG. RAM's leasehold
in the area covers approximately 9,950 gross acres lying within the much larger
Boonsville Field, which includes several hundred thousand acres.
RAM's properties in Jack and Wise Counties are comprised of two discrete
subsets: the shallow gas zones and the Barnett Shale acreage. Because a
considerable portion of RAM's leasehold in the area is segregated with respect
to rights above and below the Marble Falls formation, a prominent geologic
marker in the area, and RAM's substantially undeveloped Barnett Shale acreage
(which lies below the Marble Falls) represents a distinct property requiring
drilling, completion and production techniques quite dissimilar from the shallow
gas producing zones, RAM treats its Barnett Shale acreage as a separate
96
major property. RAM considers the Boonsville Area to include only the properties
described herein as the shallow gas zones. RAM's Barnett Shale acreage is
discussed separately below.
RAM's oil and natural gas production from the Boonsville Area is derived
principally from sands found at depths ranging from 3,800 feet to 6,100 feet.
RAM owns working interests in 84 wells producing from these shallow gas zones
and operates all but one of such wells.
RAM owns and operates an extensive gas gathering system in the field which
gathers gas solely from RAM's wells. The gas is compressed in the field through
compression facilities also owned by RAM, and then is delivered into a system
owned and operated by a third party for delivery to the Chico gas processing
plant, where the natural gas is processed for the extraction of NGLs. RAM
currently receives 80% of both the residue gas and the NGLs attributable to its
share of delivered volumes.
During the nine months ended September 30, 2005, the aggregate net
production attributable to RAM's working interests in the Boonsville shallow gas
properties (above the Marble Falls) was 18,846 Bbls of oil, 434 MMcf of natural
gas and 96,998 Bbls of NGLs, or 188,230 Boe, and average daily production for
the period was 74 Bbls of oil, 1,717 Mcf of natural gas and 383 Bbls of NGLs, or
744 Boe per day.
During September 2005, aggregate net production attributable to RAM's
interest in the Boonsville shallow gas properties was 1,252 Bbls of oil, 35,891
Mcf of natural gas and 8,376 Bbls of NGLs, or 15,610 Boe, and the average daily
production for the period was 42 Bbls of oil, 1,199 Mcf of natural gas and 279
Bbls of NGLs, or 521 Boe per day. RAM did not experience any property damage
from Hurricanes Katrina and Rita. However, as a result of these Hurricanes, RAM
experienced a temporary loss of electric power and purchasers of production from
RAM's wells temporarily reduced their purchases. As a result, production from
RAM's Boonsville Area properties during the month of September 2005 was
adversely affected.
RAM has not drilled any wells in the Boonsville Area since its acquisition
of WG Energy in 2004. Currently, there are 22 drilling locations identified as
proved undeveloped locations. RAM believes that additional wells, not currently
identified as proved undeveloped locations, will eventually be drilled to test
the shallow gas zones underlying RAM's Boonsville properties. RAM is also
actively pursuing a workover program in its existing wells to maximize
production and take advantage of opportunities in other potentially productive
zones in existing well bores that present attractive recompletion targets.
Barnett Shale Acreage. RAM owns leases covering approximately 27,700 gross
(6,800 net) acres of Barnett Shale rights in Fort Worth Basin of north central
Texas, all of which are held by production from wells completed in the shallow
gas zones. The Fort Worth Basin Barnett Shale play currently is the largest
natural gas play in Texas and one of the leading new natural gas plays in the
United States. RAM's Fort Worth Basin Barnett Shale acreage lies in the
Boonsville Area of Jack and Wise Counties, Texas, below the Marble Falls
geologic marker at depths ranging from 6,500 feet to 8,500 feet and is, for the
most part, undeveloped.
The core area of the play is in Denton, Wise and Tarrant Counties, lying
just to the east-southeast of RAM's acreage in Jack and Wise Counties. The most
productive wells in the Barnett Shale play are wells that have been drilled
horizontally. The average cost of drilling and completing a horizontal well to
the Barnett Shale is approximately $1.75 to $2.2 million.
RAM is a party to two separate agreements covering its Barnett Shale
acreage position in the Fort Worth Basin:
o Approximately 3,500 gross acres are subject to a Participation
Agreement with Chief Oil & Gas, Inc., with RAM having the right to
participate with a 36% working interest in each well proposed to be
drilled on the contract area. The agreement is on a "drill-to-
97
earn" basis, which means that Chief can earn an interest in a
particular RAM lease by drilling and paying the costs of a well on
lands covered by the lease. The Chief agreement includes a
continuous drilling obligation, requiring Chief to commence a new
well within 120 days after the filing of a completion report on the
preceding well, failing which Chief's right to earn under the
Participation Agreement will terminate. Through December 31, 2005,
Chief has drilled four and completed three commercially productive
horizontal wells on RAM's Barnett Shale acreage, and currently is in
the completion phase of the fourth horizontal well.
o RAM's remaining Barnett Shale acreage (approximately 24,000 gross
acres) is committed to an agreement with EOG Resources, Inc. RAM has
a 23.9% working interest in this acreage block. Currently, RAM has
access to EOG's 3-D seismic data on the Barnett Shale properties,
which RAM expects to utilize to identify locations for drilling
during 2006 and thereafter.
During the nine months ended September 30, 2005, the aggregate net
production attributable to RAM's interest in the currently producing Barnett
Shale wells was 2,971 Bbls of oil and 182 MMcf of natural gas, and average daily
production for the period was 11 Bbls of oil and 719 Mcf of natural gas, or 131
Boe per day.
During September 2005, the aggregate net production attributable to RAM's
interest in the Barnett Shale properties was 222 Bbls of oil and 21 MMcf of
natural gas, and the average daily production for the period was 7 Bbls of oil
and 705 Mcf of natural gas, or 125 Boe per day.
Although RAM's Fort Worth Basin Barnett Shale acreage has not yet made a
substantial contribution to RAM's daily production, RAM believes that there are
approximately 127 drilling locations on its acreage, with 108 of those wells to
be located on leasehold subject to the EOG agreement and 19 on the Chief acreage
block.
Vinegarone Field. The Vinegarone Field is located in Val Verde County,
Texas, which is in the Big Bend region of South Texas. RAM owns working
interests in seven producing wells in the field, none of which are operated by
RAM.
Production from Vinegarone Field is obtained primarily from three distinct
horizons at depths ranging from 9,100 feet to 10,100 feet. RAM owns interests in
6,686 gross (1,820 net) leasehold acres in the Vinegarone Field. In most
instances, RAM's working interest is 25%, with an average 21.9% net revenue
interest, although in one section (Section 49), in which there are two producing
wells, RAM's working interest is 38.9% and its net revenue interest is 34.0%.
During 2004, RAM participated in the drilling of four new wells in the
Vinegarone Field, all but one of which were successfully completed. RAM has
identified seven proved undeveloped locations in the field and expects to
continue its development of the field over the next three years.
For the nine months ended September 30, 2005, the aggregate net production
attributable to RAM's interest in the Vinegarone Field properties was 333 MMcf
of natural gas, and the average daily production for the period was 1,317 Mcf of
natural gas, or 219 Boe per day.
During September 2005, the aggregate net production attributable to RAM's
interest in the Vinegarone Field was 28 MMcf of natural gas, and average daily
production for the period was 948 Mcf of natural gas, or 158 Boe per day.
98
Other Properties
In addition to the principal fields and core operating areas, RAM also
owns interests in other properties located in Texas, Oklahoma, Mississippi,
Louisiana, Kansas, New Mexico, Wyoming, Arkansas and offshore California.
RAM owns a significant number of properties scattered throughout the
principal producing basins in Oklahoma. In addition, RAM also owns an interest
in two exploration prospects in Oklahoma and is actively seeking other
exploration opportunities throughout its core areas.
In Texas, in addition to the Electra/Burkburnett and Boonsville Area
properties, RAM owns miscellaneous operated and non-operated interests in 45
producing wells across the state, from the Panhandle down through the Permian
Basin to South Texas, and eastward to Louisiana. It also owns a substantial
position in an exploratory project located in Reeves County, Texas where it owns
interests in approximately 70,000 gross acres and 11,000 net acres. Virtually
all of RAM's leasehold interest in Reeves County is subject to farmout
agreements with either J. Cleo Thompson, et al., or 777 Energy LP, as successor
to Alpine, Inc. et al. The 777 Energy farmout covers roughly half of RAM's gross
acreage position and has resulted in the drilling of two Barnett Shale wells,
one vertically and one horizontally, with the horizontal well now awaiting a
completion attempt. The remaining acreage is subject to a farmout agreement with
J. Cleo Thompson, et al., which requires the acquisition of 10 square miles of
3-D seismic preparatory to the drilling of a well on or before March 1, 2006 to
a depth sufficient to test the Woodford Shale. Both farmout agreements allow the
farmee to earn an interest in certain of RAM's leases by drilling the initial
obligatory wells and then continue to earn interests by drilling subsequent
wells within 90 to 180 days after commencement of the immediately preceding
well. RAM has the right to participate for one-half of its interest in the wells
drilled subsequent to the initial earning wells under each farmout agreement.
Development, Exploration and Exploitation Programs
Development and Exploitation Program. RAM's future production and
performance depends to a large extent on the successful development of its
existing reserves of oil and natural gas. A major component of its capital
expenditure budget for 2005 was for costs associated with development drilling
and exploitation of its oil and natural gas properties. During 2005, RAM had
expended $11.4 million in development and exploitation costs.
RAM owns interests in approximately 2,900 wells, and is the operator of
leases upon which approximately 1,900 of these wells are located. As operator,
RAM is able to control expenses, capital allocation and the timing of
development and exploitation activities of these properties. RAM has identified
414 development projects on its existing properties, substantially all of which
are located in its core areas. These development projects involve both the
drilling of development wells and extension wells. During 2005, RAM drilled or
participated in the drilling of 66 gross (57.75 net) development wells on its
oil and gas properties, 59 of which were successfully completed as producing
wells and seven of which were either still drilling or awaiting completion at
year end. Through December 31, 2005, RAM's capital expenditures in connection
with the drilling and completion of these 66 development wells aggregated
approximately $7.5 million.
RAM has identified 184 projects involving re-completions of existing
wells, all of which involve reserves included in RAM's proved reserves at
September 30, 2005. During the year ended December 31, 2005, RAM conducted or
participated in recompletion operations on 22 of its existing wells, resulting
in the reestablishment or enhancement of production from 21 of these wells, with
one well remaining shut in at year end. RAM's capital expenditures in connection
with its 2005 recompletion operations aggregated approximately $1.7 million.
99
RAM's remaining properties are operated by third parties and, as a working
interest owner in those properties, RAM is required to pay its share of the
costs of developing and exploiting such properties. For the year ended December
31, 2005, RAM's approximate costs for development activities on these
non-operated properties were $1.5 million.
Exploration Program. A principal component of RAM's strategy to expand its
reserves and production includes an exploration program focused on adding
long-lived, natural gas reserves from its core areas.
Since 1987, RAM has conducted a successful development and exploitation
program resulting in the accumulation of significant long-lived natural gas and
oil reserves at relatively moderate depths, located principally in its core
areas. In 1998, utilizing the knowledge and expertise gained from this effort,
RAM initiated an exploration program by adding exploration professionals to its
technical staff. RAM intends to maintain an exploration focus in its core areas,
while remaining opportunistic with respect to other exploration concepts. In
RAM's core areas, RAM owns in excess of 115,000 gross leasehold acres, which
enhances its competitive exploration position and provides the foundation for
future reserve additions.
RAM owns 2-D seismic data covering approximately 3,285 square miles and
3-D seismic data covering approximately 108 square miles of acreage in its core
areas.
RAM has an experienced technical staff, including geologists, landmen,
engineers and other technical personnel devoted to prospect generation and
identification of potential drilling locations.
RAM seeks to reduce exploration risk by exploring at moderate depths that
are deep enough to discover sizeable gas accumulations (generally less than
13,000 feet). RAM's established presence in its core areas has provided its
staff with substantial expertise. Many of RAM's exploration plays are based upon
seismic data comparisons to its existing producing fields. While RAM will
maintain this focus, it plans to broaden its exposure and be opportunistic in
pursuing growth-oriented exploration plays in other basins, primarily on a
non-operated basis. For exploration prospects it generates, RAM will seek
partners for the joint drilling of wells. In most cases, RAM will own a greater
interest in these projects than any of its drilling partners and will operate
the wells. As a result, RAM will be able to influence the areas of exploration
and the acquisition of leases, as well as the timing and drilling of each well.
During 2005, RAM participated in the drilling of one gross (.25 net)
exploratory well at a cost of approximately $100,000, and incurred total capital
expenditures of approximately $1.0 million for all exploration activities.
Oil and Natural Gas Reserves
At September 30, 2005, RAM's estimated net proved reserves were 19.7
million Boe, of which 60% was crude oil, 29% was natural gas, and 11% was
natural gas liquids, with a PV-10 value of approximately $445.0 million before
income taxes. RAM's estimated proved developed reserves comprised 70.8% of its
total proved reserves, and its reserve life for total proved reserves was
approximately 14 years.
The following table summarizes the estimates of RAM's historical net
proved reserves and the related present values of such reserves at the dates
shown. The reserve and present value data for RAM's oil and natural gas
properties as of September 30, 2005 and December 31, 2004, were prepared by the
independent petroleum engineering firms of Williamson Petroleum Consultants and
Forrest A. Garb & Associates. The data for December 31, 2002 and 2003 were
prepared by Forrest A. Garb & Associates.
100
In the following table, PV-10 Value represents the present value of
estimated future net revenues from estimated proved reserves, before income tax
discounted at 10%, using prices in effect at the end of the respective periods
presented and excluding the effects of hedging activities. Estimates of RAM's
proved reserves and future net revenues are made using published period-end spot
oil and natural gas sales prices and are held constant throughout the life of
the properties. The spot prices used in calculating PV-10 Value as of September
30, 2005 were $63.62 per Bbl of oil, $39.21 per Bbl of NGLs and $12.70 per Mcf
of natural gas; and for December 31, 2004 were $40.25 per Bbl of oil, $27.56 per
Bbl of NGLs and $6.02 per Mcf of natural gas. The prices at which RAM sells
natural gas typically are determined on the first day of each month for the
entire month. RAM's management believes that for each $1.00 per Boe increase or
decrease in the price of oil and natural gas, the PV-10 Value of RAM's proved
reserves at September 30, 2005 would increase or decrease, as the case may be,
by $9.6 million. At December 31, 2005, the prices RAM was receiving were $58.63
per Bbl of oil, $35.89 per Bbl of NGLs and $9.14 per Mcf of natural gas.
Estimated quantities of proved reserves and future net revenues therefrom
are affected by oil and natural gas prices, which have fluctuated widely in
recent years. There are numerous uncertainties inherent in estimating oil and
natural gas reserves and their values, including many factors beyond the control
of the producer. The reserve data set forth in this report represent only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
As a result, estimates of different engineers, including those used by RAM, may
vary. In addition, estimates of reserves are subject to revisions based upon
actual production, results of future development and exploration activities,
prevailing oil and natural gas prices, operating costs and other factors, which
revisions may be material. The PV-10 Value of RAM's proved oil and natural gas
reserves does not necessarily represent the current or fair market value of such
proved reserves, and the 10% discount factor may not reflect current interest
rates, RAM's cost of capital or any risks associated with the development and
production of its proved natural gas and oil reserves. Proved reserves include
proved developed and proved undeveloped reserves.
December 31, September 30,
Reserve Data: -------------------------------------- -------------
2002 2003 2004 2005
---- ---- ---- ----
Proved developed reserves:
Oil & condensate (MBbls) 2,234 2,151 6,198 7,861
Natural gas (MMcf) 28,379 26,237 31,048 27,170
Natural gas liquids (MBbls)(1) 0 0 1,611 1,558
Total (MBoe) 13,948
PV-10 Value (in thousands) $ 68,824 $ 84,781 $164,007 $318,819
Proved reserves:
Oil & condensate (MBbls) 2,451 2,322 10,667 11,907
Natural gas (MMcf) 35,920 34,567 38,195 34,327
Natural gas liquids (MBbls)(1) 0 0 2,087 2,071
Total (MBoe) 8,438 8,083 19,120 19,699
PV-10 Value (in thousands) $ 80,751 $104,570 $236,201 $444,982
$/Bbl (Oil) $ 27.75 $ 29.25 $ 40.25 $ 63.62
$/Mcf $ 4.24 $ 6.19 $ 6.02 $ 12.70
$/Bbl (NGL) $ -- $ -- $ 27.56 $ 39.21
----------
(1) Approximately 19.9% of RAM's estimated proved reserves of NGLs at
September 30, 2005, results from its equity ownership in the Electra Gas
Plant.
The following is a summary of the standardized measure of discounted net
cash flows using methodology provided for in Statement of Financial Accounting
Standard No. 69, related to RAM's estimated proved oil and natural gas reserves.
For these calculations, estimated future cash flows from estimated future
production of proved reserves were computed using oil and natural gas prices as
of the end of the period presented. Future development and production costs
attributable to the proved reserves were estimated assuming that existing
conditions would continue over the economic lives of the individual leases and
costs were not escalated for the future. Estimated future income tax expenses
were calculated by applying future statutory tax rates (based on the current tax
law adjusted for permanent differences and tax credits) to the estimated future
pretax net cash flows related to proved oil and natural gas reserves, less the
tax basis of the properties involved. For further information regarding the
standardized measure of discounted net cash flows related to RAM's estimated
proved oil and natural gas reserves for the years ended December 31, 2002, 2003
and 2004, please review note R in the notes to RAM's year-end 2004 financial
statements of appearing elsewhere in this proxy statement.
The standardized measure of discounted future net cash flows
relating to RAM's estimated proved oil and natural gas reserves at
December 31 are summarized as follows (in thousands):
Year ended December 31, September 30,
2002 2003 2004 2005
-------- -------- --------- ----------
Future cash inflows $220,558 $281,149 $ 711,781 $1,274,797
Future production costs (54,732) (70,644) (247,314) (363,510)
Future development costs (9,532) (9,534) (36,495) (46,169)
Future income tax expenses (52,533) (69,787) (136,669) (294,364)
-----------------------------------------------
Future net cash flows 103,761 131,184 291,303 570,754
10% annual discount for estimated timing of cash flows (50,392) (63,250) (129,983) (270,919)
-----------------------------------------------
Standardized measure of discounted future
net cash flows $ 53,369 $ 67,934 $ 161,320 $ 299,835
===============================================
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Except to the extent RAM acquires properties
containing proved reserves or conducts successful exploitation and development
activities, its proved reserves will decline as reserves are
101
produced. RAM's future oil and natural gas production is, therefore, highly
dependent upon its level of success in finding or acquiring additional reserves.
Net Production, Unit Prices and Costs
The following table presents certain information with respect to RAM's oil
and natural gas production, prices and costs attributable to all oil and natural
gas properties owned by RAM for the periods shown. Average realized prices
reflect the actual realized prices received by RAM, excluding the results of
RAM's hedging activities. RAM's hedging activities are financial, and its
production of oil, natural gas and NGLs, and the average realized prices it
receives from its production, are not affected by its hedging arrangements.
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------- -----------------
2002 2003 2004 2005
---- ---- ---- ----
Production volumes:
Oil and condensate (MBbls) ................. 202 277 178 595
Natural gas liquids (MBbls) ................ 5 15 12 130
Natural gas (MMcf) ......................... 1,760 2,334 2,084 1,819
Total (MBoe) ............................ 499 671 538 1,029
Average realized prices:
Oil and condensate (per Bbl) ............... $24.79 $29.47 $37.63 $53.23
Natural gas liquids (per Bbl) .............. $ 3.32 $16.94 $26.41 $35.35
Natural gas (per Mcf) ...................... $ 2.92 $ 5.06 $ 5.26 $ 6.52
Total per boe ........................... $20.38 $29.89 $33.44 $46.80
Expenses (per Boe):
Oil and natural gas production taxes ........ $ 2.09 $ 2.10 $ 2.35 $ 2.39
Oil and natural gas production expenses ..... $ 6.06 $ 5.26 $ 6.70 $11.14
Amortization of full-cost pool ............... $ 5.48 $ 5.64 $ 5.55 $ 8.68
General and administrative ................... $11.74 $ 9.44 $12.28 $ 6.11
Acquisition, Development and Exploration Capital Expenditures
The following table presents information regarding RAM's net costs
incurred in RAM's acquisitions of proved properties, and its development and
exploration activities:
Nine Months
Year Ended Ended
December 31, September 30,
------------------------------------ -------------
2002 2003 2004 2005
---- ---- ---- ----
($s in thousands)
Proved property acquisition costs ................. $ -- $ -- $82,600 $ 141
Development costs ................................. 5,370 3,889 5,580 9,483
Exploration costs ................................. 1,449 393 727 1,177
------ ------ ------- -------
Total costs incurred ............................ $6,700 $4,282 $88,907 $10,801
====== ====== ======= =======
Proved reserves acquired/discovered
(includes revisions of previous
estimates) (MBoe) ............................... 1,210 319 13,704 1,607
Total cost per Boe of reserves
acquired/discovered ........................... $5.54 $13.42 $6.49 $6.72
102
Producing Wells
The following table sets forth the number of productive wells in which RAM
owned an interest as of December 31, 2005. Productive wells consist of
producing wells and wells capable of production, including wells awaiting
pipeline connections or connection to production facilities. Wells that RAM
completes in more than one producing horizon is counted as one well.
Gross Net
----- --------
Oil ............................... 2,005 1,339.60
Natural gas ....................... 236 101.90
----- --------
Total ....................... 2,241 1,441.50
===== ========
Acreage
The following table sets forth RAM's developed and undeveloped gross and
net leasehold acreage as of December 31, 2005:
Gross Net
----- --------
Developed.......................... 100,154 36,286
Undeveloped........................ 102,563 20,433
------- ------
Total........................ 202,717 56,719
======= ======
Approximately 90% of RAM's net acreage was located in its core areas as of
December 31, 2005. RAM's undeveloped acreage includes leased acres on which
wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and natural gas, regardless of
whether or not such acreage is held by production or contains proved reserves. A
gross acre is an acre in which RAM owns an interest. A net acre is deemed to
exist when the sum of fractional ownership interests in gross acres equals one.
The number of net acres is the sum of the fractional interests owned in gross
acres.
Drilling Activities
During the periods indicated, RAM drilled or participated in drilling the
following wells:
Year Ended December 31,
-------------------------------------------------------------------------------------
2002 2003 2004 2005
--------------- --------------- ----------------------------------------
Gross Net Gross Net Gross Net Gross Net
----- --- ----- --- ----- --- ----- ---
Development wells:
Productive ...................... 4 .42 1 .50 23 16.27 66 58.08
Non-productive .................. 0 .00 0 .00 1 .25 0 .00
Exploratory wells:
Productive ...................... 0 .00 3 .29 1 .33 1 .25
Non-productive .................. 2 .38 0 .00 4 .48 0 .00
-- --- -- --- -- ----- -- -----
Total ........................... 6 .80 4 .79 29 17.33 67 58.33
== === == === == ===== == =====
103
Oil and Natural Gas Marketing and Hedging
During the nine months ended September 30, 2005, three purchasers
accounted for approximately 75% of RAM's oil and natural gas sales; however, in
each case there are other purchasers in the fields where RAM's production sold
to these three purchasers is produced and marketed, and such other purchasers
would be available to purchase RAM's production should any of these three
purchasers discontinue operations. RAM has no reason to believe that any such
cessation is likely to occur. However, if the natural gas gathering system and
processing plant located in the Boonsville Area that is currently owned by RAM's
second largest customer were to cease operations, whether for mechanical,
financial or other reasons, such cessation could materially and adversely affect
RAM's cash flow from operations on a temporary basis, until a new purchaser
could install the necessary facilities to take delivery of RAM's natural gas
production in the area. RAM has no reason to believe that any such cessation is
likely to occur.
To reduce exposure to fluctuations in oil and natural gas prices and to
achieve more predictable cash flow, RAM periodically utilizes various hedging
strategies to manage the price received for a portion of its future oil and
natural gas production. RAM has not established hedges in excess of its expected
production. These strategies customarily involve the purchase of put options to
provide a price floor for its production, put/call collars that establish both a
floor and a ceiling price to provide price certainty within a fixed range,
put/call/call collars that establish a secondary floor above the put/call collar
ceiling, and forward sale contracts for specified monthly volumes at prices
determined with reference to the natural gas futures market or swap arrangements
that establish an index-related price above which RAM pays the hedging partner
and below which RAM is paid by the hedging partner. These contracts allow RAM to
predict with greater certainty the effective oil and natural gas prices to be
received for its production and benefit RAM when market prices are less than the
strike prices or fixed prices under its hedging contracts. However, RAM will not
benefit from market prices that are higher than the strike or fixed prices in
these contracts for its hedged production.
RAM's hedge positions at December 31, 2005 are shown in the following
table:
Crude Oil (Bbls) Natural Gas (Mmbtu)
-------------------------- -------------------------
Floors Ceilings Floors Ceilings
-----------------------------------------------------------------------
Year Per Day Price Per Day Price Per Day Price Per Day Price
-----------------------------------------------------------------------
2006 1,500 $50.77 1,500 $69.08 5,247 $6.23 5,247 $ 8.86
2007 1,000 $35.00 1,000 $69.74 5,000 $7.00 5,000 $11.95
Secondary Floors
----------------
Year Per Day Price
---- ----------------
2006 5,126 $9.94
RAM's hedging contracts for oil continue through December 2007, and its
contracts for natural gas continue through March 2007. For the three months
ended September 30, 2005, RAM's average daily production was 2,160 Bbls of oil,
6,441 Mcf of natural gas, and 435 Bbls of NGLs.
Competition
The oil and natural gas industry is highly competitive. RAM competes for
the acquisition of oil and natural gas properties, primarily on the basis of the
price to be paid for such properties, with numerous entities including major oil
companies, other independent oil and natural gas concerns and individual
producers and operators. Many of these competitors are large, well-established
companies and
104
have financial and other resources substantially greater than RAM's. The ability
of RAM to acquire additional oil and natural gas properties and to discover
reserves in the future will depend upon its ability to evaluate and select
suitable properties and to consummate transactions in a highly competitive
environment.
Title to Properties
RAM believes that it has satisfactory title to its properties in
accordance with standards generally accepted in the oil and natural gas
industry. As is customary in the oil and natural gas industry, RAM makes only a
cursory review of title to farmout acreage and to undeveloped oil and natural
gas leases upon execution of any contracts. Prior to the commencement of
drilling operations, a title examination is conducted and curative work is
performed with respect to significant defects. To the extent title opinions or
other investigations reflect title defects, RAM, rather than the seller of the
undeveloped property, typically is responsible to cure any such title defects at
RAM's expense. If RAM were unable to remedy or cure any title defect of a nature
such that it would not be prudent for RAM to commence drilling operations on the
property, RAM could suffer a loss of its entire investment in the property. RAM
has obtained title opinions on substantially all of its producing properties.
Prior to completing an acquisition of producing oil and natural gas leases, RAM
performs a title review on a material portion of the leases. RAM's oil and
natural gas properties are subject to customary royalty interests, liens for
current taxes and other burdens that RAM believes do not materially interfere
with the use of or affect the value of such properties.
Facilities
RAM's executive and operating offices are located at Suite 650, Meridian
Tower, 5100 E. Skelly Drive, Tulsa, Oklahoma 74135. RAM also has offices in
Houston and Electra, Texas. RAM leases all of its significant facilities. RAM
believes that its facilities are adequate for its current needs.
Regulation
General. Various aspects of RAM's oil and gas operations are subject to
extensive and continually changing regulation, as legislation affecting the oil
and gas industry is under constant review for amendment or expansion. Numerous
departments and agencies, both federal and state, are authorized by statute to
issue, and have issued, rules and regulations binding upon the oil and gas
industry and its individual members.
Regulation of Sales and Transportation of Natural Gas. The Federal Energy
Regulatory Commission (the "FERC") regulates the transportation and sale for
resale of natural gas in interstate commerce pursuant to the Natural Gas Act of
1938 and the Natural Gas Policy Act of 1978. In the past, the federal government
has regulated the prices at which natural gas could be sold. While sales by
producers of natural gas can currently be made at uncontrolled market prices,
Congress could reenact price controls in the future. RAM's sales of natural gas
are affected by the availability, terms and cost of transportation. The price
and terms for access to pipeline transportation are subject to extensive
regulation and proposed regulation designed to increase competition within the
natural gas industry, to remove various barriers and practices that historically
limited non-pipeline natural gas sellers, including producers, from effectively
competing with interstate pipelines for sales to local distribution companies
and large industrial and commercial customers and to establish the rates
interstate pipelines may charge for their services. Similarly, the Oklahoma
Corporation Commission and the Texas Railroad Commission have been reviewing
changes to their regulations governing transportation and gathering services
provided by intrastate pipelines and gatherers. While the changes being
considered by these federal and state regulators would affect RAM only
indirectly, they are intended to further enhance competition in natural gas
markets. RAM cannot predict what further action the FERC or state regulators
will take on these matters; however, RAM does not believe that any actions taken
will have an effect materially different than the effect on other natural gas
producers with which it competes.
105
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the FERC, state commissions and the
courts. The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by the FERC and Congress will continue.
Oil Price Controls and Transportation Rates. RAM's sales of crude oil,
condensate and gas liquids are not currently regulated and are made at market
prices. The price RAM receives from the sale of these products may be affected
by the cost of transporting the products to market.
Environmental. RAM's oil and gas operations are subject to pervasive
federal, state, and local laws and regulations concerning the protection and
preservation of the environment (e.g., ambient air, and surface and subsurface
soils and waters), human health, worker safety, natural resources, and wildlife.
These laws and regulations affect virtually every aspect of RAM's oil and gas
operations, including its exploration for, and production, storage, treatment,
and transportation of, hydrocarbons and the disposal of wastes generated in
connection with those activities. These laws and regulations increase its costs
of planning, designing, drilling, installing, operating, and abandoning oil and
gas wells and appurtenant properties, such as gathering systems, pipelines, and
storage, treatment and salt water disposal facilities.
RAM has expended and will continue to expend significant financial and
managerial resources to comply with applicable environmental laws and
regulations, including permitting requirements. RAM's failure to comply with
these laws and regulations can subject it to substantial civil and criminal
penalties, claims for injury to persons and damage to properties and natural
resources, and clean-up and other remedial obligations. Although RAM believes
that the operation of its properties generally complies with applicable
environmental laws and regulations, the risks of incurring substantial costs and
liabilities are inherent in the operation of oil and natural gas wells and
appurtenant properties. RAM could also be subject to liabilities related to the
past operations conducted by others at properties now owned by RAM, without
regard to any wrongful or negligent conduct by RAM.
RAM cannot predict what effect future environmental legislation and
regulation will have upon its oil and gas operations. The possible legislative
reclassification of certain wastes generated in connection with oil and gas
operations as "hazardous wastes" would have a significant impact on its
operating costs, as well as the oil and gas industry in general. The cost of
compliance with more stringent environmental laws and regulations, or the more
vigorous administration and enforcement of those laws and regulations, could
result in material expenditures by RAM to remove, acquire, modify, and install
equipment, store and dispose of wastes, remediate facilities, employ additional
personnel, and implement systems to ensure compliance with those laws and
regulations. These accumulative expenditures could have a material adverse
effect upon RAM's profitability and future capital expenditures.
Regulation of Oil and Gas Exploration and Production. RAM's exploration
and production operations are subject to various types of regulation at the
federal, state and local levels. Such regulations include requiring permits and
drilling bonds for the drilling of wells, regulating the location of wells, the
method of drilling and casing wells, and the surface use and restoration of
properties upon which wells are drilled. Many states also have statutes or
regulations addressing conservation matters, including provisions for the
unitization or pooling of oil and gas properties, the establishment of maximum
rates of production from oil and natural gas wells and the regulation of
spacing, plugging and abandonment of such wells. Some state statutes limit the
rate at which oil and gas can be produced from RAM's properties.
Legal Proceedings
From time to time, RAM is a party to litigation or other legal proceedings
that RAM considers to be a part of the ordinary course of its business. Other
than the pending lawsuit described below, RAM is
106
not involved in any legal proceedings, nor is it a party to any pending or
threatened claims, that could reasonably be expected to have a material adverse
effect on its financial condition or results of operations.
In the pending lawsuit, RAM, together with certain of its subsidiaries and
affiliates, are defendants in the litigation entitled Sacket v. Great Plains
Pipeline Company, et al., in the District Court of Woods County, Oklahoma (Case
No. CJ-2002-70). This is a putative class action case filed by a landowner
alleging that the royalty payments to landowners for oil and natural gas
produced from wells connected to a RAM subsidiary's natural gas, oil and
saltwater pipeline system in Woods, Alfalfa and Major Counties, Oklahoma, were
calculated on a price that was lower than the price at which the production from
the related wells was resold by the subsidiary. RAM sold its interests in the
affected leases effective December 1, 2001. The plaintiff filed the lawsuit as a
class action on behalf of himself and all other royalty owners under leases held
by any of the defendants upon which wells were connected to the system.
Plaintiff seeks unspecified damages for breach of contract, tortious breach of
implied covenants and breach of fiduciary duty, together with an accounting,
imposition of a constructive trust, a permanent injunction, punitive damages and
recovery of litigation costs and fees. RAM believes that a fair and proper
accounting was made to the royalty owners for production from the affected
leases. RAM has filed a response contesting the existence of a class and denying
the allegations made by the plaintiff. No substantive action has been taken in
the case since it was filed in 2002 and no class has been certified. A hearing
on class certification has been scheduled for the first quarter of 2006 and RAM
is vigorously resisting any class certification. If no class is certified, then
RAM does not expect any material liability as a result of the lawsuit. Whether
or not a class is certified, RAM will strenuously defend against any substantive
claims made in the litigation.
Employees
At December 31, 2005, RAM had 88 employees, 10 of whom were
administrative, accounting or financial personnel and 78 of whom were technical
and operations personnel. RAM's exploration staff includes two exploration
geologists and two exploration landmen. In addition, RAM has project specific
consulting relationships with two geophysicists. RAM's future success will
depend partially on its ability to attract, retain and motivate qualified
personnel. RAM is not a party to any collective bargaining agreement and it has
not experienced any strikes or work stoppages. RAM considers it relations with
its employees to be satisfactory.
RAM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section has been derived from our
consolidated financial statements and should be read together with our
consolidated financial statements and related notes included elsewhere in this
proxy statement. This proxy statement contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, and is
subject to the "safe harbor" created by those sections. Some of the
forward-looking statements can be identified by the use of forward-looking terms
such as "believes," "expects," "may," "will," "should," "could," "seek,"
"intends," "plans," "estimates," "anticipates" or other comparable terms.
Forward-looking statements involve inherent risks and uncertainties. A number of
important factors could cause actual results to differ materially from those in
the forward-looking statements. We urge you to consider the risks and
uncertainties discussed in "Risk Factors" in evaluating RAM's forward-looking
statements. RAM has no plans to update its forward-looking statements to reflect
events or circumstances after the date of this proxy statement. We caution
readers not to place undue reliance upon any such forward-looking statements,
which speak only as of the date made.
General
RAM is an independent oil and natural gas company engaged in the
acquisition, exploration and development of oil and natural gas properties and
the production of oil and natural gas. RAM's oil and natural gas properties are
located primarily in Texas, Louisiana and Oklahoma.
Historically, RAM has added reserves mainly through acquisitions of
producing properties and the further development and exploitation of these
properties. RAM intends to continue pursuing attractive oil and natural gas
acquisitions, as well as development activities and exploratory drilling
opportunities. Any future acquisitions or major development will require
additional financing which will be dependent upon financing arrangements, if
any, available at the time.
On December 17, 2004, RAM acquired WG Energy Holdings, Inc., a Delaware
corporation, or WG Energy (the "WG Acquisition"). Immediately following the
acquistion, the name of WG Energy was changed to RWG Energy, Inc., or RWG. The
final adjusted purchase price for WG Energy was $82.6 million, including the
assumption and payment of WG Energy's long-term debt of $24.5 million and the
settlement of all outstanding hedges against WG Energy's projected future
production of $14.4 million. Of the remaining $43.6 million, RAM paid $32.6
million in cash at closing and deposited $11.0 million in two separate escrow
accounts to provide funds against which RAM may make claims for any subsequently
determined breach by WG Energy of representations and warranties in the merger
agreement and for potential losses that may arise in connection with certain
existing litigation against WG Energy. The escrow accounts closed in the fourth
quarter of 2005, resulting in distributions of approximately $270,000 to RAM.
RAM financed the WG Acquisition with funds provided by a $90.0 million senior
secured credit facility provided by Wells Fargo Foothill, Inc.
On April 29, 2004, RAM completed the sale of all of the outstanding
capital stock of its wholly owned subsidiary, RB Operating Company, or RBOC, for
$22.5 million, subject to customary closing adjustments. The assets of RBOC
consisted of oil and gas properties located in New Mexico, cash, accounts
receivable and certain liabilities. Based on a January 1, 2004, reserve report
prepared by Forrest A. Garb & Associates, Inc., the properties of RBOC included
2.2 MBoe of estimated proved reserves having PV-10 Value of $22.1 million. At
the closing, RAM received net proceeds of $21.8 million, and used approximately
$17.9 million of these proceeds to reduce the balance of its existing secured
credit facility with Wells Fargo Foothill, Inc. to zero.
Critical Accounting Policies
The preparation of RAM's financial statements in conformity with generally
accepted accounting principles requires its management to make estimates and
assumptions that affect RAM's reported assets, liabilities and contingencies as
of the date of the financial statements and RAM's reported revenues and expenses
during the related reporting period. RAM's actual results could differ from
those estimates.
RAM uses the full cost method of accounting for its investment in oil and
natural gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and natural gas reserves are
capitalized into a "full cost pool" as incurred, and costs included in the pool
are amortized and charged to operations using the future recoverable units of
production method based on the ratio of current production to total proved
reserves, computed based on current prices and costs. Significant downward
revisions of quantity estimates or declines in oil and natural gas prices that
are not offset by other factors could result in a write-down for impairment of
the carrying value of RAM's oil and natural gas properties. Once incurred, a
write-down of oil and gas properties is not reversible at a later date, even if
quantity estimates or oil or natural gas prices subsequently increase.
Results of Operations
107
Three Months Ended September 30, 2005 Compared to Three Months Ended September
30, 2004
Operating Revenues. RAM's operating revenues increased by $3.3 million, or
100%, for the three months ended September 30, 2005, compared to the three
months ended September 30, 2004. The following table summarizes RAM's oil and
natural gas production volumes, average sales prices and period to period
comparisons, including the effect on its operating revenues, for the periods
indicated:
Three Months Ended
September 30,
-------------------- Increase
2005 2004 (Decrease)
------- ------- ---------
Oil and natural gas sales
(in thousands)
RAM $ 4,269 $ 3,568 19.6%
WG Energy 13,705 -- 100.0%
------- ------- -------
Total $17,974 $ 3,568 403.8%
Production volumes:
Oil (Mbls)
RAM 22 24 (8.3%)
WG Energy 177 -- 100.0%
------- -------
Total Oil (Mbls) 199 24 744.0%
NGL (Mbbls)
RAM 2 2 0.0%
WG Energy 38 -- 100.0%
Total NGL (Mbls) 40 2 2,492.4%
------- ------- -------
Natural gas (MMcf)
RAM 408 467 (12.6%)
WG Energy 185 -- 100.0%
------- ------- -------
Total natural gas (MMcf) 593 467 26.9%
Average sale prices:
Oil (per Bbl) $ 60.36 $ 41.78 44.5%
NGL (Bbl) $ 39.10 $ 26.54 47.3%
Natural gas (per Mcf) $ 7.48 $ 5.45 37.2%
Oil and Natural Gas Sales. For the three months ended September 30, 2005,
RAM's oil and natural revenues were higher compared to the three months ended
September 30, 2004 with a 228% increase in production due, primarily, to the
properties included in the WG Acquisition and a 54% increase in realized prices.
RAM's average daily production was 3.7 MBoe in the three months ended September
30, 2005 compared to 1.1 MBoe during the three months ended September 30, 2004,
an increase of 228%. For the three months ended September 30, 2005, RAM's oil
production increased by 744%, its NGL production increased 2,497% and its
natural gas production increased 27%, compared to the three months ended
September 30, 2004. RAM's average realized sales price for oil was $60.36 per
Bbl for the three months ended September 30, 2005, an increase of 45% compared
to $41.78 per Bbl for the three months ended September 30, 2004. RAM's average
realized NGL price for the three months ended September 30, 2005 was $39.10 per
Bbl, a 47% increase compared to $26.54 per Bbl for the three months ended
September 30, 2004. RAM's average realized natural gas price was $7.48 per Mcf
for the three months ended September 30, 2005, an increase of 37% compared to
$5.45 per Mcf for the three months ended September 30, 2004.
Realized and Unrealized Loss from Derivatives. For the three months ended
September 30, 2005, RAM's loss from derivatives was $11.8 million, compared to a
loss of $327,000 for the three months ended September 30, 2004. RAM's losses
during these periods were the net result of recording unrealized mark-to-market
values of its contracts, the premium costs paid for various derivative
contracts, and actual contract settlements. For a further discussion of RAM's
realized and unrealized loss from derivatives, please see "Commodity Price
Risk."
108
Three months ended
September 30,
----------------------
2005 2004
--------- ------
(in thousands)
Contract settlements $ (796) $(195)
Premium costs (87) --
Realized losses (883) (195)
Mark-to-market losses (10,877) (132)
Realized and unrealized losses $(11,760) $(327)
Oil and Natural Gas Production Taxes. RAM's oil and gas production taxes
for the three months ended September 30, 2005 were $919,000, an increase of
$676,000, or 278%, from the $243,000 incurred for the three months ended
September 30, 2004. Of the $676,000 increase for the three months ended
September 30, 2005, $644,000 was attributable to the WG Acquisition. Production
taxes are based on realized prices at the wellhead. As revenues from oil and gas
sales increase or decrease, production taxes on these sales increase or decrease
also. As a percentage of oil and gas sales, oil and gas production taxes were
5.1% for the three months ended September 30, 2005, compared to 6.8% for the
three months ended September 30, 2004. The reason for this decrease in
percentage is because, after its acquisition of WG Energy, RAM's greatest
revenue source is oil sales in Texas that are taxed at a 4.6% rate.
Oil and Natural Gas Production Expense. RAM's oil and natural gas
production expense was $3.9 million for the three months ended September 30,
2005, an increase of $3.3 million, or 533%, from $619,000 for the three months
ended September 30, 2004. The entire $3.3 million increase for the three months
ended September 30, 2005 was attributable to the WG Acquisition. For the three
months ended September 30, 2005, RAM's oil and natural gas production expense
was $11.62 per Boe, compared to $6.01 per Boe for the three months ended
September 30, 2004, an increase of 93%. As a percentage of oil and natural gas
sales, oil and natural gas production expense increased from 17% for the three
months ended September 30, 2004 to 22% for the three months ended September 30,
2005. The reason for the increase in costs, both in absolute amount and on a
per-barrel basis, is that one of the major fields included in its WG Energy
acquisition is a cost intensive, shallow waterflood unit.
Amortization and Depreciation Expense. RAM's amortization and depreciation
expense increased $2.7 million, or 421%, for the three months ended September
30, 2005 compared to the three months ended September 30, 2004; $2.4 million of
the increase for the three months ended September 30, 2005 was due to increased
production attributable to the WG Acquisition. On an equivalent basis, RAM's
amortization of the full-cost pool of $3.3 million was $9.70 per Boe for the
three months ended September 30, 2005, an increase per Boe of 70% compared to
$0.6 million, or $5.72 per Boe for the three months ended September 30, 2004.
Accretion Expense. SFAS No. 143, Accounting for Asset Retirement
Obligations, includes, among other things, the reporting of the "fair value" of
asset retirement obligations. Accretion expense is a function of changes in fair
value from period-to-period, and RAM recorded $71,000 for the three months ended
September 30, 2005 compared to $15,000 for the three months ended September 30,
2004. $50,000 of the increase for the three months ended September 30, 2005 was
due to the higher amount of the asset retirement obligation attributable to the
WG Acquisition.
General & Administrative Expense. For the three months ended September 30,
2005, RAM's general and administrative expenses were $2.4 million, an increase
of $973,000, or 70%, as compared with the $1.4 million reported for the three
months ended September 30, 2004. This increase was due primarily to the
increased salaries, benefits, travel, legal and $185,000 in costs of accounting
for the WG Acquisition.
Interest Expense. RAM's interest expense increased by $2.1 million to $3.1
million for the three months ended September 30, 2005, compared to $1.0 million
for the three months ended September 30, 2004. This increase was attributable to
higher outstanding balances, primarily to fund the WG Acquisition, and increased
interest rates during the 2005 period.
109
Income Taxes. For the three months ended September 30, 2005 RAM recorded
an income tax benefit of $2.7 million, based on an effective tax rate of 38%, on
a pre-tax loss of $7.2 million. For the three months ended September 30, 2004,
RAM recorded an income tax benefit of $240,000, based on an effective tax rate
of 38%, on a pre-tax loss of $633,000.
Net loss. RAM's net loss was $4.5 million for the three months ended
September 30, 2005, compared to a net loss of $0.4 million for the three months
ended September 30, 2004.
Nine Months Ended September 30, 2005, Compared to Nine Months Ended September
30, 2004
Operating Revenues. RAM's operating revenues increased by $17.5 million,
or 149%, for the nine months ended September 30, 2005, compared to the nine
months ended September 30, 2004.
The following table summarizes RAM's oil and natural gas production
volumes, average sales prices and period to period comparisons, including the
effect on its operating revenues, for the periods indicated:
Nine Months Ended
September 30,
--------------------- % Increase
2005 2004 (Decrease)
------- ------- -----------
Oil and natural gas sales ........... $48,140 $12,499 285.2%
(in thousands)
Production volumes:
Oil (MBbls) ....................... 596 129 361.3%
NGL (MBbls) ....................... 130 5 2,372.1%
Natural gas (MMcf) ................ 1,828 1,425 27.7%
Average sale prices:
Oil (per Bbl) ..................... $ 53.23 $ 35.23 51.1%
NGL (per Bbl) ..................... $ 35.36 $ 22.14 59.7%
Natural gas (per Mcf) ............. $ 6.52 $ 5.50 18.5%
Nine Months Ended
September 30,
-------------------- Increase
2005 2004 (Decrease)
------- ------- ----------
Oil and natural gas sales
(in thousands)
RAM $11,392 $12,499 (8.9%)
WG Energy 36,748 -- 100.0%
------- ------- -------
Total $48,140 $12,499 285.1%
Production volumes:
Oil (Mbls)
RAM 69 129 (46.5%)
WG Energy 526 -- 100.0%
------- ------- -------
Total Oil (Mbls) 595 129 361.3%
NGL (Mbbls)
RAM 4 5 (20.0%)
WG Energy 126 -- 100.0%
------- ------- -------
Total NGL (Mbls) 130 5 2,372.1%
Natural gas (MMcf)
RAM 1,163 1,425 (18.4%)
WG Energy 656 -- 100.0%
------- ------- -------
Total natural gas (MMcf) 1,819 1,425 27.7%
Average sale prices:
Oil (per Bbl) $ 53.23 $ 35.23 51.1%
NGL (Bbl) $ 35.35 $ 22.14 59.7%
Natural gas (per Mcf) $ 6.52 $ 5.50 18.5%
Oil and Natural Gas Sales. RAM's oil and natural gas sales revenues were
higher for the nine months ended September 30, 2005, as compared to the nine
months ended September 30, 2004, with a 177% increase in production due,
primarily, to the properties included in the WG Acquisition and a 39% increase
in realized prices, both on an Boe basis. RAM's average daily production was 3.8
MBoe in the nine months ended September 30, 2005 compared to 1.4 MBoe for the
nine months ended September 30, 2004, an increase of 177%. For the nine months
ended September 30, 2005, RAM's oil production increased by 361%, its NGL
production increased 2,372% and its gas production increased 28% compared to the
nine months ended September 30, 2004. RAM's average realized sales price for oil
was $53.23 per Bbl for the nine months ended September 30, 2005, an increase of
51% compared to $35.23 per Bbl for the nine months ended September 30, 2004.
RAM's average realized NGL price for the nine months ended September 30, 2005
was $35.36 per Bbl, a 60% increase compared to $22.14 per barrel for the nine
months ended September 30, 2004. RAM's average realized gas price was $6.52 per
Mcf of natural gas for the nine months ended September 30, 2005, an increase of
19% compared to $5.50 per Mcf for the nine months ended September 30, 2004.
Decreases in production shown above, which exclude the effects of the WG
Acquistion, are due to the sale of RBOC on April 29, 2004. RAM's production
included the following volumes and values attributable to RBOC through the end
of April 2004:
Nine Months Ended
September 30,
2004
-----------------
Oil and natural gas sales
(in thousands) $2,302
Production volumes:
Oil (Mbls) 47
Natural gas (MMcf) 410
Average sale prices:
Oil (per Bbl) $32.64
Natural gas (per Mcf) $5.68
110
Realized and Unrealized Loss from Derivatives. For the nine months ended
September 30, 2005, RAM's loss from derivatives was $19.8 million compared to a
loss of $901,000 for the nine months ended September 30, 2004. RAM's losses
during these periods were the net result of recording unrealized mark-to-market
values of its contracts, the premium costs paid for various derivative
contracts, and actual contract settlements. For a further discussion of RAM's
realized and unrealized loss from derivatives, please see "Commodity Price
Risk."
Nine months ended
September 30,
(in thousands)
------------------------
2005 2004
-------- --------
Contract settlements $ (955) $ (429)
Premium costs (188) (117)
-------- --------
Realized losses (1,143) (546)
Mark-to-market losses (18,771) (355)
-------- --------
Realized and unrealized losses $(19,914) $ (901)
======== ========
Gain On Sale of Subsidiary. On April 29, 2004, RAM completed the sale of
all of the outstanding capital stock of its wholly owned subsidiary, RBOC, for
gross proceeds of $23.0 million. After adjustments for closing costs, RAM
reported a gain of $12.1 million. The assets of RBOC at the time of the sale
consisted of oil and natural gas properties located in New Mexico, together with
cash, accounts receivable and certain liabilities.
Oil and Natural Gas Production Taxes. RAM's oil and natural gas production
taxes for the nine months ended September 30, 2005 were $2.5 million, an
increase of $1.5 million, or 169%, from the $914,000 incurred for the nine
months ended September 2004. Production taxes for the nine months ended
September 30, 2005 attributable to the properties included in the WG Acquisition
were $1.8 million. Production taxes are based on realized prices at the
wellhead. As revenues from oil and gas sales increase or decrease, production
taxes on these sales increase or decrease also. As a percentage of oil and gas
sales, oil and gas production taxes were 5.1% for the nine months ended
September 30, 2005 compared to 7.3% for the nine months ended September 30,
2004. The reason for this decrease in percentage is because, after the WG
Acquisition, RAM's greatest revenue source is oil sales in Texas that are taxed
at a 4.6% rate.
Oil and Natural Gas Production Expense. RAM's oil and natural gas
production expense was $11.5 million for the nine months ended September 30,
2005, an increase of $9.7 million, or 535%, from $1.8 million for the nine
months ended September 30, 2004. $9.6 million of the increase for the nine
months ended September 30, 2005 was due to the WG Acquisition. For the nine
months ended September 30, 2005, its oil and gas production expense was $11.14
per Boe compared to $4.85 per Boe for the nine months ended September 30, 2004,
an increase of 130%. As a percentage of oil and natural gas sales, oil and
natural gas production expense increased from 14% for the nine months ended
September 30, 2004 to 24% for the nine months ended September 30, 2005. The
reason for the increase in costs, both in absolute amount and on a per-barrel
basis is that one of the major fields included in the WG Acquisition is a cost
intensive, shallow waterflood unit.
Amortization and Depreciation Expense. RAM's amortization and depreciation
expense increased $6.9 million, or 303%, for the nine months ended September 30,
2005 compared to the nine months ended September 30, 2004 due. The WG
Acquisition accounted for $6.6 million of this increase for the nine months
ended September 30, 2005. On an equivalent basis, RAM's amortization of the
full-cost pool of $8.9 million was $8.68 per Boe for the nine months ended
September 30, 2005, an increase per Boe of 55% compared to $2.1 million, or
$5.61 per Boe for the nine months ended September 30, 2004.
111
Accretion Expense. SFAS No. 143, Accounting for Asset Retirement
Obligations, includes, among other things, the reporting of the "fair value" of
asset retirement obligations. Accretion expense is a function of changes in fair
value from period-to-period, and RAM recorded $217,000 for the nine months ended
September 30, 2005 compared to $46,000 for the nine months ended September 30,
2004. $156,000 of the increase for the nine months ended September 30, 2005 was
due to the higher amount of the asset retirement obligation attributable to the
WG Acquisition.
General & Administrative Expense. For the nine months ended September 30,
2005, RAM's general and administrative expenses were $6.3 million, an increase
$1.8 million, or 41%, as compared with the $4.5 million reported for the nine
months ended September 30, 2004. This increase was due primarily to the $410,000
in increased costs of accounting for the WG Acquisition, higher salaries,
travel, legal fees and shareholder reimbursements during the 2005 period.
Interest Expense. RAM's interest expense increased by $5.4 million to $8.8
million for the nine months ended September 30, 2005, compared to $3.4 million
for the nine months ended September 30, 2004. This increase was attributable to
higher outstanding balances, primarily to fund the WG Acquisition, and higher
rates during the 2005 period.
Income Taxes. For the nine months ended September 30, 2005, RAM recorded
an income tax benefit of $3.5 million, based on an effective tax rate of 38%, on
a pre-tax loss of $9.1 million. For the nine months ended September 30, 2004,
RAM recorded an income tax provision of $4.2 million, based on an effective tax
rate of 38%, on a pre-tax income of $11.0 million.
Net (Loss). RAM's net loss was $5.7 million for the nine months ended
September 30, 2005 compared to net income of $6.8 million for the nine months
ended September 30, 2004.
112
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Operating Revenues. RAM's operating revenues increased by $9.6 million, or
48%, for the year ended December 31, 2004, compared to the year earlier period.
The following table summarizes RAM's oil and natural gas production,
average sales prices and period to period comparisons, including the effect on
RAM's operating revenues, for the periods indicated:
Year Ended
December 31,
-------------------- % Increase
2004 2003 (Decrease)
------- ------- -----------
Oil and natural gas sales .............. $17,975 $20,053 (10.4)%
(in thousands)
Production volumes:
Oil (MBbls) ........................... 178 277 (35.8)%
Natural gas liquids (MBbls) ........... 12 5 161.6%
Natural gas (MMcf) .................... 2,084 2,334 (10.7)%
Average net sales prices:
Oil (per Bbl) ......................... $ 37.63 $ 29,47 27.7%
Natural gas liquids (per Bbl) ......... $ 26.41 $ 16.94 55.9%
Natural gas (per Mcf) ................. $ 5.26 $ 5.06 3.9%
Oil and Natural Gas and Oil Sales. RAM's oil and natural gas sales
revenues were lower in 2004 compared to 2003 with a 20% decrease in production
due, primarily, to the sale of its subsidiary, RB Operating Company, or RBOC, on
April 29, 2004, partially offset by a 12% increase in realized prices, both on a
Boe basis. RAM's average daily production was 1,473 Boe in 2004 compared to
1,838 Boe during 2003, a decrease of 20%. For 2004, RAM's natural gas production
decreased by 11% and oil production decreased 36% compared to 2003. The average
sale price realized by RAM for oil for 2004 was $37.63 per barrel, a 28%
increase from the $29.47 received for 2003, and for natural gas was $5.26 per
Mcf for 2004, compared to $5.06 per Mcf for 2003, an increase of 4%.
Gain On Sale of Subsidiary. On April 29, 2004, RAM completed the sale of
all of the outstanding capital stock of its wholly-owned subsidiary, RBOC, for
gross proceeds of $23.0 million. After adjustments for closing costs, RAM
reported a gain of $12.1 million. The assets of RB Operating Company at the time
of the sale consisted of oil and gas properties located in New Mexico, cash,
accounts receivable and certain liabilities.
Realized and Unrealized Loss from Derivatives. For 2004, RAM's loss from
derivatives was $793,000. For 2003, RAM recorded a loss from derivatives of
$203,000. These losses were the net result of contract settlements, premium
costs of various derivative contracts, and by mark-to-market values of those
contracts at year-end (in thousands).
113
2004 2003
-------- --------
Contract settlements $ (825) $ --
Premium costs (1,536) (328)
Realized losses (2,361) (328)
Mark-to-market losses 1,568 125
Realized and unrealized losses $ (793) $ (203)
Oil and Natural Gas Production Taxes. RAM's oil and natural gas production
taxes for 2004 were $1.3 million, a decrease of $145,000, or 10%, from $1.4
million for 2003. As a percentage of wellhead prices received, these production
taxes were 7% for both 2004 and 2003.
Oil and Natural Gas Production Expense. RAM's oil and natural gas
production expense for 2004 was $3.6 million, an increase of $73,000, or 2%,
from $3.5 million for 2003. RAM's oil and natural gas production expense was 20%
of sales of oil and natural gas, or $6.70 per Boe for 2004, compared to 18%, or
$5.26 per Boe for 2003. This increase was due primarily to $568,000 attributable
to RWG production expense in the 2004 period, offset by a decrease caused by the
sale of RBOC.
Accretion Expense. RAM adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, during the first quarter of 2003. One aspect of SFAS No.
143, Accounting for Asset Retirement Obligations, is the reporting of the "fair
value" of asset retirement obligations. Accretion expense is a function of
changes in fair value from period-to-period. RAM recorded $78,000 of accretion
expense for 2004, compared to $48,000 recorded for 2003.
Amortization and Depreciation Expense. RAM's amortization and depreciation
expense for 2004 was $3.3 million, a decrease of $825,000, or 20%, compared to
$4.1 million for 2003. This decrease was due primarily to lower production
during 2004. On a Boe basis, the amortization of RAM's full-cost pool was $5.55
per Boe for 2004, a decrease of 2% compared to $5.64 per Boe for 2003.
General & Administrative Expense. RAM's general and administrative expense
for 2004 was $6.6 million, an increase of $270,000, or 4% over its general and
administrative expense of $6.3 million recorded for 2003. The increase was due
primarily to increased salaries and benefits to employees, excluding officers,
during 2004.
Interest Expense. RAM's interest expense increased by $158,000 to $5.1
million for 2004 compared to $4.9 million for 2003. This increase for 2004 was
attributable to higher average interest rates during 2004, the write-off of
deferred loan costs of $309,000, and the allocation in 2003 of $609,000 to
discontinued operations.
Income Taxes. RAM's overall effective tax rate for 2004 and 2003 was 38%.
Loss from Discontinued Operations. On July 31, 2003, RAM sold its 145-mile
natural oil and gas pipeline system located in the Anadarko Shelf area in
Oklahoma to Continental Gas, Inc., or CGI, for $15.0 million, effective August
1, 2003, subject to certain adjustments. The sale price was reduced by $3.0
million in consideration of the settlement and mutual release by RAM's
subsidiary, Great Plains Pipeline Company, or GPPC, and by CGI of all claims
that were or could have been asserted by CGI and GPPC in a lawsuit filed by CGI
in September 2003, relating to disputes arising under a gas service contract
between the parties. RAM received net sale proceeds of $11.8 million after all
adjustments and less expenses relating to the sale. RAM's pipeline activities
are reported as discontinued operations for all periods presented in
114
the accompanying financial statements and operating results of the pipeline are
reflected separately from the results of continuing operations.
The results of RAM's discontinued operations for the year ended December
31, 2003 are as follows (in thousands):
Pipeline system revenue $ 14,500
Pipeline system costs and expenses
Purchases 12,066
Operating costs 598
Depreciation 388
Impairment 2,562
Interest 609
--------
Total system costs and expenses 16,223
Loss from discontinued operations (1,723)
Income tax benefit (655)
--------
Loss from discontinued operations $ (1,068)
========
Net Income. RAM recorded net income of $6.1 million for 2004 compared to a
net loss of $2.0 million for 2003, due primarily to the sale of RBOC.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Operating Revenues. RAM's operating revenues increased by $9.9 million, or
97% for the year ended December 31, 2003 compared to 2002. This increase was due
both to increased production and higher prices for natural gas and crude oil.
Oil and Natural Gas Sales. The following table summarizes RAM's oil and
natural gas production volumes, average sales prices and period to period
comparisons, including the effect on its oil and gas operating revenues, for the
periods indicated:
Year ended
December 31,
-------------------- % Increase
2003 2002 (Decrease)
------- ------- ----------
Oil and natural gas sales: ............. $20,053 $10,166 97.3%
($ in thousands)
Production volumes:
Oil (MBbls) ......................... 277 202 36.9%
Natural gas liquids (MBbl) .......... 5 3 49.9%
Natural gas (MMcf) .................. 2,334 1,760 32.6%
Average sale prices:
Oil (per Bbl) ....................... $ 29.32 $ 24.79 18.9%
Natural gas liquids (per Bbl) ....... $ 16.94 $ 3.32 410.6%
Natural gas (per Mcf) ............... $ 5.07 $ 2.92 73.3%
115
RAM's oil and natural gas sales revenues were higher in 2003 compared to
2002, with a 35% increase in production due, primarily, to recompletions of
existing wells and a 47% increase in realized prices, both on a Boe basis. RAM's
average daily production was 1,838 Boe in 2003 compared to 1,367 Boe in 2002.
For 2003, RAM's natural gas production increased by 33% and its oil production
increased 37% compared 2002. The average sales price realized by RAM for oil in
2003 was $29.47 per Bbl, a 19% increase compared to $24.79 per Bbl for 2002, and
for natural gas was $5.06 per Mcf for 2003, an increase of 73% compared to $2.92
per Mcf for 2002.
Realized and Unrealized Gains (Losses) on Derivatives. For 2003, RAM's
loss from derivatives was $203,000. For 2002, RAM recorded a loss from
derivatives of $146,000. These losses were the net result of contract
settlements, premium costs of various derivative contracts, and by
mark-to-market values of those contracts at year-end.
2003 2002
------ ------
Contract settlements $ -- $ --
Premium costs (328) (208)
Realized losses (328) (208)
Mark-to-market losses 125 62
Realized and unrealized losses $(203) $(146)
Oil and Natural Gas Production Taxes. RAM's oil and natural gas production
taxes increased by $0.4 million, or 35%, for the year ended December 31, 2003,
compared to the same period in 2002. RAM's oil and natural gas production tax
expense was $2.10 per Boe for 2003, a less than 1% decrease from $2.09 per Boe
compared to 2002.
Oil and Natural Gas Production Expense. RAM's oil and natural gas
production expense increased by $0.5 million, or 17%, for the year ended
December 31, 2003, compared to the same period in 2002. RAM's oil and natural
gas production expense was $5.26 per Boe for 2003, a 13% decrease from $6.06 per
Boe for 2002, due to decreased costs to maintain production.
Amortization and Depreciation Expense. RAM's amortization and depreciation
expense increased by $1.2 million, or 39% for 2003 compared to 2002.
Amortization of the full-cost pool per Boe was $5.64 for 2003, an increase of
$0.17, or 3%, compared to $5.48 for 2002.
Accretion Expense. RAM adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, during the first quarter of 2003. One of the aspects of
this standard is the reporting of the "fair value" of asset retirement
obligations. Accretion expense is a function of changes in fair value from
year-to-year, and RAM recorded $48,000 for the year of 2003.
General and Administrative Expense. RAM's general and administrative
expense increased to $6.3 million, an increase of $0.5 million, or 8% in 2003
compared with $5.9 million in 2002. Increases in salaries and benefits, expense
reimbursements to officer/shareholders, and legal fees, partially offset by a
decrease in litigation settlement amounts, caused the increase in the
period-to-period comparison.
Interest Expense. RAM's interest expense decreased $4.3 million, or 47%,
to $4.9 million in 2003 compared to $9.2 million in 2002. This was due to less
outstanding debt during 2003 compared to 2002 as a result of the sale at
mid-year of the pipeline operations discussed under the caption "Loss From
Discontinued Operations" and the repurchase by RAM of its 11 1/2% senior notes
during the fourth quarter
116
of 2002. Net proceeds of approximately $12.0 million from the sale of RAM's
pipeline operations were used to reduce the outstanding balance of its credit
facility.
Gain from Early Extinguishment of Debt. In November 2002 RAM repurchased
$63.5 million principal amount of its 11 1/2% senior notes due 2008, plus
accrued interest, for $30.0 million. After adjustments for proportionate
offering costs, the resulting gain was $32.9 million.
Loss from Discontinued Operations. Effective August 1, 2003, RAM sold its
145-mile oil and natural gas pipeline system located in the Anadarko Shelf area
in Oklahoma to Continental Gas, Inc., or CGI, for $15.0 million, subject to
certain adjustments. The sale price was reduced by $3.0 million in settlement of
all claims that were or could have been asserted by CGI or RAM in a lawsuit
filed by CGI in September 2003, relating to disputes arising under a gas service
contract between the parties. RAM received net sale proceeds of $11.8 million,
after all adjustments and less expenses relating to the sale, and used the net
proceeds to reduce the outstanding balance of its credit facility.
RAM's pipeline activities are reported as discontinued operations for all
periods presented in the accompanying financial statements and operating results
of the pipeline are reflected separately from the results of continuing
operations.
The results of RAM's discontinued operations for the years ended December
31, 2003 and 2002 are as follows (in thousands):
Year ended December 31,
------------------------
2003 2002
Pipeline system revenue 14,500 $ 14,409
Pipeline system costs and expenses
Purchases 12,066 11,929
Operating costs 598 928
Depreciation 388 1,999
Impairment 2,562 12,700
Litigation -- 3,450
Interest 609 1,419
-------- --------
Total system costs and expenses 16,223 32,425
Loss from discontinued operations (1,723) (18,016)
Income tax benefit (655) (6,846)
-------- --------
Loss from discontinued operations $ (1,068) $(11,170)
======== ========
Income Taxes. RAM's overall effective tax rate was approximately 38% in
2003 and 2002.
Cumulative Effect of a Change in Accounting Principle. RAM adopted SFAS
No. 143, Accounting for Asset Retirement Obligations, during the first quarter
of 2003. This resulted in a non-cash loss of $0.4 million, net of tax effects,
as a result of the cumulative effect of a change in accounting principle.
Net Income (Loss). Due to the factors described above, RAM's net income
decreased by $4.1 million, from net income of $2.1 million in 2002 to a net loss
of $2.0 million in 2003.
117
Liquidity and Capital Resources
As of December 31, 2005, RAM had cash and cash equivalents of $0.07
million, and $1.1 million available under its revolving credit facility
discussed below.
As of December 31, 2005, RAM had $112.4 million of indebtedness
outstanding evidenced by $28.3 million ($28.4 million excluding the original
issue discount) of its 11 1/2% senior notes due 2008, $83.9 million outstanding
under its credit facility and $0.2 million in other indebtedness.
Historically, RAM has funded its business activities primarily with
operating cash flow and reserve-based bank borrowings. From time to time RAM has
engaged in discussions relating to potential acquisitions of oil and natural gas
properties or companies engaged in the oil and natural gas business. Other than
the proposed merger with Tremisis, RAM has no present agreement, commitment or
understanding with respect to any material acquisitions. Any future acquisitions
may require that RAM obtain additional financing that will depend upon financing
arrangements, if any, available at the time.
Credit Facility. In November 2002, RAM obtained a $30.0 million, senior
secured, revolving credit facility from Wells Fargo Foothill, Inc. ("Foothill").
In November 2002, RAM used advances under the credit facility to purchase $63.5
million principal amount of its outstanding senior notes due 2008. During July
2003, RAM applied the $11.8 million net proceeds from the sale of its GPPC
pipeline system to pay down the outstanding balance under the credit facility.
In April 2004 RAM sold RBOC, and used approximately $17.9 million of these
proceeds to reduce the outstanding balance of the credit facility to zero. The
credit facility remained in place with a borrowing base, calculated solely with
reference to the then remaining oil and gas reserves, approximating the $30.0
million maximum facility amount.
In December 2004, RAM acquired WG Energy and changed its name to RWG
Energy, Inc., or RWG. RAM financed the WG Acquisition with a new $90.0 million
senior secured credit facility provided by Foothill. The facility was amended
and restated in its entirety on May 24, 2005, to accommodate Ableco Finance LLC
as a participating lender. The amended and restated facility subsequently was
increased to $100.0 million. The facility, as amended, includes a $30.0 million
term loan, a $60.0 million revolving credit facility, and a special $10.0
million revolving credit facility dedicated exclusively to satisfying cash
collateral requirements under RAM's hedging agreements. The $60.0 million
revolving credit facility reduced to $57.5 million in October, 2005, and to
$55.0 million on December 31, 2005 and will continue to reduce by $2.5 million
on the last day of each calendar quarter thereafter until the committed amount
of the revolver is reduced to $50.0 million. Borrowings under the $60.0 million
revolving credit facility bear interest at Foothill's base rate plus 2%, or
LIBOR plus 4%, at RAM's option, but, in either case, not less than 6%. Advances
under the term loan and under the special $10.0 million revolving credit
facility bear interest at the 10.5% or the base rate plus 5%, whichever is
greater, or 9.5% or LIBOR plus 7%, whichever is greater, also at RAM's option.
All outstanding advances under the special $10.0 million revolving credit
facility are payable on June 30, 2006. The remainder of the facility will mature
in December 2007. Borrowings under the facility are secured by liens on
substantially all of RAM's assets on a consolidated basis.
The amount of credit available at any time under RAM's credit facility may
not exceed the lesser of the borrowing base, which is subject to
re-determination at least semi-annually, or the maximum facility amount. The
credit facility contains customary covenants which, among other things, require
compliance with certain financial targets, periodic financial and reserve
reporting and limit RAM's incurrence of indebtedness, liens, dividends, loans,
mergers, transactions with affiliates, investments and sales of assets.
118
Senior Notes. At September 30, 2005, RAM had outstanding $28.4 million
aggregate principal amount of its 11 1/2% senior notes due 2008 which mature in
February 2008. The notes bear interest at an annual rate of 11 1/2%, payable
semi-annually on each February 15 and August 15. Pursuant to a Second
Supplemental Indenture executed in connection with RAM's repurchase of $63.5
million principal amount of its senior notes in November 2002, substantially all
of the restrictive covenants and certain events of default contained in the
original indenture were eliminated.
Sale of Overriding Royalty Interests. During September 2005, RAM completed
the sale (effective February 1, 2005) of small overriding royalty interests from
producing shallow gas wells in the Boonsville Field located in Jack and Wise
Counties, Texas and a carved-out 2% override in certain unproven Barnett Shale
leases also located in these counties. RAM sold these interests to a royalty
fund established for the benefit of RAM's officers and employees. The
arms-length valuation was based on a $5.50 per MMbtu price, adjusted for the
percentage-of-proceeds contract under which the gas is sold, plus a nominal
value for the non-producing aspect of the sale package. RAM received net sale
proceeds of $2.3 million, all of which was used to pay down its secured credit
facility with Foothill.
Cash Flows from Operating Activities. RAM's cash flows from operating
activities are comprised of three main items: net income (loss), adjustments to
reconcile net income to cash provided (used) before changes in working capital,
and changes in working capital. For the nine months ended September 30, 2005,
RAM's net loss was $5.7 million, as compared with net income of $6.8 million for
the nine months ended September 30, 2004. Net income for the 2004 period
resulted primarily from gain recognized on the sale of RBOC. Adjustments
(primarily non-cash items such as depreciation and amortization, unrealized loss
on derivatives, gain on the sale of RBOC, and deferred income taxes) were $25.0
million for the nine months ended September 30, 2005 compared to a negative
adjustment of $5.6 million for the nine months ended September 30, 2004, an
increase of $30.6 million. Working capital changes for the nine months ended
September 30, 2005 were a negative $4.1 million compared with a negative of $0.6
million for the nine months ended September 30, 2004. For the nine months ended
September 30, 2005, in total, net cash provided by operating activities was
$11.49 million compared to $0.6 million of net cash provided by operations for
the nine months ended September 30, 2004.
Cash Flow from Investing Activities. For the nine months ended September
30, 2005, net cash used by RAM's investing activities was $9.9 million,
consisting of $12.3 million in payments for oil and gas properties and other
property and equipment additions, offset partially by $2.3 million in proceeds
from the sale of oil and gas properties. This compares with net cash provided by
RAM's investing activities for the nine months ended September 30, 2004, of
$20.7 million, consisting of $21.8 million in proceeds from the sale of RBOC,
and $1.7 million in proceeds from short-term investments, offset by $2.9 million
in net payment for property additions.
Cash Flow from Financing Activities. For the nine months ended September
30, 2005, net cash used by RAM's financing activities was $1.0 million, compared
to $22.5 million used during the nine months ended September 30, 2004. These
payments consisted of principal payments on RAM's credit facility and dividends
for both periods, and for the 2005 period only, redemption of one-sixth of its
common shares and outstanding options on common shares.
Capital Commitments
During the year ended December 31, 2004, RAM made an $82.6 million
acquisition and had capital expenditures of $6.3 million. During 2005, RAM's
total capital expenditures aggregated approximately $15.3 million, including
costs incurred in connection with drilling, completion and recompletion
operations on wells commenced or recompleted during the year, completion
operations on wells drilled during 2004 but not completed until 2005, the
acquisition of a drilling rig and the purchase of two gas-powered electric
generators for use on RAM's Electra/Burkburnett properties, the acquisition of
an oilfield supply operation, the purchase of seismic data and other capitalized
geological and geophysical costs. The amount and timing of future capital
expenditures may vary depending on the rate at which RAM expands and develops
its oil and natural gas properties. RAM may require additional financing for
future acquisitions and to refinance its debt at its final maturities.
119
Although RAM cannot provide any assurance, assuming successful
implementation of its strategy, including the future development of its proved
reserves and realization of its cash flows as anticipated, management of RAM
believes that borrowings available under RAM's credit facilities, the balance of
its unrestricted cash and cash flows from operations will be sufficient to
satisfy its budgeted capital expenditures, working capital and debt service
obligations for the foreseeable future. The actual amount and timing of RAM's
future capital requirements may differ materially from its estimates as a result
of, among other things, changes in product pricing and regulatory, technological
and competitive developments. Sources of additional financing available to RAM
may include commercial bank borrowings, vendor financing and the sale of equity
or debt securities. Management of RAM cannot provide any assurance that any such
financing will be available on acceptable terms or at all.
The table below sets forth RAM's contractual cash obligations as of
December 31, 2005, which are obligations during the following years:
2006 2007-2008 2009-10 and after
-------- --------- ------- ---------
Contractual Cash Obligations (in thousands)
Long-term debt $ 4,000 $108,500 $ -- $ --
Operating leases 300 500 -- --
Capital leases -- -- -- --
Purchase obligations -- -- -- --
-------- -------- ---- ----
Total contractual cash obligations $ 4,300 $109,000 $ -- $ --
-------- -------- ---- ----
Quantitative and Qualitative Disclosures about Market Risk
The carrying amounts reported in RAM's balance sheets for cash and cash
equivalents, trade receivables and payables, installment notes and variable rate
long-term debt approximate their fair values. Based on management estimates, the
fair value of RAM's senior notes exceeded their carrying value at September 30,
2005 by approximately $1.4 million. The carrying value of the senior notes
exceeded their fair value by $1.4 million at December 31, 2004, and by
approximately $7.1 million at December 31, 2003, in each case based on
management estimates.
Interest Rate Risk
RAM is exposed to changes in interest rates. Changes in interest rates
affect the interest earned on its cash and cash equivalents and the interest
rate paid on its borrowings, other than its senior notes. Though available under
RAM's credit facility, RAM has not used interest rate derivative instruments to
manage its exposure to interest rate changes. For the year ended December 31,
2004, a 100 basis point (1%) increase in the interest rate on RAM's senior
credit facility would have resulted in a $116,229 increase in RAM's annual
interest expense. For the nine months ended September 30, 2005, a 100 basis
point (1%) increase in the interest rate on RAM's senior credit facility would
have resulted in an $864,842 increase in RAM's interest expense for such period.
Commodity Price Risk
RAM's revenues, profitability and future growth depend substantially on
prevailing prices for oil and natural gas. Prices also affect the amount of cash
flow available for capital expenditures and RAM's ability to borrow and raise
additional capital. Lower prices may also reduce the amount of oil and natural
gas that it can economically produce. RAM currently sells most of its oil and
natural gas production under price sensitive or market price contracts.
To reduce exposure to fluctuations in oil and natural gas prices and to
achieve more predictable cash flow, RAM periodically utilizes various hedging
strategies to manage the price received for a portion of its future oil and
natural gas production. RAM has not established hedges in excess of its expected
120
production. These strategies customarily involve the purchase of put options to
provide a price floor for its production, put/call collars that establish both a
floor and a ceiling price to provide price certainty within a fixed range,
put/call/call collars that establish a secondary floor above the put/call collar
ceiling, and forward sale contracts for specified monthly volumes at prices
determined with reference to the natural gas futures market or swap arrangements
that establish an index-related price above which RAM pays the hedging partner
and below which RAM is paid by the hedging partner. These contracts allow RAM to
predict with greater certainty the effective oil and natural gas prices to be
received for its production and benefit RAM when market prices are less than the
strike prices or fixed prices under its hedging contracts. However, RAM will not
benefit from market prices that are higher than the strike or fixed prices in
these contracts for its hedged production.
RAM's hedge positions at December 31, 2005 are shown in the following
table:
Crude Oil (Bbls) Natural Gas (Mmbtu)
----------------------- -------------------------
Floors Ceilings Floors Ceilings
------------------------------------------------------------------------
Year Per Day Price Per Day Price Per Day Price Per Day Price
------------------------------------------------------------------------
2006 1,500 $50.77 1,500 $69.08 5,247 $6.23 5,247 $ 8.86
2007 1,000 $35.00 1,000 $69.74 5,000 $7.00 5,000 $11.95
Secondary Floors
----------------
Year Per Day Price
------------------------------------------------------------------------
2006 5,126 $9.94
RAM's derivative contracts for oil continue through December 2007; its
contracts for natural gas continue through March 2007. For the three months
ended September 30, 2005, RAM produced 2,160 Bbls of oil per day, 6,441 Mcf of
gas per day and 435 Bbls of NGLs per day.
At December 31, 2004 RAM had purchased put options on 455,500 barrels of
crude oil through December, 2005, with a floor of $40.00, and had purchased
collars on 1,824,000 MMbtu of natural gas through October 2005. The average
floor price was $5.65 per MMbtu and the average ceiling price was $7.81 per
MMbtu. For the year ended December 31, 2004, RAM's hedging activities cost it a
net of $0.293 per Mcfe.
RAM frequently uses a hedging strategy known as a "collar" to provide a
range of price certainty for a portion of its projected oil and natural gas
production. In a typical collar, RAM purchases a "put" option for a stated
volume of oil or natural gas production for a future month, that is, for
example, the right to sell 1,000 Bbls of oil per day for such month at a
specified price, called the "strike price," which establishes a floor price for
the stated volume for such month. Paired with that put option, RAM sells or
writes a "call" option for the same volume and period at a strike price which
establishes a ceiling price at the top end of the range, thereby creating a
price "collar" for the stated volume of future production during the specified
month. Because puts and calls are options determined with reference to futures
prices of oil and natural gas, they are termed "derivatives." RAM does not sell
call options except in connection with a collar strategy. When at the end of any
financial reporting period the futures price for oil or natural gas for a
particular month for which RAM has sold a call option exceeds the strike price
121
under the call option, generally accepted accounting principles require RAM to
record as a loss the amount that would be required to be paid in cash by RAM on
the last day of such reporting period to "settle" or terminate the call option
contract. Of course, all of RAM's outstanding call options are not settled or
terminated at the end of each financial reporting period but rather, in most
instances, remain in place until the month specified in the call option
contract. Since RAM does not hedge in excess of its projected production for the
month specified in the call option contract, RAM will always be able to sell at
market prices the volume of oil or natural gas covered by the call option.
Therefore, while RAM is required, for all reporting periods up to the month
specified in the call option contract, to record a loss with respect to each
call option for which the futures price exceeds the call option strike price,
when the specified month arrives RAM both settles the call option in cash and
sells physical volumes of production equal to or greater than the call option
volume at the market price then prevailing. By this procedure, RAM effectively
locks-in a price for that volume of production specified in the call option
approximately equal to the top end of the collar. The market price sales
revenues for the production will be recorded as revenues from oil and gas sales
on RAM's financial statements and any difference between the call option strike
price and the current month futures price (that is, the option settlement cost)
is recorded as a realized loss from derivatives. Accordingly, so long as RAM has
sufficient volumes of production to cover call options at the top end of its
collars, RAM cannot actually "lose" money on the volumes subject to its option
hedging contracts; rather, RAM simply will not receive as much revenue from the
sale of the production as it would have received if the option had not been in
place. Therefore, even when option settlement costs are recorded as a realized
loss at the end of a period in which a call option settles, amounts so recorded
as "losses" are more in the nature of lost opportunity costs than actual losses.
RAM's statement of operations for the three month period ended September
30, 2005 reflects realized and unrealized losses from derivatives of $11.8
million. Of this amount, $.9 million is attributable to realized losses on
option contracts settled during the period and $10.9 million is attributable to
unrealized losses on option contracts that will not settle for months or years
in the future. RAM's income statement for the nine month period ended September
30, 2005 reflects realized and unrealized losses from derivatives of $19.9
million. Of this amount, $1.1 million is attributable to realized losses on
option contracts settled during the period and $18.8 million is attributable to
unrealized losses on option contracts that will not settle for months or years
in the future. Even if RAM does not purchase any additional hedging derivatives,
the unrealized loss amount for the existing options reflected on RAM's financial
statements will change in each subsequent reporting period as commodity futures
prices change.
122
DIRECTORS AND EXECUTIVE OFFICERS OF TREMISIS FOLLOWING THE MERGER
At the effective time of the merger, the board of directors and executive
officers of Tremisis will be as follows:
Name Age Position
---- --- --------
Larry E. Lee 57 Chairman, President and Chief Executive Officer
John M. Longmire 63 Senior Vice President and Chief Financial Officer
Larry G. Rampey 61 Senior Vice President
Drake N. Smiley 58 Senior Vice President
John L. Cox 55 Vice President, Secretary and Treasurer
Sean P. Lane 47 Director
Gerald R. Marshall 71 Director
John M. Reardon 64 Director
Larry E. Lee is a founder and has served as RAM's president and, with the
exception of a two-year hiatus during the early 1990s, chief executive officer
since September 1987. Mr. Lee became RAM's chairman of the board in October
2005. Mr. Lee has been active in the oil and gas industry since 1976. Mr. Lee
worked for the private companies of Goldman Enterprises and Kerr Consolidated
before developing the RAM companies in 1984. He served in the public sector as
Budget Director for the city of Oklahoma City from 1971to 1976, and was a member
of the staff of Governor David Boren during 1976. Mr. Lee is a Wildcatter member
of the Oklahoma Independent Petroleum Association and a member of the
Independent Petroleum Association of America, having previously served as
director. Mr. Lee is a member of the Board of Trustees, serves as Chairman of
the Finance Committee, is a member of the Executive Committee, and is Chairman
Elect of the Board of Trustees for the Philbrook Museum of Art. He is also a
member of the Board of Directors and Vice Chairman of the Oklahoma Heritage
Association, where he serves on the Executive and Finance Committees. Mr. Lee
serves as a member of the Executive Board of the Indian Nations Council of the
Boy Scouts of America. He is a lifetime member of World Presidents'
Organization. Mr. Lee received his B.B.A. in finance from the University of
Oklahoma.
John Longmire has been chief financial officer of RAM since August 1994
and a senior vice president since December 1997. Previously, Mr. Longmire was
vice president of RAM from August 1994 until December 1997 and was controller of
RAM from March 1990 until August 1994. Mr. Longmire has 30 years experience in
various financial management positions in the oil and gas industry. Prior to
joining RAM in 1990, Mr. Longmire held various positions with Texas
International Company, Amarex, Inc. and Union Oil Company of California. Mr.
Longmire is a Certified Public Accountant and received his B.S. in 1973 from
California State University at Los Angeles.
Larry G. Rampey has been a senior vice president of RAM since February
1998, previously serving as vice president of operations since May 1989. Mr.
Rampey has 30 years of experience in the management of both domestic and
international oil and gas properties. From 1972 until May 1989, Mr. Rampey was
employed by Reading & Bates Petroleum Co., holding positions of vice president
of international operations and vice president of domestic operations. Mr.
Rampey was employed by Amoco prior to joining Reading & Bates. Mr. Rampey is a
member of the Society of Petroleum Engineers and the Oklahoma Independent
Petroleum Association. Mr. Rampey received his B.S. in Industrial Engineering
from Oklahoma State University.
123
Drake N. Smiley has been senior vice president of land and exploration for
RAM since January 1998. Mr. Smiley served as vice president of land, legal and
business development from February 1997 until December 1997. Previously, Mr.
Smiley was employed by Reading & Bates, serving as manager of land. Before
Reading & Bates, he was employed by Cities Service Company. In June of 1994, Mr.
Smiley accepted the position of vice president, land with Continental Resources,
Inc. in Enid, Oklahoma. Mr. Smiley has 28 years of experience in the petroleum
industry and is a member of the Oklahoma and Tulsa County Bar Associations, the
Tulsa and American Associations of Petroleum Landmen and the Oklahoma
Independent Petroleum Association. He is a Phi Beta Kappa graduate of the
University of Missouri, where he also received his Juris Doctorate.
John L. Cox has been vice president of RAM since June 2005 and has been
Secretary and Treasurer of RAM since November 2005. Prior to joining RAM's
staff, Mr. Cox served as chief financial officer of Cannon Energy, Inc. from
March 2003 until June 2005. Mr. Cox previously was controller for Mannix Oil and
Gas, Inc. from February 2001 until March 2003 and controller/bankruptcy
accountant for the bankruptcy trustee for Bristol Resources Corporation from
1997 to February 2001. Mr. Cox was also a vice president and chief financial
officer for Latex Petroleum from 1994 to 1997, controller of Panada Exploration,
Inc. from 1990 to 1994, and controller/manager of financial reporting for
Reading & Bates Petroleum Co. from 1976 to 1989. Mr. Cox is a Certified Public
Accountant and received a B.S. in Accounting from Oklahoma City University.
Sean P. Lane has served as a director of Kinsale Advisors LLC since
January 2003, providing business and risk management advisory services to
companies and investors in the energy, environmental, and technology industries.
From May 1999 until December 2002, Mr. Lane was an executive vice President,
chief administrative officer, general counsel and director of beenz.com inc. a
global internet currency business. Mr. Lane served as a managing director of
Liberty Power Investments, LLC, an international electric power project
development, finance and acquisition firm from December 1992 until May 1999. Mr.
Lane has also served as an executive of Compania Boliviana de Energia Electrica,
S.A., the leading Bolivian electric utility, as well as The Henley Group, Inc.,
Wheelabrator Technologies, Inc. and Catalyst Energy Corporation, all publicly
traded firms with significant investments in the U.S. or international
independent power and environmental industries. Mr. Lane received his J.D. from
Georgetown University Law Center and a Bachelor's degree in Political Economy
and History from Fordham University.
Gerald R. Marshall has been a director of RAM since December 1997. Mr.
Marshall was vice chairman of the Midland Group of Oklahoma City, Oklahoma,
which includes Midland Mortgage Co., MidFirst Bank, Midland Asset Management Co.
and Home Shield Insurance Co., from October 1996 to March 2003 and served as a
director of MidFirst Bank from 1993 until March 2003, and served as its chief
credit officer from October 1996 until March 2001. From 1990 until 1995, Mr.
Marshall was chairman, chief executive officer and principal owner of RAM
Management Associates, an asset management contractor for the Resolution Trust
Corporation. From 1989 until 1990, Mr. Marshall served as a special consultant
to Worthen Banking Corporation of Arkansas. From 1987 until 1989, Mr. Marshall
was interim chief executive officer of an insolvent savings and loan association
in Little Rock, Arkansas, pending federal resolution. From September 1984 until
November 1986, Mr. Marshall served as chairman of the board and chief executive
officer of Bank of Oklahoma, Oklahoma City, N.A and from August 1981 to April
1984, Mr. Marshall served as president and chief executive officer of Goldman
Enterprises, a privately owned, diversified group of companies. Prior to August
1981, Mr. Marshall served as chairman and chief executive officer of Capital
Bank, N.A. of Houston, Texas and was a senior vice president of its then parent
company, Mercantile Texas Corporation. Prior to 1981, Mr. Marshall served as
president and director of The First National Bank and Trust Company of Oklahoma
City; as executive vice president of First National Bank in Dallas, and as
president of Liberty National Bank and Trust Company of Oklahoma City. Mr.
Marshall received a B.S. in Finance and Accounting from the University of
Oklahoma.
124
John M. Reardon has been market president of Union Bank of California, in
Valencia, California, since November 2002. From August 1994 until November 2002,
Mr. Reardon was president and chief executive officer of Valencia National Bank,
Santa Clarita, California. From 1991 to August 1994, Mr. Reardon was executive
vice president of Ramco Oil and Gas, Inc. and RAM Management Associates, Inc.
Mr. Reardon was a senior vice president of Wells Fargo Bank, Los Angeles,
California from 1987 to 1991. Previously, he served as chairman, president and
chief executive officer of Southwestern Bank and Trust Company, Oklahoma City;
executive vice president of The First National Bank and Trust Company of
Oklahoma City, Oklahoma, and vice president of Liberty National Bank and Trust
Company, Oklahoma City, Oklahoma. Mr. Reardon is currently president of the
board of directors of the Santa Clarita Valley Boys & Girls Club Foundation. In
2000, Mr. Reardon was presented the Entrepreneur of the Year Award by Ernst &
Young and he is a life member in the Entrepreneur of the Year Award Hall of
Fame. Mr. Reardon has served as a director of Gene Autry Western Heritage
Museum, Los Angeles, California; as a member and officer of several committees
and sub-committees of the Housing and Real Estate Finance Committee of the
American Bankers Association; and as a director of the Oklahoma Bankers
Association. Mr. Reardon has served on the faculty of the University of Oklahoma
School of Commercial Banking; Southwestern Graduate School of Banking, Southern
Methodist University, Dallas, Texas; the Real Estate Finance School and the
National Commercial Lending School of the American Bankers Association; the
Secured Lending School of the Oklahoma Bankers Association. He served as
Chairman of the Federal Government Relations Committee of the Oklahoma Bankers
Association and as a member of the board of directors of the Chair of Banking,
the College of Business of the University of Oklahoma. He has also served as an
advisory director of Oklahoma State University and a member of the Oklahoma
State Advisory Council of the United States Small Business Administration, and
President. Mr. Reardon received a B.S. in business from Oklahoma State
University and is a graduate of the Southwestern Graduate School of Banking,
Southern Methodist University in Dallas, Texas.
Meetings and Committees of the Board of Directors of Tremisis
During the fiscal year ended December 31, 2005, Tremisis' board of
directors held five meetings. Although Tremisis does not have any formal policy
regarding director attendance at annual stockholder meetings, Tremisis will
attempt to schedule its annual meetings so that all of its directors can attend.
Tremisis expects its directors to attend all board and committee meetings and to
spend the time needed and meet as frequently as necessary to properly discharge
their responsibilities.
Independence of Directors
In anticipation of being listed on Nasdaq, Tremisis will adhere to the
rules of Nasdaq in determining whether a director is independent. The board of
directors of Tremisis also will consult with our counsel to ensure that the
board's determinations are consistent with those rules and all relevant
securities and other laws and regulations regarding the independence of
directors. The Nasdaq listing standards define an "independent director"
generally as a person, other than an officer of a company, who does not have a
relationship with the company that would interfere with the director's exercise
of independent judgment. Consistent with these considerations, the board of
directors of Tremisis has affirmatively determined that, upon appointment to the
board of directors of Tremisis on the closing of the merger, Messrs. Lane,
Marshall and Reardon will be the independent directors of Tremisis for the
ensuing year. Mr. Lee is not independent.
Tremisis currently does not have a majority of independent directors and
is not required to have one.
125
Audit Committee
Upon consummation of the merger, the board of directors of Tremisis will
establish an audit committee with Messrs. Marshall, Lane and Reardon as its
members, each an independent director under Nasdaq listing standards, with Mr.
Marshall acting as chairman. The purpose of the audit committee will be to
appoint, retain, set compensation of, and supervise our independent accountants,
review the results and scope of the audit and other accounting related services
and review our accounting practices and systems of internal accounting and
disclosure controls.
Meetings and Attendance
Since the Tremisis audit committee will not be formed until the
consummation of the merger, it did not meet in the year ended December 31, 2004.
Independent Auditors' Fees
The firm of BDO Seidman, LLP is currently Tremisis' principal accountant.
UHY Mann Frankfort Stein & Lipp CPAs, LLP will serve as principal accountant
after the merger.
Audit Fees
During the fiscal year ended December 31, 2005, the fees paid Tremisis'
principal accountant totaled $______. The services performed were in connection
with Current Reports on Form 8-K filed with the Securities Exchange Commission
on __________, __________ and __________, and the review of Tremisis' 2005
Quarterly Reports filed on Form 10-QSB.
Audit-Related Fees
During 2005, Tremisis' principal accountant did not render assurance and
related services reasonably related to the performance of the audit or review of
financial statements.
Tax Fees
During 2005, Tremisis' principal accountant did not render services to it
for tax compliance, tax advise and tax planning.
All Other Fees
During 2005, there were no fees billed for products and services provided
by the principal accountant to Tremisis other than those set forth above.
Audit Committee Pre-Approval Policies and Procedures
Since the Tremisis audit committee will not be formed until the
consummation of the merger, the audit committee did not pre-approve any
accounting-related or tax services. However, in accordance with Section 10A(i)
of the Securities Exchange Act of 1934, before Tremisis engages its independent
accountant to render audit or permitted non-audit services, the engagement will
be approved by the audit committee.
126
Audit Committee Report
Since the Tremisis audit committee will not be formed until the
consummation of the merger, it has not yet met or prepared a committee report.
Code of Ethics
In June 2004, Tremisis' board of directors adopted a code of ethics that
applies to Tremisis' directors, officers and employees as well as those of its
subsidiaries. A copy of our code of ethics was filed as Exhibit 14 to our
Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 2004.
Compensation Committee Information
Upon consummation of the merger, the board of directors of Tremisis will
establish a compensation committee with Messrs. Marshall, Lane and Reardon as
its members, each an independent director under Nasdaq listing requirements. The
purpose of the compensation committee will be to review and approve compensation
paid to our officers and to administer the company's incentive compensation
plans, including authority to make and modify awards under such plans.
Initially, the only plan will be the 2006 Long-Term Incentive Plan.
Nominating Committee Information
Upon consummation of the merger, Tremisis will form a nominating committee
in connection with the consummation of the merger. The members will be Messrs.
Marshall, Lane and Reardon, each an independent director under Nasdaq listing
standards. The nominating committee will be responsible for overseeing the
selection of persons to be nominated to serve on Tremisis' board of directors.
The nominating committee will consider persons identified by its members,
management, stockholders, investment bankers and others. During the period
commencing with the closing of the merger and ending immediately after the 2008
annual meeting of the company, the nominees for Tremisis' board of directors
will be determined pursuant to the terms of the voting agreement and approved by
the nominating committee.
Tremisis does not have any restrictions on stockholder nominations under
its certificate of incorporation or by-laws. The only restrictions are those
applicable generally under Delaware corporate law and the federal proxy rules.
Prior to the consummation of the merger agreement, Tremisis has not had a
nominating committee or a formal means by which stockholders can nominate a
director for election. Currently the entire board of directors decides on
nominees, on the recommendation of one or more members of the board. None of the
current members of the board of directors is "independent." Currently, the board
of directors will consider suggestions from individual stockholders, subject to
evaluation of the person's merits. Stockholders may communicate nominee
suggestions directly to any of the board members, accompanied by biographical
details and a statement of support for the nominees. The suggested nominee must
also provide a statement of consent to being considered for nomination. Although
there are no formal criteria for nominees, the board of directors believes that
persons should be actively engaged in business endeavors.
Election of Directors; Voting Agreement
As provided in the merger agreement, upon consummation of the merger, the
board of the Tremisis will initially consist of four members. The RAM
stockholders, on the one hand, and Lawrence S. Coben and Isaac Kier on the other
hand, have entered into a voting agreement pursuant to which they have agreed to
vote for the other's designees as directors of Tremisis until immediately
following the election that will be held in 2008 as follows:
127
o in the class to stand for reelection in 2006 - - Larry E. Lee and
Sean P. Lane;
o in the class to stand for reelection in 2007 - - Gerald R. Marshall;
o in the class to stand for reelection in 2008 - - John M. Reardon.
Pursuant to the merger agreement, the RAM stockholders shall designate
three directors and Messrs. Coben and Kier shall designate one director. Messrs.
Marshall, Lee and Reardon are all designees of RAM. Mr. Lane is a designee of
Messrs. Coben and Kier. A copy of the voting agreement is attached as Annex F
hereto. We encourage you to read the voting agreement in its entirety.
Tremisis' directors do not currently receive any cash compensation for
their service as members of the board of directors. However, in the future,
non-employee directors may receive certain cash fees and stock awards that the
Tremisis board of directors may determine to pay.
Executive Compensation
No executive officer of Tremisis has received any cash or non-cash
compensation for services rendered to Tremisis. Each executive officer has
agreed not to take any compensation prior to the consummation of a business
combination.
Commencing May 12, 2004 and ending upon the acquisition of a target
business, Tremisis has and will continue to pay First Americas Management LLC,
an affiliate of Isaac Kier, Tremisis' Secretary and Treasurer, a fee of $3,500
per month for providing Tremisis with office space and certain office and
secretarial services. Other than this $3,500 per-month fee, no compensation of
any kind, including finders and consulting fees, have been or will be paid to
any of Tremisis' officers. However, Tremisis' executive officers are
reimbursed for any out-of-pocket expenses incurred in connection with activities
on Tremisis' behalf such as identifying potential target business and
performing due diligence on suitable business combinations.
Employment Agreement
Larry E. Lee
In connection with the consummation of the merger agreement, Mr. Lee will
enter into an employment agreement with Tremisis. Under the terms of the
employment agreement, Mr. Lee will serve as the president and chief executive
officer of Tremisis for a term of three years. The employment agreement provides
that Mr. Lee will receive an annual base salary of $450,000. Mr. Lee also may be
awarded a bonus for any fiscal year during the employment term, either pursuant
to an incentive compensation plan maintained by Tremisis or as otherwise may be
determined by Tremisis' board of directors.
The employment agreement provides that, in the event of the termination of
Mr. Lee's employment by Tremisis without Cause (as defined in the employment
agreement) or by Mr. Lee for Good Reason (as defined in the employment
agreement), Tremisis will pay him a lump sum equal to two times his base salary
plus a prorated bonus. In addition, Tremisis shall continue benefits to him
and/or his family equal to those which would have been provided to them in
accordance with the plans, programs, practices and policies if his employment
had not been terminated.
If Mr. Lee's employment is terminated by reason of his death or
disability, Tremisis shall pay him a lump sum equal to his then current base
salary for twelve months or such shorter period as may remain in the employment
term, plus a prorated bonus.
128
The employment agreement contains certain restrictive covenants that
prohibit Mr. Lee from disclosing information that is confidential to Tremisis
and its subsidiaries and generally prohibits him, during the employment term and
for one year thereafter, from soliciting or hiring the employees of Tremisis and
its subsidiaries. The employment agreement does not contain any restrictive
covenants that otherwise limit Mr. Lee's ability to compete with Tremisis and
its subsidiaries following his employment with Tremisis. The form of employment
agreement is annexed as Annex H hereto. We encourage you to read the employment
agreement in its entirety.
BENEFICIAL OWNERSHIP OF SECURITIES
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of our common stock as of January 31, 2006 and after consummation of
the merger by:
o each person known by us to be the beneficial owner of more than 5%
of our outstanding shares of common stock either on January 31,
2006 or after the consummation of the merger;
o each of our current executive officers and directors;
o each person who will become director upon consummation of the
merger;
o all our current executive officers and directors as a group; and
o all of our executive officers and directors as a group after the
consummation of the merger.
This table assumes that no holder of shares of Tremisis' common stock
issued in its IPO converts such shares into cash.
------------------------------------------------------------------------------------------------------------------
Beneficial Ownership of Our Beneficial ownership of Our
Common Stock on Common Stock After the
January 31, 2006 Consummation of the Merger
------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Number Class before Number Class after
Name and Address of Beneficial Owner(1) of Shares Merger of Shares Merger
------------------------------------------------------------------------------------------------------------------
Lawrence S. Coben 1,008,334 13.1% 1,008,334 3.0%
------------------------------------------------------------------------------------------------------------------
Issac Kier 183,334((2)) 2.4% 613,334(3) 1.8%
------------------------------------------------------------------------------------------------------------------
David A. Preiser((4)) 91,666 1.2% 91,666 0.3%
------------------------------------------------------------------------------------------------------------------
Jon Schotz((5)) 91,666((6)) 1.2% 241,666(7) 0.7%
------------------------------------------------------------------------------------------------------------------
Farallon Partners, L.L.C.(8) 743,070((9)) 9.7% 743,070(9) 2.2%
------------------------------------------------------------------------------------------------------------------
Amaranth LLC(10) 701,675(11) 9.1% 701,675(11) 2.1%
------------------------------------------------------------------------------------------------------------------
Jack Silver(12) 432,500((13)) 5.6% 432,500(13) 1.3%
------------------------------------------------------------------------------------------------------------------
Robert H. Setrakian((14)) 417,800((15)) 5.4% 419,800(15) 1.3%
------------------------------------------------------------------------------------------------------------------
Sapling, LLC(16) 393,100((17)) 5.1% 393,100(17) 1.1%
------------------------------------------------------------------------------------------------------------------
Larry E. Lee(18) 0 0% 12,526,592 38%
------------------------------------------------------------------------------------------------------------------
Britani Talley Bowman(19) 0 0% 12,526592(20) 38%
------------------------------------------------------------------------------------------------------------------
Gerald R. Marshall(18) 0 0% 0 0%
------------------------------------------------------------------------------------------------------------------
John M. Reardon(18) 0 0% 0 0%
------------------------------------------------------------------------------------------------------------------
Sean P. Lane(21) 0 0% 0 0%
------------------------------------------------------------------------------------------------------------------
All current Tremisis
directors and executive
officers as a group 1,375,000(22) 17.9% 1,955,000(23) 5.9%
(4 individuals)
------------------------------------------------------------------------------------------------------------------
All post-merger directors and executive 0 0% 12,526,592 38%
officers as a group (4 individuals)
------------------------------------------------------------------------------------------------------------------
129
(1) Unless otherwise noted, the business address of each of the following is
1775 Broadway, Suite 604, New York, New York 10019.
(2) Does not include 430,000 shares of common stock issuable upon exercise of
warrants that are not currently exercisable and may not become exercisable
within 60 days.
(3) Includes 430,000 shares of common stock issuable upon exercise of warrants
that become exercisable upon consummation of the merger.
(4) Mr. Preiser's business address is c/o Houlihan Lokey Howard & Zukin, 685
Third Avenue, New York, New York 10016.
(5) Mr. Schotz's business address is c/o Saybrook Capital, LLC, 401 Wilshire
Boulevard, Suite 850, Santa Monica, California 90401.
(6) Does not include 150,000 shares of common stock issuable upon exercise of
warrants that are not currently exercisable and may not become exercisable
within 60 days
(7) Includes 150,000 shares of common stock issuable upon exercise of warrants
that become exercisable upon consummation of the merger.
(8) The business address of Farallon Partners is One Maritime Plaza, Suite
1325, San Francisco, California 94111.
(9) Represents (i) a total of 503,500 shares held by Farallon Capital
Partners, L.P, Farallon Capital Institutional Partners, L.P., Farallon
Capital Institutional Partners II, L.P, Farallon Capital Institutional
Partners III, L.P, Tinicum Partners, L.P. and Farallon Capital Offshore
Investors II, L.P. (collectively, the "Funds"), and (ii) 239,570 shares
held by a certain account managed by Farallon Capital Management, L.L.C
("Management Company"). Farallon Partners, L.L.C. is the general partner
("General Partner") of the Funds. As such it exercises voting and
dispositive power over all shares held by the Funds. Chun R. Ding, William
F. Duhamel, Charles E. Ellwein, Richard B. Fried, Monica R. Landry,
William F. Mellin, Stephen L. Millham, Rajiv A. Patel, Derek C. Schrier,
Thomas F. Steyer and Mark C. Wehrly are managing members of the General
Partner and exercise voting and dispositive power over the General
Partner. Such individuals are also the managing members of the Management
Company, and as such, exercise voting and dispositive power over the
Management Company. The foregoing information was derived from an
Amendment to Schedule 13D filed with the Securities and Exchange
Commission on December 14, 2005.
(10) The business address of Amaranth LLC is c/o Amaranth Advisors L.L.C., One
American Lane, Greenwich Connecticut 06831
(11) Represents shares held by Amaranth LLC. Amaranth Advisors L.L.C. serves as
the trading advisor for Amaranth LLC and accordingly controls the voting
and disposition of these shares through Nicholas M. Maounis, the managing
member of Amaranth Advisors L.L.C. The foregoing information was derived
from an Amendment to Schedule 13G filed with the Securities and Exchange
Commission on December 16, 2005.
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(12) The business address of Mr. Silver is Sherleigh Associates LLC 660 Madison
Avenue, New York, New York 10021.
(13) Represents 430,000 shares held by Sherleigh Associates Inc. Profit Sharing
Plan and 2,500 shares held by Sherleigh Associates, Inc. Defined Benefit
Pension Plan. Mr. Silver has the sole voting and dispositive power with
respect to all 432,500 shares of common stock beneficially owned by him.
The foregoing information was derived from a Schedule 13G filed with the
Securities and Exchange Commission on October 14, 2005.
(14) The business address of Mr. Setrakian is 126 East 56th Street, New York,
New York 10022.
(15) Represents 29,700 shares of common stock owned directly by Mr. Setrakian
and 388,100 shares of common stock held by Helios Partners Fund, LP and
Helios Partners Offshore, Ltd. Mr. Setrakian is the managing director of
Helios Partners Fund Management, LLC, the investment manager of the two
funds, and as a result, exercises voting and dispositive power over these
shares. The foregoing information was derived from a Schedule 13G filed
with the Securities and Exchange Commission on November 17, 2005.
(16) The business address of Sapling, LLC is 535 Fifth Avenue, 31st Floor, New
York, New York 10017.
(17) Fir Tree Inc., of whom Jeffrey Tannenbaum is President, is the controlling
person of Sapling, LLC. This information was derived from a Schedule 13G
filed with the Securities and Exchange Commission on January 28, 2005.
(18) The business address of this Stockholder is 5100 E. Skelly Drive, Suite
650, Tulsa, Oklahoma 74135.
(19) Ms. Bowman's business address is 3155 East 86th Street, Tulsa, Oklahoma
74137.
(20) These shares are held by Danish Knights, A Limited Partnership. Ms. Bowman
beneficially owns 98.5% of Danish Knights and is the custodian for a 1.3%
interest owned by her minor child. Danneborg Corporation, the general
partner of Danish Knights, owns the remaining 0.2% interest. Ms. Bowman is
the president and sole director of Danneborg Corporation. Accordingly, Ms.
Bowman exercises voting and dispositive power over all shares held by
Danish Knights.
(21) Mr. Lane's business address is 111 Prospect Street, Suite 330, Stamford,
CT 06901.
(22) Does not include 580,000 shares of common stock issuable upon exercise of
warrants held by our officers and directors that are not currently
exercisable and may not become exercisable within 60 days.
(23) Includes 580,000 shares of common stock issuable upon exercise of warrants
that become exercisable upon consummation of the merger.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Tremisis Related Party Transactions
Prior to our IPO, we issued an aggregate of 750,000 shares of common stock
to the Tremisis Inside Stockholders as set forth below at a purchase price of
approximately $0.033 per share. Subsequent to the issuance, our board of
directors authorized a 1.1666666-to-1 forward split of our common stock on March
10, 2004, a 1.428571-to-1 split on April 16, 2004, and a 1.375-to-1 forward
stock split of our common stock on April 23, 2004, effectively lowering the
purchase price to $0.018 per share. The following share numbers have been
adjusted to reflect these stock splits:
Number
Name of Shares Relationship to Us
---- --------- ------------------
Lawrence S. Coben 1,008,334 Chairman and Chief Executive Officer
Isaac Kier 183,334 Secretary, Treasurer and Director
David A. Preiser 91,666 Director
Jon Schotz 91,666 Director
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These shares are being held in escrow with Continental Stock Transfer &
Trust Company, as escrow agent, until May 2007 pursuant to an escrow agreement
between us, the Tremisis Inside Stockholders and the escrow agent. These shares
will not be transferable except to their spouses, children or trusts established
for their benefit and will be released prior to May 2007 only if we liquidate
following a business combination or upon a subsequent transaction resulting in
our stockholders having the right to exchange their shares for cash or other
securities.
The holders of these shares are entitled to make up to two demands that
Tremisis register these shares pursuant to a registration rights agreement dated
April 27, 2004. In addition, these stockholders have certain "piggy-back"
registration rights on registration statements filed subsequent to the date on
which these shares of common stock are released from escrow. We will bear the
expenses incurred in connection with the filing of any such registration
statements. In connection with the registration rights agreement to be entered
into with the RAM stockholders upon consummation of the merger, Tremisis
requested that the Tremisis Inside Stockholders modify their "piggy-back"
registration rights in order to ensure that such rights do not conflict with the
new registration rights granted to the RAM stockholders. In consideration
therefor, Tremisis agreed that the Tremisis Inside Stockholders shall be
entitled to "piggy-back" their registrable securities on any registration
statement filed by Tremisis, even if such registration statements are filed
prior to the date on which their shares are released from escrow.
Commencing on our IPO through the consummation of the merger, we will pay
First Americas Management a monthly fee of $3,500 for general and administrative
services.
Tremisis has and will continue to reimburse its officers and directors for
any reasonable out-of-pocket business expenses incurred by them in connection
with certain activities on our behalf, such as identifying and investigating
possible target businesses and business combinations.
Other than the $3,500 per-month administrative fee payable to First
Americas Management and reimbursable out-of-pocket expenses payable to Tremisis
officers and directors, no compensation or fees of any kind, including finders
and consulting fees, will be paid to any of the above listed Tremisis
stockholders for the services rendered to Tremisis prior to or in connection
with the consummation of the merger.
During 2004 Lawrence S. Coben advanced $77,500 to Tremisis to cover
expenses related to Tremisis' initial pubic offering. This loan was repaid
without interest in June 2004.
All ongoing and future transactions between Tremisis and any of its
officers and directors or their respective affiliates will be on terms believed
by Tremisis to be no less favorable than are available from unaffiliated third
parties and will require prior approval in each instance by a majority of the
members of Tremisis board who do not have an interest in the transaction.
RAM Related Party Transactions
In October 2004, RAM agreed to purchase from KCS Energy an interest in an
exploratory oil and gas prospect generated by KCS in the Arkoma Basin of Eastern
Oklahoma, and to participate in the drilling of the first well to be drilled on
the prospect. RAM acquired a 30.0% interest in prospect, generally, and an
additional 8.6% interest in the drillsite section for the initial test well. In
November 2004, RAM paid its 38.7% share in the estimated $1.2 million dry hole
cost for the initial test well. In connection with its participation in the
prospect, RAM agreed to allow certain of its senior executive officers, managers
and shareholders to participate in the prospect for their own account by
purchasing an aggregate 5% interest in the prospect at the same price paid by
RAM to KCS. Accepting participants included, among other officers and employees
of RAM, Messrs. Rampey and Smiley, both senior vice presidents of RAM, Mr. Lee,
President, CEO and a 50% shareholder of RAM, and Dr. William W. Talley II,
Chairman of RAM and principal owner of Danish Knights, a 50% shareholder of RAM.
In November 2004, RAM entered into a participation agreement with each of the
participating parties pursuant to which such parties agreed to participate in
the prospect and pay their respective shares of the costs (including dry hole
costs) incurred in drilling and completing the initial well on the prospect and
to subject their interests to an operating agreement for the further development
of the prospect. The participation agreements provided that in order to
facilitate billings, distribution of production revenues and other
administrative matters, record title to the interests acquired by the
participants would be held by REPCO, LLC, a limited liability company formed and
owned 50% each by Mr. Lee and Danish Knights. REPCO was formed specifically for
the purpose of holding title to the interests of the participating parties in
the prospect and to facilitate their participation. In December 2004, RAM
assigned an undivided 5% interest in the prospect to REPCO, to hold as nominee
for the participants, and the participants were invoiced by REPCO for their
respective shares of acreage and dry hole costs on the initial test well. While
REPCO is carried on the books of RAM as the party liable for joint interest
billings and as the party entitled to receive production revenues attributable
to the interests owned by the participating parties, pursuant to the terms of
the participation agreements, each participant is directly liable to RAM for his
proportionate share of such costs and is entitled to his proportionate share of
such revenues. At December 31, 2004, the participating parties were indebted to
RAM in the amount of $184,722 representing their aggregate unpaid share of joint
interest billings on the prospect. At September 30, 2005, the unpaid balance of
joint interest billings on the prospect attributable to the participants was
$138,570. No interest is charged or paid on such indebtedness. All amounts owed
will be paid prior to closing.
For the years ended December 31, 2003 and 2002, RAM paid expenses of
$260,000 and $46,000, respectively, on behalf of Danish Knights, A Limited
Partnership and a principal shareholder of RAM, Dr. William Talley, who owned
98% of the general partner of Danish Knights, was chairman of RAM.
In December 2004, RAM acquired WG Energy Holdings, Inc. Among WG's assets
was a package of overriding royalty interests in various oil and gas properties.
Following consummation of the WG Energy acquisition, Bridgeport Royalties, LLC
("Bridgeport") was formed for the purpose of purchasing the overriding royalty
interest package RAM had acquired through its purchase of WG Energy, together
with certain other overriding royalty interests on undeveloped WG Energy
acreage. The managers of Bridgeport, initially, were Mr. Lee and Dr. Talley.
Following Dr. Talley's death in October 2005, Mr. Lee has continued as the sole
manager of Bridgeport. Member interests in Bridgeport were offered as an
employee benefit and perquisite to a number of RAM's officers and employees, and
to the owner of outstanding options to acquire RAM common stock. Thirteen of the
offerees accepted and became members of the limited liability company, along
with Mr. Lee and Dr. Talley. RAM officers, directors and shareholders purchasing
membership interests in Bridgeport, and their respective interests, include
Messrs. Rampey and Smiley, 3.0% each; Mr. Cox, 2.0%; and Dr. Talley and Mr. Lee,
39.9% each. The proposed $2.3 million purchase price for the overriding royalty
package was determined based on a percentage of the present value, discounted at
10% per annum, of the estimated future net revenues attributable to the
overriding royalty interests included in the package and was approved by RAM's
senior secured lender as a condition to such lender releasing its lien on the
overriding royalties included in the sale. In June 2005, Bridgeport completed
the purchase of the overriding royalty package from RAM at the $2.3 million
agreed price. The purchase price was funded with $355,000 in cash provided by
the members of Bridgeport and $1.955 million of loan proceeds obtained by
Bridgeport from BancFirst. RAM has no continuing obligation of any nature with
respect to the Bridgeport loan from BancFirst or any other Bridgeport liability.
132
For the year ended December 31, 2004, RAM paid rent expense of $66,000
related to a condominium for the benefit of Mr. Lee, a director, executive
officer and one of RAM's principal shareholders. In addition, for the year ended
December 31, 2004, RAM's general and administrative expenses include
approximately $792,000 of expenses paid for the benefit of Larry Lee ($627,000)
and Dr. Talley ($165,000 who, at the time, was a director and Chairman of the
Board of RAM, and the principal owner of Danish Knights, A Limited Partnership,
which was the other of RAM's two principal shareholders. Some of the expenses
paid may have been personal in nature.
In the spring of 1998, after the issuance of its publicly held senior
notes, RAM determined that it would be appropriate to hire an experienced
attorney to serve as company's general counsel in its Tulsa office. However,
after discussions with its outside law firm, McAfee & Taft in Oklahoma City, RAM
decided that if Mr. David Stinson, the McAfee & Taft lawyer who had performed
extensive legal services for RAM since its inception in 1987, could be made
available to RAM on a priority and essentially full-time, but not exclusive,
basis, RAM would continue to utilize McAfee & Taft and Mr. Stinson as its
primary counsel and would pay McAfee & Taft a monthly retainer fee for Mr.
Stinson's services, which fee was fixed for a period of three years, with
scheduled annual escalations thereafter. As an incentive for Mr. Stinson to
agree to the proposed arrangement, RAM agreed to grant Mr. Stinson options to
acquire shares of RAM common stock. Effective July 1, 1998, RAM, McAfee & Taft
and Mr. Stinson entered into a Special Retainer Agreement containing the terms
agreed upon between the parties, and immediately thereafter the agreed stock
options were granted to Mr. Stinson. Under the terms of the Special Retainer
Agreement, as amended, in the event the agreement is terminated by Mr. Stinson
for "good cause" or upon a "change of control," as such terms are defined in the
agreement, or by RAM other than for "cause," RAM is required to pay to McAfee &
Taft an amount equal to twelve times the monthly retainer amount. The amount of
the monthly retainer has escalated over time both by agreement of the parties
and by operation of the automatic escalation provisions of the agreement, and
effective as of January 1, 2006, is set at $30,000 per month. Pursuant to the
terms of the Special Retainer Agreement and subsequent issuances and
adjustments, Mr. Stinson holds options to acquire 83.33 shares of RAM common
stock at an exercise price of $250 per share. By letter agreement dated October
20, 2005 and attached as Exhibit C to the merger agreement, Mr. Stinson has
agreed to exercise all of his options prior to the closing of the merger. This
will result in Mr. Stinson becoming a stockholder of RAM and being paid his pro
rata portion of the merger consideration.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires Tremisis directors, officers and persons owning more than 10% of
Tremisis' common stock to file reports of ownership and changes of ownership
with the Securities ad Exchange Commission. Based on its review of the copies of
such reports furnished to Tremisis, or representations from certain reporting
persons that no other reports were required, Tremisis believes that all
applicable filing requirements were complied with during the fiscal year dated
December 31, 2005.
DESCRIPTION OF TREMISIS COMMON STOCK AND OTHER SECURITIES
General
The certificate of incorporation of Tremisis authorizes the issuance of
30,000,000 shares of common stock, par value $.0001, and 1,000,000 shares of
preferred stock, par value $.0001. As of the record date, 7,700,000 shares of
common stock were outstanding and no shares of preferred stock were outstanding.
Common Stock
The holders of common stock are entitled to one vote for each share held
of record on all matters to be voted on by stockholders. In connection with the
vote required for any business combination, all of the existing stockholders,
including all officers and directors of Tremisis, have agreed to vote their
respective shares of common stock owned by them immediately prior to the IPO in
accordance with the vote of the public stockholders owning a majority of the
shares of Tremisis' outstanding common stock. This voting arrangement does not
apply to shares included in units purchased in the IPO or purchased following
the IPO in the open market by any of Tremisis' stockholders, officers and
directors. Tremisis' stockholders, officers and directors may vote their shares
in any manner they determine, in their sole discretion, with respect to any
other items that come before a vote of our stockholders.
133
Tremisis will proceed with the merger only if the stockholders who own at
least a majority of the shares of common stock sold in the IPO vote in favor of
the merger and stockholders owning less than 20% of the shares sold in the IPO
exercise conversion rights discussed below.
Our board of directors is divided into three classes, each of which will
generally serve for a term of three years with only one class of directors being
elected in each year. There is no cumulative voting with respect to the election
of directors, with the result that the holders of more than 50% of the shares
voted for the election of directors can elect all of the directors.
If Tremisis is required to liquidate, the holders of Tremisis common stock
purchased in the IPO will be entitled to share ratably in the trust fund,
inclusive of any interest, and any net assets remaining available for
distribution to them after payment of liabilities. Holders of common stock
issued prior to Tremisis' IPO have agreed to waive their rights to share in any
distribution with respect to common stock owned by them prior to the IPO if
Tremisis is forced to liquidate.
Holders of Tremisis common stock do not have any conversion, preemptive or
other subscription rights and there are no sinking fund or redemption provisions
applicable to the common stock, except that the holders of Tremisis common stock
acquired in the IPO have the right to have their shares of common stock
converted to cash equal to their pro rata share of the trust account if they
vote against the merger and the merger is approved and completed. Holders of
common stock who convert their stock into their share of the trust account still
have the right to exercise the warrants that they received as part of the units.
Preferred Stock
The certificate of incorporation of Tremisis authorizes the issuance of
1,000,000 shares of a blank check preferred stock with such designations, rights
and preferences as may be determined from time to time by Tremisis' board of
directors. Accordingly, Tremisis' board of directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting power
or other rights of the holders of common stock, although Tremisis has entered
into an underwriting agreement which prohibits Tremisis, prior to a business
combination, from issuing preferred stock which participates in any manner in
the proceeds of the trust account, or which votes as a class with the common
stock on a business combination. Tremisis may issue some or all of the preferred
stock to effect a business combination. In addition, the preferred stock could
be utilized as a method of discouraging, delaying or preventing a change in
control of Tremisis. There are no shares of preferred stock outstanding and
Tremisis does not currently intend to issue any preferred stock.
Warrants
Tremisis currently has outstanding 12,650,000 redeemable common stock
purchase warrants. Each warrant entitles the registered holder to purchase one
share of our common stock at a price of $5.00 per share, subject to adjustment
as discussed below, at any time commencing on the completion of the merger. The
warrants expire on May 11, 2008 at 5:00 p.m., New York City time. Tremisis may
call the warrants for redemption;
o in whole and not in part;
o at a price of $.01 per warrant at any time after the warrants become
exercisable;
o upon not less than 30 days' prior written notice of redemption to
each warrant holder; and
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o if, and only if, the reported last sale price of the common stock
equals or exceeds $8.50 per share, for any 20 trading days within a
30 trading day period ending on the third business day prior to the
notice of redemption to warrant holders.
The exercise price and number of shares of common stock issuable on
exercise of the warrants may be adjusted in certain circumstances including in
the event of a stock dividend, or Tremisis' recapitalization, reorganization,
merger or consolidation. However, the warrants will not be adjusted for
issuances of common stock at a price below the exercise price.
The warrants may be exercised upon surrender of the warrant certificate on
or prior to the expiration date at the offices of the warrant agent, with the
exercise form on the reverse side of the warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price, by
certified check payable to Tremisis, for the number of warrants being exercised.
The warrant holders do not have the rights or privileges of holders of common
stock and any voting rights until they exercise their warrants and receive
shares of common stock. After the issuance of shares of common stock upon
exercise of the warrants, each holder will be entitled to one vote for each
share held of record on all matters to be voted on by stockholders.
No warrants will be exercisable unless at the time of exercise a
prospectus relating to common stock issuable upon exercise of the warrants is
current and the common stock has been registered or qualified or deemed to be
exempt under the securities laws of the state of residence of the holder of the
warrants. Under the terms of a warrant agreement, Tremisis has agreed to
maintain a current prospectus relating to common stock issuable upon exercise of
the warrants until the expiration of the warrants. However, there is no
assurance that Tremisis will be able to do so. The warrants may be deprived of
any value and the market for the warrants may be limited if the prospectus
relating to the common stock issuable upon the exercise of the warrants is not
current or if the common stock is not qualified or exempt from qualification in
the jurisdictions in which the holders of the warrants reside.
We have engaged EarlyBirdCapital, the representative of the underwriters
of Tremisis' IPO, on a non-exclusive basis, as our agent for the solicitation
of the exercise of the warrants. To the extent not inconsistent with the
guidelines of the NASD and the rules and regulations of the SEC, we have agreed
to pay the representative for bona fide services rendered a commission equal to
5% of the exercise price for each warrant exercised more than one year after the
date of our IPO if the exercise was solicited by the underwriters. In addition
to soliciting, either orally or in writing, the exercise of the warrants, the
representative's services may also include disseminating information, either
orally or in writing, to warrantholders about us or the market for our
securities, and assisting in the processing of the exercise of warrants. No
compensation will be paid to the representative upon the exercise of the
warrants if:
o the market price of the underlying shares of common stock is lower
than the exercise price;
o the holder of the warrants has not confirmed in writing that
EarlyBirdCapital, Inc. solicited the exercise;
o the warrants are held in a discretionary account;
o the warrants are exercised in an unsolicited transaction; or
o the arrangement to pay the commission is not disclosed in the
prospectus provided to warrantholders at the time of exercise.
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PRICE RANGE OF TREMISIS SECURITIES AND DIVIDENDS
Tremisis' units, common stock and warrants are traded on the OTCBB under
the symbols TEGYU, TEGY and TEGYW, respectively. The following table sets forth
the range of high and low closing bid prices for the units, common stock and
warrants for the periods indicated since the units commenced public trading on
May 13, 2004 and since the common stock and warrants commenced public trading on
May 24, 2004. The over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
reflect actual transactions.
------------------------------------------------------------------------------------------
Units Common Stock Warrants
------------------------------------------------------------------------------------------
High Low High Low High Low
------------------------------------------------------------------------------------------
2005:
------------------------------------------------------------------------------------------
First Quarter ....................... $7.35 $6.70 $5.50 $5.01 $0.94 $0.74
------------------------------------------------------------------------------------------
Second Quarter ...................... $7.05 $6.36 $5.56 $5.12 $0.82 $0.57
------------------------------------------------------------------------------------------
Third Quarter ....................... $7.30 $6.20 $5.55 $5.13 $0.98 $0.50
------------------------------------------------------------------------------------------
Fourth Quarter
(through ___, 2005) ..............
------------------------------------------------------------------------------------------
2004:
------------------------------------------------------------------------------------------
Fourth Quarter ...................... $6.65 $5.70 $5.14 $4.80 $0.80 $0.48
------------------------------------------------------------------------------------------
Third Quarter ....................... $6.35 $5.97 $5.00 $4.81 $0.71 $0.52
------------------------------------------------------------------------------------------
Second Quarter (commencing May 24)... $6.40 $6.00 $5.00 $4.70 $0.82 $0.69
------------------------------------------------------------------------------------------
Holders of Tremisis common stock, warrants and units should obtain current
market quotations for their securities. The market price of Tremisis common
stock, warrants and units could vary at any time before the merger.
In connection with the merger, Tremisis and RAM will use their reasonable
best efforts to obtain the listing for trading on Nasdaq of Tremisis common
stock, warrants and units. Tremisis believes it will meet the Nasdaq listing
requirements because upon consummation of the merger, it will have (i) a market
value of listed securities of at least $50 million, (ii) over one million
publicly held shares, (iii) a market value of publicly held shares in excess of
$5 million, (iv) a minimum bid price of $4.00, (v) over 300 shareholders and
(vi) at least three market makers who will make a market in its securities. In
the event Tremisis' common stock, warrants and units are listed on Nasdaq at the
time of the closing of the merger, the symbol will change to one determined by
Tremisis and Nasdaq that is reasonably representative of the corporate name or
business of Tremisis. If the listing on Nasdaq is not finally approved, it is
expected that the common stock, warrants and units will continue to trade on the
OTCBB.
Holders
As of ________, 2006, there were ___ holders of record of Tremisis units,
___ holders of record of Tremisis common stock and ___ holders of record of
Tremisis warrants. Tremisis believes that the beneficial holders of the units,
common stock and warrants to be in excess of 400 persons each.
Dividends
Tremisis has not paid any dividends on our common stock to date and does
not intend to pay dividends prior to the completion of the merger. It is the
present intention of Tremisis' board of directors to retain all earnings, if
any, for use in our business operations and, accordingly, our board does not
anticipate declaring any dividends in the foreseeable future. The payment of
dividends subsequent to the merger will be within the discretion of our then
board of directors and will be contingent upon our
136
revenues and earnings, if any, capital requirements and general financial
condition subsequent to completion of the merger.
APPRAISAL RIGHTS
Tremisis stockholders do not have appraisal rights in connection the
merger or the issuance of Tremisis common stock pursuant to the merger under the
DGCL.
STOCKHOLDER PROPOSALS
Assuming the merger proposal is approved, the Tremisis 2006 annual meeting
of stockholders will be held on or about ________, 2006 unless the date is
changed by the board of directors. If you are a stockholder and you want to
include a proposal in the proxy statement for the year 2006 annual meeting, you
need to provide it to us by no later than _____________, 2006. You should direct
any proposals to our secretary at Tremisis' principal office in New York, New
York. If you want to present a matter of business to be considered at the year
2006 annual meeting, under Tremisis' by-laws you must give timely notice of the
matter, in writing, to our secretary. To be timely, the notice has to be given
between __________ and ____________. If Tremisis is liquidated as a result of
not consummating a business combination transaction before May 18, 2006, there
will be no annual meeting in 2006.
EXPERTS
The consolidated financial statements of RAM Energy, Inc. at December 31,
2004 and 2003, and for each of the three years in the period ended December 31,
2004, included in this proxy statement, have been audited by UHY Mann Frankfort
Stein & Lipp CPAs, LLP, independent registered public accounting firm, as set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
The financial statements of Tremisis at December 31, 2004 and for the
period from February 5, 2004 (inception) to December 31, 2004, included in this
proxy statement have been audited by BDO Seidman, LLP, independent registered
public accounting firm, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of RWG Energy, Inc. and its
subsidiaries at December 31, 2004 and 2003, and for each of the two years in the
period ended December 31, 2004, included in this proxy statement have been
audited by ELMS FARIS & COMPANY, LLP, independent public accountants, as set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given on the authority for such firm as experts.
Representatives of BDO Seidman, LLP, and of UHY Mann Frankfort Stein &
Lipp CPAs, LLP, will be present at the stockholder meeting or will be available
by telephone with the opportunity to make statements and to respond to
appropriate questions.
WHERE YOU CAN FIND MORE INFORMATION
Tremisis files reports, proxy statements and other information with the
Securities and Exchange Commission as required by the Securities Exchange Act of
1934, as amended. You may read and copy reports, proxy statements and other
information filed by Tremisis with the Securities and Exchange Commission at the
Securities and Exchange Commission public reference room located at 100 F
Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. You may also obtain copies of the materials
described above at prescribed rates by writing to the Securities and Exchange
Commission, Public Reference Section, 100 F Street, N.E., Washington, D.C.
20549. You may access information on Tremisis at the Securities and Exchange
Commission web site containing reports, proxy statements and other information
at: http://www.sec.gov.
Information and statements contained in this proxy statement, or any annex
to this proxy statement incorporated by reference in this proxy statement, are
qualified in all respects by reference to the copy of the relevant contract or
other annex filed as an exhibit to this proxy statement or incorporated in this
proxy statement by reference.
137
All information contained in this document relating to Tremisis has been
supplied by Tremisis, and all such information relating to RAM has been supplied
by RAM. Information provided by one another does not constitute any
representation, estimate or projection of the other.
If you would like additional copies of this document, or if you would like
to request, without charge, any and all information that has been incorporated
by reference in the proxy statement, or if you have questions about the merger,
you should contact via phone or in writing:
Lawrence S. Coben
Chairman and Chief Executive Officer
Tremisis Energy Acquisition Corporation
1755 Broadway, Suite 604
New York, New York 10019
(212) 397-1464
GLOSSARY OF TERMS
The definitions set forth below shall apply to the indicated terms as used
in this proxy statement. All volumes of natural gas referred to herein are
stated at the legal pressure base of the state or area where the reserves exist
and at 60 degrees Fahrenheit and in most instances are rounded to the nearest
major multiple.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas.
Bcfe. One billion cubic feet of natural gas equivalent, determined using
the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or
natural gas liquids.
Boe. The amount of natural gas that is equal to one barrel of oil on an
energy basis, using the ratio of six Mcf of natural gas to one Bbl of
crude oil, condensate or natural gas liquids.
Completion. The installation of permanent equipment for the production of
oil or natural gas or, in the case of a dry hole, the reporting of
abandonment to the appropriate agency.
Development well. A well drilled within the proved areas of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons
in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas
reserves not classified as proved, to find a new reservoir in a field
previously found to be productive of oil or natural gas in another
reservoir or to extend a known reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Injection well. A well employed for the introduction into an underground
stratum of water or gas under pressure. Injection wells are employed for
the disposal of salt water produced with oil, as well as in pressure
maintenance, secondary recovery or recycling operations to introduce a
fluid or gas into the producing formation to maintain underground
pressures which would otherwise be reduced by virtue of the production of
oil or natural gas.
Mbbls. One thousand barrels of crude oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcfe. One thousand cubic feet of natural gas equivalent, determined using
the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or
natural gas liquids.
Mmcf. One million cubic feet of natural gas.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells, as the case may be.
Oil. Crude oil.
PV-10 Value and present value. When used with respect to proved reserves
of oil, natural gas and natural gas liquids, the estimated future gross
revenues to be generated from the production of proved reserves, net of
estimated production and future development costs, using prices and costs
in effect as of the date indicated, without giving effect to non-property
related expenses such as general and administrative expenses, debt service
and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of
such production exceed production expenses and taxes.
Proved developed reserves. Proved reserves that are expected to be
recovered from existing wellbores, whether or not currently producing,
without drilling additional wells. Production of such reserves may require
a recompletion. For a complete definition of "proved developed reserves,"
please refer to Rule 4-10(c)(3) of Regulation S-X, as promulgated under
the Securities Act of 1933, as amended.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. For a
complete definition of "proved reserves," please refer to Rule 4-10 (a)(2)
of Regulation S-X, as promulgated under the Securities Act of 1933, as
amended.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves (PUD). Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where
a relatively major expenditure is required for recompletion. For a
complete definition "proved undeveloped reserves," please refer to Rule
4-10(a)(4) of Regulation S-X, as promulgated under the Securities Act of
1933, as amended.
Recompletion. The completion for production of an existing wellbore in
another formation from that in which the well has been previously
completed.
Reserve life. A ratio determined by dividing the existing reserves
determined as of the stated measurement date by production from such
reserves for the prior twelve month period.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or natural gas that is confined
by impermeable rock or water barriers and is individual and separate from
other reservoirs.
Royalty interest. An interest in an oil and gas property entitling the
owner to a share of oil or natural gas production free of costs of
production.
3-D seismic data. Seismic data collected as an intersecting grid of
seismic lines. Data collected in this fashion may be used to help create
3-D computer models of the underground geometries of the rocks. The
collection of seismic data involves sending shock waves into the ground
and measuring how long it takes the subsurface rocks to reflect the waves
back to the surface. Shock waves are generated by pounding the earth with
a vibrator truck or by exploding small dynamite charges in shallow holes.
The arrival times of the waves at the surface are detected by listening
devices called geophones. Computers then process the geophone data and
convert it into seismic lines, which are two- or three-dimensional
displays that resemble cross-sections.
2-D seismic data. Seismic data collected using two-dimensional lines
created by laying geophones out in single line. See the definition of 3-D
seismic data for a description of how seismic data is collected.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether such acreage contains
proved reserves.
Well bore. The hole drilled by the bit.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a
share of production.
Workover. Operations on a producing well to restore or increase
production.
138
INDEX TO FINANCIAL STATEMENTS
RAM Energy, Inc. -- Nine months ended September 30, 2005 and 2004
Condensed Consolidated:
Balance Sheets as of September 30, 2005 (unaudited)
and December 31, 2004 F- 2
Statements of Operations for the nine months ended
September, 2005 and 2004 (unaudited) F- 3
Statements of Stockholders' Deficit for the nine months
ended September 30, 2005 (unaudited) and for the year
ended December 31, 2004 F- 4
Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 (unaudited) F- 5
Notes to Unaudited Condensed Consolidated Financial Statements F- 6
RAM Energy, Inc. -- Years ended December 31, 2004, 2003, and 2002 F- 7
Report of Independent Registered Public Accounting Firm F-17
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-18
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-19
Consolidated Statements of Stockholders' Deficit for
the years ended December 31, 2004, 2003 and 2002 F-20
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002 F-21
Notes to Consolidated Financial Statements F-22
RWG Energy, Inc. -- Years ended December 31, 2004 and 2003
Report of Independent Auditors F-47
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-48
Consolidated Statements of Operations for the years ended
December 31, 2003 and 2004 F-49
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004 and 2003 F-50
Consolidated Statements of Cash Flows for the years
ended December 31, 2004 and 2003 F-51
Notes to Consolidated Financial Statements F-53
Tremisis Energy Acquisition Corp.
Report of Independent Regsistered Public Accounting Firm F-69
Balance Sheets F-70
Statements of Operations F-71
Statements of Stockholders' Equity F-72
Statements of Cash Flows F-73
Summary of Significant Accounting Policies F-74
Notes to Financial Statements F-75
F-1
RAM Energy, Inc.
Condensed consolidated balance sheets
(in thousands, except share and per share amounts)
September
30, 2005 December
(unaudited) 31, 2004
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,753 $ 1,175
Accounts receivable:
Oil and natural gas sales 6,870 5,039
Joint interest operations, net of
allowance for doubtful accounts of $591 and
$687 at September 30, 2005, and December
31, 2004, respectively 491 630
Other 99 28
Derivative assets -- 1,627
Prepaid expenses and other current assets 522 706
--------- ---------
Total current assets 9,735 9,205
PROPERTIES AND EQUIPMENT, AT COST:
Oil and natural gas properties and equipment,
using full cost accounting 155,330 146,598
Other property and equipment 6,924 5,779
--------- ---------
162,254 152,377
Less accumulated depreciation, depletion
and amortization (33,134) (23,919)
--------- ---------
Net properties and equipment 129,120 128,458
OTHER ASSETS:
Deferred loan costs, net of accumulated
amortization of $4,565 and $4,110 at September
30, 2005, and December 31, 2004, respectively 1,390 1,845
Other 880 816
--------- ---------
Total assets $ 141,125 $ 140,324
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable:
Trade $ 5,348 $ 5,273
Oil and natural gas proceeds due others 2,948 2,528
Related party 200 --
Accrued liabilities:
Compensation 391 583
Interest 638 1,547
Income taxes payable -- 289
Dividends -- --
Derivative liabilities 5,308 --
Long-term debt due within one year 8,917 3,891
--------- ---------
Total current liabilities 23,750 14,111
DERIVATIVE LIABILITIES 5,432 --
OIL AND NATURAL GAS PROCEEDS DUE OTHERS 2,006 1,642
LONG-TERM DEBT 108,384 113,453
DEFERRED AND OTHER NON-CURRENT INCOME TAXES 21,173 24,374
ASSET RETIREMENT OBLIGATION 6,873 6,656
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' DEFICIT
Common stock, $10.00 par value; authorized -
5,000 shares; issued
and outstanding - 2,273 shares 23 23
Additional paid-in capital 73 73
Accumulated deficit (26,589) (20,008)
--------- ---------
Total stockholders' deficit (26,493) (19,912)
--------- ---------
Total liabilities and stockholders' deficit $ 141,125 $ 140,324
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
RAM Energy, Inc.
Condensed consolidated statements of operations
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---------- -------- ---------- ---------
REVENUE AND OTHER OPERATING INCOME:
Oil and natural gas sales $ 17,974 $ 3,568 $ 48,140 $ 12,499
Realized and unrealized losses
from derivatives (11,760) (327) (19,914) (901)
Gain on sale of subsidiary -- -- -- 12,139
Other 398 67 983 117
---------- -------- ---------- ---------
Total revenues and other
operating income 6,612 3,308 29,209 23,854
OPERATING EXPENSES:
Oil and natural gas production taxes 919 243 2,460 914
Oil and natural gas production expenses 3,917 619 11,453 1,803
Depreciation, depletion and amortization 3,397 652 9,213 2,288
Accretion expense 71 15 217 46
General and administrative, overhead and
other expenses 2,367 1,394 6,285 4,454
---------- -------- ---------- ---------
Total operating expenses 10,671 2,923 29,628 9,505
---------- -------- ---------- ---------
Operating income (loss) (4,059) 385 (419) 14,349
---------- -------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest expense (3,145) (1,029) (8,769) (3,394)
Interest income 19 11 41 31
---------- -------- ---------- ---------
Income (loss) before taxes (7,185) (633) (9,147) 10,986
Income tax (benefit) provision (2,720) (240) (3,466) 4,175
---------- -------- ---------- ---------
Net income (loss) $ (4,465) $ (393) $ (5,681) $ 6,811
========== ======== ========== =========
EARNINGS (LOSS) PER SHARE:
Basic $(1,964.36) $(159.11) $(2,499.34) $2,578.95
Diluted $(1,964.36) $(159.11) $(2,499.34) $2,487.58
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 2,273 2,470 2,273 2,641
Diluted 2,273 2,470 2,273 2,738
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-3
RAM Energy, Inc.
Condensed consolidated statements of stockholders' deficit
(in thousands, except share and per share amounts)
(unaudited)
Common Stock Additional Total
-------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
-------- -------- ---------- ----------- -------------
BALANCE, December 31, 2003 2,727 $ 27 $ 88 $(19,768) $(19,653)
Net income -- -- -- 6,076 6,076
Dividends declared -- -- -- (1,200) (1,200)
Purchase and cancellation of common
shares and outstanding options (454) (4) (15) (5,116) (5,135)
-------- -------- -------- -------- --------
BALANCE, December 31, 2004 2,273 23 73 (20,008) (19,912)
Net loss -- -- -- (5,681) (5,681)
Dividends declared -- -- -- (900) (900)
-------- -------- -------- -------- --------
BALANCE, September 30, 2005 2,273 $ 23 $ 73 $(26,589) $(26,493)
======== ======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-4
RAM Energy, Inc.
Condensed consolidated statements of cash flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2005 2004
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (5,681) $ 6,811
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization
Oil and natural gas properties and equipment 8,923 2,086
Amortization of Deferred loan costs
and Senior notes discount 486 355
Other property and equipment 290 202
Accretion expense 217 46
Gain on sale of assets -- (2)
Gain on the sale of subsidiary -- (12,139)
Unrealized losses on derivatives 18,767 --
Deferred income taxes (3,466) 3,875
Changes in operating assets and liabilities
Accounts receivable (1,763) (90)
Prepaid expenses and other current assets 184 80
Accounts payable 695 (158)
Accrued liabilities and other (7,159) (432)
-------- --------
Total adjustments 17,174 (6,177)
-------- --------
Net cash provided by operating activities 11,493 634
-------- --------
INVESTING ACTIVITIES:
Proceeds from maturity of short-term investments -- 1,681
Payments for oil and natural gas properties (11,078) (2,937)
and equipment
Proceeds from sales of oil and natural gas
properties and equipment 2,346 295
Payments for other property and equipment (1,209) (140)
Proceeds from sales of other property and equipment -- 38
Proceeds from sale of subsidiary -- 21,791
-------- --------
Net cash (used in) provided by investing activities (9,941) 20,728
FINANCING ACTIVITIES:
Payments on long-term debt (6,952) (18,222)
Proceeds from borrowings on long-term debt 6,878 2,018
Dividends paid (900) (1,200)
Common stock and options purchased -- (5,135)
-------- --------
Net cash used in financing activities (974) (22,539)
Increase (decrease) in cash and cash equivalents 578 (1,177)
Cash and cash equivalents at beginning of period 1,175 2,118
-------- --------
Cash and cash equivalents at end of period $ 1,753 $ 941
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ 300
======== ========
Cash paid for interest $ 3,770 $ 3,820
======== ========
DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Accrued interest added to principal balance of
revolving credit facility $ 5,908 $ 458
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-5
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ORGANIZATION, AND BASIS OF
PRESENTATION
1. Basis of Financial Statements
The accompanying unaudited condensed consolidated financial statements present
the financial position at September 30, 2005, and December 31, 2004, and the
results of operations and cash flows of RAM Energy, Inc. and subsidiaries (the
Company) for the three-month and nine-month periods ended September 30, 2005 and
2004. These condensed consolidated financial statements include all adjustments,
consisting of normal and recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the financial position and
the results of operations for the indicated periods. The results of operations
for the three and nine months ended September 30, 2005, are not necessarily
indicative of the results to be expected for the full year ending December 31,
2005. Reference is made to the Company's consolidated financial statements for
the year ended December 31, 2004, for an expanded discussion of the Company's
financial disclosures and accounting policies.
2. Nature of Operations and Organization
The Company operates exclusively in the upstream segment of the oil and gas
industry with activities including the drilling, completion, and operation of
oil and gas wells. The Company conducts the majority of its operations primarily
in the states of Texas, Louisiana, and Oklahoma.
On December 17, 2004, the Company completed its acquisition of WG Energy
Holdings, Inc. ("WG"), a Delaware corporation, in which a wholly owned
subsidiary of the Company created specifically for such purpose merged with and
into WG and WG was the surviving corporation in the merger (the "WG
Acquisition"). At the time of the merger, the name of WG was changed to RWG
Energy, Inc. ("RWG"). RWG, with its four existing subsidiaries, are now first
and second tier subsidiaries of the Company.
3. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Estimates and assumptions that, in the opinion of management of the Company are
significant include oil and natural gas reserves, amortization relating to oil
and natural gas properties, asset retirement obligations and income taxes.
4. Reclassifications
Certain reclassifications of previously reported amounts for 2004 have been made
to conform with the 2005 presentation format. These reclassifications had no
effect on net income or loss.
F-6
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
5. Earnings Per Common Share
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if dilutive stock options
and warrants were exercised, calculated using the treasury stock method. There
is no dilution if a three or nine month period shows a net loss, because the
effect of stock options and warrants would be antidilutive. A reconciliation of
net income and weighted average shares used in computing basic and diluted net
income per share is as follows for the three and nine months ended September 30
(in thousands, except share and per share amounts):
Three Months
Ended September 30
2005 2004
---- ----
BASIC AND DILUTED INCOME PER SHARE:
Net loss $ (4,465) $ (393)
========== =========
Weighted average shares 2,273 2,470
========== =========
Basic and diluted loss per share $(1,964.36) $ (159.11)
========== =========
Nine Months
Ended September 30
2005 2004
---- ----
BASIC INCOME (LOSS) PER SHARE:
Net income (loss) $ (5,681) $ 6,811
========== =========
Weighted average shares 2,273 2,641
========== =========
Basic income (loss) per share $(2,499.34) $2,578.95
========== =========
DILUTED INCOME (LOSS) PER SHARE:
Net income (loss) $ (5,681) $ 6,811
========== =========
Weighted average shares, basic 2,273 2,641
Dilutive effect of stock options -- 97
---------- ---------
Weighted average shares, diluted 2,273 2,738
========== =========
Diluted income (loss) per share $(2,499.34) $2,487.58
========== =========
6. Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values and is effective for the first interim or annual reporting period
beginning after June 30, 2005. Management has not determined the impact on the
Company's future financial position or results of operations.
B - WG ACQUISITION
The Company completed the WG Acquisition on December 17, 2004. The final
adjusted purchase price was $82.6 million, including the assumption and payment
of WG's long-term debt of $24.5 million, the settlement of all outstanding
derivative instruments of $14.4 million and the balance (excluding the escrow)
of $32.7 million was paid in cash. $11.0 million of the purchase price was
deposited in two separate escrow accounts to provide funds against which the
Company may make claims for any
F-7
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
subsequently determined breach by WG of representations and warranties in the
merger agreement and for potential losses that may arise in connection with
certain existing litigation against WG. (See Note E.) The acquisition was
financed with a credit facility provided by Wells Fargo Foothill, Inc.
(Foothill), the Company's existing senior secured lender. (See Note F.) RWG's
principal assets are producing oil properties located in north Texas, a gas
plant and a significant block of undeveloped deep rights in held-by-production
leases.
C - DERIVATIVE CONTRACTS
During 2005 and 2004, the Company entered into numerous derivative contracts.
The Company did not formally designate these transactions as hedges as required
by SFAS No. 133 in order to receive hedge accounting treatment. Accordingly, all
gains and losses on the derivative financial instruments have been recorded in
the statement of operations.
At September 30, 2005, the Company had purchased put options on 138,000 barrels
of oil through December 2005 with a weighted average floor price of $40.00 per
barrel, and had purchased call options on 46,000 barrels of oil through December
2005 with a weighted average ceiling price of $55.75 per barrel. The Company
also had collars on 958,500 barrels of oil through December 2007 with a weighted
average floor price of $39.53 and a weighted average ceiling price of $63.36.
For natural gas, the Company had collars on 2,917,000 MMbtu through March 2007.
The weighted average floor price was $6.31 per MMbtu and the weighted average
ceiling price was $9.27 per MMbtu. The Company also had purchased calls on
1,070,000 MMbtu for April 2006 through October 2006 at a weighted average floor
of $9.50 per MMbtu.
At December 31, 2004, the Company had purchased put options on 37,958 barrels of
oil through December 2005, with a floor price of $40.00. For natural gas, the
Company had purchased collars on 152,000 MMbtu through October 2005. The
weighted average floor price was $5.65 per MMbtu and the weighted average
ceiling price was $7.84 per MMbtu.
The Company measured the fair value of its derivatives at September 30, 2005,
and December 31, 2004, based on quoted market prices. Accordingly, a net
liability of $10,740,000 and a net asset of $1,627,000 were recorded in the
consolidated balance sheets at September 30, 2005, and December 31, 2004,
respectively. During August and September, 2005 the Company paid its
counterparty $6,400,000 in margin calls, which amount reduced the carrying value
of its derivative liability.
D - SUBSIDIARY GUARANTORS
The Company's Senior Notes are fully and unconditionally guaranteed, jointly and
severally, on a senior unsecured basis, by all of the Company's current and
future subsidiaries (the "Subsidiary Guarantors"). The following table sets
forth condensed consolidating financial information of the Subsidiary
Guarantors. There are currently no restrictions on the ability of the Subsidiary
Guarantors to transfer funds to the Company in the form of cash dividends, loans
or advances.
F-8
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
The following represents the condensed consolidating balance sheets for the
Company and its subsidiaries at September 30, 2005, and December 31, 2004 (in
thousands):
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
--------- ---------- ------------- ------------
September 30, 2005
Current assets $ 4,082 $ 24,992 $ (19,339) $ 9,735
Property and equipment, net 14,576 114,544 -- 129,120
Investment in subsidiary 24,365 -- (24,365) --
Other assets 2,145 125 -- 2,270
--------- --------- --------- ---------
Total assets $ 45,168 $ 139,661 $ (43,704) $ 141,125
========= ========= ========= =========
Current liabilities $ 34,399 $ 8,690 $ (19,339) $ 23,750
Long-term debt 28,360 80,024 -- 108,384
Other non-current liabilities 8,902 5,409 -- 14,311
Deferred and other non-current income taxes -- 21,173 -- 21,173
--------- --------- --------- ---------
Total liabilities 71,661 115,296 (19,339) 167,618
Stockholders' equity (deficit) (26,493) 24,365 (24,365) (26,493)
--------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit) $ 45,168 $ 139,661 $ (43,704) $ 141,125
========= ========= ========= =========
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
--------- ---------- ------------- ------------
December 31, 2004
Current assets $ 1,203 $ 8,002 $ -- $ 9,205
Property and equipment, net 10,563 117,895 -- 128,458
Investment in subsidiary 11,882 -- (11,882) --
Other assets 2,661 -- -- 2,661
--------- --------- --------- ---------
Total assets $ 26,309 $ 125,897 $ (11,882) $ 140,324
========= ========= ========= =========
Current liabilities $ 6,086 $ 8,025 $ -- $ 14,111
Long-term debt 34,489 78,964 -- 113,453
Other non-current liabilities 3,104 5,194 -- 8,298
Deferred and other non-current income taxes 2,542 21,832 -- 24,374
--------- --------- --------- ---------
Total liabilities 46,221 114,015 -- 160,236
Stockholders' equity (deficit) (19,912) 11,882 (11,882) (19,912)
--------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit) $ 26,309 $ 125,897 $ (11,882) $ 140,324
========= ========= ========= =========
F-9
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
The following represents the condensed consolidating statements of operations
and statements of cash flows for the Company and its subsidiaries for the three
months and nine months ended September 30, 2005 and 2004:
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
-------- ---------- ------------- ------------
Three Months Ended September 30, 2005
Operating revenues $ (9,051) $ 15,663 $ -- $ 6,612
Operating expenses 3,417 7,254 -- 10,671
-------- -------- -------- --------
Operating income (loss) (12,468) 8,409 -- (4,059)
Other income (1,391) 11 (1,746) (3,126)
-------- -------- -------- --------
Income (loss) before income taxes (13,859) 8,420 (1,746) (7,185)
Income taxes (9,394) 6,674 -- (2,720)
-------- -------- -------- --------
Net income (loss) $ (4,465) $ 1,746 $ (1,746) $ (4,465)
======== ======== ======== ========
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
-------- ---------- ------------- ------------
Three Months Ended September 30, 2004
Operating revenues $ 1,741 $ 1,567 $ -- $ 3,308
Operating expenses 2,562 361 -- 2,923
------- ------- ----- -------
Operating income (821) 1,206 -- 385
Other income (270) -- (748) (1,018)
------- ------- ----- -------
Income (loss) before income taxes (1,091) 1,206 (748) (633)
Income taxes (698) 458 -- (240)
------- ------- ----- -------
Net income (loss) $ (393) $ 748 $(748) $ (393)
======= ======= ===== =======
F-10
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
-------- ---------- ------------- ------------
Nine Months Ended September 30, 2005
Operating revenues $(13,110) $ 42,319 $ -- $ 29,209
Operating expenses 9,138 20,490 -- 29,628
-------- -------- -------- --------
Operating income (22,248) 21,829 -- (419)
Other income 2,400 26 (11,154) (8,728)
-------- -------- -------- --------
Income (loss) before income taxes (19,848) 21,855 (11,154) (9,147)
Income taxes (14,167) 10,701 -- (3,466)
-------- -------- -------- --------
Net income (loss) $ (5,681) $ 11,154 $(11,154) $ (5,681)
======== ======== ======== ========
Cash flows provided by (used in) $ (36) $ 11,529 $ -- $ 11,493
operating activities
Cash flows used in (2,638) (7,303) -- (9,941)
investing activities
Cash flows provided by (used in)
financing activities 3,329 (4,303) -- (974)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents 655 (77) -- 578
Cash and cash equivalents at beginning of period 1,043 132 -- 1,175
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 1,698 $ 55 $ -- $ 1,753
======== ======== ======== ========
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
-------- ---------- ------------- ------------
Nine Months Ended September 30, 2004
Operating revenues $ 17,410 $ 6,524 $ (80) $ 23,854
Operating expenses 7,856 1,729 (80) 9,505
-------- -------- -------- --------
Operating income 9,554 4,795 -- 14,349
Other income (401) 30 (2,992) (3,363)
-------- -------- -------- --------
Income (loss) before income taxes 9,153 4,825 (2,992) 10,986
Income taxes 2,342 1,833 -- 4,175
-------- -------- -------- --------
Net income (loss) $ 6,811 $ 2,992 $ (2,992) $ 6,811
======== ======== ======== ========
Cash flows provided by (used in) $ 24,922 $(24,288) $ -- $ 634
operating activities
Cash flows provided by (used in) (3,560) 24,288 -- 20,728
investing activities
Cash flows used in financing activities (22,539) -- -- (22,539)
-------- -------- -------- --------
Decrease) in cash and cash equivalents (1,177) -- -- (1,177)
Cash and cash equivalents at beginning of period 2,118 -- -- 2,118
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 941 $ -- $ -- $ 941
======== ======== ======== ========
The Company has allocated a portion of its long-term debt and has not allocated
any portion of accrued interest payable, unamortized debt issue costs and
unamortized issue discount to its subsidiaries. In
F-11
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
addition, the Company has not allocated general and administrative expenses or
interest charges to its subsidiaries. Accordingly, the above condensed
consolidating information is not intended to present the Company's subsidiaries
on a stand-alone basis.
E - COMMITMENTS AND CONTINGENCIES
In November 2004, Ted Collins, Jr. filed a lawsuit against WG Energy Holdings,
Inc. and Michael G. Grella, the former President of that company. Mr. Collins
alleged that WG and Mr. Grella failed to timely apply a $1.5 million advance
toward enhancing the shallow depths in certain leases, and failed to deliver
assignments of certain interests in those leases, both as allegedly required by
the participation agreement between them. Mr. Collins further claimed that WG
had failed to account to him for revenues allegedly accruing to him under the
terms of the participation agreement. Mr. Collins sought an accounting and to
have the partial assignment and/or participation agreement reformed based on
allegations of mutual mistake, and further pled claims of fraud and negligent
misrepresentation. He did not specify the amount of damages claimed. As this
lawsuit existed at the time of the Company's acquisition of WG, a $5 million
escrow was established as a reserve for this lawsuit. (see Note B). A settlement
agreement was reached on September 14, 2005, whereby Ted Collins Jr. and
Defendants have settled and released all claims that have been asserted and
those that might be asserted in the said lawsuit. On October 19, 2005, RWG
received $250,000 from the escrow account as a result of this settlement.
In April 2002, a lawsuit was filed in the District Court for Woods County,
Oklahoma against the Company, certain of its subsidiaries and various other
individuals and unrelated companies, by lessors and royalty owners of certain
tracts of land, which were sold to Chesapeake in 2001. The petition claims that
additional royalties are due, because Carmen Field Limited Partnership (CFLP), a
wholly-owned subsidiary of the Company, resold oil and gas purchased at the
wellhead for an amount in excess of the price upon which royalty payments were
based and paid no royalties on natural gas liquids extracted from the gas at
plants downstream of the system. Other allegations include under-measurement of
oil and gas at the wellhead by CFLP, failure to pay royalties on take-or-pay
settlement proceeds and failure to properly report deductions for
post-production costs in accordance with Oklahoma's check stub law.
Company defendants have filed answers in the lawsuit denying all material
allegations set out in the petition. The Company believes that fair and proper
accounting was made to the royalty owners for production from the subject leases
and intends to vigorously defend the lawsuit. Management is unable to estimate a
range of potential loss, if any, related to this lawsuit, and accordingly no
amounts have been recorded in the consolidated financial statements. In the
event the court should find Company defendants liable for damages in the
lawsuit, a former joint venture partner is contractually obligated to pay a
portion of any damages assessed against the defendant lessees up to a maximum
contribution of approximately $2.8 million.
The Company is also involved in other legal proceedings and litigation in the
ordinary course of business. In the opinion of management, the outcome of such
matters will not have a material adverse effect on the Company's financial
position or results of operations.
The Company has established a severance agreement for the President and CEO of
the Company. This agreement provides for severance benefits to be paid upon
involuntary separation as a result of actions taken by the Company or its
successors. At December 31, 2004 and 2003, the severance benefits under this
agreement were approximately $1,750,000 and $1,825,000, respectively. A
provision for these benefits will not be made until an involuntary termination
is probable.
F-12
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
Pursuant to a Special Retainer Agreement effective July 1, 1998, as amended, the
Company is obligated to pay an outside counsel law firm approximately $348,000
in the event that the agreement is terminated by reason of expiration of term,
by counsel for good reason, by reason of change in control, or by the Company at
will. A provision for the payment will not be made until termination of the
agreement is probable.
F - LONG-TERM DEBT
Long-term debt consists of the following:
September December
30, 2005 31, 2004
--------- --------
(in thousands)
11.5% Senior Notes due 2008, net of discount $ 28,299 $ 28,268
Revolving Credit Facility 88,749 88,663
Installment loan agreements 253 413
-------- --------
117,301 117,344
Less amount due within one year 8,917 3,891
-------- --------
$108,384 $113,453
======== ========
1. Senior Notes
In February 1998, the Company completed the sale of $115 million of 11.5% Senior
Notes due 2008 in a public offering of which $28.2 million remained outstanding
at September 30, 2005, and December 31, 2004. The Senior Notes are senior
unsecured obligations of the Company and are redeemable at the option of the
Company in whole or in part, at any time on or after February 15, 2005, at
prices ranging from 111.5% to 103.8% of face amount to their scheduled maturity
in 2008.
At September 30, 2005, and December 31, 2004, the unamortized original issue
discount associated with the Notes totaled $97,000 and $128,000, respectively.
2. Revolving Credit Facility
In December 2004, the Company entered into an amended and restated $90.0 million
senior secured credit facility provided by Foothill. The facility includes a
$30.0 million term loan and a $60.0 million revolving credit facility, reducing
by $2.5 million per quarter commencing September 30, 2005, and continuing until
the committed amount of the revolver is reduced to $50.0 million. Borrowings
under the revolving credit facility bear interest at Foothill's base rate plus
2% (8.75% and 7.25% at September 30, 2005, and December 31, 2004), or LIBOR plus
4% (8.02% at September 30, 2005), at the option of the Company, while advances
under the term loan bear interest at the base rate plus 5% (11.75% at September
30, 2005, and 9.25% at December 31, 2004), or LIBOR plus 7% (11.02% at September
30, 2005), also at the option of the Company. The entire facility will mature in
December 2008. The amount of credit available under the credit facility at
September 30, 2005, and December 31, 2004, was $1.3 million, at each respective
date.
The Company is required to pay a commitment fee equal to .375% per annum on the
amount by which the borrowing base exceeds the aggregate amount outstanding
under the Foothill credit facility. Amounts outstanding under the Foothill
credit facility are collateralized by substantially all current and future
F-13
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
assets of the Company and its subsidiaries. Along with the pledged collateral
mentioned above, Foothill also has first rights to the Company's cash accounts.
The credit facility contains customary covenants which, among other things,
require periodic financial and reserve reporting and limit the Company's
incurrence of indebtedness, liens, dividends, loans, mergers, transactions with
affiliates, investments and sales of assets, and require the Company to maintain
certain financial ratios, including limitation of capital expenditures and
EBITDA. The credit facility also requires the Company to maintain derivative
contracts for specified percentages of future production.
If the Company fails to satisfy or obtain a waiver for the covenants of the
credit facility, Foothill could consider the Company to be in default. Upon
default, Foothill may declare all obligations immediately due and payable, cease
advancing money or extending credit, terminate the agreement, and secure its
rights in the Company's collateral. The Foothill credit facility also contains a
subjective acceleration clause whereby Foothill may declare an event of default
if it determines a material adverse change has occurred. Management believes it
is unlikely that the subjective acceleration clause would be asserted in the
next twelve months and therefore has classified the credit facility as a
long-term obligation in accordance with its stated maturity.
On April 29, 2004, the Company amended its loan and security agreement with
Foothill to allow for the sale of a subsidiary (Note H) and to restate certain
future financial covenants.
On May 24, 2005, the Company amended its loan and security agreement with Wells
Fargo Foothill (Foothill), resulting in the addition of a third party, ABLECO,
and additional hedging requirements.
The loan and security agreement was also amended on October 11, 2005. The latest
amendment created a new "Special Revolving Commitment" of $10 million to fund
margin calls from the Company's counterparty to its derivative contracts and a
"Special Maturity Date" of June 30, 2006. The amendment also waived, until
execution of the amendment, the $2.5 million reduction of the Revolving
Commitment and reset EBITDA and capital expenditure limit covenants and a
timetable to set other financial covenants.
Borrowings under the special revolving credit facility bear interest at
Foothill's base rate plus 5% (11.75% at September 30, 2005), or LIBOR plus 4%
(11.05% at September 30, 2005), at the Company's option.
In addition to prior deposits, the Company paid $6,400,000 in margin calls
related to its derivative contracts during August and September, 2005. The
special revolving credit facility was funded in the amount of $6.9 million and
the revolving credit facility was reduced by that amount. Any refunds of margin
calls must be applied to the special revolving credit facility. On November 4,
2005 the counterparty refunded $4,600,000 of the margin deposits.
Simultaneous with the funding, a closing fee of $500,000 was paid. Under certain
conditions, an additional fee of $375,000 may be required to be paid as early as
March 31, 2006.
At September 30, 2005, the Company was in compliance with debt covenants.
G - CAPITAL STOCK
In August 2004, the Company repurchased and retired one-sixth of its outstanding
common shares and vested stock options for $5.0 million and $135,000,
respectively. The cash paid to repurchase the
F-14
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
common shares and stock options is equal to their respective estimated fair
values on the date of settlement and, therefore, is recorded as a reduction of
equity. No additional compensation expense was incurred as a result of the
repurchase of the stock options. Absent a market price for or comparable to the
untraded securities, management estimated the fair value of the common stock by
dividing the net asset value by the total number of shares outstanding. The fair
value of the stock options was calculated as the excess of the estimated value
of the common stock over the exercise price of the options. Management believes
the estimation method and assumptions utilized represent the best available
evidence of the value of the equity securities at the settlement date.
The Company declared cash dividends of $0 and $396.0396 per share or $0 and
$900,000 for the three and nine months ended September 30, 2005.
The Company declared cash dividends of $146.6814 and $146.6814 per share or
$400,000 and $800,000 for the three and nine months ended September 30, 2004.
H - SALE OF SUBSIDIARY
On April 23, 2004, the Company entered into a stock sale agreement with Range
Energy I, Inc. to sell all of the issued and outstanding shares of common
capital stock of RB Operating Company (RBOC), a wholly-owned subsidiary of the
Company. The transaction closed on April 29, 2004, for a purchase price of $22.5
million, subject to customary post-closing adjustments. The Company received
proceeds of $21.8 million, net of transaction costs of $363,000 and cash paid of
$814,000, from the sale, of which $17.9 million was used to pay the remaining
balance on the Foothill loan and security agreement.
With this sale, the Company sold approximately 27% of its proved oil and natural
gas reserves. As this significantly altered the relationship between the
Company's capitalized costs and proved reserves, the Company recognized a gain
on the sale of $12.1 million.
Although the Company sold a wholly-owned subsidiary, the subsidiary was formed
solely to effect this transaction and the assets included in the subsidiary
consisted solely of oil and gas properties located in New Mexico that were
carved out of another RAM entity. That RAM entity continues to hold and operate
significant other oil and gas properties, including oil and gas properties
located in New Mexico, which have similar quality hydrocarbons and similar
economic characteristics as those properties sold. Because the net assets of
RBOC were part of a larger cash-flow-generating product group and, in the
aggregate, did not represent a group that on their own would be a component of
the Company, the conditions in Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" for
reporting the gain associated with the sale of RBOC in discontinued operations
were not met.
I - FINANCIAL CONDITION AND MANAGEMENT PLANS
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.
As shown in the consolidated financial statements, for the nine months ended
September 30, 2005, the Company incurred a net loss of approximately $5.7
million. Net cash provided by operating activities for the same period was $11.5
million.
F-15
RAM ENERGY, INC.
Notes to unaudited condensed consolidated financial statements, continued
Management believes that cash flows from operations, borrowings currently
available to the Company under the Company's revolving credit facility, the
remaining balance of unrestricted cash and will be sufficient to satisfy its
currently expected capital expenditures, working capital and debt service
obligations for the foreseeable future. The actual amount and timing of future
capital requirements may differ materially from estimates as a result of, among
other things, changes in product pricing and regulatory, technological and
competitive developments. Sources of additional financing may include commercial
bank borrowings, vendor financing and the sale of oil and natural gas properties
or equity or debt securities. Management cannot assure that any such financing
will be available on acceptable terms, if at all.
J - RELATED PARTY TRANSACTIONS
The Company paid rent expense of approximately $28,000 and $23,000 relating to a
condominium for one of the shareholders of the Company for the nine months ended
September 30, 2005 and 2004, respectively.
For the nine months ended September 30, 2005 and 2004, approximately $374,000
and $388,000, respectively, of expenses for the shareholders of the Company are
included in general and administrative expenses in the consolidated statements
of operations, some of which may be personal in nature.
In June 2005, the Company sold overriding royalty interests in certain
properties located in Jack and Wise Counties, Texas for $2.3 million to
Bridgeport Royalties, LLC. Bridgeport Royalties, LLC is a related party of the
Company, owned and operated by the owners and several officers and employees of
the Company, in addition to outside counsel. No gain on the sale was recognized
and the proceeds were applied to reduce the Foothill Revolver facility. As of
September 30, 2005, and December 31, 2004, the Company had accrued revenues
payable of $30,000 and $0 to Bridgeport Royalties, LLC.
K - SUBSEQUENT EVENTS
In October 2005, the Company entered into a definitive merger agreement with
Tremisis Energy Acquisition Corporation pursuant to which the Company will
become a wholly owned subsidiary of Tremisis.
F-16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
RAM Energy, Inc.
We have audited the accompanying consolidated balance sheets of RAM Energy, Inc.
(a Delaware corporation) and subsidiaries (the "Company") as of December 31,
2004 and 2003, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for each of the three years in the period
ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis of our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RAM
Energy, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note A, effective January 1, 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations.
UHY Mann Frankfort Stein & Lipp CPAs, LLP
Houston, Texas
November 22, 2005
F-17
RAM Energy, Inc.
Consolidated balance sheets
(In thousands, except share and per share amounts)
December 31, 2004 and 2003
2004 2003
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,175 $ 2,118
Short-term investments -- 1,681
Accounts receivable:
Oil and natural gas sales, net of allowance
of $0 ($0 in 2003) 5,039 1,926
Joint interest operations, net of allowance
of $687 ($433 in 2003) 630 616
Other, net of allowance of $37 ($0 on 2003) 28 36
Prepaid expenses and other current assets 706 134
Derivative assets 1,627 125
--------- ---------
Total current assets 9,205 6,636
PROPERTIES AND EQUIPMENT, AT COST (Note P):
Oil and natural gas properties and equipment,
using full cost accounting 146,598 60,760
Other property and equipment 5,779 4,642
--------- ---------
152,377 65,402
Less accumulated depreciation, depletion,
and amortization 23,919 27,809
--------- ---------
Net properties and equipment 128,458 37,593
OTHER ASSETS:
Deferred loan costs, net of accumulated
amortization of $4,110
($4,303 in 2003 (Note D) 1,845 1,078
Other 816 601
--------- ---------
Total assets $ 140,324 $ 45,908
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable:
Trade $ 5,273 $ 1,244
Oil and natural gas proceeds due others 2,528 2,056
Accrued liabilities:
Compensation 583 422
Interest 1,547 1,316
Income taxes 289 2,475
Other -- 421
Long-term debt due within one year (Note D) 3,891 61
--------- ---------
Total current liabilities 14,111 7,995
GAS BALANCING LIABILITY -- 168
OIL AND NATURAL GAS PROCEEDS DUE OTHERS 1,642 1,564
LONG-TERM DEBT (Note D) 113,453 45,996
DEFERRED AND OTHER NON-CURRENT INCOME TAXES 24,374 7,886
ASSET RETIREMENT OBLIGATION 6,656 1,952
COMMITMENTS AND CONTINGENCIES (Note K) -- --
STOCKHOLDERS' DEFICIT:
Common stock, $10.00 par value; authorized -
5,000 shares; issued and outstanding -
2,273 shares and 2,727 shares at December 31,
2004 and 2003 respectively 23 27
Additional paid-in capital 73 88
Accumulated deficit (20,008) (19,768)
--------- ---------
Total stockholders' deficit (19,912) (19,653)
--------- ---------
Total liabilities and stockholders' deficit $ 140,324 $ 45,908
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-18
RAM Energy, Inc.
Consolidated statements of operations
(In thousands, except share and per share amounts)
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
--------- --------- ----------
REVENUES AND OTHER OPERATING INCOME:
Oil and natural gas sales $ 17,975 $ 20,053 $ 10,166
Gain on sale of subsidiary 12,139 -- --
Other 338 170 163
Realized and unrealized losses from derivatives (793) (203) (146)
--------- --------- ----------
Total revenues and other operating income 29,659 20,020 10,183
OPERATING EXPENSES:
Oil and natural gas production taxes 1,263 1,408 1,044
Oil and natural gas production expenses 3,600 3,527 3,023
Depreciation, depletion and amortization 3,273 4,098 2,947
Accretion expense 78 48 --
General and administrative, overhead and other expenses, net of
operator's overhead fees 6,601 6,331 5,858
--------- --------- ----------
Total operating expenses 14,815 15,412 12,872
--------- --------- ----------
Operating income (loss) 14,844 4,608 (2,689)
OTHER INCOME (EXPENSE):
Gain on early extinguishment of debt -- -- 32,883
Interest expense (5,070) (4,912) (9,240)
Interest income 35 41 277
--------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 9,809 (263) 21,231
INCOME TAX PROVISION 3,733 228 7,975
--------- --------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 6,076 (491) 13,256
DISCONTINUED OPERATIONS:
Loss from discontinued operations -- (1,723) (18,016)
Income tax benefit -- (655) (6,846)
--------- --------- ----------
LOSS FROM DISCONTINUED OPERATIONS -- (1,068) (11,170)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 6,076 (1,559) 2,086
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(Net of tax benefit of $0, $275, and $0 in 2004, 2003, and 2002, respectively) -- (448) --
--------- --------- ----------
Net income (loss) $ 6,076 $ (2,007) $ 2,086
========= ========= ==========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $2,383.67 $ (180.05) $ 4,861.01
Loss from discontinued operations -- (391.64) (4,096.08)
Cumulative effect of change in accounting principle -- (164.28) --
--------- --------- ----------
Net income (loss) $2,383.67 $ (735.97) $ 764.93
========= ========= ==========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 2,549 2,727 2,727
========= ========= ==========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations $2,299.77 $(180.05) $ 4,861.01
Loss from discontinued operations -- (391.64) (4,096.08)
Cumulative effect of change in accounting principle -- (164.28) --
--------- --------- ----------
Net income (loss) $2,299.77 $(735.97) $ 764.93
========= ========= ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 2,642 2,727 2,727
========= ========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-19
RAM Energy, Inc.
Consolidated statements of stockholders' deficit
(In thousands, except share amounts)
Years Ended December 31, 2004, 2003 and 2002
Common Stock Additional Total
-------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
-------- -------- ---------- ----------- -------------
BALANCE, January 1, 2002 2,727 $ 27 $ 16 $(19,043) $(19,000)
Net income -- -- 0 2,086 2,086
Expense related to stock options -- 72 -- 72
-------- -------- -------- -------- --------
BALANCE, December 31, 2002 2,727 27 88 (16,957) (16,842)
Net loss -- -- 0 (2,007) (2,007)
Dividends declared -- -- (804) (804)
-------- -------- -------- -------- --------
BALANCE, December 31, 2003 2,727 27 88 (19,768) (19,653)
Net income -- -- 6,076 6,076
Dividends declared -- -- (1,200) (1,200)
Purchase and cancellation of common
shares and outstanding options (454) (4) (15) (5,116) (5,135)
-------- -------- -------- -------- --------
BALANCE, December 31, 2004 2,273 $ 23 $ 73 $(20,008) $(19,912)
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-20
RAM Energy, Inc.
Consolidated statements of cash flows
(In thousands)
Years Ended December 31, 2004, 2003 and 2002
2004 2003 2002
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 6,076 $ (2,007) $ 2,086
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities -
Depreciation, depletion and amortization 3,273 4,098 2,947
Amortization of Deferred loan costs and Senior Notes discount 492 445 611
Accretion expense 78 48 --
Gain on sale of subsidiary (12,139) -- --
Loss from discontinued operations, net of tax -- 1,068 11,170
Cumulative effect of change in accounting principle, net of tax -- 448 --
Provision for doubtful accoounts 385 17 450
Unrealized gain on derivatives (1,524) (41) (62)
Expense related to stock options -- -- 72
Loss (gain) on sale of other property and equipment (1) 13 8
Gain on early extinguishment of debt -- -- (32,883)
Deferred income taxes (3,159) (3,962) 7,975
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable (18) 77 (361)
Prepaid expenses and other assets 342 95 181
Accounts payable (67) (664) (4,290)
Accrued liabilities 1,556 1,792 (888)
Income taxes payable 6,892 4,190 --
Gas balancing liability (393) 109 (173)
-------- -------- --------
Total adjustments (4,283) 7,781 (15,243)
-------- -------- --------
Net cash provided by (used in) operating activities 1,793 5,774 (13,157)
INVESTING ACTIVITIES:
Proceeds released from escrow -- -- 6,375
Payments for oil and natural gas properties and equipment (5,900) (4,282) (6,700)
Proceeds from sales of oil and natural gas properties 320 187 446
and equipment
Payments for other property and equipment (205) (343) (266)
Proceeds from sales of other property and equipment 38 15 39
RWG acquisition, net of cash acquired (82,577) -- --
Proceeds from the sale of subsidiary 21,791 -- --
Proceeds from sale of pipeline system -- 12,026 --
Payment for and proceeds from sale of other assets -- -- 60
Proceeds from (payments for) short-term investments 1,681 (181) (1,685)
-------- -------- --------
Net cash (used in) provided by investing activities (64,852) 7,422 (1,731)
FINANCING ACTIVITIES:
Payments on long-term debt (18,234) (11,929) (238)
Proceeds from borrowings on long-term debt 88,585 -- 27,459
Payments for purchase of Senior Notes -- -- (30,000)
Payments for deferred loan costs (1,500) -- (952)
Stock repurchased and retired (5,135) -- --
Dividends paid (1,600) (404) --
-------- -------- --------
Net cash provided by (used in) financing activities 62,116 (12,333) (3,731)
INCREASE (DECREASE) IN CASH AND (943) 863 (18,619)
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of year 2,118 1,255 19,874
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 1,175 $ 2,118 $ 1,255
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes $ 300 $ -- $ --
======== ======== ========
Cash paid for interest $ 4,285 $ 3,292 $ 10,199
======== ======== ========
DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Accrued interest added to principal balance of credit facility $ 554 $ 1,699 $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-21
RAM ENERGY, INC.
Notes to consolidated financial statements
DECEMBER 31, 2004 AND 2003
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, ORGANIZATION AND BASIS OF
PRESENTATION
1. Nature of Operations and Organization
RAM Energy, Inc. (the "Company") operates exclusively in the upstream
segment of the oil and natural gas industry with activities including
drilling, completion and operation of onshore oil and natural gas wells.
The Company conducts the majority of its operations in the states of
Texas, Louisiana, Oklahoma and New Mexico. On December 17, 2004, the
Company completed its acquisition of WG Energy Holdings, Inc. ("WG"), a
Delaware corporation, in which a wholly owned subsidiary of the Company
created specifically for such purpose merged with and into WG and WG was
the surviving corporation in the merger (the "WG Acquisition"). At the
time of the merger, the name of WG was changed to RWG Energy, Inc., or
RWG. RWG, with its subsidiaries, are now first and second tier
subsidiaries of the Company. On August 1, 2003, the Company sold its oil
and natural gas pipeline system and saltwater disposal operation in north
central Oklahoma (the pipeline system). The pipeline system purchased,
transported and marketed oil and natural gas production and disposed of
saltwater from properties owned by the Company and other oil and natural
gas companies (see Note J).
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
3. Properties and Equipment
The Company follows the full cost method of accounting for oil and natural
gas operations. Under this method, all productive and nonproductive costs
incurred in connection with the acquisition, exploration and development
of oil and natural gas reserves are capitalized. No gains or losses are
recognized upon the sale or other disposition of oil and natural gas
properties except in transactions that would significantly alter the
amortization base of the capitalized costs.
Under the full cost method, the net book value of oil and natural gas
properties, less related deferred income taxes, may not exceed the
estimated after-tax future net revenues from proved oil and natural gas
properties, discounted at 10% per year (the ceiling limitation). In
arriving at estimated future net revenues, estimated lease operating
expenses, development costs and certain production-related and ad valorem
taxes are deducted. In calculating future net revenues, prices and costs
in effect at the time of the calculation are held constant indefinitely,
except for changes that are fixed and determinable by existing contracts.
The net book value is compared to the ceiling limitation on a quarterly
and yearly basis. The excess, if any, of the net book value above the
ceiling limitation is charged to expense in the period in which it occurs
and is not subsequently reinstated. Reserve estimates used in determining
estimated future net revenues have been prepared by an independent
petroleum engineer.
F-22
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
The Company has capitalized internal costs of approximately $596,000,
$434,000 and $600,000 for the years ended December 31, 2004, 2003 and
2002, respectively. Such capitalized costs include salaries and related
benefits of individuals directly involved in the Company's acquisition,
exploration and development activities based on the percentage of their
time devoted to such activities.
In accordance with the impairment provisions of Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company assesses the recoverability of
the carrying value of its non-oil and gas long-lived assets when events
occur that indicate an impairment in value may exist. An impairment loss
is indicated if the sum of the expected future cash flows is less than the
carrying amount of the assets. If this occurs, an impairment loss is
recognized for the amount by which the carrying amount of the assets
exceeds the estimated fair value of the asset. At December 31, 2002, the
net book value of the pipeline system exceeded the expected future cash
flows from the pipeline. Accordingly, an impairment charge of $12.7
million ($7.9 million after tax) was recorded in the statement of
operations for the year ended December 31, 2002, for the excess of the net
book value over the fair value. No impairments were recorded in 2004 or
2003.
Other property and equipment consists principally of furniture and
equipment and leasehold improvements. Other property and equipment and
related accumulated amortization and depreciation are relieved upon
retirement or sale and the gain or loss is included in operations.
Renewals and replacements that extend the useful life of property and
equipment are treated as capital additions. Accumulated depreciation of
other property and equipment at December 31, 2004 and 2003, is
approximately $3,845,000 and $3,803,000, respectively.
4. Depreciation and Amortization
All capitalized costs of oil and natural gas properties and equipment,
including the estimated future costs to develop proved reserves, are
amortized using the unit-of-production method using total proved reserves.
Depreciation of other equipment is computed based on the estimated useful
lives of the assets, which range from three to ten years. Amortization of
leasehold improvements is computed based on the straight-line method over
the term of the associated lease.
5. Natural Gas Sales and Gas Imbalances
Natural gas imbalances are generated on properties for which two or more
owners have the right to take production "in-kind" and, in doing so, take
more or less than their respective entitled percentage.
The Company follows the entitlement method of accounting for natural gas
sales, recognizing as revenues only its net interest share of all
production sold. Any amount attributable the sale of production in excess
of or less than the Company's net interest is recorded as a gas balancing
asset or liability. At December 31, 2004, the Company's net underproduced
position was approximately 153,000 Mcf with an associated asset of
approximately $230,000, which is recorded in other assets in the
consolidated balance sheet. At December 31, 2003, the Company's net
overproduced position was approximately 108,000 Mcf with an associated
liability of approximately $168,000.
F-23
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
6. Cash Equivalents
All highly liquid unrestricted investments with a maturity of three months
or less when purchased are considered to be cash equivalents.
7. Short-Term Investments
The Company purchased a $1.5 million certificate of deposit (CD) with a
bank that served as collateral for a three-year $1.5 million standby
letter of credit issued to Carmen Acquisition Corp. in 2001. The CD is
included in current assets in the consolidated balance sheet as of
December 31, 2003. The letter of credit was released during the fourth
quarter of 2003 due to the sale of the Company's pipeline during 2003 (see
Note J). The CD matured in the first quarter of 2004.
8. Credit and Market Risk
The Company sells oil and natural gas to various customers and
participates with other parties in the drilling, completion and operation
of oil and natural gas wells. Joint interest and oil and natural gas sales
receivables related to these operations are generally unsecured. In 2004,
approximately 52% of total revenues were to four customers (68% to four
customers in 2003 and 63% to four customers in 2002), with sales to each
comprising 23%, 11%, 10% and 8% (27%, 20%, 12% and 9% in 2003 and 35%,
16%, 6% and 6% in 2002) of total revenues.
At December 31, 2004 and 2003, the Company had cash deposits in certain
banks which exceeded the maximum insured by the Federal Deposit Insurance
Corporation. The Company monitors the financial condition of the banks and
has experienced no losses on these accounts.
9. Deferred Loan Costs
Deferred loan costs are stated at cost net of amortization computed using
the straight-line method over the term of the related loan agreement,
which approximates the interest method.
The estimated aggregate amortization expense for the next five fiscal
years is as follows:
2005 $619,000
2006 619,000
2007 600,000
2008 7,000
2009 --
10. General and Administrative Expense
The Company receives fees for the operation of jointly-owned oil and
natural gas properties and records such reimbursements as reductions of
general and administrative expense. Such fees totaled approximately
$212,000, $406,000 and $517,000 for the years ended December 31, 2004,
2003 and 2002, respectively.
F-24
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
11. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Estimates and assumptions that,
in the opinion of management of the Company are significant include oil
and natural gas reserves, amortization relating to oil and natural gas
properties, asset retirement obligations, and income taxes.
12. Fair Value of Financial Instruments
Cash and cash equivalents, trade receivables and payables and installment
notes: The carrying amounts reported in the balance sheets approximate
fair value due to the short-term maturity of these instruments.
Long-term debt: The carrying amount reported in the balance sheets
approximates fair value because this debt instrument carries a variable
interest rate based on market interest rates.
Senior Notes: The carrying amount reported in the balance sheets exceeds
fair value at December 31, 2004 and December 31, 2003, by approximately
$1.4 million and $7.1 million, respectively, based upon management's
estimates. Management bases its estimate on information from the bond
underwriters on current bids for the Company's senior notes.
Derivative contracts: The carrying amount reported in the balance sheets
is the fair value of the contracts based upon commodity futures prices for
similar contracts.
13. Reclassifications
Certain reclassifications of previously reported amounts for 2003 and 2002
have been made to conform with the 2004 presentation. These
reclassifications had no effect on net income (loss).
14. Derivatives
The Company applies the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. SFAS No. 133
requires companies to recognize all derivative instruments as either
assets or liabilities in the statement of financial position at fair
value.
The Company entered into numerous derivative contracts to reduce the
impact of oil and natural gas price fluctuations and as required by the
terms of its credit facility (see Note L). The Company did not designate
these transactions as hedges as required by SFAS No. 133 in order to
receive hedge accounting treatment. Accordingly, all gains and losses on
the derivative instruments during 2004, 2003 and 2002 have been recorded
in the statement of operations.
F-25
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
15. Earnings per Common Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if dilutive stock options were exercised, calculated using the
treasury stock method. A reconciliation of net income (loss) and weighted
average shares used in computing basic and diluted net income (loss) per
share is as follows for the years ended December 31 (in thousands, except
share and per share amounts):
2004 2003 2002
--------- -------- -------
BASIC INCOME (LOSS) PER SHARE:
Net income (loss) $ 6,076 $ (2,007) $ 2,086
========= ======== =======
Weighted average shares 2,549 2,727 2,727
========= ======== =======
Basic net income (loss) per share $2,383.67 $(735.97) $764.93
========= ======== =======
DILUTED INCOME (LOSS) PER SHARE:
Net income (loss) $ 6,076 $ (2,007) $ 2,086
========= ======== =======
Weighted average shares - basic 2,549 2,727 2,727
Dilutive effect of stock options 93 -- --
--------- -------- -------
Weighted average shares assuming
dilutive effect of stock options 2,642 2,727 2,727
========= ======== =======
Diluted net income (loss) per share $2,299.77 $(735.97) $764.93
========= ======== =======
During 2003, the Company executed a 1,000-to-1 reverse stock split. Prior
period amounts have been restated to reflect the reverse stock split.
16. Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs and amends FASB Statement No. 19, Financial Accounting
and Reporting by Oil and Gas Producing Companies. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made, and that the associated asset retirement costs
be capitalized as part of the carrying amount of the long-lived asset. The
Company adopted this standard as of January 1, 2003. The effect of this
standard on the Company's results of operations and financial position at
adoption included an increase in long-term liabilities for plugging and
abandonment costs of oil and natural gas properties of $1,304,000, net
increase in oil and natural gas properties and equipment of $530,000, and
a non-cash loss as a result of the cumulative effect of change in
accounting principle, net of tax, of $448,000 (using a 6.25% discount
factor). The Company recorded accretion expense of approximately $78,000
and $48,000 in 2004 and 2003, respectively.
F-26
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
Had the provisions of SFAS No. 143 been adopted in 2002, the liability as
a result of the adoption for asset retirement obligations would have been
approximately $1,253,000 at January 1, 2002 and the Company's net income
and earnings per share for the year ended December 31, 2002 would have
been as follows (in thousands, except per share amounts):
As Reported Pro Forma
----------- ---------
Net income $ 2,086 $ 2,000
Income per share (basic and diluted) $764.93 $733.41
The Company recorded the following activity related to the asset
retirement liability for the years ended December 31, 2004 and 2003 (in
thousands):
2004 2003
------- -------
Liability for asset retirement obligations,
beginning of year $ 1,952 $ 600
-- 1,304
Liability recognized upon adoption of SFAS No. 143
Obligations for wells sold with RB Operating Company (238) --
Accretion expense 78 48
New obligations for wells drilled 275 --
Obligations for wells purchased in WG Acquisition 4,660 --
Obligations for wells sold (71) --
------- -------
Liability for asset retirement obligations, end of year $ 6,656 $ 1,952
======= =======
17. Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payments.
SFAS 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements
based on their fair values and is effective for the first annual reporting
period beginning after June 30, 2005. Management has not determined the
impact of SFAS 123R on the Company's future financial position or results
of operations.
18. Income Taxes
The Company accounts for income taxes and the related accounts under the
liability method. Deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax bases of assets
and liabilities using enacted rates expected to be in effect during the
year in which the basis differences reverse.
B - ACQUISITION
The Company completed the WG Acquisition on December 17, 2004.
The final adjusted purchase price was $82.6 million, including the
assumption and payment of WG's long-term debt of $24.5 million, the
settlement of all outstanding derivative instruments of $14.4 million and
the balance (excluding the escrow) of $32.7 million was paid in cash.
$11.0 million of the purchase price was deposited in two separate escrow
accounts to provide funds against which the Company may make claims for
any subsequently determined breach by WG of representations and warranties
in the merger agreement and for potential losses that may arise in
connection with certain existing litigation against WG (see Note K). The
litigation escrow fund was released in October, 2005. Claims against the
general escrow fund must be asserted on or before December 17, 2005. The
acquisition was financed with a credit facility provided by Wells Fargo
Foothill, Inc. (Foothill) (see Note D).
F-27
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
RWG's principal assets are producing oil properties located in north
Texas, a gas plant and a significant block of undeveloped deep rights in
held-by-production leases.
The WG acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141, Business Combinations, and the
purchase price has been allocated based on the estimated fair value of the
individual assets acquired and liabilities assumed at the date of
acquisition.
The assets acquired and purchase price allocation of the WG acquisition is
as follows (in thousands):
Current assets $ 5,437
Oil and natural gas properties 97,243
Current liabilities (4,233)
Debt (340)
Asset retirement obligations (4,661)
Deferred taxes (10,869)
--------
$ 82,577
========
The results of operations for the acquisition have been included in the
consolidated statement of operations from the date of acquisition. The
following unaudited pro forma information is presented as if the
acquisition had occurred at the beginning of the periods presented (in
thousands, except per share amounts):
Year ended December 31,
2004 2003
---------- ----------
Revenues and other operating income $ 49,792 $ 40,526
Loss before cumulative effect of
change in accounting principle (5,040) (4,909)
---------- ----------
Net loss $ (5,040) $ (5,357)
========== ==========
Basic and diluted loss per share $(1,977.25) $(1,964.43)
========== ==========
C - SALE OF SUBSIDIARY
On April 23, 2004, the Company entered into a stock sale agreement with
Range Energy I, Inc. to sell all of the issued and outstanding shares of
common capital stock of RB Operating Company (RBOC), a wholly-owned
subsidiary of the Company. The transaction closed on April 29, 2004, for a
purchase price of $22.5 million, subject to customary post-closing
adjustments. The Company received proceeds of $21.8 million, net of
transaction costs of $363,000 and cash paid of $814,000, from the sale, of
which $17.9 million was used to pay the remaining balance on the Foothill
loan and security agreement.
With this sale, the Company sold approximately 27% of its proved oil and
natural gas reserves. As this significantly altered the relationship
between the Company's capitalized costs and proved reserves, the Company
recognized a gain on the sale of $12.1 million.
Although the Company sold a wholly-owned subsidiary, the subsidiary was
formed solely to effect this transaction and the assets included in the
subsidiary consisted solely of oil and gas properties located in New
Mexico that were carved out of another RAM entity. That RAM entity
continues to hold and operate significant other oil and gas properties,
including oil and gas properties located in New Mexico, which have similar
quality hydrocarbons and similar economic characteristics as those
properties sold. Because the net assets of RBOC were part of a larger
cash-flow-generating product group and, in the aggregate, did not
represent a group that on their own would be a component of the Company,
the conditions in Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" for
reporting the gain associated with the sale of RBOC in discontinued
operations were not met.
F-28
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," for reporting the gain associated with the sale of RBOC in
discontinued operations were not met.
D - LONG-TERM DEBT
Long-term debt at December 31 consists of the following (in thousands):
2004 2003
-------- --------
11.5% Senior Notes due 2008,
net of discount $ 28,268 $ 28,226
Credit facility 88,663 17,752
Installment loan agreements 413 79
-------- --------
117,344 46,057
Less amount due within one year 3,891 61
-------- --------
$113,453 $ 45,996
======== ========
The amount of required principal payments for the next five years and
thereafter, as of December 31, 2004, is as follows: 2005-$3.9 million;
2006-$5.1 million; 2007-$80.0 million; 2008-$28.4 million; 2009-none.
1. Senior Notes
In February 1998, the Company completed the sale of $115.0 million of
11.5% Senior Notes due 2008 in a public offering of which $28.2 million
remained outstanding at December 31, 2004 and 2003. The Senior Notes are
senior unsecured obligations of the Company and are redeemable at the
option of the Company in whole or in part, at any time on or after
February 15, 2005, at prices ranging from 111.5% to 103.8% of face amount
to their scheduled maturity in 2008.
The indenture under which the Senior Notes were issued contained certain
covenants, including covenants that limited (i) incurrences of additional
indebtedness and issuances of disqualified capital stock, (ii) restricted
payments, (iii) dividends and other payments affecting subsidiaries, (iv)
transactions with affiliates and outside directors' fees, (v) asset sales,
(vi) liens, (vii) lines of business, (viii) merger, sale or consolidation
and (ix) non-refundable acquisition deposits.
In November 2002, the Company recognized a gain (net of unamortized
deferred offering and original issue discount costs and transaction fees)
of $32.9 million as a result of the purchase of $63.475 million face
amount of the Senior Notes. The Senior Notes, plus accrued interest of
$1.988 million, were purchased at 46% of face amount and were canceled by
the Company. The Company utilized borrowings under its revolving credit
agreement and available cash to purchase the Senior Notes.
In connection with the Company's November 2002 purchase of the Senior
Notes, the indenture was amended to eliminate the limitations described
above.
At December 31, 2004 and 2003, the unamortized original issue discount
associated with the Notes totaled approximately $128,000 and $170,000,
respectively.
F-29
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
2. Credit Facility
In November 2002, the Company entered into a two-part revolving credit
facility with Foothill. It provided for a three year, $30 million
revolving commitment, subject to certain limitations. Advances under the
credit facility bore interest, payable monthly, at the Foothill reference
rate plus 2% per annum, but no less than 6% per annum on Loan A ($17.8
million outstanding at December 31, 2003) and at the Foothill reference
rate plus 6% per annum, but no less than 10% per annum on Loan B ($0
outstanding at December 31, 2003) (see Note C). The facility was paid in
full in April 2004 with the proceeds from the sale of RBOC.
In December 2004, the Company entered into an amended and restated $90.0
million senior secured credit facility provided by Foothill. The facility
included a $30.0 million term loan and a $60.0 million revolving credit
facility, reducing by $2.5 million per quarter commencing September 30,
2005 and continuing until the committed amount of the revolver is reduced
to $50.0 million. Borrowings under the revolving credit facility bore
interest at Foothill's base rate plus 2% (7.25% at December 31, 2004), or
LIBOR plus 4%, at the option of the Company, while advances under the term
loan bore interest at the base rate plus 4% (9.25% at December 31, 2004),
or LIBOR plus 6%, also at the option of the Company.
The amount of credit available under the credit facility at December 31,
2004 was $1.3 million.
The Company and Foothill amended the credit facility on March 7, 2005.
This amendment decreased the minimum EBITDA threshold and decreased the
limit on the annual maximum amount of capital expenditures.
On May 24, 2005, the credit facility was amended and restated in its
entirety to accommodate Ableco Finance LLC as a participating lender.
Significant changes in the amended and restated facility included
increasing the interest rate on the term loan to Foothill's base rate plus
5%, or 10.5%, whichever is greater, or LIBOR plus 7%, or 9.5%, whichever
is greater, at the Company's option, and increasing the percentage of the
Company's projected future production for which hedging contracts are
required. The scheduled reductions in availability under the revolving
credit portion of the facility were not changed.
In August and September 2005, the Company paid $6,400,000 in margin calls
related to the derivative contracts required under the amended and
restated facility. Principally due to these margin call requirements, the
amended and restated credit facility was amended once again on October 11,
2005, with an effective date of September 30, 2005. That amendment
increased the amount of the facility to $100.0 million and created a new
special revolving facility in the amount of $10.0 million specifically to
fund margin calls under the Company's hedging contracts. Borrowings under
the special revolving facility bear interest at the same rate as the term
loan. The amendment also deferred until the date of its execution the
first $2.5 million reduction in the $30.0 million revolver and reset
EBITDA and capital expenditure limit covenants and a timetable to set
other financial covenants. The special revolving credit facility was
funded in the amount of $6.9 million, including a $500,000 closing fee,
and the revolving credit facility was reduced by that amount. Under
certain conditions, an additional fee of $375,000 may be required to be
paid as early as March 31, 2006. On November 4, 2005, the counterparty to
the Company's hedging contracts refunded $4,600,000 of the margin deposits
and that amount was applied to reduce the special revolving facility.
F-30
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
With the exception of the $10.0 million special revolving facility, which
is due June 30, 2006, the amended and restated credit facility will mature
on December 17, 2007.
The Company is required to pay monthly and annual fees under the credit
facility. Amounts outstanding under the credit facility are collateralized
by substantially all current and future assets of the Company and its
subsidiaries. Along with the pledged collateral mentioned above, the
lenders also have first rights to the Company's cash accounts.
The credit facility contains customary covenants which, among other
things, require periodic financial and reserve reporting and limits the
Company's incurrence of indebtedness, executive compensation, capital
expenditures, transactions with affiliates, sales of assets, liens, loans,
mergers and investments and requires the Company to meet minimum EBITDA
thresholds and hedging requirements. The Company was in compliance with
these covenants or had obtained waivers for non-compliance at December 31,
2004.
If the Company fails to satisfy or obtain a waiver for the covenants of
the credit facility, the lenders could consider the Company to be in
default. Upon default, the lenders may declare all obligations immediately
due and payable, cease advancing money or extending credit, terminate the
agreement, and secure its rights in the Company's collateral. The credit
facility also contains a subjective acceleration clause whereby the
lenders may declare an event of default if they determines a material
adverse change has occurred. Management believes it is unlikely that the
subjective acceleration clause would be asserted in 2005 and therefore has
classified the credit facility as a long-term obligation in accordance
with its stated maturity.
F-31
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
E - SUBSIDIARY GUARANTORS
The Company's Senior Notes are fully and unconditionally guaranteed,
jointly and severally, on a senior unsecured basis, by all of the
Company's current and future subsidiaries (the "Subsidiary Guarantors").
The following table sets forth condensed consolidating financial
information of the Subsidiary Guarantors. There are currently no
restrictions on the ability of the Subsidiary Guarantors to transfer funds
to the Company in the form of cash dividends, loans or advances.
The following represents the condensed consolidating balance sheets for
the Company and its subsidiaries as of December 31, 2004 and 2003 (in
thousands):
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
--------- --------- ------------- ------------
December 31, 2004
Current assets $ 1,203 $ 8,002 $ -- $ 9,205
Property and equipment, net 10,563 117,895 -- 128,458
Investment in subsidiaries 11,882 -- (11,882) --
Other assets 2,661 -- -- 2,661
--------- --------- --------- ---------
Total assets $ 26,309 $ 125,897 $ (11,882) $ 140,324
========= ========= ========= =========
Current liabilities $ 6,086 $ 8,025 $ -- $ 14,111
Long-term debt 34,489 78,964 -- 113,453
Other non-current liabilities 3,104 5,194 -- 8,298
Deferred income taxes 2,542 21,832 -- 24,374
--------- --------- --------- ---------
Total liabilities 46,221 114,015 -- 160,236
Stockholders' equity (deficit) (19,912) 11,882 (11,882) (19,912)
--------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit) $ 26,309 $ 125,897 $ (11,882) $ 140,324
========= ========= ========= =========
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
--------- --------- ------------- ------------
December 31, 2003
Current assets $ 2,795 $ 15,455 $(11,614) $ 6,636
Property and equipment, net 16,946 20,647 -- 37,593
Investment in subsidiaries 27,869 -- (27,869) --
Other assets 1,679 -- -- 1,679
--------- --------- --------- ---------
Total assets $ 49,289 $ 36,102 $(39,483) $ 45,908
========= ========= ========= =========
Current liabilities $ 15,242 $ 4,367 $(11,614) $ 7,995
Long-term debt 45,996 -- -- 45,996
Other non-current liabilities 3,274 410 -- 3,684
Deferred income taxes 4,430 3,456 -- 7,886
--------- --------- --------- ---------
Total liabilities 68,942 8,233 (11,614) 65,561
Stockholders' equity (deficit) (19,653) 27,869 (27,869) (19,653)
--------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit) $ 49,289 $ 36,102 $(39,483) $ 45,908
========= ========= ========= =========
F-32
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
The following represents the condensed consolidating statements of
operations and statements of cash flows for the Company and its
subsidiaries for the years ended December 31, 2004, 2003 and 2002 (in
thousands):
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
--------- --------- ------------- ------------
Year ended December 31, 2004
Operating revenues $ 20,370 $ 9,369 $ (80) $ 29,659
Operating expenses 11,553 3,342 (80) 14,815
-------- -------- -------- --------
Operating income 8,817 6,027 -- 14,844
Other income 359 25 (5,419) (5,035)
-------- -------- -------- --------
Income before income taxes 9,176 6,052 (5,419) 9,809
Income taxes 3,100 633 -- 3,733
-------- -------- -------- --------
Net income $ 6,076 $ 5,419 $ (5,419) $ 6,076
======== ======== ======== ========
Cash flows provided by (used in)
operating activities $ 85,788 $(83,995) $ -- $ 1,793
Cash flows (used in) provided by
investing activities (66,556) 1,704 -- (64,852)
Cash flows (used in) provided by
financing activities (20,113) 82,229 -- 62,116
-------- -------- -------- --------
Decrease in cash and cash equivalents (881) (62) -- (943)
Cash and cash equivalents, beginning of
year 1,924 194 -- 2,118
-------- -------- -------- --------
Cash and cash equivalents, end of year $ 1,043 $ 132 $ -- $ 1,175
======== ======== ======== ========
F-33
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
--------- --------- ------------- ------------
Year ended December 31, 2003
Operating revenues $ 14,612 $ 5,408 $ -- $ 20,020
Operating expenses 14,320 1,092 -- 15,412
-------- -------- -------- --------
Operating income 292 4,316 -- 4,608
Other expense (3,257) -- (1,614) (4,871)
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (2,965) 4,316 (1,614) (263)
Income taxes (1,406) 1,634 -- 228
-------- -------- -------- --------
Income (loss) from continuing operations (1,559) 2,682 (1,614) (491)
Loss from discontinued operations, net of
tax -- (1,068) -- (1,068)
-------- -------- -------- --------
Net income (loss) before cumulative
effect of change in accounting principle (1,559) 1,614 (1,614) (1,559)
Cumulative effect of change in accounting
principle, net of tax (448) -- -- (448)
-------- -------- -------- --------
Net income (loss) $ (2,007) $ 1,614 $ (1,614) $ (2,007)
======== ======== ======== ========
Cash flows provided by (used in)
operating activities $ 17,756 $(11,982) $ -- $ 5,774
Cash flows (used in) provided by
investing activities (4,423) 11,845 -- 7,422
Cash flows (used in) provided by
financing activities (12,333) -- -- (12,333)
-------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents 1,000 (137) -- 863
Cash and cash equivalents, beginning of
year 924 331 -- 1,255
-------- -------- -------- --------
Cash and cash equivalents, end of
year $ 1,924 $ 194 $ -- $ 2,118
======== ======== ======== ========
F-34
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
Total
Subsidiary Consolidating Consolidated
Parent Guarantors Adjustments Amounts
--------- --------- ------------- ------------
Year ended December 31, 2002
Operating revenues $ 7,608 $ 2,575 $ -- $ 10,183
Operating expenses 12,512 360 -- 12,872
-------- -------- -------- --------
Operating income (loss) (4,904) 2,215 -- (2,689)
Other income 2,642 1,467 19,811 23,920
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (2,262) 3,682 19,811 21,231
Income taxes (4,348) 12,323 -- 7,975
-------- -------- -------- --------
Income (loss) from continuing operations 2,086 (8,641) 19,811 13,256
Loss from discontinued operations, net of
tax -- (11,170) -- (11,170)
-------- -------- -------- --------
Net income (loss) $ 2,086 $(19,811) $ 19,811 $ 2,086
======== ======== ======== ========
Cash flows used in operating activities $ (6,349) $ (8,493) $ -- $(14,842)
Cash flows provided by (used in)
investing activities 4,332 (4,378) -- (46)
Cash flows (used in) provided by
financing activities (3,889) 158 -- (3,731)
-------- -------- -------- --------
Decrease in cash and cash equivalents (5,906) (12,713) -- (18,619)
Cash and cash equivalents, beginning of
year 6,830 13,044 -- 19,874
-------- -------- -------- --------
Cash and cash equivalents, end of year $ 924 $ 331 $ -- $ 1,255
======== ======== ======== ========
The Company has not allocated to its subsidiaries general and
administrative expenses. Accordingly, the above condensed consolidating
information is not intended to present the Company's subsidiaries on a
stand-alone basis.
F - LEASES
The Company leases office space and certain equipment under non-cancelable
operating lease agreements that expire on various dates through 2007.
Approximate future minimum lease payments for operating leases at December
31, 2004, are as follows:
2005 $287,000
2006 261,000
2007 54,000
--------
$602,000
========
F-35
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
Rent expense of approximately $288,000, $254,000 and $203,000 was incurred
under operating leases in the years ended December 31, 2004, 2003 and
2002, respectively.
In conjunction with the WG Acquisition, the Company acquired capital
leases for operating equipment. Future minimum lease payments for capital
leases are approximately $100,000 in 2005 and approximately $50,000 in
2006.
G - DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) defined contribution plan for the benefit of
substantially all of its employees. The plan allows eligible employees to
contribute up to 100% of their annual compensation, not to exceed the
maximum amount permitted by IRS regulations, which limited contributions
to $13,000 for those under 50 years of age and $16,000 for those over 50
years of age in 2004. Employer contributions to the plan are
discretionary. Company contributions to the plan in 2004, 2003 and 2002
were $190,000, $163,000 and $148,000, respectively.
H - CAPITAL STOCK
Pursuant to a Special Retainer Agreement effective July 1, 1998, as
amended, the Board of Directors granted an outside counsel an option to
purchase 50 shares of the Company's common stock, which became fully
vested during 2000, and is exercisable through June 30, 2008. On April 4,
2002, the Board of Directors granted fully-vested options to purchase an
additional 50 shares of the Company's common stock and set the exercise
price on all options at $2,500 per share, an amount which management
believes approximated the per common share value of the Company at that
date. Expense of approximately $72,000 related to the stock options has
been recognized in the 2002 statement of operations based on the estimated
fair value of the stock options. As of December 31, 2004, after the
redemption of one-sixth of the outstanding stock options in August 2004
described below, options to purchase 83.33 shares remained outstanding.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.0%, no expected dividends,
expected life of 6.7 years and no volatility.
In January 1998, the Company adopted its 1998 Stock Incentive Plan and
reserved 550 shares of common stock for issuance under the plan. No awards
have been granted under the Plan as of December 31, 2004.
In April 2002, the Company amended its Certificate of Incorporation to
eliminate its authorized preferred stock and reduce its authorized common
stock to 5,000,000 shares. Prior to the amendment, the Company's
authorized capital consisted of 5,000,000 shares of preferred stock, none
of which were issued and outstanding, and 15,000,000 shares of common
stock.
In December 2003, the Company effected a 1,000-to-1 reverse stock split
and amended its Certificate of Incorporation to reduce its authorized
common stock to 5,000 shares, with a par value of $10.00 per share. Prior
period amounts have been restated to reflect the reverse stock split.
In August 2004, the Company repurchased and retired one-sixth of its
outstanding common shares and vested stock options for $5.0 million and
$135,000, respectively. The cash paid to repurchase the common shares and
stock options was equal to their respective estimated fair values on the
date of settlement and, therefore, is recorded as a reduction of equity.
Absent a market price for or comparable to the untraded securities,
management estimated the fair value of the common stock by dividing the
estimated net asset value per share by the total number of shares
outstanding. Management believes the estimation method and assumptions
utilized represent the best available evidence of the value of the equity
securities at the settlement date.
F-36
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
The Company declared cash dividends of $804,000 for the year ended
December 31, 2003, $294.68 per share. The unpaid dividends at December 31,
2003 are recorded as other accrued liabilities on the balance sheet and
were paid in January 2004. The Company declared cash dividends of
$1,200,000 for the year ended December 31, 2004, $146.68 per share for
$800,000 declared prior to the stock repurchase, and $176.02 per share for
the $400,000 declared subsequent to the stock repurchase. All dividends
declared in 2004 were paid by December 31, 2004.
I - INCOME TAXES
The (provision) benefit for income taxes is comprised of (in thousands):
Year Ended December 31,
------------------------------
2004 2003 2002
------- ------- -------
Current $(6,892) $(4,190) $ 0
Deferred 3,159 3,962 (7,975)
------- ------- -------
Provision for income tax (expense) benefit $(3,733) $ (228) $(7,975)
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before provision
for income taxes. The significant differences between pre-tax book income
and taxable book income relate to non-deductible personal expenses, meals
and entertainment expenses and state income taxes.
The sources and tax effects of the differences are as follows (in
thousands):
Year Ended December 31,
--------------------------
2004 2003 2002
------- ----- -------
Income tax (provision) benefit at the federal
statutory rate (34%) $(3,088) $ (73) $ (7167)
State income (tax) benefit, net of federal benefit (361) (6) (611)
Non-deductible expenses and other (284) (149) (197)
------- ----- -------
Income tax (provision) benefit $(3,733) $(228) $(7,975)
The Company's income tax provision was computed based on the federal
statutory rate and the average state statutory rates, net of the related
federal benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
F-37
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
Significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
Year Ended December 31,
2004 2003
-------- --------
Deferred tax assets:
Current:
Hedge termination payment $ 4,894 $ 0
Accrued expenses and other 85 0
-------- --------
$ 4,979 $ 0
Valuation allowance 0 0
-------- --------
Net current deferred tax assets $ 4,979 $ 0
Noncurrent deferred tax assets:
Net operating loss carryforward $ 1,887 $ 0
Accrued liabilities and other 1,855 573
-------- --------
$ 3,742 $ 573
Valuation allowance 0 0
-------- --------
Net noncurrent deferred tax assets $ 3,742 $ 573
Deferred tax liabilities:
Noncurrent:
Depreciable/depletable property, plant and equipment $(23,257) $ (8,459)
Other (0) (0)
-------- --------
Total noncurrent deferred tax liabilities $(23,257) $ (8,459)
Net noncurrent deferred tax asset (liability) $(19,515) $ (7,886)
======== ========
Net deferred tax asset (liability) $(14,536) $ (7,886)
======== ========
As of December 31, 2004, the Company has federal net operating loss
carryforwards of approximately $5.55 million for tax purposes, which were
an inherited attribute from the WG Energy Holdings, Inc. acquisition
during 2004. These net operating loss carryforwards are subject to the
ownership change limitation provisions of Section 382 of the Internal
Revenue Code. However, based upon the value of WG Energy Holdings, Inc. at
the time of the acquisition, the amount of these net operating losses that
may be used annually should be sufficient to allow the losses to be
utilized prior to their expiration. Accordingly, the Company believes that
it will more likely than not be able to utilize these losses and that no
valuation allowance for the deferred tax asset associated therewith is
required. If not used, these carryforwards will generally expire between
2021 and 2023. In addition, the Company has generated net operating loss
carryforwards for state income tax purposes, which the Company believes
will more likely than not be realized during the relevant carryforward
periods; however, such amounts have not been separately disclosed in the
financial statements as the Company does not believe that these net
operating losses are material to the amounts presented herein.
The Company has reported the recovery of tax basis amounts in certain
assets in prior years that generated net operating losses for tax return
filing purposes; however, the Company has not recorded a tax benefit for
such amounts due to certain factual and technical issues related thereto.
The Company will record the benefit for such tax basis amounts in future
periods when it can appropriately conclude that the realization of such
benefit is more likely than not assured.
F-38
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
J - SALE OF PIPELINE SYSTEM
On July 18, 2003, the Company entered into an agreement to sell its oil
and natural gas pipeline system in north central Oklahoma to Continental
Gas, Inc. (CGI) for $15.0 million, effective August 1, 2003, and subject
to certain adjustments. The sale price was reduced by $3.0 million in
settlement of the claim by CGI. (see Note K). The sale of the pipeline
closed July 31, 2003, and approximately $11.8 million net proceeds were
used to reduce the Company's credit facility.
The results of operations and cash flows related to the pipeline system
are reflected in the accompanying financial statements as discontinued
operations. For the years ended December 31, 2003 and 2002, revenues for
discontinued operations were $14,500,000 and $14,409,000, respectively.
Interest expense of $609,000 and $1,419,000 for the years ended December
31, 2003 and 2002, respectively, has been allocated to discontinued
operations in the statements of operations. The 2002 financial statements
have been reclassified to provide for comparison.
No gain or loss on disposal was recorded because impairment provisions had
written the pipeline system down to its realizable value.
K - COMMITMENTS AND CONTINGENCIES
In November 2004, Ted Collins, Jr. filed a lawsuit against WG Energy
Holdings, Inc. and Michael G. Grella, the former president of that
company. Mr. Collins alleged that WG and Mr. Grella failed to timely apply
a $1.5 million advance toward developing the shallow formations underlying
certain leases, and failed to deliver assignments of certain interests in
those leases, both as allegedly required by the participation agreement
between them. Mr. Collins further claimed that WG failed to account to him
for revenues allegedly accruing to him under the terms of the
participation agreement. Mr. Collins sought an accounting and to have the
partial assignment and/or participation agreement reformed based on
allegations of mutual mistake, and further pled claims of fraud and
negligent misrepresentation. He did not specify the amount of damages
claimed. As this lawsuit existed at the time of the Company's acquisition
of WG, a $5 million escrow was established as a reserve for this lawsuit
(see Note B). A settlement agreement was reached on September 14, 2005,
whereby Ted Collins Jr. and the defendants settled and released all claims
that had been asserted and those that might have been asserted in the
lawsuit. On October 19, 2005, RWG received $250,000 from the escrow
account as a result of this settlement.
In June 2003, a lawsuit was filed by CGI against Great Plains Pipeline
Company (GPPC), a wholly owned subsidiary of the Company, in the District
Court of Garfield County, Oklahoma. GPPC and CGI were parties to a Gas
Service Contract (the Contract) dated November 22, 1996, pursuant to which
GPPC delivered to CGI all of the gas that flowed through GPPC's pipeline
system. CGI compressed and processed the gas and then redelivered
thermally equivalent volumes to GPPC at the tailgate of the CGI processing
plant in Woods County. The term of the Contract was for the life of the
leases from which GPPC purchased gas in a specified service area.
In the lawsuit, CGI alleged that over several years, GPPC delivered gas
under the Contract that was produced from wells and leases lying outside
the specified service area and that such gas was not covered by and should
not have been delivered under the Contract. CGI alleged that only gas
produced from wells and leases lying inside the service area should be
counted for purposes of determining whether or not a compression and
processing fee was due, that when outside volumes were excluded,
compressing and processing fees were due CGI, and with respect to the
outside volumes GPPC delivered under the Contract, GPPC owed CGI a market
rate for compressing and processing services performed with respect to
such gas.
F-39
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
As a part of the agreement for the sale of the pipeline system by GPPC to
CGI, the parties agreed to $3.0 million as consideration for a
contemporaneous mutual release by CGI and GPPC of all claims of every
nature arising out of the Contract. A provision for litigation settlements
in the amount of $3.0 million was recorded at December 31, 2002 as a
current liability and netted from the proceeds received from the sale of
the pipeline (see Note J).
In April 2002, a lawsuit was filed in the District Court for Woods County,
Oklahoma against the Company, certain of its subsidiaries and various
other individuals and unrelated companies, by lessors and royalty owners
of certain tracts of land, which were sold to a subsidiary of Chesapeake
Energy Corporation in 2001. The petition claims that additional royalties
are due, because Carmen Field Limited Partnership (CFLP), a wholly-owned
subsidiary of the Company, resold oil and gas purchased at the wellhead
for an amount in excess of the price upon which royalty payments were
based and paid no royalties on natural gas liquids extracted from the gas
at plants downstream of the system. Other allegations include
under-measurement of oil and gas at the wellhead by CFLP, failure to pay
royalties on take-or-pay settlement proceeds and failure to properly
report deductions for post-production costs in accordance with Oklahoma's
check stub law.
Company defendants have filed answers in the lawsuit denying all material
allegations set out in the petition. The Company believes that fair and
proper accounting was made to the royalty owners for production from the
subject leases and intends to vigorously defend the lawsuit. Management is
unable to estimate a range of potential loss, if any, related to this
lawsuit, and accordingly no amounts have been recorded in the consolidated
financial statements. In the event the court should find Company
defendants liable for damages in the lawsuit, a former joint venture
partner is contractually obligated to pay a portion of any damages
assessed against the Company defendants up to a maximum contribution of
approximately $2.8 million.
In a suit filed in mid-2001 by a large independent oil and gas exploration
and production company, claims arising from gas balancing on seven wells
located in western Oklahoma, then operated by the Company, were made. In
December 2002, a provision for settlement of this claim was made in the
amount of $140,000, which was paid in May 2003.
The Company is also involved in other legal proceedings and litigation in
the ordinary course of business. In the opinion of management, the outcome
of such matters will not have a material adverse effect on the Company's
financial position or results of operations.
The Company has established a severance agreement for the President and
CEO of the Company. This agreement provides for severance benefits to be
paid upon involuntary separation as a result of actions taken by the
Company or its successors. At December 31, 2004 and 2003, the severance
benefits under this agreement were approximately $1,750,000 and
$1,825,000, respectively. A provision for these benefits will not be made
until an involuntary termination is probable.
F-40
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
Pursuant to a Special Retainer Agreement effective July 1, 1998, as
amended, the Company is obligated to pay an outside counsel law firm
approximately $348,000 in the event that the agreement is terminated by
reason of expiration of term, by counsel for good reason, by reason of
change in control, or by the Company at will. A provision for the payment
will not be made until termination of the agreement is probable.
L - HEDGING ACTIVITIES
The Company utilizes a hedging program to reduce its exposure to
unfavorable changes in oil and natural gas prices that are subject to
significant and often volatile fluctuation. This program customarily
involves the purchase of put options to provide a price floor for its
production, put/call collars that establish both a floor and a ceiling
price to provide price certainty within a fixed range, put/call/call
collars that establish a secondary floor above the put/call collar
ceiling, forward sale contracts for specified monthly volumes at prices
determined with reference to the natural gas futures market and swap
arrangements that establish an index-related price above which the Company
pays the hedging partner and below which the Company is paid by the
hedging partner. When market prices for oil and natural gas decline, the
decline in the value of the cash flows from the Company's forecasted
natural gas production designated as being hedged is substantially offset
by gains in the value of the hedging contracts. Conversely, when market
prices increase, the increase in the value of the cash flows from the
Company's forecasted natural gas production designated as being hedged is
substantially offset by losses in the value of the hedging contracts.
In 2002, the Board of Directors approved risk management policies and
procedures to utilize these hedging contracts for the reduction of defined
commodity price risks in alignment with the terms of the Company's
revolving credit facility with Foothill. These policies prohibit
speculation with derivatives, limit the amount of production hedged and
limit hedge agreements to counterparties with appropriate credit
standings.
During 2004, 2003 and 2002, the Company entered into numerous derivative
contracts. The Company did not formally designate these transactions as
hedges as required by SFAS No. 133 in order to receive hedge accounting
treatment. Accordingly, all gains and losses on the derivative financial
instruments during 2004, 2003 and 2002 have been recorded in the statement
of operations.
At December 31, 2004, the Company had purchased put options on 37,958
barrels/month of crude oil through December, 2005, with a floor price of
$40.00 per barrel. For natural gas, the Company had purchased collars on
152,000 Mmbtu/month through October 2005; the weighted average floor price
was $5.65 per MMbtu and the weighted average ceiling price was $7.84 per
MMbtu. An asset of approximately $1,627,000 was recorded in the
consolidated balance sheets.
At December 31, 2003, the Company had collars in place on 15,167
barrels/month in 2004 for future oil production. The 15,167 barrels/month
in 2004 had a weighted average floor and ceiling of $24.50 and $32.35,
respectively. At December 31, 2003, the Company had purchased natural gas
put options on total notional volumes of 52,941 Mmbtu/month for 2004 with
a weighted average price of $4.92. At December 31, 2003, the Company also
had natural gas call options on total notional volumes of 54,000
Mmbtu/month for 2004 with a weighted average price of $6.71. An asset of
approximately $125,000 was recorded in the consolidated balance sheets.
The primary market risk related to the Company's derivative contracts are
the volatility in commodity prices. However, this market risk is offset by
the gain or loss recognized upon the related sale or purchase of the
commodity that is hedged. Credit risk relates to the risk of loss as a
result of nonperformance by the Company's counterparties. The
counterparties are primarily major trading companies which management
believes present minimal credit risks.
F-41
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
M - FINANCIAL CONDITION AND MANAGEMENT PLANS
The financial statements of the Company have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the consolidated financial
statements, the Company has an accumulated deficit of $20,008,000 and
negative working capital of $4,906,000 at December 31, 2004. The financial
statements do not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be
unable to continue as a going concern.
Management believes that borrowings currently available to the Company
under the Company's credit facilities ($1.3 million available at December
31, 2004), the balance of unrestricted cash and anticipated cash flows
from operations will be sufficient to satisfy its currently expected
capital expenditures, working capital and debt service obligations for the
foreseeable future. The actual amount and timing of future capital
requirements may differ materially from estimates as a result of, among
other things, changes in product pricing and regulatory, technological and
competitive developments. Sources of additional financing may include
commercial bank borrowings, vendor financing and the sale of oil and
natural gas properties or equity or debt securities. Management cannot
assure that any such financing will be available on acceptable terms or at
all.
N - RELATED PARTY TRANSACTIONS
For the years ended December 31, 2004, 2003 and 2002, the Company paid
expenses in the amount of $0, $260,000 and $46,000, respectively, for
expenses on behalf of the Danish Knights, a Limited Partnership, which is
a principal shareholder of the Company.
The Company paid rent expense of approximately $66,000, $54,000 and $0
relating to a condominium for one of the shareholders of the Company for
the years ended December 31, 2004, 2003 and 2002, respectively.
For the years ended December 31, 2004, 2003 and 2002, approximately
$792,000, $299,000 and $140,000, respectively, of expenses (excluding the
rent payments discussed above) for the shareholders of the Company are
included in general and administrative expenses in the consolidated
statements of operations, some of which may be personal in nature.
O - DEFERRED COMPENSATION
On April 21, 2004, the Company adopted a Deferred Bonus Compensation Plan
(the Plan) for senior management employees of the Company. The Plan is to
provide additional compensation for significant business transactions with
a portion of each bonus to be deferred to encourage retention of key
employees. Determination of significant business transactions and terms of
awards is made by a committee comprised of the shareholders of the
Company.
During 2004, three members of senior management were granted awards. Each
award provides for a total cash compensation of $75,000 and vests on each
anniversary date for three years, beginning on July 1, 2004. Receipt of
the award is contingent on the members being employed on the anniversary
date. Should there be a change of control or involuntary termination, as
defined in the award contract, each member will become fully vested in his
award. At December 31, 2004, $37,500 is recorded in accrued compensation.
Compensation expense is recorded on a straight-line basis. For the year
ended December 31, 2004, $112,500 has been recorded as compensation
expense in the consolidated statement of operations.
F-42
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
P - OIL AND NATURAL GAS PRODUCING ACTIVITIES
Capitalized costs relating to oil and natural gas producing activities and
related accumulated depreciation, depletion, and amortization at December
31 are summarized as follows (in thousands):
2004 2003
--------- ---------
Proved oil and
natural gas properties $ 146,598 $ 60,760
Accumulated depreciation,
depletion, and amortization (20,074) (24,006)
--------- ---------
$ 126,524 $ 36,754
========= =========
Costs incurred in oil and natural gas producing activities for the years
ended December 31 are as follows (in thousands, except per equivalent
Mcf):
2004 2003 2002
------- ------- -------
Acquisition of proved properties $82,600 $ -- $ 1,300
Development costs 5,580 4,080 3,698
Exploration costs 727 202 1,702
Amortization rate per equivalent Mcf 1.00 .92 .89
Q - SUBSEQUENT EVENTS
In June 2005, the Company sold overriding royalty interests in certain
properties located in Jack and Wise Counties, Texas for $2.3 million to
Bridgeport Royalties, LLC. Bridgeport Royalties, LLC is a related party of
the Company, owned and operated by the owners and several officers and
employees of the Company, in addition to outside counsel. No gain on the
sale was recognized and the proceeds were applied to reduce the
outstanding balance under the Company's revolving credit facility.
In October 2005, the Company entered into a definitive merger agreement
with Tremisis Energy Acquisition Corporation pursuant to which the Company
will become a wholly owned subsidiary of Tremisis.
R - SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION (UNAUDITED)
The Company has interests in oil and natural gas properties that are
principally located in Texas, Louisiana, Oklahoma and New Mexico. The
Company does not own or lease any oil and natural gas properties outside
the United States of America.
The Company retains independent engineering firms to provide year-end
estimates of the Company's future net recoverable oil, natural gas and
natural gas liquids reserves. Estimated proved net recoverable reserves as
shown below include only those quantities that can be expected to be
commercially recoverable at prices and costs in effect at the balance
sheet dates under existing regulatory practices and with conventional
equipment and operating methods.
F-43
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
Proved developed reserves represent only those reserves expected to be
recovered through existing wells. Proved undeveloped reserves include
those reserves expected to be recovered from new wells on undrilled
acreage or from existing wells on which a relatively major expenditure is
required for re-completion.
Net quantities of proved developed and undeveloped reserves of oil and
natural gas, including condensate and natural gas liquids, are summarized
as follows:
Natural Gas Crude Oil
(Million (Thousand
Cubic Feet) Barrels)
----------- --------
December 31, 2001 35,488 1,902
Extensions and discoveries 2,808 813
Sales of reserves in place (96) (74)
Purchases of reserves in place 6,395 66
Revisions of previous estimates (6,915) (50)
Production (1,760) (206)
------ ------
December 31, 2002 35,920 2,451
------ ------
Extensions and discoveries 1,152 258
Sales of reserves in place (16) --
Purchases of reserves in place 1,114 --
Revisions of previous estimates (1,269) (105)
Production (2,334) (282)
------ ------
December 31, 2003 34,567 2,322
------ ------
Extensions and discoveries 3,016 17
Sales of reserves in place (4,979) (1,299)
Purchases of reserves in place 9,986 11,573
Revisions of previous estimates (2,311) 332
Production (2,084) (190)
------ ------
December 31, 2004 38,195 12,755
====== ======
Proved developed reserves:
December 31, 2001 22,089 1,556
December 31, 2002 28,379 2,234
December 31, 2003 26,237 2,151
December 31, 2004 31,048 7,809
The following is a summary of a standardized measure of discounted net
cash flows related to the Company's proved oil and natural gas reserves.
For these calculations, estimated future cash flows from estimated future
production of proved reserves were computed using oil and natural gas
prices as of the end of the period presented. Future development and
production costs attributable to the proved reserves were estimated
assuming that existing conditions would continue over the economic lives
of the individual leases and costs were not escalated for the future.
Estimated future income tax expenses were calculated by applying future
statutory tax rates (based on the current tax law adjusted for permanent
differences and tax credits) to the estimated future pretax net cash flows
related to proved oil and natural gas reserves, less the tax basis of the
properties involved.
F-44
RAM ENERGY, INC.
Notes to consolidated financial statements, continued
The Company cautions against using this data to determine the fair value
of its oil and natural gas properties. To obtain the best estimate of fair
value of the oil and natural gas properties, forecasts of future economic
conditions, varying discount rates, and consideration of other than proved
reserves would have to be incorporated into the calculation. In addition,
there are significant uncertainties inherent in estimating quantities of
proved reserves and in projecting rates of production that impair the
usefulness of the data.
The standardized measure of discounted future net cash flows relating to
proved oil and natural gas reserves at December 31 are summarized as
follows (in thousands):
2004 2003 2002
--------- --------- ---------
Future cash inflows $ 711,781 $ 281,149 $ 220,558
Future production costs (247,314) (70,644) (54,732)
Future development costs (36,495) (9,534) (9,532)
Future income tax expenses (136,669) (69,787) (52,533)
--------- --------- ---------
Future net cash flows 291,303 131,184 103,761
10% annual discount for estimated timing of cash
flows (129,983) (63,250) (50,392)
--------- --------- ---------
Standardized measure of discounted future net
cash flows $ 161,320 $ 67,934 $ 53,369
========= ========= =========
The following are the principal sources of change in the standardized
measure of discounted future net cash flows of the Company for each of the
three years in the period ended December 31 (in thousands):
2004 2003 2002
--------- --------- ---------
Discounted future net cash flows at beginning of
year $ 67,934 $ 53,369 $ 33,020
Changes during the year:
Sales and transfers of oil and natural gas
produced, net of production costs (13,112) (14,919) (5,891)
Net changes in prices and production costs 7,612 33,972 30,124
Extensions and discoveries, less related costs 9,337 5,153 15,620
Development costs incurred and revisions -- -- 525
Sales of reserves in place (19,840) (26) (1,005)
Purchases of reserves in place 153,364 1,643 11,867
Revisions of previous quantity estimates (1,677) (9,166) (12,970)
Net change in income taxes (38,246) (9,253) (19,911)
Accretion of discount 6,793 8,075 4,049
Other (10,845) (914) (2,059)
--------- --------- ---------
Net change 93,386 14,565 20,349
--------- --------- ---------
Discounted future net cash flows at end of year $ 161,320 $ 67,934 $ 53,369
========= ========= =========
Prices used in computing these calculations of future cash flows from
estimated future production of proved reserves were $40.25, $29.25 and
$27.75 per barrel of oil at December 31, 2004, 2003 and 2002,
respectively, and $6.02, $6.17 and $4.24 per thousand cubic feet of
natural gas at December 31, 2004, 2003 and 2002, respectively.
F-45
INDEPENDENT AUDITORS' REPORT
The Board of Directors
RWG Energy, Inc.
We have audited the accompanying consolidated balance sheets of RWG Energy, Inc.
and Subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RWG Energy, Inc. and
Subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information disclosed
in Note 14 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has not been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, accordingly, we express no opinion on it.
ELMS FARIS & COMPANY, LLP
November 3, 2005
Midland, Texas
F-46
RWG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
------------- -------------
A S S E T S
CURRENT ASSETS
Cash and Cash Equivalents $ 688,387 $ 5,075,952
Accounts Receivable
Oil and Gas Sales 3,141,173 1,533,454
Other 209,806 278,262
Related Party Receivable 975,014 --
Other Current Assets 608,095 104,215
------------- -------------
TOTAL CURRENT ASSETS 5,622,475 6,991,883
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
Oil and Gas Properties
(Using Successful Efforts) 97,048,597 45,202,262
Other Property and Equipment 1,160,328 1,078,635
------------- -------------
98,208,925 46,280,897
Less Accumulated Depreciation and Depletion (348,000) (5,488,141)
------------- -------------
NET PROPERTY, PLANT AND EQUIPMENT 97,860,925 40,792,756
------------- -------------
OTHER ASSETS
Other Assets, Net of Amortization of $0
and $649,905, Respectively -- 507,898
DEFERRED TAX ASSET 6,758,000 1,301,000
------------- -------------
TOTAL ASSETS
(Pledged for Parent Company Debt - $ 110,241,400 $ 49,593,537
============= =============
See Note 2)
The accompanying notes are an integral
part of these financial statements.
F-47
RWG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Maturities of Long-Term Debt (See Note 2) $ 3,867,411 $ 90,994
Accounts Payable
Trade 3,175,742 2,337,014
Other 901,933 1,106,215
Accrued Liabilities 364,827 99,797
Derivative Obligation -- 1,211,272
------------- -------------
TOTAL CURRENT LIABILITIES 8,309,913 4,845,292
------------- -------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES (See Note 2) 78,964,732 24,028,795
DERIVATIVE OBLIGATION -- 242,036
ASSET RETIREMENT OBLIGATION 4,661,073 4,674,466
DEFERRED TAX LIABILITY 20,946,000 4,205,000
------------- -------------
TOTAL LIABILITIES 112,881,718 37,995,589
------------- -------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, $.01 Par Value, 14,000,000 Shares
Authorized, 11,000,000 Shares Issued and Outstanding -- 110,000
Common Stock, Class A, $.0001 Par Value, 17,200,000 Shares
Authorized, 5,200,000 Shares Issued and Outstanding -- 520
Common Stock, Class B, $.0001 Par Value, 10,000,000 Shares
Authorized, 6,800,000 Shares Issued and Outstanding -- 680
Common Stock, $1 Par Value, 5,000 Shares
Authorized, 1,000 Shares Issued and Outstanding 1,000 --
Additional Paid-In Capital 86,672 13,083,584
Retained Earnings (Deficit) (2,727,990) (826,685)
Accumulated Other Comprehensive Income (Loss),
Net of Taxes of $397,000 in 2003 -- (770,151)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (2,640,318) 11,597,948
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,241,400 $ 49,593,537
============= =============
The accompanying notes are an integral
part of these financial statements.
F-48
RWG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
REVENUES
Oil and Gas Sales $ 31,995,406 $ 20,447,993
Realized Loss on Settlement of Derivative Contracts (25,379,185) (5,479,411)
Management and Other Fees 72,935 56,881
Gain (Loss) on Sale of Assets 1,584,964 (258,830)
Other Miscellaneous Income 155,195 17,461
------------ ------------
TOTAL REVENUES 8,429,315 14,784,094
------------ ------------
EXPENSES
Oil and Gas Production Costs 10,646,379 8,292,034
Oil and Gas Production Taxes 1,531,816 1,023,399
Depreciation, Depletion and Amortization 3,264,818 2,539,564
General and Administrative Expenses 2,411,986 2,151,626
Interest Expense, Net of Interest Income 1,087,298 1,380,247
Loss on Extinguishment of Debt -- 42,105
------------ ------------
TOTAL EXPENSES 18,942,297 15,428,975
------------ ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (10,512,982) (644,881)
------------ ------------
INCOME TAX BENEFIT (EXPENSE)
Current Income Taxes (80,579) --
Deferred Income Taxes 1,042,519 (145,000)
------------ ------------
TOTAL INCOME TAXES 961,940 (145,000)
------------ ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (9,551,042) (789,881)
------------ ------------
DISCONTINUED OPERATIONS
Earnings (Loss) from Discontinued Operations -- (55,804)
Tax Benefit (Expense) -- 19,000
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS -- (36,804)
------------ ------------
NET INCOME (LOSS) (9,551,042) (826,685)
OTHER COMPREHENSIVE INCOME (LOSS)
Deferred Hedge Loss -- (770,151)
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (9,551,042) $ (1,596,836)
============ ============
The accompanying notes are an integral
part of these financial statements.
F-49
RWG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Additional
Preferred -------------------------------------------- Paid-In
Stock Class A Class B New Capital
------------ ------------ ------------ ------------- ------------
Balance, December 31, 2002 $ -- $ -- $ -- $ -- $ --
Redemption of Partnership Interest -- -- -- -- --
Conversion of Partnership Interest -- 520 -- -- 3,451,482
Capital Contributions 110,000 -- 680 -- 9,632,102
Net Income (Loss) -- -- -- -- --
Deferred Hedge Losses -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 $ 110,000 $ 520 $ 680 $ -- $ 13,083,584
============ ============ ============ ============ ============
Accumulated Other
Comprehensive Income (Loss) -- -- -- -- --
Net Income (Loss) -- -- -- -- --
Purchase Transaction (110,000) (520) (680) 1,000 69,494,088
Acquisition of Debt at Purchase -- -- -- -- (82,491,000)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 $ -- $ -- $ -- $ 1,000 $ 86,672
============ ============ ============ ============ ============
Accumulated
Retained Other Partners' Capital
Earnings Comprehensive General Limited
(Deficit) Income (Loss) Partner Partners Total
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 $ -- $ -- $ 54,453 $ 5,390,889 $ 5,445,342
Redemption of Partnership Interest -- -- (19,933) (1,973,407) (1,993,340)
Conversion of Partnership Interest -- -- (34,520) (3,417,482) --
Capital Contributions -- -- -- -- 9,742,782
Net Income (Loss) (826,685) -- -- -- (826,685)
Deferred Hedge Losses -- (770,151) -- -- (770,151)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 $ (826,685) $ (770,151) $ -- $ -- $ 11,597,948
============ ============ ============ ============ ============
Accumulated Other
Comprehensive Income (Loss) -- 959,118 -- -- 959,118
Net Income (Loss) (9,551,042) -- -- -- (9,551,042)
Purchase Transaction 7,649,737 (188,967) -- -- 76,844,658
Acquisition of Debt at Purchase -- -- -- -- (82,491,000)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 $ (2,727,990) $ -- $ -- $ -- $ (2,640,318)
============ ============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements
F-50
RWG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $ (9,551,042) $ (826,685)
Adjustments to reconcile Net (Loss) to Net Cash
(Used In) provided by Operating Activities
Depreciation, Depletion and Amortization 3,264,818 2,539,564
Deferred Hedge Loss -- 286,157
(Gain) Loss on Sale of Assets (1,584,964) 258,830
Changes in Assets and Liabilities
(Increase) Decrease In
Accounts Receivable (1,539,263) 227,876
Other Current Assets (503,880) (1,298)
Related Party Receivable (975,014) --
Other Assets 507,898 --
Increase (Decrease) In
Accounts Payable 634,446 1,114,943
Accrued Liabilities 265,030 (171,045)
Derivative Obligation (1,453,308) --
Deferred Taxes 2,286,942 126,000
NET CASH (USED IN) PROVIDED (8,648,337) 3,554,342
BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment (3,971,546) (3,358,038)
Proceeds from Sale of Property, Plant and Equipment 4,436,474 193,500
Retirement of Property, Plant and Equipment -- 199,374
Other Asset Retirements -- 336,528
NET CASH PROVIDED BY (USED IN) 464,928 (2,628,636)
INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long-Term Borrowings 32,619,072 23,851,040
Repayment of Long-Term Borrowings (28,823,228) (27,996,243)
Redemption of Partnership Interest -- (1,993,340)
Capital Contributions -- 11,000,000
Cost of Capital Contributions -- (1,257,218)
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,795,844 3,604,239
NET (DECREASE) INCREASE IN CASH (4,387,565) 4,529,945
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 5,075,952 546,007
CASH AND CASH EQUIVALENTS - END OF YEAR $ 688,387 $ 5,075,952
============ ============
(Continued)
F-51
RWG ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid for Interest $ 1,093,423 $ 2,482,694
============ ============
SIGNIFICANT NON-CASH TRANSACTIONS
Additions to Property, Plant and Equipment 12,181,732 (4,425,895)
Increase in Asset Retirement Obligation (13,393) 4,425,895
Increase in Deferred Tax Liability (12,168,339) --
Step-up in Basis of Property and Equipment at Acquisition (50,629,286) --
Purchase Transaction/Long Term Debt Assumption 50,629,286 --
TOTAL SIGNIFICANT NON-CASH TRANSACTIONS $ -- $ --
============ ============
The accompanying notes are an integral
part of these financial statements.
F-52
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
WG Energy, Inc., a Texas corporation, was organized and began operations
on June 1, 2000, with the purchase of 100% of the outstanding shares of
Williamson Petroleum Consultants, Inc., ("WPC") a Texas corporation
organized in 1969. WG Operating, Inc. and WG Royalty Company, both
wholly-owned subsidiaries of WG Energy, Inc. were also founded in 2000.
Effective January 25, 2002, WG Energy, Inc. reorganized its legal entity
structure and converted into WG Energy, Ltd, (the "Partnership"), a Texas
limited partnership. WG Energy Management, LLC was created to serve as the
Partnership's General Partner. Such conversion qualified as a Type F
tax-free reorganization.
As discussed in Note 3 to the financial statements, on April 3, 2003, the
Partnership entered into a series of reorganization transactions that
resulted in the redemption of approximately 50% of the Partnership's
interest, the conversion of the remaining Partnership's interest into
5,200,000 shares of Class A Common Stock of WG Energy Holdings, Inc. (the
"Company"), a newly formed Delaware corporation, and a $8,000,000 capital
contribution by WGE Investment, LLC, a Delaware limited liability company,
("WGE Investment") in exchange for 4,800,000 shares of Class B Common
Stock and 8,000,000 shares of Series A Preferred Stock of the Company.
Subsequently, on December 23, 2003, WGE Investment invested another
$3,000,000 for 2,000,000 shares of Class B Common Stock and 3,000,000
shares of Series A Preferred Stock of the Company.
On December 17, 2004, Ram Energy, Inc. (Ram), a Delaware corporation,
completed its acquisition of WG Energy Holdings, Inc. (WG), a Delaware
corporation, in which a wholly owned subsidiary of Ram created
specifically for such purpose merged with and into WG and WG was the
surviving corporation in the merger. At the time of the merger, the name
of WG was changed to RWG Energy, Inc., or RWG.
The Company is involved in the exploration, development, production, and
acquisition of oil and gas properties. Since operations began, the Company
and its subsidiaries have experienced growth through the acquisition of
oil and gas properties and the exploitation of these properties in the
Texas Panhandle and North Texas regions.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. As discussed in Note 3, the operations
of WPC through April 3, 2003, are recorded as discontinued operations in
the accompanying consolidated financial statements.
All material inter-company accounts and transactions have been eliminated
in the consolidation. The accounts of Ram and its subsidiaries, other than
those directly owned by the company are not included in these financial
statements.
F-53
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain reclassifications have been made to the 2003 amounts to conform
with the 2004 financial statement presentation.
Guarantor Obligation of Parent Debt
To facilitate the December 17, 2004 acquisition by Ram of WG and
subsequent merger with RWG Energy, Inc., Ram obtained financing using
substantially all of the assets of RWG Energy, Inc. as collateral and
involving RWG Energy, Inc. as guarantor on the debt. In accordance with
SEC Staff Accounting Bulletins 54 and 73, a purchase transaction which
results in an entity becoming substantially wholly owned establishes a new
basis of accounting for the purchased assets and liabilities, and the
parent company's debt and related debt issuance costs should be reflected
in the subsidiary's financial statements if the subsidiary guarantees or
pledges its assets as collateral for the parent company's debt.
The acquisition transaction was recorded under the purchase method which
resulted in a new cost basis of valuing the assets and liabilities of the
newly created entity, RWG Energy, Inc. The major adjustments to the
financial statements can be seen on the balance sheet as current
maturities of long term debt of approximately $3,867,000 and long term
debt, net of current maturities of approximately $78,965,000. The increase
to oil and gas properties includes a step-up in basis of approximately
$50,561,000 and appears on the balance sheet as an end result of
approximately $97,049,000.
Use of Estimates
Preparation of the accompanying consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". SFAS 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived
assets to be disposed of. It supersedes, with exceptions, SFAS 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of",
and is effective for the fiscal years beginning after December 15, 2001.
Effective January 1, 2002, the Company adopted the provisions of SFAS 144.
At December 31, 2004 and 2003, the Company's long-lived assets were not
deemed to be impaired.
F-54
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN
45 requires that upon the issuance of guarantees, the guarantor must
recognize a liability for the fair value of the obligations it assumes
under the guarantee. Liability recognition is required on a prospective
basis for guarantees that are made or modified after December 31, 2002.
The adoption of FIN 45 resulted in the Company recognizing debt, which was
guaranteed by the Company, representing Ram's indebtedness used to acquire
the Company and a re-valuation of the Company's assets as of December 17,
2004.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123."
This statement amends SFAS 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
Effective January 1, 2003, the Company adopted the provision of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB 51.
The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means
other than through voting rights (variable interest entities or VIEs) and
how to determine when and which business enterprise should consolidate the
VIE. This new model for consolidation applies to an entity which either:
(1) the equity investors, if any, do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance
that entity without receiving additional subordinated financial support
from other parties. The adoption of this standard does not have any impact
on the Company's consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 149 is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The Company has previously
adopted the provisions of SFAS 133, as amended.
F-55
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity", which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity and requires that an issuer classify a financial
instrument within the scope of SFAS No. 150 as a liability (or an asset in
some circumstances). SFAS No. 150 was effective for the Company beginning
in the third quarter 2003. The adoption of SFAS No. 150 did not have a
material impact on the Company's financial position or the results of
operations.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based
on their fair values and is effective for the first interim or annual
reporting period beginning after January 1, 2006. Management does not
believe the adoption of SFAS No. 123R will have a significant impact on
the Company's financial position or statement of operations.
The FASB issued Staff Position (FSP) Nos. 141-1 and 142-1 as a result of
the March 17-18, 2004, Emerging Issues Task Force (EITF) meeting, after
the EITF reached a consensus on EITF Issue No. 04-2, Whether Mineral
Rights are Tangible or Intangible Assets, and concluded that mineral
rights, as defined in the issue, are tangible assets. This FSP addressed
the inconsistency between this consensus and the characterization of
mineral rights as intangible assets in SFAS No. 141 and SFAS No. 142. The
guidance in this FSP is applicable to the first reporting period beginning
after April 29, 2004 and, therefore effective for the Company January 1,
2005. The FASB encourages early adoption. As such, the Company adopted
this FSP effective December 31, 2004. The adoption of this FSP did not
have a significant impact on the Company's financial position or results
of operations.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all demand deposits, money market accounts and certificates of
deposit purchased with an original maturity of three months or less to be
cash equivalents.
Inventories
Inventories consist of various supplies used in the production of oil and
gas reserves and are accounted for at the lower of cost (first-in,
first-out) or market. Inventories, which are not material, are included in
other current assets in the accompanying consolidated balance sheets.
F-56
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant and Equipment
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Under this method of accounting, all costs
associated with productive wells and nonproductive development wells are
capitalized. Exploration costs are capitalized pending determination of
whether proved reserves are found. If no proved reserves are found,
previously capitalized exploration costs are charged to expense. If, after
the passage of one year, the existence of proved reserves cannot be
conclusively established, any deferred costs are charged to expense.
Costs of significant non-producing properties, wells in the process of
being drilled and development projects are excluded from depletion until
such time as the related project is developed and proved reserves are
established or impairment is determined. The Company capitalizes interest
on expenditures for significant development projects until such time as
significant operations commence.
The Company has adopted the provisions of SFAS 143. Capitalized costs of
individual properties abandoned or retired, net of salvage proceeds, are
charged to accumulated depreciation and depletion. Costs of abandonment or
retirement are charged to the asset retirement obligation.
Sales proceeds from insignificant sales of individual properties are
credited to property costs and no gain or loss is recognized until the
entire property base is sold or abandoned. For significant sales of
interests in producing oil and gas properties, the estimated present value
of fair market value of the interests conveyed is credited to the
producing oil and gas properties and any resulting gain or loss is
reflected in operations.
In accordance with SFAS 144, the Company's oil and gas properties are
assessed for impairment whenever changes in facts and circumstances
indicate a possible significant deterioration in the future cash flows
expected to be generated by an asset group. If, upon review, the sum of
the undiscounted pretax cash flows is less than the carrying value of the
asset group, the carrying value is written down to the estimated fair
value. Individual assets are grouped for impairment purposes at the lowest
level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets - generally on a
property-by-property basis. The fair value of impaired assets is
determined based on quoted market prices in active markets, if available,
or upon the present values of expected future cash flows using discount
rates commensurate with the risks involved in the asset group. Long-lived
assets committed by management for disposal are accounted for at the lower
of amortized cost or fair value less cost to sell. None of the Company's
oil and gas properties were deemed impaired for the years ended December
31, 2004 and 2003.
Other property and equipment, which includes office furniture, fixtures,
and equipment and vehicles, are recorded at cost. Major renewals and
betterments are capitalized while the costs of repairs and maintenance are
charged to operating expenses in the period incurred. With respect to
dispositions of assets, other than oil and gas properties, the cost of the
asset retired or otherwise disposed of, and the applicable accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is reflected in operations.
F-57
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant and Equipment (Continued)
As a result of Ram acquiring the stock of the company (as discussed in
Note 1), the assets of RWG were re-valued at December 17, 2004 on the
basis of the amount of the purchase price, which was largely financed by
Ram revolving and term debt instruments. The non oil & gas property and
equipment were adjusted to fair value, while the oil & gas properties were
valued at the remaining purchase price of the company.
Depreciation, Depletion and Amortization
Depreciation and depletion of the Company's oil and gas properties are
provided using the unit-of-production method and estimated proved reserves
on a property-by-property basis. In addition, estimated costs of future
dismantlement, restoration and abandonment, if any, are accrued as part of
the property cost and subjected to depreciation and depletion.
Other property and equipment is depreciated using the straight-line method
over the estimated useful lives of the assets. Deferred long-term loan
origination costs are capitalized and amortized over the life of the
related loan.
Concentrations of Credit Risk
The Company is engaged primarily in the oil and gas production business.
The Company performs ongoing credit evaluations of its customers'
financial condition and generally, requires no collateral from their
customers.
The Company maintains its cash balances at one financial institution
insured by the Federal Deposit Insurance Corporation with each depositor
insured up to $100,000. At December 31, 2004 and 2003, the Company had
cash on deposit at the bank of approximately $1,027,000 and $5,596,000,
respectively.
Income Taxes
The Company follows the provisions of SFAS 109, "Accounting for Income
Taxes". Under the asset and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
F-58
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Environmental
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate
the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized depending on their
future economic benefit. Expenditures that relate to an existing condition
caused by past operations and that have no future economic benefits are
expensed. Liabilities for expenditures of a non-capital nature are
recorded when environmental assessment and/or remediation is probable, and
the costs can be reasonably estimated.
Revenue Recognition and Gas Imbalances
The Company uses the sales method of accounting for crude oil revenues.
Under this method, revenues are recognized based on actual volumes of oil
sold to purchasers.
The Company used the entitlements method of accounting for natural gas
revenues. Under this method, revenues are recognized based on the
Company's proportionate share of actual sales of natural gas. Natural gas
revenues would not have been significantly altered in any period had the
sales method of recognizing natural gas revenues been utilized. The
Company has no material gas balancing asset or liability at December 31,
2004 and 2003.
The Company recognizes marketing revenue, net of the cost of gas and
third-party delivery fees, as service is provided.
Commodity Hedging
SFAS 133 requires the accounting recognition of all derivative instruments
as either assets or liabilities at fair value. Derivative instruments that
are not hedges must be adjusted to fair value through net income (loss).
Under the provisions of SFAS 133, changes in the fair value of derivative
instruments that are fair value hedges are offset against changes in the
fair value of the hedged assets, liabilities or firm commitments, through
net income (loss). Effective changes in the fair value of derivative
instruments that are cash flow hedges are recognized in accumulated other
comprehensive income ("AOCI") - deferred hedges gains (losses), net in the
stockholders' equity sections of the Company's consolidated balance sheet
until such time as the hedged items are recognized in net income (loss).
The ineffective portion of a derivative instrument's change in fair value
is immediately recognized in net income (loss).
Under provisions of SFAS 133, a cash flow hedge is a derivative instrument
that hedges the exposure to variability in expected future cash flows that
are attributable to a particular risk. Both at the inception of a hedge
and on an ongoing basis, a cash flow hedge must be expected to be highly
effective in achieving offsetting cash flows attributable to the hedged
risk during the term of the hedge. The expectation of hedge effectiveness
must be supported by matching the essential terms of the hedged asset,
liability or forecasted transaction to the derivative hedge contract or by
effectiveness assessments using statistical measurement. The Company's
policy is to assess actual hedge effectiveness at least on an annual
basis.
F-59
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition and Gas Imbalances
The Company's crude oil contracts required the physical delivery and sale
of specific volumes of crude oil at fixed prices over a twenty-four month
period. The Company considers its crude oil contracts to be forward sales
contracts and does not meet the requirements of SFAS 133.
The Company considers its natural gas hedge contracts to be derivative
financial instruments within the scope of SFAS 133. All hedge contracts of
the Company were settled in full at December 17, 2004, at the time Ram
acquired the Company. This settlement resulted in a hedging loss of $14.4
million reported in the statements of operations. At December 31, 2004,
the Company had no hedge contracts outstanding.
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs and amends
FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be
made, and that the associated asset retirement costs be capitalized as
part of the carrying amount of the long-lived asset. The Company adopted
this standard as of January 1, 2003. The effect of this standard on the
Company's results of operations and financial condition at adoption
included an increase in long-term liabilities for plugging and abandonment
costs of natural gas and oil properties of $4,425,895. The cumulative
effect of SFAS No. 143 on previously reported operations was not material.
The company recorded accretion expense of approximately $226,992 and
$248,571 in 2004 and 2003, respectively.
The Company recorded the following activity related to the asset
retirement liability for the years ended December 31, 2004 and 2003:
2004 2003
----------- -----------
Liability for Asset Retirement Obligations,
Beginning of Year $ 4,674,466 $ 4,425,895
Accretion Expense 226,992 248,571
Purchase Price Adjustment (240,385) --
----------- -----------
Liability for Asset Retirement Obligations,
End of Year $ 4,661,073 $ 4,674,466
=========== ===========
F-60
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 3: REORGANIZATION TRANSACTIONS
On April 3, 2003, the following reorganizations transactions occurred:
o The Partnership agreed to extinguish certain convertible promissory
notes issued in connection with the acquisition of 100% of the
common stock of WPC. Promissory notes aggregating $908,525 and
accrued interest of $117,283 were extinguished for cash payments
totaling $72,660, the transfer of WPC common stock back to the
original WPC owners, the transfer of certain Company assets to WPC
and the forgiveness of WPC's intercompany payable and receivable
balances. The extinguishment of convertible promissory notes
resulted in a loss of $42,105.
o The Partnership agreed to redeem the interest of certain limited
partners (the "Redeemed Parties") owning approximately 50% of the
Partnership. In exchange for their Partnership interest, the
Redeemed Parties received cash of $277,340 on April 3, 2003, $75,000
payable in $25,000 installments on July 1, 2003, December 31, 2003,
and February 1, 2004, and a $1,800,000 non-interest bearing
installment obligation (discounted to a present value of
$1,641,000), secured by a deed of trust, and payable monthly based
on the net production revenue from certain oil and gas properties.
The total cost of the 50% Partnership interest redemption of
$1,993,340 was charged to partners' capital.
o Immediately after the Partnership redemption transaction, the
Company was formed and the remaining Partnership interest was
converted into 5,200,000 shares of the Company's Class A Common
Stock. The conversion transaction resulted in a credit to additional
paid-in capital of $3,417,482.
o In accordance with a Plan of Merger and Contribution Agreement, WGE
Investment contributed $8,000,000 in exchange for 4,800,000 shares
of Class B Common Stock and 8,000,000 shares of Series A Preferred
Stock of the Company. The contribution transaction resulted in a
credit to additional paid-in capital of $6,662,302, net of legal,
accounting and other cost of capital of $1,257,220. On December 23,
2003, WGE Investment converted $3,000,000 of its Bridge Loan into
3,000,000 shares of Series A Preferred Stock and 2,000,000 shares of
Class B Common Stock and resulted in $2,969,800 being credited to
additional paid-in capital.
o In connection with the Company's restructuring transactions, the
Company and its primary lender entered into a Second Amended and
Restated Revolving Credit Agreement, dated April 3, 2003. This
Revolving Credit Agreement was terminated and the loan amount due
was paid in full upon the Ram acquisition of the Company on December
17, 2004.
F-61
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 4: ACQUISITION TRANSACTION
On December 17, 2004, the company was acquired by and merged with a
subsidiary of RAM Energy, Inc. (RAM) resulting in the surviving
corporation RWG Energy, Inc. (RWG). RWG is a wholly owned subsidiary of
RAM. RWG and its four subsidiaries make up the first and second tier
subsidiaries of RAM. All common and preferred stock of the company was
retired and replaced with 1,000 shares of new common stock of RWG. All
outstanding debt of the Company was paid in full as a result of the merger
and acquisition. Additionally, all outstanding derivative positions were
settled for cash as part of the merger and acquisition transaction. The
final adjusted purchase price was $82.6 million, including the assumption
and payment of WG's long term debt of $24.5 million and the settlement of
all outstanding derivative instruments of $14.4 million. The WG
acquisition was accounted for using the purchase method of accounting in
accordance with SFAS No. 141, Business Combinations, and the purchase
price has been initially allocated based on the estimated fair value of
the individual assets acquired and liabilities assumed at the date of
acquisition.
NOTE 5: PREFERRED AND COMMON STOCK
As stated in Note 4, all outstanding preferred and common stock of the
company was retired and replaced with 1,000 shares of RWG as a result of
the merger and acquisition transaction on December 17, 2004. Stockholders'
equity includes 5,000 shares of authorized $1 par value common stock, of
which 1,000 shares are issued and outstanding as of December 31, 2004. All
shares are owned by RAM Energy, Inc.
NOTE 6: LONG-TERM DEBT
Long-term debt at December 31, 2004 and 2003 consisted of the following:
2004 2003
------------ ------------
Foothill Term and Revolving
Credit Facility $ 82,491,000 $ --
Revolving Credit Facility -- 19,555,000
Secured Convertible Promissory Note -- 3,010,000
Installment Obligation -- 1,308,468
Other 341,143 246,321
------------ ------------
82,832,143 24,119,789
Less Current Maturities (3,867,411) (90,994)
------------ ------------
$ 78,964,732 $ 24,028,795
============ ============
All outstanding debt of the company (except some automobile loans and
leases) was paid as a result of the merger and acquisition transaction on
December 17, 2004. The Company assumed a significant portion of RAM's
Foothill Term and Revolving Credit Facility with the transaction as a
result of push down accounting as more fully described in Note 2.
F-62
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 6: LONG-TERM DEBT
Foothill Term and Revolving Credit Facility
The facility includes a $30.0 million term loan and a $60.0 million
revolving credit facility, reducing by $2.5 million per quarter commencing
September 30, 2005 and continuing until the committed amount of the
revolver is reduced to $50.0 million. Borrowings under the revolving
credit facility bear interest at Foothill's base rate plus 2% (7.25% at
December 31, 2004), or LIBOR plus 4%, at the option of RAM, while advances
under the term loan bear interest at the base rate plus 4% (9.25% at
December 31, 2004), or LIBOR plus 6%, also at the option of the RAM. The
entire facility will mature in three years. The amount of credit available
under the credit facility at December 31, 2004 was $1.3 million.
RAM is required to pay a commitment fee equal to .375% per annum on the
amount by which the borrowing base exceeds the aggregate amount
outstanding under the Foothill credit facility. Amounts outstanding under
the Foothill credit facility are collateralized by substantially all
current and future assets of RAM and its subsidiaries. Along with the
pledged collateral mentioned above, Foothill also has first rights to
RAM's cash accounts.
The credit facility contains customary covenants which, among other
things, require periodic financial and reserve reporting and limit the
Company's incurrence of indebtedness, executive compensation, capital
expenditures, transactions with affiliates, sales of assets, liens, loans,
mergers and investments and require RAM to meet minimum EBITDA thresholds.
Additionally, the credit facility requires RAM to hedge at least 40%, but
not more than 80%, of its estimated production for the ensuing six-month
period. RAM was in compliance with these covenants or had obtained waivers
at December 31, 2004.
If RAM fails to satisfy or obtain a waiver for the covenants of the credit
facility, Foothill could consider RAM to be in default. Upon default,
Foothill may declare all obligations immediately due and payable, cease
advancing money or extending credit, terminate the agreement, and secure
its rights in RAM's collateral. The Foothill credit facility also contains
a subjective acceleration clause whereby Foothill may declare an event of
default if it determines a material adverse change has occurred.
Management believes it is unlikely that the subjective acceleration clause
would be asserted in 2005 and therefore has classified the credit facility
as a long-term obligation in accordance with its stated maturity.
Scheduled maturities of Company's long-term debt at December 31, 2004, are
as follows:
2005 $ 3,867,411
2006 5,132,589
2007 73,491,000
-----------
$82,491,000
===========
Other
The Company has entered into several financing agreements with a financial
institution aggregating $290,926 at December 31, 2004, at interest rates
ranging from 9.0% to 11.25%. The notes are payable in monthly installments
ranging from $556 to $1,584, including principal and interest. The notes
are secured by vehicles. The company also had non-current lease
obligations totaling $50,217 secured by equipment.
F-63
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, other current assets, accounts payable and other
current liabilities. The carrying amounts of such assets and liabilities
approximate fair value due to the short maturity of these instruments.
The carrying amount of long-term debt approximates fair value because this
debt carries a variable interest rate based on market interest rates.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Senior Note Obligation to Parent
RAM's Senior Notes are fully and unconditionally guaranteed, jointly and
severally, on a senior unsecured basis, by all of the RAM's current and
future subsidiaries (the Subsidiary Guarantors which include RWG Energy,
Inc and subsidiaries.) These senior notes are described below.
In February 1998, RAM completed the sale of $115 million of 11.5% Senior
Notes due 2008 in a public offering of which $28.4 million remained
outstanding at December 31, 2004 and 2003. The Senior Notes are senior
unsecured obligations of RAM and are redeemable at the option of RAM in
whole or in part, at any time on or after February 15, 2005, at prices
ranging from 111.5% to 103.8% of face amount to their scheduled maturity
in 2008.
Other
The Company is party to various legal actions arising in the ordinary
course of business. In the opinion of the Company's management, upon
advice of legal counsel, the Company has adequate legal defense and/or
insurance coverage and does not believe they will materially affect the
Company's operations or financial position.
NOTE 9: RETIREMENT PLAN
The Company sponsors a 401(k) defined contribution plan for the benefit of
substantially all employees. The plan allows eligible employees to
contribute up to 100% of their annual compensation, not to exceed $13,000
for those under 50 years of age and $16,000 for those over 50 in 2004.
Employer contributions to the plan are discretionary. There were no
employer contributions to the plan during 2003 or 2004.
NOTE 10: MAJOR CUSTOMERS
For the years ended December 31, 2004 and 2003, two of the Company's
customers accounted for 10% or more of the Company's consolidated revenues
as follows:
2004 2003
----------- -----------
Purchaser A $22,061,243 $ 9,119,000
Purchaser B $ 5,428,202 $ 4,860,000
Purchaser C $ 1,109,479 $ 575,828
F-64
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 11: DERIVATIVE FINANCIAL INSTRUMENTS
During 2004 and 2003, the Company entered into numerous crude oil and
natural gas derivative contracts. The Company did not formally designate
the crude oil transactions as hedges as required by SFAS No. 133 in order
to receive hedge accounting treatment. The natural gas contracts were,
however, designated as hedges under the scope of SFAS 133. Realized gains
and losses on the derivative financial instruments during 2004 and 2003
have been recorded in the statement of operations in the amounts of
$(25,379,185) and $(5,479,411) in 2004 and 2003, respectively.
Additionally, the Company recognized a deferred hedge loss of $(770,151),
net of deferred taxes of $397,000 recorded as a charge to other
comprehensive income in 2003.
All outstanding derivative financial instruments of WG Energy Holdings,
Inc. and subsidiaries (aggregating $14.4 million) were settled with the
merger and acquisition transaction on December 17, 2004. All current
hedging activities occur at the parent company RAM Energy, Inc.
NOTE 12: RELATED PARTY TRANSACTIONS
Employment Contract
The employment contract described below was ended with the merger and
acquisition transaction on December 17, 2004. The president's stock was
purchased and his employment ended as of that date.
On April 3, 2003, the Company executed an employment contract with its
president providing for an annual salary of $175,000 per year and a
$250,000 signing bonus. Under the terms of the contract, the president was
permitted to devote up to one day per month to his personal investments
and the operations of Manhattan Petroleum, Inc. ("Manhattan") and the
Company had a right of first refusal to purchase any prospect developed by
Manhattan. The employment contract expired March 31, 2005. For the year
ended December 31, 2004, the Company exercised its first right of refusal
and paid Manhattan the sum of $168,000 for certain rights and claims
related to a Manhattan project.
NOTE 13: INCOME TAXES
The components of the federal income tax benefit (expense) for the period
ended December 31, 2004 and 2003 are as follows:
2004 2003
---------- ---------
Continuing Operations
Current-Income Tax (Expense) $ (80,579) $ --
Net Deferred Income Tax (Expense) 1,042,519 (145,000)
---------- ---------
Total Income Tax Benefit (Expense) $ 961,940 $(145,000)
========== =========
F-65
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 13: INCOME TAXES
The components of the Company's net deferred federal income tax
liabilities at December 31, 2004 and 2003 are as follows:
2004 2005
----------- -----------
Deferred Income Tax Liabilities
Depreciation, Depletion, and Amortization $20,934,000 $ 4,179,000
Other 12,000 26,000
----------- -----------
Total Deferred Income Tax Liabilities $20,946,000 $ 4,205,000
Deferred Income Tax Assets
Federal Income Tax Credits -- (163,000)
Net Operating Loss Carryover (1,608,000) (1,138,000)
Hedging Losses (4,900,000) --
Other (250,000) --
----------- -----------
Total Deferred Income Tax Assets (6,758,000) (1,301,000)
----------- -----------
Net Deferred Income Tax Liabilities $14,188,000 $ 2,904,000
=========== ===========
The utilization of the Company's net operating loss carry-forwards is
limited to approximately $674,000 per year due to a change in the
ownership of the Company. The carry-forwards expire December 31, 2023. It
is estimated that all deferred federal income tax assets will be fully
utilizable and, as a result, no valuation allowance has been applied
against these assets.
NOTE 14: UNAUDITED SUPPLEMENTARY INFORMATION
Reserve Quantity Information
The following estimates of proved crude oil, natural gas liquids, natural
gas reserve quantities and future net revenues are estimates only, and do
not purport to reflect realizable values or fair market values of the
Company's reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more
imprecise than those of producing oil and gas properties. Accordingly,
these estimates are expected to change as future information becomes
available. The estimates of proved oil and gas reserves, which are located
in Texas, were prepared by an independent professional petroleum engineer.
Proved reserves are estimated reserves of crude oil (including
condensate), natural gas liquids and natural gas that geological and
engineering data demonstrate, with reasonable certainty, to be recoverable
in future years from known reservoirs under existing economic and
operating conditions.
The Company's estimated future net revenues are computed utilizing year
end pricing of $40.25 per Bbl for crude oil and $6.02 per MMBtu for
natural gas.
F-66
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 14: UNAUDITED SUPPLEMENTARY INFORMATION (Continued)
Oil and Gas Reserve Information as of December 31, 2004
Proved Reserves:
Crude Oil (Bbls) 9,453,740
Natural Gas Liquids (Bbls) 2,087,027
Natural Gas (MMBtu) 9,957,622
Future Net Revenues:
Undiscounted $ 271,770,312
Discounted at 10% $ 152,017,531
Capitalized Costs Relating to Oil and Gas Producing
Activities at December 31, 2004
Proved Oil and Gas Properties $ 96,833,526
Gas Processing Equipment and Facilities 215,071
-------------
97,048,597
Less Accumulated Depreciation and Depletion (348,000)
-------------
Net Capitalized Costs $ 96,700,597
=============
Cost Incurred in Oil and Gas Producing Activities
for the Year Ended December 31, 2004
Property Acquisition Costs
Drilling and Development Costs $ 1,798,552
Lease and Well Equipment 967,010
Leasehold Costs 33,368
-------------
$ 2,798,930
=============
Results of Operations for Oil and Gas Producing Activities
for the Year Ended December 31, 2004
Oil and Gas Sales $ 31,995,406
Realized Losses from Settlement of Derivatives (25,379,185)
Production Costs (10,646,379)
Depreciation, Depletion, and Amortization (2,758,964)
Income Tax Expense (34%) 2,308,301
-------------
Results of Operations for Oil and Gas Producing Activities
(Excluding Corporate Overhead and Financing Costs) $ (4,480,821)
=============
F-67
RWG ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2004 AND 2003
NOTE 15: OTHER COMPREHENSIVE INCOME (LOSS)
Other Comprehensive Income (Loss) at December 31, 2003 was comprised of
net loss of $(826,685) and an amount for deferred hedge loss of
$(770,151), net of deferred taxes of $397,000, for total comprehensive
income (loss) of $(1,596,836). At December 31, 2004, there was no other
comprehensive income or (loss).
F-68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Tremisis Energy Acquisition Corporation
New York, NY
We have audited the accompanying balance sheet of Tremisis Energy Acquisition
Corporation (a corporation in the development stage) as of December 31, 2004 and
the related statements of operations, stockholders' equity and cash flows for
the period from February 5, 2004 (inception) to December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As discussed in Note 1, the Company's Certificate of Incorporation provides for
mandatory liquidation of the Company, in the event that the Company does not
consummate a business combination within 18 months from the date of the
consummation of its initial public offering ("Offering")(such date would be
November 18, 2005) or 24 months from the consummation of the Offering if certain
extension criteria have been satisfied.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tremisis Energy Acquisition
Corporation as of December 31, 2004 and the related statements of operations and
cash flows for the period from February 5, 2004 (inception) to December 31, 2004
in conformity with accounting principles generally accepted in the United States
of America.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, NY
March 16, 2005
(except as to Note 4, which is as of November 11, 2005)
F-69
Tremisis Energy Acquisition Corporation
(a corporation in the development stage)
Balance Sheets
--------------------------------------------------------------------------------
September December
30, 2005 31, 2004
----------- -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 499,413 $ 834,094
U.S. Government Securities held
in Trust Fund (Note 2) 34,059,992 33,351,358
Accrued interest receivable,
Trust Fund (Note 2) 57,699 91,170
Prepaid expenses 10,771 22,125
----------- -----------
Total current assets 34,627,875 34,298,747
Deferred acquisition costs (Note 4) 85,063 --
Furniture and equipment (net of accumulated
deprecation of $4,044 and $1,418) 9,829 6,558
Total assets $34,722,767 $34,305,305
----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Accrued expenses $ 122,490 $ 26,680
Taxes payable 130,637 26,000
----------- -----------
Total current liabilities 253,127 52,680
----------- -----------
Common stock, subject to possible conversion
1,264,368 shares at conversion value (Note 2) 6,820,129 6,685,164
Commitment (Note 5) -- --
Stockholders' equity (Notes 2, 3, 4 and 6
and 7) Preferred stock, $.0001 par value,
authorized 1,000,000 shares; none issued -- --
Common stock, $.0001 par value Authorized
30,000,000 shares; Issued and outstanding
7,700,000 shares (which includes 1,264,368
subject to possible conversion) 770 770
Additional paid-in capital 27,367,201 27,502,166
Earnings accumulated during the development stage 281,540 64,525
----------- -----------
Total stockholders' equity 27,649,511 27,567,461
----------- -----------
Total liabilities and stockholders' equity $34,722,767 $34,305,305
----------- -----------
See accompanying summary of significant
accounting policies and notes to financial statements.
F-70
Tremisis Energy Acquisition Corporation
(a corporation in the development stage)
Statements of Operations
Period from Period from Period from
February February February
Nine months 5, 2004 5, 2004 5, 2004
Ended (inception) (inception) (inception)
September to September to December to September
30, 2005 30, 2004 31, 2004 30, 2005
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Audited) (Unaudited)
Expenses:
General and
administrative expenses
(Note 5) $ 266,881 $ 102,674 $ 164,392 $ 431,273
Operating loss (266,881) (102,674) (164,392) (431,273)
Interest income 682,446 163,242 308,032 990,478
Income before provision
for taxes 415,565 60,568 143,640 559,205
Provision for taxes
(note 8) (198,550) (21,200) (79,115) (277,665)
Net Income $ 217,015 $ 39,368 $ 64,525 $ 281,540
Accretion of Trust Fund
relating to common
stock subject to possible
conversion 134,965 31,574 59,875 194,840
Net income
attributable to
common stockholders $ 82,050 $ 7,794 $ 4,650 $ 86,700
Basic and diluted
income per
share $ 0.01 $ 0.00 $ 0.00
Weighted average
common shares
outstanding 7,700,000 4,977,848 5,739,057
See accompanying summary of significant
accounting policies and notes to unaudited financial statements.
F-71
Tremisis Energy Acquisition Corporation
(a corporation in the development stage)
Statements of Stockholder's Equity
Earnings
accumulated
Common Stock Additional during the
---------------------- Paid-In development
Shares Amount Capital stage Total
--------------------------------------------------------------------
Balance, February 5, 2004 -- $ -- $ -- $ -- $ --
(inception)
Issuance of common stock to
initial stockholders 1,375,000 137 24,863 -- 25,000
Sale of 6,325,000 units and
underwriters' option, net of
underwriters' discount and
offering expenses (includes
1,264,368 share subject to
Possible conversion) 6,325,000 633 27,537,178 -- 27,537,811
Accretion of Trust Fund
relating to common stock
subject to conversion (59,875) -- (59,875)
Net income for the period -- -- -- 64,525 64,525
-----------------------------------------------------------------------------------------------------
Balance, December 31, 2004 7,700,000 770 27,502,166 64,525 27,567,461
Accretion of Trust Fund
relating to common stock
subject to possible conversion
(unaudited) -- -- (134,965) -- (134,965)
Net income for the nine month
period (unaudited) -- -- -- 217,015 217,015
------------------------------------------------------------------
Balance, September 30, 2005
(unaudited) 7,700,000 $770 $27,367,201 $281,540 27,649,511
-----------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting
policies and notes to financial statements.
F-72
Tremisis Energy Acquisition Corporation
(a corporation in the development stage)
Statements of Cash Flows
Period from Period from Period from
February February February
Nine months 5, 2004 5, 2004 5, 2004
Ended (inception) (inception) (inception)
September to September to December to September
30, 2005 30, 2004 31, 2004 30, 2005
------------- ------------- ------------- -------------
Cash Flows From Operating Activities (Unaudited) (Unaudited) (Audited) (Unaudited)
Net income for the period $ 217,015 $ 39,368 $ 64,525 $ 281,540
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation 2,626 811 1,418 4,044
Gain on maturities of U.S. Government
Securities held in Trust Fund (708,476) -- (208,605) (917,081)
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses 11,354 (36,875) (22,125) (10,771)
Decrease (increase) in accrued interest
receivable 33,471 (157,953) (91,170) (57,699)
Increase in accrued expenses 10,747 9,096 26,680 37,427
Increase in income tax payable 104,637 21,200 26,000 130,637
------------- ------------- ------------- -------------
Net cash used in operating activities (328,626) (124,353) (203,277) (531,903)
------------- ------------- ------------- -------------
Cash Flows from Investing Activities
Purchases of U.S. Government Securities held
in Trust Fund (202,846,158) (33,143,000) (66,493,753) (269,339,911)
Maturity of U.S. Government Securities held
in Trust Fund 202,846,000 -- 33,351,000 236,197,000
Purchase of furniture and equipment (5,897) (7,976) (7,976) (13,873)
------------- ------------- ------------- -------------
Net cash used in investing activities (6,055) (33,150,976) (33,150,729) (33,156,784
------------- ------------- ------------- -------------
Cash Flows from Financing Activities
Proceeds from public offering of 6,325,000
units and underwriter option, net -- 34,163,000 34,163,100 34,163,100
Proceeds from issuance of common stock to
initial stockholders -- 25,000 25,000 25,000
Proceeds from note payable, stockholder -- 77,500 77,500 77,500
Repayment of note payable, stockholder -- (77,500) (77,500) (77,500)
------------- ------------- ------------- -------------
Net cash provided by financing activities 34,188,000 34,188,100 34,188,100
Net (decrease) increase in cash and cash
equivalents (334,681) 912,671 834,094 499,413
Cash and cash equivalents at beginning of the
period 834,094 -- -- --
------------- ------------- ------------- -------------
Cash and cash equivalents end of the period $ 499,413 $ 912,671 $ 834,094 $ 499,413
------------- ------------- ------------- -------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for
income taxes $ 93,913 $ -- $ 53,115 $ 147,028
Supplemental disclosure of non cash activity:
Accrued deferred acquisition costs $ 85,063 $ -- $ -- $ 85,063
Accretion of Trust Fund relating to common
stock subject to possible conversion $ 134,965 $ 31,574 $ 59,875 $ 194,841
See accompanying summary of significant accounting
policies and notes to unaudited financial statements..
F-73
Tremisis Energy Acquisition Corporation
(a corporation in the development stage)
Summary of Significant Accounting Policies
Furniture and Equipment Furniture and equipment is stated at cost, net of
accumulated depreciation. Depreciation if computed
on a straight-line basis over the estimated lives
commencing upon the date the asset is placed in
service.
Cash and Cash Equivalents The Company considers all highly liquid
investments with original maturities of three
months or less to be cash equivalents.
Income Taxes The Company follows Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes" which is an asset
and liability approach that requires the
recognition of deferred tax assets and liabilities
for the expected future tax consequences of events
that have been recognized in the Company's
financial statements or tax returns.
Net Income Net income per share is computed on the basis of
Per Share the weighted average number of common shares
outstanding during the period. Basic earnings per
share excludes dilution and is computed by
dividing income available to common stockholders
by the weighted average common shares outstanding
for the period. Diluted earnings per share
reflects the potential dilution that could occur
if securities or other contracts to issue common
stock were exercised or converted into common
stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
Since the effect of outstanding warrants to
purchase common stock is antidilutive, they have
been excluded from the Company's computation of
net income per share.
Use of Estimates The preparation of financial statements in
conformity with accounting principles generally
accepted in the United States of America requires
management to make estimates and assumptions that
affect the reported amounts of assets and
liabilities at the date of the financial
statements and the reported amounts of expenses
during the reporting period. Actual results could
differ from those estimates.
Reclassification Certain items have been reclassified from prior
periods to conform with the current period
presentation.
F-74
Tremisis Energy Acquisition Corporation
(a corporation in the development stage)
Notes to Financial Statements
1. Unaudited Interim The accompanying balance sheet as of September 30,
Financial Statements 2005 and the statements of operations and cash
flows for the nine months ended September 30, 2005
and the period from inception (February 5, 2004 to
September 30, 2004) are unaudited and have been
prepared in accordance with accounting principles
generally accepted in the United States of America
for interim financial information. In the opinion
of management, all adjustments (consisting
primarily of normal accruals) have been made that
are necessary to present fairly the financial
position of the Company. The information described
in the notes to the financial statements for these
periods is also unaudited. Operating results for
the interim period presented are not necessary
indicative of the results to be expected for the
full year.
2. Organization and The Company was incorporated in February 5, 2004
Business Operations as a blank check company whose objective is to
acquire an operating business in either the energy
or the environmental industry and their related
infrastructures.
The registration statement for the Company's
initial public offering ("Offering") was declared
effective May 13, 2004. The Company consummated
the offering on May 18, 2004 and received net
proceeds of approximately $34,163,100 (Note 3).
The Company's management has broad discretion with
respect to the specific application of the net
proceeds of this Offering, although substantially
all of the net proceeds of this Offering are
intended to be generally applied toward
consummating a business combination with an
operating business in the energy and environmental
industry and their related infrastructures
("Business Combination"). An amount of $34,117,691
and $33,442,528 (which includes accrued interest
of $57,699 and $91,170) as of September 30, 2005
and December 31, 2004, respectively, is being held
in an interest-bearing trust account ("Trust
Fund") until the earlier of (i) the consummation
of its first Business Combination or (ii)
liquidation of the Company. Under the agreement
governing the Trust Fund, funds will only be
invested in United States government securities
(Treasury Bills) with a maturity of 180 days or
less. The remaining net proceeds may be used to
pay for business, legal and accounting due
diligence on prospective acquisitions and
continuing general and administrative expenses.
The Company, has signed a definitive agreement for
the acquisition of a target business (see Note 4),
and will submit such transaction for stockholder
approval. In the event that stockholders owning
20% or more of the shares sold in the Offering,
vote against the Business Combination and exercise
the conversion rights described below, the
Business Combination will not be consummated. All
of the Company's stockholders prior to the
Offering, including all of the officers and
directors of the Company ("Initial Stockholders"),
have agreed to vote their 1,375,000 founding
shares of common stock in accordance with the vote
of the majority in interest of all other
stockholders of the Company ("Public
Stockholders") with respect to the
F-75
Tremisis Energy Acquisition Corporation
(a corporation in the development stage)
Notes to Financial Statements
Business Combination. After consummation of the
Business Combination, all of these voting
safeguards will no longer be applicable.
With respect to a Business Combination which is
approved and consummated, any Public Stockholder
who voted against the Business Combination may
demand that the Company convert his or her shares.
The per share conversion price will equal the
amount in the Trust Fund as of the record date for
determination of stockholders entitled to vote on
the Business Combination divided by the number of
shares of common stock held by Public Stockholders
at the consummation of the Offering. Accordingly,
Public Stockholders holding 19.99% of the
aggregate number of shares owned by all Public
Stockholders may seek conversion of their shares
in the event of a Business Combination. Such
Public Stockholders are entitled to receive their
per share interest in the Trust Fund computed
without regard to the shares held by Initial
Stockholders. In this respect, $6,820,129 and
$6,685,164 (which includes accretion of Trust
Fund) has been classified as common stock subject
to possible conversion at September 30, 2005 and
December 31, 2004, respectively.
The Company's Certificate of Incorporation
provides for mandatory liquidation of the Company
in the event that the Company does not consummate
a Business Combination within 18 months from the
date of the consummation of the Offering (such
date would be November 18, 2005), or 24 months
from the consummation of the Offering (such date
would be May 18, 2006) if certain extension
criteria have been satisfied. In the event of
liquidation, it is likely that the per share value
of the residual assets remaining available for
distribution (including Trust Fund assets) will be
less than the initial public offering price per
share in the Offering (assuming no value is
attributed to the Warrants contained in the Units
sold in the Offering discussed in Note 3). The
Company has satisfied the extension criteria by
entering into an Agreement and Plan of merger with
RAM Energy, Inc as described in Note 4.
3. Offering On May 18, 2004, the Company sold 6,325,000 units
("Units") in the Offering including an additional
825,000 Units pursuant to the underwriters'
over-allotment option. Each Unit consists of one
share of the Company's common stock, $.0001 par
value, and two Redeemable Common Stock Purchase
Warrants ("Warrants"). Each Warrant will entitle
the holder to purchase from the Company one share
of common stock at an exercise price of $5.00
commencing the later of the completion of a
Business Combination with a target business or one
year from the effective date of the Offering and
expiring five years from the date of the
prospectus. The Warrants will be redeemable at a
price of $.01 per Warrant upon 30 days' notice
after the Warrants become exercisable, only in the
event that the last sale price of the common stock
is at least $8.50 per share for any 20 trading
days within a 30 trading day period ending on the
third day prior to the date on which notice of
redemption is given. In connection with this
Offering, the Company issued, for $100, an option
to the representative of the underwriters to
purchase 275,000 Units at an exercise price of
$9.90 per Unit. In addition, the warrants
underlying such Units are exercisable at $6.25 per
share.
4. Business On October 20, 2005, the Company entered into an
Agreement and Plan of .
F-76
Combination Merger ("Merger Agreement") with RAM Energy, Inc.
and Deferred ("RAM") and all of RAM's stockholders
Acquisition ("Stockholders"), which was amended on November
Costs 11, 2005. The Company formed a wholly owned
subsidiary on October 5, 2005 to effectuate the
transactions contemplated by the Merger Agreement
with RAM ("Merger"). RAM will be the surviving
corporation in the Merger, becoming a wholly owned
subsidiary of Tremisis. RAM is a privately-owned,
independent, oil and gas company headquartered in
Tulsa, Oklahoma. RAM's business strategy is to
acquire, explore, develop, exploit, produce and
manage oil and gas properties, primarily in Texas,
Louisiana and Oklahoma. RAM has been active in
these core areas since its inception in 1987.
RAM's management team has extensive technical and
operating expertise in all areas of RAM's
operations and geographic focus.
Pursuant to the Merger Agreement, the
Stockholders, in exchange for all of the
securities of RAM outstanding immediately prior to
the Merger, will receive from the Company $30
million in cash and a number of shares of the
Company's common stock equal to the greater of (x)
$160,000,000 divided by 115% of the average
closing price of a share of the Company's common
stock for the ten trading days immediately prior
to the consummation of the Merger and (y)
25,600,000. A portion of the shares of the
Company's common stock being issued to the
Stockholders in the Merger will be placed into
escrow to secure the indemnity rights of the
Company under the Merger Agreement and will be
governed by the terms of an Escrow Agreement.
In connection with this business combination, the
Company incurred $85,063 in Deferred Acquisition
costs as of September 30, 2005.
5. Commitment The Company presently occupies office space
provided by and affiliate of an initial
stockholder. Such affiliate has agreed that, until
the acquisition of a target business by the
Company, it will make such office space, as well
as certain office and secretarial services
available to the Company, as may be required by
the Company from time to time. The Company pays
such affiliate $3,500 per month for such services
commencing on May 18, 2004, the effective date of
the Offering. Included in general and
administrative such services are $31,500 for the
nine month period ended September 30, 2005,
$17,500 for the period from February 5, 2004
(inception) to September 30, 2004, $28,000 for the
period from February 5, 2004 (inception) to
December 31, 2004, and $59,500 for the period from
February 5, 2004 (inception) to September 30,
2005.
6. Preferred Stock The Company is authorized to issue 1,000,000
shares of preferred stock with such designations,
voting and other rights and preferences as may be
determined from time to time by the Board of
Directors.
7. Common Stock The Company's Board of Directors authorized a
1.666666 to one forward stock split of its common
stock on March 10, 2004, a 1.1428571 to one
forward stock split of its common stock on April
16, 2004 and a 1.375 to one forward stock split of
its common stock on April 23, 2004. All references
in the accompanying financial statements to the
numbers of shares have been retroactively restated
to reflect the transaction.
F-77
Tremisis Energy Acquisition Corporation
(a corporation in the development stage)
Notes to Financial Statements
As of September 30, 2005, 13,475,000 shares of
common stock were reserved for issuance upon
exercise of redeemable warrants and underwriters'
unit purchase option.
8. Provision for Taxes Provision for taxes consists of:
For
the Period For the
February Period from
Nine Months 5, 2004 February
Ended (inception) 5, 2004
September to September (inception)
30, 2005 30, 2004 to December
unaudited) unaudited) 31, 2004
----------- ------------ -----------
Current:
Federal $119,000 $ 10,000 $ 33,000
State and Local 79,550 $ 11,200 46,115
Deferred: -- -- --
-------- -------- --------
Total $198,550 $ 21,200 $ 79,115
======== ======== ========
The effective tax rate exceeds statutory rates primarily due to state and local
taxes which are calculated as a percentage of capital.
F-78
Annex A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
TREMISIS ENERGY ACQUISITION CORPORATION,
RAM ENERGY ACQUISITION, INC.,
RAM ENERGY, INC.
and
THE STOCKHOLDERS OF
RAM ENERGY, INC.
DATED AS OF OCTOBER 20, 2005
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made and entered into as of October
20, 2005, by and among Tremisis Energy Acquisition Corporation, a Delaware
corporation ("Parent"), RAM Energy Acquisition, Inc., a Delaware corporation and
a wholly-owned subsidiary of Parent ("Merger Sub"), RAM Energy, Inc., a Delaware
corporation ("Company"), and each of the persons listed under the caption
"Stockholders" on the signature page hereof, such persons being all of the
stockholders of the Company (each a "Stockholder" and, collectively, the
"Stockholders;" from and after the date of exercise of the stock option referred
to in Section 1.13, C. David Stinson shall, for all purposes of this Agreement,
be a "Stockholder" and shall be included within the definition of
"Stockholders").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2) and in accordance with the General Corporation Law of
the State of Delaware (the "DGCL"), Parent and Company intend to enter into a
business combination transaction by means of a merger between Merger Sub and the
Company in which the Company will merge with Merger Sub and be the surviving
entity and a wholly owned subsidiary of Parent, through an exchange of all the
issued and outstanding shares of capital stock of the Company for shares of
common stock of Parent and cash.
B. The Boards of Directors of each of the Company, Parent and Merger Sub
have determined that the Merger (as defined in Section 1.1) is fair to, and in
the best interests of, their respective companies and their respective
stockholders.
C. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows (defined terms used in this Agreement are listed alphabetically in
Article IX, together with the Section and, if applicable, paragraph number in
which the definition of each such term is located):
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the DGCL, Merger Sub shall be merged with and into
Company (the "Merger"), the separate corporate existence of Merger Sub shall
cease and Company shall continue as the surviving corporation. The Company as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "Surviving Corporation."
1.2 Effective Time; Closing. Subject to the conditions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing with the
Secretary of State of the State of Delaware in accordance with the relevant
provisions of the DGCL a Certificate of Merger (the "Certificate of Merger")
(the time of such filing with the Secretary of State of the State of Delaware,
or such later time as may be agreed in writing by Company and Parent and
specified in the Certificate of Merger, being the "Effective Time") as soon as
practicable on or after the Closing Date (as herein defined). The term
"Agreement" as used herein refers to this Agreement and Plan of Merger, as the
same may be amended from time to time, and all schedules hereto (including the
Company Schedule and the Parent Schedule, as defined in the preambles to
Articles II and III hereof, respectively). Unless this Agreement shall have been
terminated pursuant to Section 8.1, the closing of the Merger (the "Closing")
shall take place at the offices of Graubard Miller, counsel to Parent, at 405
Lexington Avenue, New York, New York, at a time and date to be specified by the
parties, which shall be no later than the second business day after the
satisfaction or waiver of the conditions set forth in Article VI, or at such
other time, date and location as the parties hereto agree in writing (the
"Closing Date"). Closing signatures may be transmitted by facsimile.
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of the
DGCL. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises
of the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of the
Merger Sub, a copy of which is attached hereto as Exhibit A, shall be the
Certificate of Incorporation of the Surviving Corporation.
(b) Also at the Effective Time, the Bylaws of the Merger Sub, a copy
of which is attached hereto as Exhibit B, shall be the Bylaws of the
Surviving Corporation.
1.5 [Intentionally Omitted.]
A-2
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and this Agreement and
without any action on the part of Merger Sub, the Company or the holders of any
of the following securities, the following shall occur:
(a) Conversion of Company Common Stock. Other than any shares to be
canceled pursuant to Section 1.6(c), each share of common stock, par value
$10.00, of the Company ("Company Common Stock") issued and outstanding
immediately prior to the Effective Time will be automatically converted
(subject to Section 1.6(f)) into the right to receive on the Closing Date
(i) that number of shares of common stock, par value $0.0001, of Parent
("Parent Common Stock") determined by dividing the Aggregate Parent Common
Stock Number by the Outstanding Company Stock Number, and (ii) that amount
of cash determined by dividing the Aggregate Cash Number by the
Outstanding Company Stock Number. The term "Aggregate Parent Common Stock
Number" shall mean that number of shares of Parent Common Stock equal to
the greater of (x) $160,000,000 divided by 115% of the average closing
price of the Parent Common Stock for the ten trading days immediately
prior to the Closing and (y) 25,600,000. The term "Outstanding Company
Stock Number" shall mean the number of shares of Company Common Stock
outstanding on the Closing Date, after giving effect to all stock option
exercises contemplated hereby. The term "Aggregate Cash Number" shall mean
the lesser of (I) $30,000,000, and (II) the amount of cash distributed to
Parent from the Trust Fund at the Closing (after payment to those
stockholders of Parent who elect to have their shares converted to cash in
accordance with Parent's Charter Documents (as defined in Section 2.1(a)),
less the sum of all expenses reasonably incurred by Parent in connection
with the transaction contemplated hereby, and less the sum of $1,000,000
which shall be retained by Parent for working capital requirements.
(b) Certificates for Shares. The amount of cash and certificates
representing the shares of Parent Common Stock issuable with respect to
certificates for shares of Company Common Stock ("Certificates") shall be
issued to the holders of the shares of Company Common Stock upon surrender
of the Certificates representing such shares in the manner provided in
Section 1.7 (or in the case of a lost, stolen or destroyed certificate,
upon delivery of an affidavit (and indemnity, if required) in the manner
provided in Section 1.9). Each holder shall be issued separate
certificates for such holder's Escrow Shares (as defined in Section 1.14)
and for the remaining number of shares of Parent Common Stock to which
such holder is entitled.
(c) Cancellation of Treasury and Parent-Owned Stock. Each share of
Company Common Stock held by the Company or owned by Merger Sub, Parent or
any direct or indirect wholly-owned subsidiary of the Company or of Parent
immediately prior to the Effective Time shall be canceled and extinguished
without any conversion or payment in respect thereof.
(d) Capital Stock of Merger Sub. Each share of Common Stock, par
value $.0001, of Merger Sub (the "Merger Sub Common Stock") issued and
outstanding
A-3
immediately prior to the Effective Time shall be converted into one
validly issued, fully paid and nonassessable share of common stock, par
value $.0001 per share, of the Surviving Corporation. Each certificate
evidencing ownership of shares of Merger Sub Common Stock shall evidence
ownership of such shares of common stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratios. The numbers of shares of Parent
Common Stock and amounts of cash that the holders of the Company Common
Stock are entitled to receive as a result of the Merger shall be equitably
adjusted to reflect appropriately the effect of any stock split, reverse
stock split, stock dividend (including any dividend or distribution of
securities convertible into Parent Common Stock or Company Common Stock),
extraordinary cash dividends, reorganization, recapitalization,
reclassification, combination, exchange of shares or other like change
with respect to Parent Common Stock or Company Common Stock occurring on
or after the date hereof and prior to the Effective Time; provided,
however, that no such adjustment shall be made with respect to any
dividend or redemption permitted by Section 4.1.
(f) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued by virtue of the Merger, and each holder of shares of
Company Common Stock who would otherwise be entitled to a fraction of a
share of Parent Common Stock (after aggregating all fractional shares of
Parent Common Stock that otherwise would be received by such holder)
shall, upon compliance with Section 1.7, receive from Parent, in lieu of
such fractional share, one (1) share of Parent Common Stock.
1.7 Surrender of Certificates.
(a) Exchange Procedures. Upon surrender of Certificates at the
Closing, the holders of such Certificates shall receive in exchange
therefor such amounts of cash and certificates representing the number of
shares of Parent Common Stock into which their shares of Company Common
Stock shall be converted at the Effective Time, and the Certificates so
surrendered shall forthwith be canceled. Until so surrendered, outstanding
Certificates will be deemed, from and after the Effective Time, to
evidence only the right to receive the applicable amount of cash and
number of shares of Parent Common Stock issuable pursuant to Section
1.6(a).
(b) Distributions With Respect to Unexchanged Shares. No dividends
or other distributions declared or made after the date of this Agreement
with respect to Parent Common Stock with a record date after the Effective
Time will be paid to the holders of any unsurrendered Certificates with
respect to the shares of Parent Common Stock to be issued upon surrender
thereof until the holders of record of such Certificates shall surrender
such Certificates. Subject to applicable law, following surrender of any
such Certificates with a properly completed letter of transmittal, Parent
shall promptly deliver to the record holders thereof, without interest,
the cash and certificates representing shares of Parent Common Stock
issued in exchange therefor and the
A-4
amount of any such dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such shares of
Parent Common Stock.
(c) Transfers of Ownership. If cash and certificates representing
shares of Parent Common Stock are to be issued in a name other than that
in which the Certificates surrendered in exchange therefor are registered,
it will be a condition of the issuance thereof that the Certificates so
surrendered will be properly endorsed and otherwise in proper form for
transfer and that the persons requesting such exchange will have paid to
Parent or any agent designated by it any transfer or other taxes required
by reason of the issuance of certificates representing shares of Parent
Common Stock in any name other than that of the registered holder of the
Certificates surrendered, or established to the satisfaction of Parent or
any agent designated by it that such tax has been paid or is not payable.
(d) Required Withholding. Each of Parent and the Surviving
Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement
to any holder or former holder of Company Common Stock such amounts as are
required to be deducted or withheld therefrom under the Code or under any
provision of state, local or foreign tax law or under any other applicable
legal requirement. To the extent such amounts are so deducted or withheld,
such amounts shall be treated for all purposes under this Agreement as
having been paid to the person to whom such amounts would otherwise have
been paid.
(e) No Liability. Notwithstanding anything to the contrary in this
Section 1.7, neither Parent nor the Surviving Corporation, the Company or
any party hereto shall be liable to a holder of shares of Parent Common
Stock or Company Common Stock for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar
law.
1.8 No Further Ownership Rights in Company Stock. All cash and shares of
Parent Common Stock issued in accordance with the terms hereof shall be deemed
to have been issued in full satisfaction of all rights pertaining to such shares
of Company Common Stock and there shall be no further registration of transfers
on the records of the Surviving Corporation of shares of Company Common Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event that any
Certificates shall have been lost, stolen or destroyed, Parent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, the cash and certificates
representing the shares of Parent Common Stock that the shares of Company Common
Stock formerly represented by such Certificates were converted into and any
dividends or distributions payable pursuant to Section 1.7(b); provided,
however, that, as a condition precedent to the issuance of such cash and
certificates representing shares of Parent Common Stock and other distributions,
the owner of such lost, stolen or destroyed Certificates
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shall indemnify Parent against any claim that may be made against Parent or the
Surviving Corporation with respect to the Certificates alleged to have been
lost, stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States
Income Tax Regulations.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub will take all such lawful and necessary action.
1.12 [Intentionally Omitted.]
1.13 Outstanding Stock Option. Concurrently with the execution of this
Agreement, C. David Stinson shall execute and deliver to the Company and Parent
an agreement in the form of Exhibit C annexed hereto pursuant to which he shall
agree to exercise the option granted to him to purchase 83.33 shares of Company
Common Stock prior to the Closing and waiving any appraisal rights that may be
afforded to him as a result of such ownership.
1.14 Escrow. As the sole remedy for the indemnity obligations set forth in
Article VII, at the Closing the Persons receiving shares of Parent Common Stock
to be issued as a result of the Merger shall deposit in escrow, to be held
during the period ending on June 30, 2007 ("Escrow Period"), twelve and one-half
percent (12.5%) of the shares of Parent Common Stock received by such Persons as
a result of the Merger (the "Escrow Shares"), which shares shall be allocated
among the Persons entitled to receive them in the same proportions as the shares
of Parent Common Stock are allocated among them, all in accordance with the
terms and conditions of the Escrow Agreement to be entered into at the Closing
between Parent, the Company Stockholder Representative (the "Representative")
(who shall be Larry E. Lee until a successor is appointed pursuant to Section
1.17(b)) and Continental Stock Transfer and Trust Company, as Escrow Agent, in
the form annexed hereto as Exhibit D (the "Escrow Agreement"). Subject to
Article VII, on the first business day following the conclusion of the Escrow
Period, the Escrow Agent shall deliver the Escrow Shares, less any such shares
applied in satisfaction of a claim for indemnification and any shares then in
dispute related to the indemnification obligations set forth in Article VII, to
each such Person in the same proportions as initially deposited in escrow. Any
Escrow Shares, to the extent not applied in satisfaction of a claim for
indemnification, will be distributed to such Persons promptly upon resolution of
the dispute or claim.
1.15 Rule 145. All shares of Parent Common Stock issued pursuant to this
Agreement to "affiliates" of the Company listed on Schedule 1.15 will be subject
to certain resale restrictions under Rule 145 promulgated under the Securities
Act and all certificates representing such shares shall bear an appropriate
restrictive legend. At the Closing, Parent and the Stockholders shall execute
and deliver a Registration Rights Agreement in the form annexed hereto as
Exhibit E with respect to registration of the shares of Parent Common Stock
under the Securities Act (the "Registration Rights Agreement").
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1.16 Stockholder Matters.
(a) By his, her or its execution of this Agreement, each
Stockholder, in his, her or its capacity as a stockholder of the Company,
hereby approves and adopts this Agreement and authorizes the Company, its
directors and officers to take all actions necessary for the consummation
of the Merger and the other transactions contemplated hereby pursuant to
the terms of this Agreement and its exhibits. Such execution shall be
deemed to be action taken by the irrevocable written consent of each
Stockholder for purposes of Section 228 of the DGCL.
(b) Each Stockholder, for itself only, represents and warrants as
follows: (i) all Parent Common Stock to be acquired by such Stockholder
pursuant to this Agreement will be acquired for his, her or its account
and not with a view towards distribution thereof other than, with respect
to Stockholders that are entities, transfers to its stockholders, partners
or members; (ii) it understands that he, she or it must bear the economic
risk of the investment in the Parent Common Stock, which cannot be sold by
he, she or it unless it is registered under the Securities Act, or an
exemption therefrom is available thereunder; (iii) he, she or it has had
both the opportunity to ask questions and receive answers from the
officers and directors of Parent and all persons acting on Parent's behalf
concerning the business and operations of Parent and to obtain any
additional information to the extent Parent possesses or may possess such
information or can acquire it without unreasonable effort or expense
necessary to verify the accuracy of such information; and (iv) he, she or
it has had access to the Parent SEC Reports filed prior to the date of
this Agreement. Each Stockholder acknowledges, as to himself, herself or
itself only, that (v) he, she or it is either (A) an "accredited investor"
as such term is defined in Rule 501(a) promulgated under the Securities
Act or (B) a person possessing sufficient knowledge and experience in
financial and business matters to enable it to evaluate the merits and
risks of an investment in Parent; and (vi) he, she or it understands that
the certificates representing the Parent Common Stock to be received by
he, she or it may bear legends to the effect that the Parent Common Stock
may not be transferred except upon compliance with (C) the registration
requirements of the Securities Act (or an exemption therefrom) and (D) the
provisions of this Agreement. Each Stockholder that is an entity, for
itself, represents, warrants and acknowledges, with respect to each holder
of its equity interests, to the same effect as the foregoing provisions of
this Section 1.16(b).
(c) Each Stockholder, for himself, herself or itself, represents and
warrants that the execution and delivery of this Agreement by such
Stockholder does not, and the performance of his, her or its obligations
hereunder will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any court, administrative agency,
commission, governmental or regulatory authority, domestic or foreign (a
"Governmental Entity"), except (i) for applicable requirements, if any, of
the Securities Act, the Securities Exchange Act of 1934, as amended
("Exchange Act"), state securities laws ("Blue Sky Laws"), and the rules
and regulations thereunder, and (ii)
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where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse
Effect (as defined in Section 9.2(b)) on such Stockholder or the Company
or, after the Closing, the Parent, or prevent consummation of the Merger
or otherwise prevent the parties hereto from performing their obligations
under this Agreement.
1.17 Committee and Representative for Purposes of Escrow Agreement.
(a) Parent Committee. Prior to the Closing, the Board of Directors
of Parent shall appoint a committee consisting of one of its then members
to act on behalf of Parent to take all necessary actions and make all
decisions pursuant to the Escrow Agreement regarding Parent's right to
indemnification pursuant to Article VII hereof. In the event of a vacancy
in such committee, the Board of Directors of Parent shall appoint as a
successor a Person who was a director of Parent prior to the Closing Date
or some other Person who would qualify as an "independent" director of
Parent and who has not had any relationship with the Company prior to the
Closing. Such committee is intended to be the "Committee" referred to in
Article VII hereof and the Escrow Agreement.
(b) Representative. The Stockholders hereby designate Larry E. Lee
to represent the interests of the Persons entitled to receive cash and
Parent Common Stock as a result of the Merger for purposes of the Escrow
Agreement. If such Person ceases to serve in such capacity for any reason,
such Person shall designate his or her successor. Failing such designation
within 10 business days after the Representative has ceased to serve,
those members of the Board of Directors of Parent who were directors of
the Company prior to the Closing shall appoint as successor a Person who
was a former stockholder of the Company, or such other Person as such
members shall designate. Such Person or successor is intended to be the
"Representative" referred to in Section 1.14 and Article VII hereof and
the Escrow Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Subject to the exceptions set forth in Schedule 2 attached hereto (the
"Company Schedule"), the Company hereby represents and warrants to Parent and
Merger Sub, as follows (as used in this Article II and elsewhere in this
Agreement, the term "Company" includes the Subsidiaries, as hereinafter defined,
unless the context clearly otherwise indicates):
2.1 Organization and Qualification.
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and has the
requisite corporate power and authority to own, lease and operate its
assets and properties and to carry on its business as it is now being or
currently planned by the Company to be conducted. The Company is in
possession of all franchises, grants, authorizations, licenses, permits,
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easements, consents, certificates, approvals and orders ("Approvals")
necessary to own, lease and operate the properties it purports to own,
operate or lease and to carry on its business as it is now being or
currently planned by the Company to be conducted, except where the failure
to have such Approvals could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the Company.
Complete and correct copies of the certificate of incorporation and
by-laws (or other comparable governing instruments with different names)
(collectively referred to herein as "Charter Documents") of the Company,
as amended and currently in effect, have been heretofore delivered to
Parent or Parent's counsel. The Company is not in violation of any of the
provisions of the Company's Charter Documents.
(b) The Company is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature
of its activities makes such qualification or licensing necessary, except
for such failures to be so duly qualified or licensed and in good standing
that could not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect on the Company. Each jurisdiction in
which the Company is so qualified or licensed is listed in Schedule 2.1.
(c) The minute books of the Company contain true, complete and
accurate records of all meetings and consents in lieu of meetings of its
Board of Directors (and any committees thereof), similar governing bodies
and stockholders ("Corporate Records") since January 1, 2000. Copies of
such Corporate Records of the Company have been heretofore made available
to Parent or Parent's counsel.
(d) The stock transfer, warrant and option transfer and ownership
records of the Company contain true, complete and accurate records of the
securities ownership as of the date of such records and the transfers
involving the capital stock and other securities of the Company since
January 1, 2000. Copies of such records of the Company have been
heretofore made available to Parent or Parent's counsel.
2.2 Subsidiaries.
(a) The Company has no subsidiaries other than those listed on
Schedule 2.2 (each, a "Subsidiary" and, collectively, the "Subsidiaries").
Except for the Subsidiaries, the Company does not own, directly or
indirectly, any ownership, equity, profits or voting interest in any
Person or have any agreement or commitment to purchase any such interest,
and has not agreed and is not obligated to make nor is bound by any
written, oral or other agreement, contract, subcontract, lease, binding
understanding, instrument, note, option, warranty, purchase order,
license, sublicense, insurance policy, benefit plan, commitment or
undertaking of any nature, as of the date hereof or as may hereafter be in
effect under which it may become obligated to make, any future investment
in or capital contribution to any other entity.
(b) Each Subsidiary that is a corporation is duly incorporated,
validly existing and in good standing under the laws of its state of
incorporation (as listed on Schedule
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2.2) and has the requisite corporate power and authority to own, lease and
operate its assets and properties and to carry on its business as it is
now being or currently planned by the Company to be conducted. Each
Subsidiary that is a limited liability company is duly organized or
formed, validly existing and in good standing under the laws of its state
of organization or formation (as listed on Schedule 2.2) and has the
requisite power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being or currently
planned by the Company to be conducted. Each Subsidiary is in possession
of all Approvals necessary to own, lease and operate the properties it
purports to own, operate or lease and to carry on its business as it is
now being or currently planned by the Company to be conducted, except
where the failure to have such Approvals could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on the
Company or such Subsidiary. Complete and correct copies of the Charter
Documents of each Subsidiary, as amended and currently in effect, have
been heretofore delivered to Parent or Parent's counsel. No Subsidiary is
in violation of any of the provisions of its Charter Documents.
(c) Each Subsidiary is duly qualified or licensed to do business as
a foreign corporation or foreign limited liability company and is in good
standing in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so
duly qualified or licensed and in good standing that could not,
individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on the Company or such Subsidiary. Each
jurisdiction in which each Subsidiary is so qualified or licensed is
listed in Schedule 2.2.
(d) The minute books of each Subsidiary contain true, complete and
accurate records of all meetings and consents in lieu of meetings of its
Board of Directors (and any committees thereof), similar governing bodies
and stockholders since January 1, 2000. Copies of the Corporate Records of
each Subsidiary have been heretofore made available to Parent or Parent's
counsel.
2.3 Capitalization.
(a) The authorized capital stock of the Company consists of 5,000
shares of Company Common Stock, of which 2,272.5 shares of Company Common
Stock are issued and outstanding as of the date of this Agreement, all of
which are validly issued, fully paid and nonassessable and are owned by
the Persons who are Stockholders. As of the date of this Agreement and as
it may be revised as of the Closing Date in accordance with the terms of
this Agreement, (i) except with respect to the stock option referred to in
Section 1.13, no shares of Company Common Stock are reserved for issuance
upon the exercise of outstanding options to purchase Company Common Stock
granted to employees of Company or other parties ("Company Stock
Options"), and (ii) no shares of Company Common Stock are reserved for
issuance upon the exercise of outstanding warrants or other rights (other
than Company Stock Options) to purchase Company Common Stock. All shares
of Company Common Stock subject to issuance as aforesaid, upon issuance on
the terms and conditions specified in the instrument pursuant to which
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they are issuable, will be duly authorized, validly issued, fully paid and
nonassessable. There are no commitments or agreements of any character to
which Company is bound obligating Company to accelerate the vesting of any
Company Stock Option as a result of the Merger. All outstanding shares of
Company Common Stock and all outstanding Company Stock Options have been
issued and granted in compliance with (x) all applicable securities laws
and (in all material respects) other applicable laws and regulations, and
(y) all requirements set forth in any applicable Company Contracts (as
defined in Section 2.19). The Company has heretofore delivered to Parent
or Parent's counsel an accurate copy of substantially the forms of
documents used for the issuance of Company Stock Options and a true and
complete list of the holders thereof, including their names and the
numbers of shares of Company Common Stock underlying such holders' Company
Stock Options.
(b) Except as contemplated by this Agreement and except as set forth
in Section 2.3(a) hereof, there are no subscriptions, options, warrants,
equity securities, partnership interests or similar ownership interests,
calls, rights (including preemptive rights), commitments or agreements of
any character to which the Company is a party or by which it is bound
obligating the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, or repurchase, redeem or otherwise acquire, or cause
the repurchase, redemption or acquisition of, any shares of capital stock,
partnership interests or similar ownership interests of the Company or
obligating the Company to grant, extend, accelerate the vesting of or
enter into any such subscription, option, warrant, equity security, call,
right, commitment or agreement.
(c) Except as contemplated by this Agreement, there are no
registration rights, and there is no voting trust, proxy, rights plan,
antitakeover plan or other agreement or understanding to which the Company
is a party or by which the Company is bound with respect to any equity
security of any class of the Company.
(d) The authorized and outstanding capital stock or membership
interests of each Subsidiary are set forth in Schedule 2.3(d) hereto.
Except as set forth in Schedule 2.3(d), the Company owns all of the
outstanding equity securities of each Subsidiary, free and clear of all
liens and encumbrances, either directly or indirectly through one or more
other Subsidiaries. There are no outstanding options, warrants or other
rights to purchase securities of any Subsidiary.
2.4 Authority Relative to this Agreement. The Company has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and to consummate the transactions
contemplated hereby (including the Merger). The execution and delivery of this
Agreement and the consummation by the Company of the transactions contemplated
hereby (including the Merger) have been duly and validly authorized by all
necessary corporate action on the part of the Company (including the approval by
its Board of Directors and stockholders, subject in all cases to the
satisfaction of the terms and conditions of this Agreement, including the
conditions set forth in Article VI), and no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement or to consummate
the transactions contemplated hereby pursuant to the DGCL and the terms and
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conditions of this Agreement. This Agreement has been duly and validly executed
and delivered by the Company and, assuming the due authorization, execution and
delivery thereof by the other parties hereto, constitutes the legal and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as may be limited by bankruptcy, insolvency, reorganization or
other similar laws affecting the enforcement of creditors' rights generally and
by general principles of equity.
2.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company do
not, and the performance of this Agreement by the Company shall not, (i)
conflict with or violate the Company's Charter Documents, (ii) subject to
obtaining the adoption of this Agreement and the Merger by the
stockholders of the Company, conflict with or violate any Legal
Requirements (as defined in Section 9.2(c)), (iii) except as set forth in
Schedule 2.5, result in any breach of or constitute a default (or an event
that with notice or lapse of time or both would become a default) under,
or materially impair the Company's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of
the Company pursuant to, any Company Contracts or (iv) except as set forth
in Schedule 2.5, result in the triggering, acceleration or increase of any
payment to any Person pursuant to any Company Contract, including any
"change in control" or similar provision of any Company Contract, except,
with respect to clauses (ii), (iii) or (iv), for any such conflicts,
violations, breaches, defaults, triggerings, accelerations, increases or
other occurrences that would not, individually and in the aggregate, have
a Material Adverse Effect on the Company.
(b) The execution and delivery of this Agreement by the Company does
not, and the performance of its obligations hereunder will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, except (i) for applicable
requirements, if any, of the Securities Act, the Exchange Act or Blue Sky
Laws, and the rules and regulations thereunder, and appropriate documents
received from or filed with the relevant authorities of other
jurisdictions in which the Company is licensed or qualified to do
business, and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on the Company or, after the Closing, the Parent,
or prevent consummation of the Merger or otherwise prevent the parties
hereto from performing their obligations under this Agreement.
2.6 Compliance. To the Company's knowledge, the Company has complied with
and is not in violation of any Legal Requirements with respect to the conduct of
its business, or the ownership or operation of its business, except for failures
to comply or violations which, individually or in the aggregate, have not had
and are not reasonably likely to have a Material Adverse Effect on the Company.
The Company is not in default or violation of any term, condition or provision
of any applicable Charter Documents. Except as set forth in Schedule 2.6,
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no written notice of non-compliance with any Legal Requirements has been
received by the Company (and the Company has no knowledge of any such notice
delivered to any other Person). The Company is not in violation of any term of
any Company Contract, except for failures to comply or violations which,
individually or in the aggregate, have not had and are not reasonably likely to
have a Material Adverse Effect on the Company.
2.7 Financial Statements.
(a) The Company has provided to Parent a correct and complete copy
of the audited consolidated financial statements (including any related
notes thereto) of the Company for the fiscal years ended December 31, 2004
and December 31, 2003 (the "Audited Financial Statements"). The Audited
Financial Statements were prepared in accordance with generally accepted
accounting principles of the United States ("U.S. GAAP") applied on a
consistent basis throughout the periods involved (except as may be
indicated in the notes thereto), and each fairly presents in all material
respects the financial position of the Company at the respective dates
thereof and the results of its operations and cash flows for the periods
indicated.
(b) Company has provided to Parent a correct and complete copy of
the unaudited consolidated financial statements (including, in each case,
any related notes thereto) of the Company for the six month period ended
June 30, 2005 (the "Unaudited Financial Statements"). The Unaudited
Financial Statements comply as to form in all material respects, and were
prepared in accordance with, U.S. GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto), and fairly present in all material respects the financial
position of the Company at the date thereof and the results of its
operations and cash flows for the period indicated, except that such
statements do not contain notes and are subject to normal adjustments that
are not expected to have a Material Adverse Effect on the Company.
(c) Since January 1, 2000, the books of account, minute books, stock
certificate books and stock transfer ledgers and other similar books and
records of the Company have been maintained in accordance with good
business practice, are complete and correct in all material respects and
there have been no material transactions that are required to be set forth
therein and which are not so set forth.
(d) Except as otherwise noted in the Audited Financial Statements or
the Unaudited Financial Statements, or as set forth in Schedule 2.7(d),
the accounts and notes receivable of the Company reflected on the balance
sheets included in the Audited Financial Statements and the Unaudited
Financial Statements (i) arose from bona fide transactions in the ordinary
course of business and are payable on ordinary trade terms, (ii) are
legal, valid and binding obligations of the respective debtors enforceable
in accordance with their terms, except as such may be limited by
bankruptcy, insolvency, reorganization, or other similar laws affecting
creditors' rights generally, and by general equitable principles, (iii)
are not subject to any valid set-off or counterclaim except to the extent
set forth in such balance sheet contained therein, and (iv) except as set
forth in
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Schedule 2.7(d), are not the subject of any actions or proceedings brought
by or on behalf of the Company.
2.8 No Undisclosed Liabilities. Except as set forth in Schedule 2.8
hereto, to the knowledge of the Company, the Company has no liabilities
(absolute, accrued, contingent or otherwise) of a nature required to be
disclosed on a balance sheet or in the related notes to the Unaudited Financial
Statements which are, individually or in the aggregate, material to the
business, results of operations or financial condition of the Company, except:
(i) liabilities provided for in or otherwise disclosed in the balance sheet
included in the Unaudited Financial Statements, and (ii) such liabilities
arising in the ordinary course of the Company's business since June 30, 2005,
none of which would have a Material Adverse Effect on the Company.
2.9 Absence of Certain Changes or Events. Except as set forth in Schedule
2.9 hereto or in the Unaudited Financial Statements, or as otherwise provided in
this Agreement, since December 31, 2004, there has not been: (i) any Material
Adverse Effect on the Company, (ii) any declaration, setting aside or payment of
any dividend on, or other distribution (whether in cash, stock or property) in
respect of, any of the Company's stock, or any purchase, redemption or other
acquisition by the Company of any of the Company's capital stock or any other
securities of the Company or any options, warrants, calls or rights to acquire
any such shares or other securities, (iii) any split, combination or
reclassification of any of the Company's capital stock, (iv) any granting by the
Company of any increase in compensation or fringe benefits, except for normal
increases of cash compensation in the ordinary course of business consistent
with past practice, or any payment by the Company of any bonus, except for
bonuses made in the ordinary course of business consistent with past practice,
or any granting by the Company of any increase in severance or termination pay
or any entry by Company into any currently effective employment, severance,
termination or indemnification agreement or any agreement the benefits of which
are contingent or the terms of which are materially altered upon the occurrence
of a transaction involving the Company of the nature contemplated hereby, (v)
entry by the Company into any licensing or other agreement with regard to the
acquisition or disposition of any Intellectual Property (as defined in Section
2.18 hereof) other than licenses in the ordinary course of business consistent
with past practice or any amendment or consent with respect to any licensing
agreement filed or required to be filed by the Company with respect to any
Governmental Entity, (vi) any material change by the Company in its accounting
methods, principles or practices, (vii) any change in the auditors of the
Company, (viii) any issuance of capital stock of the Company, (ix) any
revaluation by the Company of any of its assets, including, without limitation,
writing down the value of capitalized inventory or writing off notes or accounts
receivable or any sale of assets of the Company other than in the ordinary
course of business, or (x) any agreement, whether written or oral, to do any of
the foregoing.
2.10 Litigation. Except as disclosed in Schedule 2.10 hereto, there are no
claims, suits, actions or proceedings pending or, to the knowledge of the
Company, threatened against the Company before any court, governmental
department, commission, agency, instrumentality or authority, or any arbitrator
that seeks to restrain or enjoin the consummation of the transactions
contemplated by this Agreement or which could reasonably be expected, either
singularly or in the aggregate with all such claims, actions or proceedings, to
have a Material
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Adverse Effect on the Company or have a Material Adverse Effect on the ability
of the parties hereto to consummate the Merger.
2.11 Employee Benefit Plans.
(a) All employee compensation, incentive, fringe or benefit plans,
programs, policies, commitments or other arrangements (whether or not set
forth in a written document) covering any active or former employee,
director or consultant of the Company, or any trade or business (whether
or not incorporated) which is under common control with the Company, with
respect to which the Company has liability (collectively, the "Plans")
have been maintained and administered in all material respects in
compliance with their respective terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations which
are applicable to such Plans, and all liabilities with respect to the
Plans have been properly reflected in the financial statements and records
of the Company. No suit, action or other litigation (excluding claims for
benefits incurred in the ordinary course of Plan activities) has been
brought, or, to the knowledge of the Company, is threatened, against or
with respect to any Plan. There are no audits, inquiries or proceedings
pending or, to the knowledge of the Company, threatened by any
governmental agency with respect to any Plan. All contributions, reserves
or premium payments required to be made or accrued as of the date hereof
to the Plans have been timely made or accrued. The Company does not have
any plan or commitment to establish any new Plan, to modify any Plan
(except to the extent required by law or to conform any such Plan to the
requirements of any applicable law, in each case as previously disclosed
to Parent in writing, or as required by this Agreement), or to enter into
any new Plan. Each Plan can be amended, terminated or otherwise
discontinued after the Closing in accordance with its terms, without
liability to Parent (other than ordinary administration expenses and
expenses for benefits accrued but not yet paid).
(b) Except as disclosed in Schedule 2.11 hereto, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or
otherwise) becoming due to any stockholder, director or employee of the
Company under any Plan or otherwise, (ii) materially increase any benefits
otherwise payable under any Plan, or (iii) result in the acceleration of
the time of payment or vesting of any such benefits.
2.12 Labor Matters. The Company is not a party to any collective
bargaining agreement or other labor union contract applicable to persons
employed by the Company nor does the Company know of any activities or
proceedings of any labor union to organize any such employees.
2.13 Restrictions on Business Activities. Except as disclosed in Schedule
2.13 hereto, to the Company's knowledge, there is no agreement, commitment,
judgment, injunction, order or decree binding upon the Company or its assets or
to which the Company is a party which has or could reasonably be expected to
have the effect of prohibiting or materially impairing
A-15
any business practice of the Company, any acquisition of property by the Company
or the conduct of business by Company as currently conducted other than such
effects, individually or in the aggregate, which have not had and could not
reasonably be expected to have a Material Adverse Effect on the Company.
2.14 Title to Property.
(a) Schedule 2.14(a) hereto sets forth a schedule of the oil and gas
properties owned by the Company (collectively, the "Mineral Properties"
and, individually, a "Mineral Property"). The Company has Defensible Title
(as hereinafter defined) to the Mineral Properties. Each Mineral Property
and each structure thereon is in good and operable condition, ordinary
wear and tear excepted, and is suitable for the purposes for which it is
intended to be used, except where the failure to comply with the foregoing
is not reasonably expected to have a Material Adverse Effect on the
Company.
(b) As used herein with respect to each Mineral Property,
"Defensible Title" means title that:
(i) entitles the Company to receive from each lease, unit or
well separately scheduled on Schedule 2.14(a) (free and clear of all
royalties, overriding royalties, nonparticipating royalties, net
profits interests or other burdens on or measured by production of
oil and gas) throughout the duration of the productive life of the
relevant lease, unit or well, not less than the "net revenue
interest" set forth on Schedule 2.14(a) of the oil, gas and other
minerals produced, saved and marketed from the lease, unit or well,
without reduction, suspension or termination, except as may be
qualified by any "before payout" (BPO) or "after payout" (APO)
notations on Schedule 2.14(a) with respect to such lease, unit or
well;
(ii) obligates the Company to bear a percentage of the costs
and expenses of the maintenance and development of, and operations
relating to, any lease, unit or well not greater than the "working
interest" set forth on Schedule 2.14(a), without increase throughout
the productive life of such lease, well or unit, except as may be
qualified by any "before payout" (BPO) or "after payout" (APO)
notations on Schedule 2.14(a) with respect to such lease, unit or
well; and
(iii) is free and clear of Liens or defects except for (y)
Permitted Encumbrances, and (z) mortgages, deeds of trust, liens and
security interests held by lending institutions to secure payment of
indebtedness existing for loans and advances made by such lending
institutions. As used herein, the term "Permitted Encumbrances"
means:
(A) the terms and conditions of all Company Contracts,
to the extent such terms and conditions do not adversely
affect the net revenue interests or working interests set
forth in Schedule 2.14(a);
A-16
(B) preferential rights of purchase and required third
party consents to assignments and similar rights held by third
parties that are not applicable to the Merger;
(C) Liens for Taxes or assessments not yet delinquent
or, if delinquent, that are being contested in good faith in
the normal course of business;
(D) Liens arising under operating agreements,
unitization and pooling agreements and production sales
contracts securing amounts not yet delinquent, or if
delinquent, that are being contested in good faith in the
normal course of business;
(E) conventional rights of reassignment prior to
abandonment;
(F) easements, rights-of-way, servitudes, permits,
surface leases and other rights in respect of surface
operations, pipelines, grazing, hunting, fishing, logging,
canals, ditches, reservoirs or the like; and easements of
streets, alleys, highways, pipelines, telephone lines, power
lines, railways and other similar easements and rights-of-way
on, over or in respect of the Mineral Property, none of which
materially interferes with the development and operation of
any Mineral Property for the production of hydrocarbons or for
the use for which the same is held;
(G) such title defects as Parent may have expressly
waived in writing, may have elected not to assert or may be
deemed to have waived under Section 5.3 or 5.4;
(H) rights reserved to or vested in any Governmental
Entity to control or regulate any Mineral Property in any
manner, and all applicable laws, rules and orders;
(I) imperfections of title that do not materially
interfere with the use, operation and possession or materially
reduce the value of any particular Mineral Property or the
production and sale of hydrocarbons for the account of the
Company therefrom; and
(J) liens, charges, encumbrances and irregularities in
the chain of title which, because of remoteness in or passage
of time, statutory cure periods, marketable title acts or
other similar reasons, have not affected or interrupted, and
are not reasonably expected to affect or interrupt, the
claimed ownership of the Company or its predecessors in title
to, or the receipt of production revenues from, the Mineral
Property affected thereby.
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(c) Schedule 2.14(c) sets forth all real property owned by the
Company, other than Mineral Properties (the "Owned Real Property). The
Company has marketable title to each such item of Owned Real Property free
and clear of all (y) Liens, other than mortgages, deeds of trust, liens
and security interests held by lending institutions to secure payment of
indebtedness existing for loans and advances made by such lending
institutions, and (z) title defects, other than imperfections of title
that do not materially interfere with the use, operation and possession or
materially reduce the value of any particular item of Owned Real Property.
Each item of Owned Real Property and each structure thereon is in good and
operable condition, ordinary wear and tear excepted, and is suitable for
the purposes for which it is intended to be used, except where the failure
to comply with the foregoing is not reasonably expected to have a Material
Adverse Effect on the Company.
(d) Schedule 2.14(d) hereto sets forth all leases of real property
held by the Company (the "Leased Real Property"). The Leased Real Property
and all personal property and other property and assets of the Company
owned, used or held for use in connection with the business of the Company
(collectively, the "Personal Property") are shown or reflected on the
balance sheet included in the Audited Financial Statements or the
Unaudited Financial Statements, to the extent required by U.S. GAAP, as of
the dates of such Audited Financial Statements or Unaudited Financial
Statements. The Company has a good, valid and enforceable leasehold
interest in each item of Leased Real Property and owns and has good and
marketable title to each other item of Personal Property, and all such
Personal Property is in each case held free and clear of all Liens except
for liens and encumbrances disclosed in the Audited Financial Statements,
the Unaudited Financial Statements or in Schedule 2.14(d) hereto. All
items of Leased Real Property and Personal Property are in good and
operable condition, ordinary wear and tear excepted, and are suitable for
the purposes for which they are intended to be used, except where the
failure to comply with the foregoing is not reasonably expected to have a
Material Adverse Effect on the Company.
(e) All leases for Leased Real Property and Personal Property are
valid and effective in accordance with their respective terms, and there
is not, under any of such leases, any existing material default or event
of default of the Company or, to the Company's knowledge, any other party
(or any event which with notice or lapse of time, or both, would
constitute a material default), except where the lack of such validity and
effectiveness or the existence of such default or event of default could
not reasonably be expected to have a Material Adverse Effect on the
Company.
2.15 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
or "Taxes" refers to any and all federal, state, local and foreign taxes,
including, without limitation, gross receipts, income, profits, sales,
use, occupation, value added, ad valorem, transfer, franchise,
withholding, payroll, recapture, employment, excise and property taxes,
assessments, governmental charges and duties together with all interest,
penalties and additions imposed with respect to any such amounts and any
obligations
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under any agreements or arrangements with any other person with respect to
any such amounts and including any liability of a predecessor entity for
any such amounts.
(b) Tax Returns and Audits. (c) Except as set forth in Schedule 2.15
hereto:
(i) The Company has timely filed all federal, state, local and
foreign returns, estimates, information statements and reports
relating to Taxes ("Returns") required to be filed by the Company
with any Tax authority prior to the date hereof, except such Returns
which are not material to Company. To the Company's knowledge, all
such Returns are true, correct and complete in all material
respects. The Company has paid all Taxes shown to be due on such
Returns.
(ii) All Taxes that the Company is required by law to withhold
or collect have been duly withheld or collected, and have been
timely paid over to the proper governmental authorities to the
extent due and payable.
(iii) To the Company's knowledge, the Company has not been
delinquent in the payment of any material Tax nor is there any
material Tax deficiency outstanding, proposed or assessed against
the Company, nor has the Company executed any unexpired waiver of
any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(iv) To the Company's knowledge, no audit or other examination
of any Return of the Company by any Tax authority is presently in
progress. The Company has not been notified of any request for such
an audit or other examination.
(v) No adjustment relating to any Returns filed by the Company
has been proposed in writing, formally or informally, by any Tax
authority to the Company or any representative thereof.
(vi) To the Company's knowledge, the Company has no liability
for any material unpaid Taxes which have not been accrued for or
reserved on the Company's balance sheets included in the Audited
Financial Statements or the Unaudited Financial Statements, whether
asserted or unasserted, contingent or otherwise, which is material
to the Company, other than any liability for unpaid Taxes that may
have accrued since the end of the most recent fiscal year in
connection with the operation of the business of the Company in the
ordinary course of business.
(vii) The Company has not taken any action and does not know
of any fact, agreement, plan or other circumstance that is
reasonably likely to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
A-19
2.16 Environmental Matters.
(a) Except as disclosed in Schedule 2.16 hereto, there are no
agreements, consents or administrative orders, injunctions, decrees,
judgments, license or permit conditions, or other directives of
Governmental Entities based on any Applicable Environmental Laws (as
hereinafter defined), that require any material change in the present
condition or remediation of the Properties, Personal Property and other
assets owned or used by the Company (collectively, "Assets"), and neither
the Company nor any of its Affiliates (as defined in Section 10.2(f)) has
received from any Governmental Entity or any private or public person or
entity any notice or claim advising such person that it is or is
potentially responsible for damages or response costs under Applicable
Environmental Law as a result of the Company's or its predecessors'
ownership or activities in connection with the Assets. Except as set forth
on Schedule 2.16, to the Company's knowledge, there has not occurred an
event in the use and operation of the Properties or the Leased Real
Property, and there does not exist on the Properties or the Leased Real
Property a condition, that constitutes a violation of Applicable
Environmental Law that reasonably could be expected to have a Material
Adverse Effect on the Company.
(b) The Company, and, to the knowledge of the Company, each other
Person that operates the Properties and the Leased Real Property, has
obtained all permits, licenses, franchises, authorities, consents and
approvals, and has made all material filings and maintained all material
data, documentation and records necessary for owning and operating the
Properties and the Leased Real Property under Applicable Environmental
Law, and all such permits, licenses, franchises, authorities, consents,
approvals and filings remain in full force and effect.
(c) There are no pending or, to the knowledge of the Company,
threatened claims, demands, actions, administrative proceedings, lawsuits
or inquiries relating to (i) the Properties and the Leased Real Property
under Applicable Environmental Law, or (ii) the restoration, remediation
or reclamation of any Properties or Leased Real Property, except as set
forth on Schedule 2.16.
(d) Except as set forth on Schedule 2.16, there are no environmental
investigations, studies or audits with respect to any of the Properties or
Leased Real Property owned or commissioned by, or in the possession of,
the Company.
(e) As used in this Agreement, the term "Applicable Environmental
Law" means (i) all federal statutes regulating or prescribing restrictions
regarding the use of the Assets or other activities affecting the
environment (air, water, land, animal and plant life), including but not
limited to the following: the Clean Air Act, Clean Water Act,
Comprehensive Environmental Response, Compensation and Liability Act,
Emergency Planning and Community Right-to-Know Act, Endangered Species
Act, Hazardous Materials Transportation Act, Migratory Bird Treaty Act,
National Environmental Policy Act, Occupational Safety and Health Act, Oil
Pollution Act of 1990, Resource Conservation and Recovery Act, Safe
Drinking Water Act, and Toxic Substances Control Act; (ii) any regulations
promulgated under such federal statutes; (iii) any state law counterparts
of such
A-20
federal statutes and the regulations promulgated thereunder; (iv) any
other state or local statutes, rules, regulations or ordinances regulating
the use of or affecting the environment; and (v) all common law rights,
duties and obligations regarding the use of or matters affecting the
environment.
2.17 Brokers; Third Party Expenses. Except as set forth in Schedule 2.17
hereto, the Company has not incurred, nor will it incur, directly or indirectly,
any liability for brokerage, finders' fees, agent's commissions or any similar
charges in connection with this Agreement or any transactions contemplated
hereby. Except pursuant to Sections 1.6 and 1.13, no shares of common stock,
options, warrants or other securities of either Company or Parent are payable to
any third party by Company as a result of the Merger.
2.18 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"Intellectual Property" shall mean any or all of the following and all
worldwide common law and statutory rights in, arising out of, or
associated therewith: (i) patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof ("Patents"); (ii) inventions (whether
patentable or not), invention disclosures, improvements, trade secrets,
proprietary information, know how, technology, technical data and customer
lists, and all documentation relating to any of the foregoing; (iii)
copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) software and
software programs; (v) domain names, uniform resource locators and other
names and locators associated with the Internet; (vi) industrial designs
and any registrations and applications therefor; (vii) trade names, logos,
common law trademarks and service marks, trademark and service mark
registrations and applications therefor (collectively, "Trademarks");
(viii) all databases and data collections and all rights therein; (ix) all
moral and economic rights of authors and inventors, however denominated,
and (x) any similar or equivalent rights to any of the foregoing (as
applicable).
"Company Intellectual Property" shall mean any Intellectual Property that
is owned by, or exclusively licensed to, Company, including software and
software programs developed by or exclusively licensed to the Company
(specifically excluding any off the shelf or shrink-wrap software).
"Registered Intellectual Property" means all Intellectual Property that is
the subject of an application, certificate, filing, registration or other
document issued, filed with, or recorded by any private, state, government
or other legal authority.
"Company Registered Intellectual Property" means all of the Registered
Intellectual Property owned by, or filed in the name of, Company.
"Company Products" means all current versions of products or service
offerings of Company.
A-21
(a) Except as disclosed on Schedule 2.18 hereto, no Company
Intellectual Property or Company Product is subject to any material
proceeding or outstanding decree, order, judgment, contract, license,
agreement or stipulation restricting in any manner the use, transfer or
licensing thereof by the Company, or which may affect the validity, use or
enforceability of such Company Intellectual Property or Company Product,
which in any such case could reasonably be expected to have a Material
Adverse Effect on the Company.
(b) Except as disclosed on Schedule 2.18 hereto, the Company owns
and has good and exclusive title to each material item of Company
Intellectual Property owned by it free and clear of any liens and
encumbrances (excluding non-exclusive licenses and related restrictions
granted by it in the ordinary course of business); and the Company is the
exclusive owner of all material registered Trademarks used in connection
with the operation or conduct of the business of the Company including the
sale of any products or the provision of any services by the Company.
(c) The operation of the business of the Company as such business
currently is conducted, including (i) the design, development,
manufacture, distribution, reproduction, marketing or sale of the Company
Products and (ii) the Company's use of any product, device or process has
not and does not infringe or misappropriate the Intellectual Property of
any third party or constitute unfair competition or trade practices under
the laws of any jurisdiction.
2.19 Agreements, Contracts and Commitments.
(a) Schedule 2.19 hereto sets forth a complete and accurate list of
all Material Company Contracts (as hereinafter defined), specifying the
parties thereto. For purposes of this Agreement, (i) the term "Company
Contracts" shall mean all contracts, agreements, leases, mortgages,
indentures, notes, bonds, licenses, permits, franchises, purchase orders,
sales orders, and other understandings, commitments and obligations of any
kind, whether written or oral, to which the Company is a party or by or to
which any of the properties or assets of Company may be bound, subject or
affected (including without limitation notes or other instruments payable
to the Company), (ii) the term "Routine Operating Contracts" shall mean
oil and gas leases, mineral and royalty conveyances, operating agreements,
unit agreements, farmout and farmin agreements, gathering and
transportation agreements, processing agreements, gas, oil and liquids
purchase, sale and exchange agreements, and other similar agreements
routinely used in the day to day operations of the Company, and (iii) the
term "Material Company Contracts" shall mean (x) each Company Contract
that is not a Routine Operating Contract and (I) which provides for
payments (present or future) to the Company in excess of $100,000 in the
aggregate or (II) under which or in respect of which the Company presently
has any liability or obligation of any nature whatsoever (absolute,
contingent or otherwise) in excess of $100,000, (y) each Company Contract
that is not a Routine Operating Contract and that otherwise is or may be
material to the businesses, operations, assets, condition (financial or
otherwise) or prospects of the Company and (z) without limitation of
subclause (x) or subclause (y), each of the following Company Contracts
(but excluding
A-22
in every case Routine Operating Contracts), the relevant terms of which
remain executory:
(i) any mortgage, indenture, note, installment obligation or
other instrument, agreement or arrangement for or relating to any
borrowing of money by or from the Company, or any officer, director
or Stockholder ("Insider") of the Company;
(ii) any guaranty, direct or indirect, by the Company or any
Insider of the Company of any obligation for borrowings, or
otherwise, excluding endorsements made for collection in the
ordinary course of business and guarantees by Subsidiaries of
Company obligations;
(iii) any Company Contract of employment;
(iv) any Company Contract made other than in the ordinary
course of business or (x) providing for the grant of any
preferential rights to purchase or lease any asset of the Company or
(y) providing for any right (exclusive or non-exclusive) to sell or
distribute, or otherwise relating to the sale or distribution of,
any product or service of the Company;
(v) any obligation to register any shares of the capital stock
or other securities of the Company with any Governmental Entity;
(vi) any obligation to make payments, contingent or otherwise,
arising out of the prior acquisition of the business, assets or
stock of other Persons;
(vii) any collective bargaining agreement with any labor
union;
(viii) any lease or similar arrangement for the use by the
Company of personal property (other than leases of vehicles, office
equipment or operating equipment where the annual lease payments are
less than $100,000 in the aggregate); and
(ix) any Company Contract to which any Insider of the Company
is a party.
(b) Each Company Contract was entered into at arms' length and in
the ordinary course, is in full force and effect and is valid and binding
upon and enforceable against each of the parties thereto. True, correct
and complete copies of all Material Company Contracts (or written
summaries in the case of oral Material Company Contracts) have been
heretofore made available to Parent or Parent's counsel.
A-23
(c) Except as set forth in Schedule 2.19, neither the Company nor,
to the best of Company's knowledge, any other party thereto is in breach
of or in default under, and no event has occurred which with notice or
lapse of time or both would become a breach of or default under, any
Material Company Contract. No party to any Company Contract has given any
written notice of any claim of any breach, default or event, which,
individually or in the aggregate, are reasonably likely to have a Material
Adverse Effect on the Company. Each Material Company Contract to which the
Company is a party or by which it is bound that has not expired by its
terms is in full force and effect.
(d) Except as set forth in Schedule 2.19(d), each Routine Operating
Contract contains terms and conditions that are customary in the
geographical area in which the Mineral Properties covered thereby are
located, or to the extent not customary, do not materially and adversely
affect or burden such Mineral Properties.
(e) Except as set forth in Schedule 2.19(e), each Company Contract
providing for the sale of oil or gas by the Company is terminable by the
Company on sixty (60) days' or less prior written notice.
2.20 Insurance. Schedule 2.20 sets forth the Company's insurance policies
and fidelity bonds covering the assets, business, equipment, properties,
operations, employees, officers and directors (collectively, the "Insurance
Policies") of the Company which the Company reasonably believes are adequate in
amount and scope for the Business in which they are engaged.
2.21 Governmental Actions/Filings. The Company has been granted and holds,
and has made, all Governmental Actions/Filings (including, without limitation,
the Governmental Actions/Filings required for (i) emission or discharge of
effluents and pollutants into the air and the water and (ii) the manufacture and
sale of all products manufactured and sold by it) necessary to the conduct by
the Company of its business (as presently conducted and as presently proposed to
be conducted) or used or held for use by the Company, and true, complete and
correct copies of which have heretofore been made available to Parent. Each such
Governmental Action/Filing is in full force and effect and will not expire prior
to December 31, 2006 (except to the extent such expiration is not reasonably
expected to have a Material Adverse Effect), and the Company is in substantial
compliance with all of its obligations with respect thereto. No event has
occurred and is continuing which requires or permits, or after notice or lapse
of time or both would require or permit, and consummation of the transactions
contemplated by this Agreement or any ancillary documents will not require or
permit (with or without notice or lapse of time, or both), any modification or
termination of any such Governmental Actions/Filings except such events which,
either individually or in the aggregate, would not have a Material Adverse
Effect upon the Company. No Governmental Action/Filing is necessary to be
obtained, secured or made by the Company to enable it to continue to conduct its
businesses and operations and use its properties after the Closing in a manner
which is consistent with current practice.
A-24
For purposes of this Agreement, the term "Governmental Action/Filing"
shall mean any franchise, license, certificate of compliance, authorization,
consent, order, permit, approval, consent or other action of, or any filing,
registration or qualification with, any federal, state, municipal, foreign or
other governmental, administrative or judicial body, agency or authority.
2.22 Interested Party Transactions. Except as set forth in the
Schedule 2.22 hereto or in the Audited Financial Statements or the
Unaudited Financial Statements, no employee, officer, director or
stockholder of the Company or a member of his or her immediate family is
indebted to the Company, nor is the Company indebted (or committed to make
loans or extend or guarantee credit) to any of them, other than (i) for
payment of salary for services rendered, (ii) reimbursement for reasonable
expenses incurred on behalf of the Company, and (iii) for other employee
benefits made generally available to all employees. Except as set forth in
Schedule 2.22, to the Company's knowledge, none of such individuals has
any direct or indirect ownership interest in any Person with whom the
Company is affiliated or with whom the Company has a contractual
relationship, or in any Person that competes with the Company, except that
each employee, stockholder, officer or director of Company and members of
their respective immediate families may own less than 5% of the
outstanding stock in publicly traded companies that may compete with
Company. Except as set forth in Schedule 2.22, to the knowledge of the
Company, no officer, director or Stockholder or any member of their
immediate families is, directly or indirectly, interested in any Material
Company Contract with the Company (other than such contracts as relate to
any such Person's ownership of capital stock or other securities of the
Company or such Person's employment with the Company).
2.23 Corporate Approvals. The board of directors of the Company has,
as of the date of this Agreement, duly approved this Agreement and the
transactions contemplated hereby. The shares of Company Common Stock owned
by the Stockholders constitute, in the aggregate, the requisite amount of
shares necessary for the adoption of this Agreement and the approval of
the Merger by the stockholders of the Company in accordance with the DGCL
and the execution of this Agreement by the Stockholders constitutes such
adoption and approval.
2.24 Additional Representations Regarding Business. The additional
representations and warranties of the Company set forth in Appendix I
attached hereto are incorporated into Article II of this Agreement as if
fully set forth herein. In the event of a conflict between the
representations and warranties set forth in Appendix I and the
representations and warranties set forth in Article II, the
representations and warranties set forth in Appendix I shall prevail.
2.25 Representations and Warranties Complete. The representations
and warranties of the Company included in this Agreement and any list,
statement, document or information set forth in, or attached to, any
Schedule provided pursuant to this Agreement or delivered hereunder, are
true and complete in all material respects and do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein
not misleading, under the circumstance under which they were made.
2.26 Survival of Representations and Warranties. The representations
and warranties of the Company set forth in this Agreement shall survive
the Closing until June 30, 2007,
A-25
except that the representations and warranties set forth in Sections 2.14
and 2.16 shall not survive the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as set forth in Schedule 3 attached hereto (the "Parent Schedule"),
Parent represents and warrants to the Company, as follows:
3.1 Organization and Qualification.
(a) Parent is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware and has the
requisite corporate power and authority to own, lease and operate its
assets and properties and to carry on its business as it is now being or
currently planned by Parent to be conducted. Parent is in possession of
all Approvals necessary to own, lease and operate the properties it
purports to own, operate or lease and to carry on its business as it is
now being or currently planned by Parent to be conducted, except where the
failure to have such Approvals could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on
Parent. Complete and correct copies of the Charter Documents of Parent, as
amended and currently in effect, have been heretofore delivered to the
Company. Parent is not in violation of any of the provisions of the
Parent's Charter Documents.
(b) Parent is duly qualified or licensed to do business as a foreign
corporation and is in good standing, in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature
of its activities makes such qualification or licensing necessary, except
for such failures to be so duly qualified or licensed and in good standing
that could not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect on Parent.
(c) Merger Sub is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and has the
requisite corporate power and authority to own, lease and operate its
assets and properties and to carry on its business as it is now being or
currently planned by Parent to be conducted. Complete and correct copies
of the Charter Documents of Merger Sub, as amended and currently in
effect, are attached hereto as Exhibits A and B. Merger Sub is not in
violation of any of the provisions of the Merger Sub's Charter Documents.
3.2 Subsidiaries. Except for Merger Sub, which is a wholly-owned
subsidiary of Parent, Parent has no Subsidiaries and does not own, directly or
indirectly, any ownership, equity, profits or voting interest in any Person or
has any agreement or commitment to purchase any such interest, and Parent has
not agreed and is not obligated to make nor is bound by any written, oral or
other agreement, contract, subcontract, lease, binding understanding,
instrument, note, option, warranty, purchase order, license, sublicense,
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insurance policy, benefit plan, commitment or undertaking of any nature, as of
the date hereof or as may hereafter be in effect under which it may become
obligated to make, any future investment in or capital contribution to any other
entity.
3.3 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock
of Parent consists of 30,000,000 shares of common stock, par value $0.0001
per share ("Parent Common Stock") and 1,000,000 shares of preferred stock,
par value $0.0001 per share ("Parent Preferred Stock"), of which 7,700,000
shares of Parent Common Stock and no shares of Parent Preferred Stock are
issued and outstanding, all of which are validly issued, fully paid and
nonassessable. Except as set forth in Schedule 3.3(a), (i) no shares of
Parent Common Stock or Parent Preferred Stock are reserved for issuance
upon the exercise of outstanding options to purchase Parent Common Stock
or Parent Preferred Stock granted to employees of Company or other parties
("Parent Stock Options") and there are no outstanding Parent Stock
Options; (ii) no shares of Parent Common Stock or Parent Preferred Stock
are reserved for issuance upon the exercise of outstanding warrants to
purchase Parent Common Stock or Parent Preferred Stock ("Parent Warrants")
and there are no outstanding Parent Warrants; and (iii) no shares of
Parent Common Stock or Parent Preferred Stock are reserved for issuance
upon the conversion of the Parent Preferred Stock or any outstanding
convertible notes, debentures or securities ("Parent Convertible
Securities"). All shares of Parent Common Stock and Parent Preferred Stock
subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instrument pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid and
nonassessable. All outstanding shares of Parent Common Stock and all
outstanding Parent Warrants have been issued and granted in compliance
with (x) all applicable securities laws and (in all material respects)
other applicable laws and regulations, and (y) all requirements set forth
in any applicable Parent Contracts (as defined in Section 3.19). Parent
has heretofore delivered to the Company true, complete and accurate copies
of the Parent Warrants, including any and all documents and agreements
relating thereto.
(b) The shares of Parent Common Stock to be issued by Parent in
connection with the Merger, upon issuance in accordance with the terms of
this Agreement, will be duly authorized and validly issued and such shares
of Parent Common Stock will be fully paid and nonassessable.
(c) Except as set forth in Schedule 3.3(c) or as contemplated by
this Agreement, there are no registrations rights, and there is no voting
trust, proxy, rights plan, antitakeover plan or other agreements or
understandings to which the Parent is a party or by which the Parent is
bound with respect to any equity security of any class of the Parent.
3.4 Authority Relative to this Agreement. Each of Parent and Merger Sub
has full corporate power and authority to: (i) execute, deliver and perform this
Agreement, and each ancillary document which Parent or Merger Sub has executed
or delivered or is to execute or
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deliver pursuant to this Agreement, and (ii) carry out Parent's and Merger Sub's
obligations hereunder and thereunder and, to consummate the transactions
contemplated hereby (including the Merger). The execution and delivery of this
Agreement and the consummation by Parent and Merger Sub of the transactions
contemplated hereby (including the Merger) have been duly and validly authorized
by all necessary corporate action on the part of Parent and Merger Sub
(including the approval by its Board of Directors), and no other corporate
proceedings on the part of Parent or Merger Sub are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby, other than the
Parent Stockholder Approval (as defined in Section 5.1(a)). This Agreement has
been duly and validly executed and delivered by Parent and Merger Sub and,
assuming the due authorization, execution and delivery thereof by the other
parties hereto, constitutes the legal and binding obligation of Parent and
Merger Sub, enforceable against Parent and Merger Sub in accordance with its
terms, except as may be limited by bankruptcy, insolvency, reorganization or
other similar laws affecting the enforcement of creditors' rights generally and
by general principles of equity.
3.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Parent and
Merger Sub do not, and the performance of this Agreement by Parent and
Merger Sub shall not: (i) conflict with or violate Parent's or Merger
Sub's Charter Documents, (ii) conflict with or violate any Legal
Requirements, or (iii) result in any breach of or constitute a default (or
an event that with notice or lapse of time or both would become a default)
under, or materially impair Parent's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of
Parent pursuant to, any Parent Contracts, except, with respect to clauses
(ii) or (iii), for any such conflicts, violations, breaches, defaults or
other occurrences that would not, individually and in the aggregate, have
a Material Adverse Effect on Parent.
(b) The execution and delivery of this Agreement by Parent and
Merger Sub do not, and the performance of their respective obligations
hereunder will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Entity, except (i)
for applicable requirements, if any, of the Securities Act, the Exchange
Act, Blue Sky Laws, and the rules and regulations thereunder, and
appropriate documents with the relevant authorities of other jurisdictions
in which Company is qualified to do business, and (ii) where the failure
to obtain such consents, approvals, authorizations or permits, or to make
such filings or notifications, would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on
Parent, or prevent consummation of the Merger or otherwise prevent the
parties hereto from performing their obligations under this Agreement.
3.6 Compliance. Parent has complied with, is not in violation of, any
Legal Requirements with respect to the conduct of its business, or the ownership
or operation of its business, except for failures to comply or violations which,
individually or in the aggregate, have not had and are not reasonably likely to
have a Material Adverse Effect on Parent. The business and activities of Parent
have not been and are not being conducted in violation of any
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Legal Requirements. Parent is not in default or violation of any term, condition
or provision of its Charter Documents. No written notice of non-compliance with
any Legal Requirements has been received by Parent.
3.7 SEC Filings; Financial Statements.
(a) Parent has made available to the Company and the Stockholders a
correct and complete copy of each report, registration statement and
definitive proxy statement filed by Parent with the SEC (the "Parent SEC
Reports"), which are all the forms, reports and documents required to be
filed by Parent with the SEC prior to the date of this Agreement. As of
their respective dates the Parent SEC Reports: (i) were prepared in
accordance and complied in all material respects with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the rules
and regulations of the SEC thereunder applicable to such Parent SEC
Reports, and (ii) did not at the time they were filed (and if amended or
superseded by a filing prior to the date of this Agreement then on the
date of such filing and as so amended or superseded) contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Except to the extent set forth in the preceding sentence, Parent makes no
representation or warranty whatsoever concerning the Parent SEC Reports as
of any time other than the time they were filed.
(b) Each set of financial statements (including, in each case, any
related notes thereto) contained in Parent SEC Reports, including each
Parent SEC Report filed after the date hereof until the Closing, complied
or will comply as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, was or will be
prepared in accordance with U.S. GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto or, in the case of unaudited statements, do not contain footnotes
as permitted by Form 10-QSB of the Exchange Act) and each fairly presents
or will fairly present in all material respects the financial position of
Parent at the respective dates thereof and the results of its operations
and cash flows for the periods indicated, except that the unaudited
interim financial statements were, are or will be subject to normal
adjustments which were not or are not expected to have a Material Adverse
Effect on Parent taken as a whole.
3.8 No Undisclosed Liabilities. Parent has no liabilities (absolute,
accrued, contingent or otherwise) of a nature required to be disclosed on a
balance sheet or in the related notes to the financial statements included in
Parent SEC Reports which are, individually or in the aggregate, material to the
business, results of operations or financial condition of Parent, except (i)
liabilities provided for in or otherwise disclosed in Parent SEC Reports filed
prior to the date hereof, and (ii) liabilities incurred since June 30, 2005 in
the ordinary course of business, none of which would have a Material Adverse
Effect on Parent. Merger Sub has no assets or properties of any kind, does not
now conduct and has never conducted any business, and has and will have at the
Closing no obligations or liabilities of any nature whatsoever except such
obligations and liabilities as are imposed under this Agreement.
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3.9 Absence of Certain Changes or Events. Except as set forth in Parent
SEC Reports filed prior to the date of this Agreement, and except as
contemplated by this Agreement, since December 31, 2004, there has not been: (i)
any Material Adverse Effect on Parent, (ii) any declaration, setting aside or
payment of any dividend on, or other distribution (whether in cash, stock or
property) in respect of, any of Parent's capital stock, or any purchase,
redemption or other acquisition by Parent of any of Parent's capital stock or
any other securities of Parent or any options, warrants, calls or rights to
acquire any such shares or other securities, (iii) any split, combination or
reclassification of any of Parent's capital stock, (iv) any granting by Parent
of any increase in compensation or fringe benefits, except for normal increases
of cash compensation in the ordinary course of business consistent with past
practice, or any payment by Parent of any bonus, except for bonuses made in the
ordinary course of business consistent with past practice, or any granting by
Parent of any increase in severance or termination pay or any entry by Parent
into any currently effective employment, severance, termination or
indemnification agreement or any agreement the benefits of which are contingent
or the terms of which are materially altered upon the occurrence of a
transaction involving Parent of the nature contemplated hereby, (v) entry by
Parent into any licensing or other agreement with regard to the acquisition or
disposition of any Intellectual Property other than licenses in the ordinary
course of business consistent with past practice or any amendment or consent
with respect to any licensing agreement filed or required to be filed by Parent
with respect to any Governmental Entity, (vi) any material change by Parent in
its accounting methods, principles or practices, except as required by
concurrent changes in U.S. GAAP, (vii) any change in the auditors of Parent,
(vii) any issuance of capital stock of Parent, or (viii) any revaluation by
Parent of any of its assets, including, without limitation, writing down the
value of capitalized inventory or writing off notes or accounts receivable or
any sale of assets of Parent other than in the ordinary course of business.
3.10 Litigation. There are no claims, suits, actions or proceedings
pending or to Parent's knowledge, threatened against Parent, before any court,
governmental department, commission, agency, instrumentality or authority, or
any arbitrator that seeks to restrain or enjoin the consummation of the
transactions contemplated by this Agreement or which could reasonably be
expected, either singularly or in the aggregate with all such claims, actions or
proceedings, to have a Material Adverse Effect on Parent or have a Material
Adverse Effect on the ability of the parties hereto to consummate the Merger.
3.11 Employee Benefit Plans. Except as may be contemplated by the Parent
Plan (as defined in Section 5.1(a)), Parent does not maintain, and has no
liability under, any Plan, and neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will (i)
result in any payment (including severance, unemployment compensation, golden
parachute, bonus or otherwise) becoming due to any stockholder, director or
employee of Parent, or (ii) result in the acceleration of the time of payment or
vesting of any such benefits.
3.12 Labor Matters. Parent is not a party to any collective bargaining
agreement or other labor union contract applicable to persons employed by
Parent, nor does Parent know of any activities or proceedings of any labor union
to organize any such employees.
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3.13 Restrictions on Business Activities. Except as set forth in the
Parent Charter Documents, there is no agreement, commitment, judgment,
injunction, order or decree binding upon Parent or to which Parent is a party
which has or could reasonably be expected to have the effect of prohibiting or
materially impairing any business practice of Parent, any acquisition of
property by Parent or the conduct of business by Parent as currently conducted
other than such effects, individually or in the aggregate, which have not had
and could not reasonably be expected to have, a Material Adverse Effect on
Parent.
3.14 Title to Property. Parent does not own or lease any Real Property or
Personal Property. Except as set forth in Schedule 3.14, there are no options or
other contracts under which Parent has a right or obligation to acquire or lease
any interest in Real Property or Personal Property.
3.15 Taxes.
(a) Parent has timely filed all Returns required to be filed by
Parent with any Tax authority prior to the date hereof, except such
Returns which are not material to Parent. All such Returns are true,
correct and complete in all material respects. Parent has paid all Taxes
shown to be due on such Returns.
(b) All Taxes that Parent is required by law to withhold or collect
have been duly withheld or collected, and have been timely paid over to
the proper governmental authorities to the extent due and payable.
(c) Parent has not been delinquent in the payment of any material
Tax nor is there any material Tax deficiency outstanding, proposed or
assessed against Parent, nor has Parent executed any unexpired waiver of
any statute of limitations on or extending the period for the assessment
or collection of any Tax.
(d) No audit or other examination of any Return of Parent by any Tax
authority is presently in progress, nor has Parent been notified of any
request for such an audit or other examination.
(e) No adjustment relating to any Returns filed by Parent has been
proposed in writing, formally or informally, by any Tax authority to
Parent or any representative thereof.
(f) Parent has no liability for any material unpaid Taxes which have
not been accrued for or reserved on Parent's balance sheets included in
the audited financial statements for the most recent fiscal year ended,
whether asserted or unasserted, contingent or otherwise, which is material
to Parent, other than any liability for unpaid Taxes that may have accrued
since the end of the most recent fiscal year in connection with the
operation of the business of Parent in the ordinary course of business,
none of which is material to the business, results of operations or
financial condition of Parent.
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(g) Parent has not taken any action and does not know of any fact,
agreement, plan or other circumstance that is reasonably likely to prevent
the Merger from qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
3.16 Environmental Matters. Except for such matters that, individually or
in the aggregate, are not reasonably likely to have a Material Adverse Effect:
(i) Parent has, to the knowledge of Parent, complied with all applicable
Environmental Laws; (ii) Parent has not received any notice, demand, letter,
claim or request for information alleging that Parent may be in violation of or
liable under any Environmental Law; and (iii) Parent is not subject to any
orders, decrees, injunctions or other arrangements with any Governmental Entity
or subject to any indemnity or other agreement with any third party relating to
liability under any Environmental Law.
3.17 Brokers. Parent has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or agent's commissions
or any similar charges in connection with this Agreement or any transaction
contemplated hereby.
3.18 Intellectual Property. Parent does not own, license or otherwise have
any right, title or interest in any Intellectual Property or Registered
Intellectual Property.
3.19 Agreements, Contracts and Commitments.
(a) Except as set forth in the Parent SEC Reports filed prior to the
date of this Agreement, there are no contracts, agreements, leases,
mortgages, indentures, notes, bonds, liens, license, permit, franchise,
purchase orders, sales orders or other understandings, commitments or
obligations (including without limitation outstanding offers or proposals)
of any kind, whether written or oral, to which Parent is a party or by or
to which any of the properties or assets of Parent may be bound, subject
or affected, which either (a) creates or imposes a liability greater than
$25,000, or (b) may not be cancelled by Parent on less than 30 days' or
less prior notice ("Parent Contracts"). All Parent Contracts are set forth
in Schedule 3.19 other than those that are exhibits to the Parent SEC
Reports.
(b) Each Parent Contract was entered into at arms' length and in the
ordinary course, is in full force and effect and is valid and binding upon
and enforceable against each of the parties thereto. True, correct and
complete copies of all Parent Contracts (or written summaries in the case
of oral Parent Contracts) and of all outstanding offers or proposals of
Parent have been heretofore delivered to the Company.
(c) Neither Parent nor, to the knowledge of Parent, any other party
thereto is in breach of or in default under, and no event has occurred
which with notice or lapse of time or both would become a breach of or
default under, any Parent Contract, and no party to any Parent Contract
has given any written notice of any claim of any such breach, default or
event, which, individually or in the aggregate, are reasonably likely to
have a Material Adverse Effect on Parent. Each agreement, contract or
commitment to which Parent is a party or by which it is bound that has not
expired by its terms is in full
A-32
force and effect, except where such failure to be in full force and effect
is not reasonably likely to have a Material Adverse Effect on Parent.
3.20 Insurance. Except for directors' and officers' liability insurance,
Parent does not maintain any Insurance Policies.
3.21 Interested Party Transactions. Except as set forth in the Parent SEC
Reports filed prior to the date of this Agreement, no employee, officer,
director or stockholder of Parent or a member of his or her immediate family is
indebted to Parent nor is Parent indebted (or committed to make loans or extend
or guarantee credit) to any of them, other than reimbursement for reasonable
expenses incurred on behalf of Parent. To Parent's knowledge, none of such
individuals has any direct or indirect ownership interest in any Person with
whom Parent is affiliated or with whom Parent has a material contractual
relationship, or any Person that competes with Parent, except that each
employee, stockholder, officer or director of Parent and members of their
respective immediate families may own less than 5% of the outstanding stock in
publicly traded companies that may compete with Parent. To Parent's knowledge,
no officer, director or stockholder or any member of their immediate families
is, directly or indirectly, interested in any material contract with Parent
(other than such contracts as relate to any such individual ownership of capital
stock or other securities of Parent).
3.22 Indebtedness. Parent has no indebtedness for borrowed money.
3.23 Over-the-Counter Bulletin Board Quotation. Parent Common Stock is
quoted on the Over-the-Counter Bulletin Board ("OTC BB"). There is no action or
proceeding pending or, to Parent's knowledge, threatened against Parent by
NASDAQ or NASD, Inc. ("NASD") with respect to any intention by such entities to
prohibit or terminate the quotation of Parent Common Stock on the OTC BB.
3.24 Board Approval. The Board of Directors of Parent (including any
required committee or subgroup of the Board of Directors of Parent) has, as of
the date of this Agreement, unanimously (i) declared the advisability of the
Merger and approved this Agreement and the transactions contemplated hereby,
(ii) determined that the Merger is in the best interests of the stockholders of
Parent, and (iii) determined that the fair market value of the Company is equal
to at least 80% of Parent's net assets.
3.25 Trust Fund. As of the date hereof and at the Closing Date, Parent has
and will have no less than $33,600,000 invested in United States Government
securities in a trust account administered by Continental Stock Transfer and
Trust Company (the "Trust Fund"), less such amounts, if any, as Parent is
required to pay to stockholders who elect to have their shares converted to cash
in accordance with the provisions of Parent's Charter Documents.
3.26 Governmental Filings. Except as set forth in Schedule 3.26, Parent
has been granted and holds, and has made, all Governmental Actions/Filings
necessary to the conduct by Parent of its business (as presently conducted) or
used or held for use by Parent, and true, complete and correct copies of which
have heretofore been delivered to the Company. Each such Governmental
Action/Filing is in full force and effect and, except as disclosed in
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Schedule 3.26, will not expire prior to December 31, 2006, and Parent is in
compliance with all of its obligations with respect thereto. No event has
occurred and is continuing which requires or permits, or after notice or lapse
of time or both would require or permit, and consummation of the transactions
contemplated by this Agreement or any ancillary documents will not require or
permit (with or without notice or lapse of time, or both), any modification or
termination of any such Governmental Actions/Filings except such events which,
either individually or in the aggregate, would not have a Material Adverse
Effect upon Parent.
3.27 Representations and Warranties Complete. The representations and
warranties of Parent included in this Agreement and any list, statement,
document or information set forth in, or attached to, any Schedule provided
pursuant to this Agreement or delivered hereunder, are true and complete in all
material respects and do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading, under the circumstance under
which they were made.
3.28 Survival of Representations and Warranties. The representations and
warranties of Parent set forth in this Agreement shall not survive the Closing.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by Company and Parent. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement pursuant to its terms or the Closing, each of the Company, Parent
and Merger Sub shall, except to the extent that the other party shall otherwise
consent in writing, carry on its business in the usual, regular and ordinary
course consistent with past practices, in substantially the same manner as
heretofore conducted and in compliance with all applicable laws and regulations
(except where noncompliance would not have a Material Adverse Effect), pay its
debts and taxes when due subject to good faith disputes over such debts or
taxes, pay or perform other material obligations when due, and use its
commercially reasonable efforts consistent with past practices and policies to
(i) preserve substantially intact its present business organization, (ii) keep
available the services of its present officers and employees and (iii) preserve
its relationships with customers, suppliers, distributors, licensors, licensees,
and others with which it has significant business dealings. In addition, except
as required or permitted by the terms of this Agreement or set forth in Schedule
4.1 hereto, without the prior written consent of the other party, during the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement pursuant to its terms or the Closing, each of the
Company, Parent and Merger Sub shall not do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or (except
as specifically provided for herein) change the period of exercisability
of options or restricted stock, or reprice options granted under any
employee, consultant, director or other stock plans or authorize cash
payments in exchange for any options granted under any of such plans;
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(b) Grant any severance or termination pay to any officer or
employee except pursuant to applicable law, written agreements
outstanding, or policies existing on the date hereof and as previously or
concurrently disclosed in writing or made available to the other party, or
adopt any new severance plan, or amend or modify or alter in any manner
any severance plan, agreement or arrangement existing on the date hereof;
(c) Transfer or license to any person or otherwise extend, amend or
modify any material rights to any Intellectual Property of the Company or
Parent, as applicable, or enter into grants to transfer or license to any
person future patent rights, other than in the ordinary course of business
consistent with past practices provided that in no event shall the Company
or Parent license on an exclusive basis or sell any Intellectual Property
of the Company, or Parent as applicable;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly,
any shares of capital stock of the Company and Parent, as applicable,
including repurchases of unvested shares at cost in connection with the
termination of the relationship with any employee or consultant pursuant
to stock option or purchase agreements in effect on the date hereof;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber,
or agree to any of the foregoing with respect to, any shares of capital
stock or any securities convertible into or exchangeable for shares of
capital stock, or subscriptions, rights, warrants or options to acquire
any shares of capital stock or any securities convertible into or
exchangeable for shares of capital stock, or enter into other agreements
or commitments of any character obligating it to issue any such shares or
convertible or exchangeable securities;
(g) Amend its Charter Documents;
(h) Except for routine acquisitions of oil and gas leases and
related properties in the ordinary course of business, acquire or agree to
acquire by merging or consolidating with, or by purchasing any equity
interest in or a portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets which are material, individually or in the aggregate, to the
business of Parent or the Company as applicable, or enter into any joint
ventures, strategic partnerships or alliances or other arrangements that
provide for exclusivity of territory or otherwise restrict such party's
ability to compete or to offer or sell any products or services;
(i) Sell, lease, license, encumber or otherwise dispose of any
properties or assets, except (A) sales of services and licenses of
software in the ordinary course of
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business consistent with past practice, (B) sales of inventory in the
ordinary course of business consistent with past practice, (C) the sale,
lease or disposition (other than through licensing) of property or assets
that are not material, individually or in the aggregate, to the business
of such party and (D) routine dispositions of oil and gas leases and
related properties in the ordinary course of business;
(j) Except with respect to advances under (i) the Company's existing
senior secured credit facility, or (ii) any overline facility obtained for
the specific purpose of funding margin calls to secure the Company's
hedging obligations, or (iii) any senior secured credit facility that
replaces the Company's existing senior secured credit facility, incur any
indebtedness for borrowed money in excess of $25,000 in the aggregate
(other than purchase money debt in connection with the acquisition by the
Company of vehicles, office equipment and operating equipment not
exceeding $500,000 in the aggregate) or guarantee any such indebtedness of
another person, issue or sell any debt securities or options, warrants,
calls or other rights to acquire any debt securities of Parent or the
Company, as applicable, enter into any "keep well" or other agreement to
maintain any financial statement condition or enter into any arrangement
having the economic effect of any of the foregoing;
(k) Adopt or amend any employee benefit plan, policy or arrangement,
any employee stock purchase or employee stock option plan, or enter into
any employment contract or collective bargaining agreement (other than
offer letters and letter agreements entered into in the ordinary course of
business consistent with past practice with employees who are terminable
"at will"), pay any special bonus or special remuneration to any director
or employee, or increase the salaries or wage rates or fringe benefits
(including rights to severance or indemnification) of its directors,
officers, employees or consultants, except in the ordinary course of
business consistent with past practices;
(l) Pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), or litigation (whether or not commenced prior to the date of
this Agreement) other than the payment, discharge, settlement or
satisfaction, in the ordinary course of business consistent with past
practices or in accordance with their terms, or liabilities recognized or
disclosed in the Unaudited Financial Statements or in the most recent
financial statements included in the Parent SEC Reports filed prior to the
date of this Agreement, as applicable, or incurred since the date of such
financial statements, or waive the benefits of, agree to modify in any
manner, terminate, release any person from or knowingly fail to enforce
any confidentiality or similar agreement to which the Company is a party
or of which the Company is a beneficiary or to which Parent is a party or
of which Parent is a beneficiary, as applicable;
(m) Except in the ordinary course of business consistent with past
practices, modify, amend or terminate any Material Company Contract or
Parent Contract, as applicable, or waive, delay the exercise of, release
or assign any material rights or claims thereunder;
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(n) Except as required by U.S. GAAP, revalue any of its assets or
make any change in accounting methods, principles or practices;
(o) Except in the ordinary course of business consistent with past
practices, incur or enter into any agreement, contract or commitment
requiring such party to pay in excess of $100,000 in any 12 month period,
other than the Company under a Routine Operating Contract;
(p) Engage in any action that could reasonably be expected to cause
the Merger to fail to qualify as a "reorganization" under Section 368(a)
of the Code;
(q) Make or rescind any Tax elections that, individually or in the
aggregate, could be reasonably likely to adversely affect in any material
respect the Tax liability or Tax attributes of such party, settle or
compromise any material income tax liability or, except as required by
applicable law, materially change any method of accounting for Tax
purposes or prepare or file any Return in a manner inconsistent with past
practice;
(r) Form, establish or acquire any subsidiary except as contemplated
by this Agreement;
(s) Permit any Person to exercise any of its discretionary rights
under any Plan to provide for the automatic acceleration of any
outstanding options, the termination of any outstanding repurchase rights
or the termination of any cancellation rights issued pursuant to such
plans;
(t) Make capital expenditures except in accordance with prudent
business and operational practices consistent with prior practice;
(u) Make or omit to take any action which would be reasonably
anticipated to have a Material Adverse Effect;
(v) Enter into any transaction with or distribute or advance any
assets or property to any of its officers, directors, partners,
stockholders or other affiliates; or
(w) Agree in writing or otherwise agree, commit or resolve to take
any of the actions described in Section 4.1 (a) through (v) above.
4.2 Examination of Title and Access. Parent may make or cause to be made
at its expense such examination as it may desire of the title of the Company to
any Mineral Property or Owned Real Property (collectively, the "Titled
Properties" and, individually, a "Titled Property"). For such purposes, the
Company shall (a) give to Parent and to the employees, consultants, independent
contractors, attorneys and other advisers of Parent full access at any
reasonable time to all of the files, records, contracts, correspondence,
computer output and data files, maps, data, reports, plats, abstracts of title,
lease files, well files, unit files, division order files, production marketing
files, title opinions, title files and title records, ownership maps, surveys
and any other information, data, records and files which the Company may
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have (or have access to) relating in any way to the title to the Titled
Properties, the past or present operation thereof and the marketing of
production therefrom; (b) furnish to Parent all other information in the
possession of or available to the Company with respect to the title to the
Titled Properties as Parent may from time to time reasonably request; and (c)
authorize Parent and its representatives to consult with attorneys, abstract
companies and other consultants or independent contractors of the Company,
whether utilized in the past or presently, concerning title-related matters with
respect to the Titled Properties.
4.3 Environmental Review.
(a) Environmental Review. Insofar as the Company has the power and
authority to grant such right, Parent and its employees, agents and
contractors shall have the right, at the sole risk and expense of Parent,
but with the cooperation and assistance of the Company, to:
(i) enter all or any portion of the Mineral Properties, the
Owned Real Properties or the Leased Real Properties (collectively,
the "Environmental Properties" and, individually, an "Environmental
Property") to inspect, inventory, test, investigate, study and
examine the Properties in any manner Parent reasonably determines to
be warranted and to verify the accuracy of the representations made
in Section 2.16;
(ii) conduct air, water or soil tests on the Environmental
Properties and make such samples and borings and analysis as Parent
may consider necessary or appropriate for such purposes.
(iii) conduct such other independent inspections, inventories,
tests, investigations, studies or examinations as may be necessary
or appropriate in the sole judgment of Parent for the preparation of
health, safety, environmental or other reports or assessments
relating to the operation, use, maintenance, condition or status of
the Environmental Properties, and their compliance with all
applicable Laws, regulations, ordinances, orders, permits and
licenses; and
(iv) conduct an independent assessment of the extent of any
possible existing or contingent liabilities due or related to the
operation, use, maintenance, condition or status of the
Environmental Properties.
(b) Conduct of Review. All inspections and reviews shall be
undertaken with a minimum of disruption to ongoing operations and shall be
undertaken only after reasonable notice to the Company. Parent shall not
undertake any destructive testing without the prior approval of the
Company, which approval will not be unreasonably withheld. Parent shall
provide the Company with a copy of the results and reports of all such
inspections, testing and reviews.
(c) Conditions of Access. Access to the Environmental Properties to
conduct Parent's environmental assessment shall be subject to the
following conditions: Parent
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waives and releases all claims against the Company, its owners, directors,
officers, employees, agents and contractors, for injury to or death of
persons or damage to property arising in any way from the exercise of
rights granted to Parent hereby or the activities of Parent or its
employees, agents, consultants or contractors on the Environmental
Properties, provided that Parent does not hereby assume the risk of
damage, injury or death attributable to the willful misconduct or gross
negligence of the Company or its employees, agents or contractors. Parent
shall indemnify the Company and its owners, directors, officers,
employees, agents and contractors, and shall hold each and all of said
indemnities harmless from and against any and all loss whatsoever arising
out of: (i) any and all statutory or common law liens or other
encumbrances for labor or materials furnished in connection with such
tests, samplings, studies or surveys as Parent may conduct with respect to
the Environmental Properties; and (ii) any injury to or death of persons
or damage to property occurring in, on or about the Environmental
Properties as a result of such exercise or activities (except for any such
injuries or damages caused by the gross negligence or willful misconduct
of any said indemnitees). Notwithstanding any provision of this Agreement
to the contrary, the foregoing obligation of indemnity shall survive the
Closing or the termination of this Agreement without Closing.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement; Special Meeting.
(a) As soon as is reasonably practicable after receipt by Parent
from the Company of all financial and other information relating to the
Company as Parent may reasonably request for its preparation, Parent shall
prepare and file with the SEC under the Exchange Act, and with all other
applicable regulatory bodies, proxy materials for the purpose of
soliciting proxies from holders of Parent Common Stock to vote in favor
of,: (i) the adoption of this Agreement and the approval of the Merger
("Parent Stockholder Approval"); (ii) the change of the name of Parent to
a name selected by the Company (the "Name Change Amendment"); (iii) an
increase in the number of authorized shares of Parent Common Stock to
100,000,000 (the "Capitalization Amendment"); (iv) an amendment to remove
the preamble and Sections A through D, inclusive, of Article Sixth from
Parent's Certificate of Incorporation from and after the Closing and to
redesignate section E of Article Sixth as Article Sixth; and (v) the
adoption of a Performance Equity Plan in the form attached hereto as
Exhibit F (the "Parent Plan"), at a meeting of holders of Parent Common
Stock to be called and held for such purpose (the "Special Meeting"). The
Parent Plan shall provide that an aggregate of 2,400,000 shares of Parent
Common Stock shall be reserved for issuance pursuant to the Parent Plan.
Such proxy materials shall be in the form of a proxy statement to be used
for the purpose of soliciting such proxies from holders of Parent Common
Stock (the "Proxy Statement"). The Company shall furnish to Parent all
information concerning the Company as Parent may reasonably request in
connection with the preparation of the Proxy Statement. The Company and
its counsel shall be given an opportunity to review and comment on the
Proxy Statement prior to its filing with the SEC. Parent, with the
assistance of the Company, shall
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promptly respond to any SEC comments on the Proxy Statement and shall
otherwise use reasonable best efforts to cause the Proxy Statement to be
approved for issuance by the SEC as promptly as practicable. Parent shall
also take any and all such actions to satisfy the requirements of the
Securities Act and the Exchange Act. Prior to the Closing Date, Parent
shall use its reasonable best efforts to cause the shares of Parent Common
Stock to be issued pursuant to the Merger to be registered or qualified
under all applicable Blue Sky Laws of each of the states and territories
of the United States in which it is believed, based on information
furnished by the Company, holders of the Company Common Stock reside and
to take any other such actions that may be necessary to enable the Parent
Common Stock to be issued pursuant to the Merger in each such
jurisdiction.
(b) As soon as practicable following its approval by the Commission,
Parent shall distribute the Proxy Statement to the holders of Parent
Common Stock and, pursuant thereto, shall call the Special Meeting in
accordance with the DGCL and, subject to the other provisions of this
Agreement, solicit proxies from such holders to vote in favor of the
adoption of this Agreement and the approval of the Merger and the other
matters presented to the stockholders of Parent for approval or adoption
at the Special Meeting, including, without limitation, the matters
described Section 5.1(a).
(c) Parent shall comply with all applicable provisions of and rules
under the Exchange Act and all applicable provisions of the DGCL in the
preparation, filing and distribution of the Proxy Statement, the
solicitation of proxies thereunder, and the calling and holding of the
Special Meeting. Without limiting the foregoing, Parent shall ensure that
the Proxy Statement does not, as of the date on which it is distributed to
the holders of Parent Common Stock, and as of the date of the Special
Meeting, contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading (provided
that Parent shall not be responsible for the accuracy or completeness of
any information relating to the Company or any other information furnished
by the Company for inclusion in the Proxy Statement). The Company
represents and warrants that the information relating to the Company
supplied by the Company for inclusion in the Proxy Statement will not as
of date of its distribution to the holders of Parent Common Stock (or any
amendment or supplement thereto) or at the time of the Special Meeting
contain any statement which, at such time and in light of the
circumstances under which it is made, is false or misleading with respect
to any material fact, or omits to state any material fact required to be
stated therein or necessary in order to make the statement therein not
false or misleading.
(d) Parent, acting through its board of directors, shall include in
the Proxy Statement the recommendation of its board of directors that the
holders of Parent Common Stock vote in favor of the adoption of this
Agreement and the approval of the Merger, and shall otherwise use
reasonable best efforts to obtain the Parent Stockholder Approval.
5.2 Directors and Officers of Parent and the Company and the Subsidiaries
After Merger. Parent and the Company shall take all necessary action so that the
persons listed on
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Schedule 5.2 are elected to the positions of officers and directors of Parent
and the Company, as set forth therein, to serve in such positions effective
immediately after the Closing. The Stockholders and directors of the Company and
the directors of Parent shall enter into a Voting Agreement in the form of
Exhibit G hereto concurrently with the execution of this Agreement. At his
election, Lawrence S. Coben may attend, as an observer, any and all meetings of
the Board of Directors of Parent during any period prior to the third
anniversary of the Closing Date in which he is not a director of Parent. During
such period, Mr. Coben shall be given notice of all meetings of the Board of
Directors of Parent in the same manner and at the same time as notice thereof is
given to the members of the Board of Directors, shall be provided with copies of
all materials that are provided to the members of the Board of Directors in
connection with any meeting and shall be reimbursed for his out-of-pocket
expenses incurred in attending any meeting.
5.3 Adverse Title or Environmental Conditions.
(a) If on or prior to the Notice Date (as hereinafter defined),
Parent determines (i) that the Company does not have title to any Titled
Property as represented and warranted by the Company in Article II, or
(ii) that the environmental condition of any Environmental Property is not
as warranted in Article II, each, an "Adverse Condition" and collectively,
"Adverse Conditions"), then Parent shall give written notice thereof to
the Company not later than January 3, 2006 (the "Notice Date"). Each such
notice shall include, with respect to each Property covered thereby (x) a
brief description of each Adverse Condition existing with respect to such
Property, (y) a statement of the action required to cure each such Adverse
Condition; and (z) a statement and calculation of the proposed adjustment
to the Merger consideration to be received by the Stockholders (the
"Merger Consideration") by reason of the existence of each such Adverse
Condition (an "Adjustment"). Each Adjustment shall be the sum of (I) the
estimated diminution in value of such Property by reason of the existence
of such Adverse Condition, and (II) without duplication of the foregoing,
the estimated potential liability for cure or remediation of such Adverse
Condition, with the amounts determined at (I) and (II) to be estimated in
good faith by Parent, with the bases therefor set out in the notice.
Parent shall be deemed to have waived any inaccuracy of representation or
breach of warranty constituting an Adverse Condition with respect to the
Titled Properties and Environmental Properties except to the extent set
out in a notice substantially in the form described above, given on or
prior to the Notice Date. The Company may, but shall have no obligation
to, attempt to cure any Adverse Conditions of which notice is timely and
properly given by Parent. As used in this Agreement, the term "Property"
shall include any and all Titled Properties and Environmental Properties.
(b) Notwithstanding the foregoing: (i) in no event may Parent give
notice of Adverse Conditions existing with respect to any particular
Property unless the sum of all Adjustments with respect to such Property
exceed $25,000 (the "Property Threshold"), provided, however, that in the
event the same or substantially the same circumstances constituting a
particular Adverse Condition affect 100 or more of the wells located on
the Mineral Properties, the Property Threshold with respect to the
Properties on which such wells are located shall be $1,000 with respect,
only, to such Adverse Condition; and (ii)
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in no event may Parent give any notice of Adverse Conditions unless the
sum if all Adjustments with respect to all of the Properties of which
notice is timely and properly given exceed $500,000 (the "Aggregate
Threshold"). In the event some or all of the Adverse Conditions affecting
any Property and specified in any notice timely and properly given by
Parent are cured prior to the Cure Date (as hereinafter defined), and as a
result of such cure the Adjustments attributable to any remaining uncured
Adverse Conditions specified in the notice given with respect to such
Property do not satisfy the Property Threshold, then such uncured Adverse
Conditions shall be deemed waived. In the event some or all of the Adverse
Conditions affecting the Properties and specified in notices timely and
properly given by Parent are cured prior to the Cure Date, and as a result
of such cure the Adjustments attributable to any remaining uncured Adverse
Conditions specified in notices given with respect to all the Properties
do not satisfy the Aggregate Threshold, then all of such uncured Adverse
Conditions shall be deemed waived.
5.4 Adjustments for Uncured Adverse Conditions; Condemnation or Casualty.
(a) If all of the Adverse Conditions of which notice has been timely
and properly given by Parent have not been cured to the reasonable
satisfaction of Parent, or waived by Parent, on or prior to January 31,
2006 (the "Cure Date"), then Parent and the Company shall in good faith
attempt to determine (i) whether in fact the Adverse Conditions exist, and
if so, (ii) whether in fact the Adjustment proposed by Parent with respect
to each Adverse Condition is reasonable and accurate, and if both (i) and
(ii) are determined in the affirmative, (iii) an appropriate aggregate
Adjustment by reason of the existence of such Adverse Conditions, with the
understanding that any such Adjustment shall be made solely with respect
to the Parent Common Stock portion of the Merger Consideration to the
extent such Adjustment will not impair the tax-exempt treatment of the
Parent Common Stock portion of the Merger Consideration received by the
Stockholders in the Merger. In the event Parent and the Company are able
to agree on an appropriate Adjustment to the Merger Consideration by
reason of such Adverse Conditions, the Merger Consideration will be
adjusted accordingly at Closing. In the event Parent and the Company are
unable to agree on an appropriate Adjustment to the Merger Consideration
by reason of such Adverse Conditions, then Parent and the Company shall
postpone the Closing for a period of up to thirty (30) days, during which
period the parties shall meet or confer regularly (not less than once each
week) and with their respective experts in a good faith effort to resolve
their differences. If at the conclusion of such thirty (30) day period the
parties still are unable to agree, then either Parent or the Company may,
by written notice to the other, terminate this Agreement, in which event
such termination shall be deemed to be by mutual agreement of the parties.
(b) Except as otherwise hereinafter provided, the parties'
obligation to proceed with the Closing shall not be excused and no
adjustment to the Merger Consideration shall be required if, after the
execution of this Agreement and prior to the Closing Date, any item of the
Properties is damaged or destroyed by fire or other casualty or is taken
under the right of eminent domain. Prior to the Closing Date, the Company
shall not voluntarily compromise, settle or adjust any claims, causes of
action or demands against third parties,
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arising out of such damage, destruction or taking, or commit, use or apply
any insurance proceeds or payments toward the repair, restoration or
replacement of the affected property without the prior written consent of
Parent. In the event Properties are damaged or destroyed by fire or other
casualty or are taken under the right of eminent domain and as a result
thereof the value of the Properties is, in Parent's good faith judgment,
reduced by an amount exceeding $1,000,000 (net of insurance proceeds),
then Parent may terminate this Agreement in its entirety without liability
to either party.
5.5 Other Actions.
(a) At least five (5) days prior to Closing, Parent shall prepare a
draft Form 8-K announcing the Closing, together with, or incorporating by
reference, the financial statements prepared by the Company and its
accountant, and such other information that may be required to be
disclosed with respect to the Merger in any report or form to be filed
with the SEC ("Merger Form 8-K"), which shall be in a form reasonably
acceptable to the Company and in a format acceptable for EDGAR filing.
Prior to Closing, Parent and the Company shall prepare the press release
announcing the consummation of the Merger hereunder ("Press Release").
Simultaneously with the Closing, Parent shall file the Merger Form 8-K
with the SEC and distribute the Press Release.
(b) The Company and Parent shall further cooperate with each other
and use their respective reasonable best efforts to take or cause to be
taken all actions, and do or cause to be done all things, necessary,
proper or advisable on its part under this Agreement and applicable laws
to consummate the Merger and the other transactions contemplated hereby as
soon as practicable, including preparing and filing as soon as practicable
all documentation to effect all necessary notices, reports and other
filings and to obtain as soon as practicable all consents, registrations,
approvals, permits and authorizations necessary or advisable to be
obtained from any third party (including the respective independent
accountants of the Company and Parent) and/or any Governmental Entity in
order to consummate the Merger or any of the other transactions
contemplated hereby. This obligation shall include, on the part of Parent,
sending a termination letter to Continental Stock Transfer and Trust
Company ("Continental") in substantially the form of Exhibit A attached to
the Investment Management Trust Agreement by and between Parent and
Continental dated as of May 12, 2004. Subject to applicable laws relating
to the exchange of information and the preservation of any applicable
attorney-client privilege, work-product doctrine, self-audit privilege or
other similar privilege, each of the Company and Parent shall have the
right to review and comment on in advance, and to the extent practicable
each will consult the other on, all the information relating to such party
that appears in any filing made with, or written materials submitted to,
any third party and/or any Governmental Entity in connection with the
Merger and the other transactions contemplated hereby. In exercising the
foregoing right, each of the Company and Parent shall act reasonably and
as promptly as practicable.
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5.6 Required Information. In connection with the preparation of the Merger
Form 8-K and Press Release, and for such other reasonable purposes, the Company
and Parent each shall, upon request by the other, furnish the other with all
information concerning themselves, their respective directors, officers and
stockholders (including the directors of Parent and the Company to be elected
effective as of the Closing pursuant to Section 5.2 hereof) and such other
matters as may be reasonably necessary or advisable in connection with the
Merger, or any other statement, filing, notice or application made by or on
behalf of the Company and Parent to any third party and/or any Governmental
Entity in connection with the Merger and the other transactions contemplated
hereby. Each party warrants and represents to the other party that all such
information shall be true and correct in all material respects and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
5.7 Confidentiality; Access to Information.
(a) Confidentiality. Any confidentiality agreement previously
executed by the parties shall be superseded in its entirety by the
provisions of this Agreement. Each party agrees to maintain in confidence
any non-public information received from the other party, and to use such
non-public information only for purposes of consummating the transactions
contemplated by this Agreement. Such confidentiality obligations will not
apply to (i) information which was known to the one party or their
respective agents prior to receipt from the other party; (ii) information
which is or becomes generally known; (iii) information acquired by a party
or their respective agents from a third party who was not bound to an
obligation of confidentiality; and (iv) disclosure required by law. In the
event this Agreement is terminated as provided in Article VIII hereof,
each party (i) will return or cause to be returned to the other all
documents and other material obtained from the other in connection with
the Merger contemplated hereby, and (ii) will use its reasonable best
efforts to delete from its computer systems all documents and other
material obtained from the other in connection with the Merger
contemplated hereby.
(b) Access to Information.
(i) Company will afford Parent and its financial advisors,
accountants, counsel and other representatives reasonable access
during normal business hours, upon reasonable notice, to the
properties, books, records and personnel of the Company during the
period prior to the Closing to obtain all information concerning the
business, including the status of product development efforts,
properties, results of operations and personnel of the Company, as
Parent may reasonably request. No information or knowledge obtained
by Parent in any investigation pursuant to this Section 5.7 will
affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the parties
to consummate the Merger.
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(ii) Parent will afford the Company and its financial
advisors, underwriters, accountants, counsel and other
representatives reasonable access during normal business hours, upon
reasonable notice, to the properties, books, records and personnel
of Parent during the period prior to the Closing to obtain all
information concerning the business, including the status of product
development efforts, properties, results of operations and personnel
of Parent, as the Company may reasonably request. No information or
knowledge obtained by the Company in any investigation pursuant to
this Section 5.7 will affect or be deemed to modify any
representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
(iii) Notwithstanding anything to the contrary contained
herein, each party ("Subject Party") hereby agrees that by
proceeding with the Closing, it shall be conclusively deemed to have
waived for all purposes hereunder any inaccuracy of representation
or breach of warranty by another party which is actually known by
the Subject Party prior to the Closing.
5.8 Charter Protections; Directors' and Officers' Liability Insurance.
(a) All rights to indemnification for acts or omissions occurring
through the Closing Date now existing in favor of the current directors
and officers of Parent as provided in the Charter Documents of Parent or
in any indemnification agreements shall survive the Merger and shall
continue in full force and effect in accordance with their terms.
(b) For a period of six (6) years after the Closing Date, Parent
shall cause to be maintained in effect the current policies of directors'
and officers' liability insurance maintained by Parent (or policies of at
least the same coverage and amounts containing terms and conditions which
are no less advantageous) with respect to claims arising from facts and
events that occurred prior to the Closing Date.
(c) If Parent or any of its successors or assigns (i) consolidates
with or merges into any other Person and shall not be the continuing or
surviving entity of such consolidation or merger, or (ii) transfers or
conveys all or substantially all of its properties and assets to any
Person, then, in each such case, to the extent necessary, proper provision
shall be made so that the successors and assigns of Parent assume the
obligations set forth in this Section 5.8.
(d) The provisions of this Section 5.8 are intended to be for the
benefit of, and shall be enforceable by, each Person who will have been a
director or officer of Parent for all periods ending on or before the
Closing Date and may not be changed without the consent of Committee
referred to in Section 1.16(a).
5.9 Public Disclosure. From the date of this Agreement until Closing or
termination, the parties shall cooperate in good faith to jointly prepare all
press releases and public announcements pertaining to this Agreement and the
transactions governed by it, and no party
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shall issue or otherwise make any public announcement or communication
pertaining to this Agreement or the transaction without the prior consent of
Parent (in the case of the Company and the Stockholders) or the Company (in the
case of Parent), except as required by any legal requirement or by the rules and
regulations of, or pursuant to any agreement of a stock exchange or trading
system. Each party will not unreasonably withhold approval from the others with
respect to any press release or public announcement. If any party determines
with the advice of counsel that it is required to make this Agreement and the
terms of the transaction public or otherwise issue a press release or make
public disclosure with respect thereto, it shall, at a reasonable time before
making any public disclosure, consult with the other party regarding such
disclosure, seek such confidential treatment for such terms or portions of this
Agreement or the transaction as may be reasonably requested by the other party
and disclose only such information as is legally compelled to be disclosed. This
provision will not apply to communications by any party to its counsel,
accountants and other professional advisors. Notwithstanding the foregoing, the
parties hereto agree that promptly as practicable after the execution of this
Agreement, Parent will file with the SEC a Current Report on Form 8-K pursuant
to the Exchange Act to report the execution of this Agreement, with respect to
which Parent shall consult with the Company. Unless objected to by the Company
by written notice given to Parent within five (5) days after such filing
specifying the language to which objection is taken, any language included in
such Current Report shall be deemed to have been approved by the Company and may
be used in other filings made by Parent with the SEC.
5.10 Reasonable Efforts. Upon the terms and subject to the conditions set
forth in this Agreement, each of the parties agrees to use its commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with the other parties in doing,
all things necessary, proper or advisable to consummate and make effective, in
the most expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including using commercially reasonable efforts
to accomplish the following: (i) the taking of all reasonable acts necessary to
cause the conditions precedent set forth in Article VI to be satisfied, (ii) the
obtaining of all necessary actions, waivers, consents, approvals, orders and
authorizations from Governmental Entities and the making of all necessary
registrations, declarations and filings (including registrations, declarations
and filings with Governmental Entities, if any) and the taking of all reasonable
steps as may be necessary to avoid any suit, claim, action, investigation or
proceeding by any Governmental Entity, (iii) the obtaining of all consents,
approvals or waivers from third parties required as a result of the transactions
contemplated in this Agreement, including without limitation the consents
referred to in Schedule 2.5 of the Company Disclosure Schedule, (iv) the
defending of any suits, claims, actions, investigations or proceedings, whether
judicial or administrative, challenging this Agreement or the consummation of
the transactions contemplated hereby, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed and (v) the execution or delivery of any additional
instruments reasonably necessary to consummate the transactions contemplated by,
and to fully carry out the purposes of, this Agreement. In connection with and
without limiting the foregoing, Parent and its board of directors and the
Company and its board of directors shall, if any state takeover statute or
similar statute or regulation is or becomes applicable to the Merger, this
Agreement or any of the transactions contemplated by this Agreement, use its
commercially reasonable efforts to enable the Merger and the other transactions
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contemplated by this Agreement to be consummated as promptly as practicable on
the terms contemplated by this Agreement. Notwithstanding anything herein to the
contrary, nothing in this Agreement shall be deemed to require Parent or the
Company to agree to any divestiture by itself or any of its affiliates of shares
of capital stock or of any business, assets or property, or the imposition of
any material limitation on the ability of any of them to conduct their business
or to own or exercise control of such assets, properties and stock.
5.11 Treatment as a Reorganization. Neither Parent nor the Company nor
Stockholders shall take any action prior to or following the Merger that could
reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" within the meaning of Section 368(a) of the Code.
5.12 No Parent Common Stock Transactions. Each officer, director and
Stockholder (including, for this purpose, C. David Stinson) of the Company shall
agree that he or it shall not, prior to the day that is one (1) year after the
Closing, sell, transfer or otherwise dispose of an interest in any of the shares
of Parent Common Stock he or it receives as a result of the Merger other than as
permitted pursuant to the Lock-Up Letter in the form of Exhibit H hereto
executed by such Person concurrently with the execution of this Agreement.
5.13 Certain Claims. As additional consideration for the issuance of
Parent Common Stock pursuant to this Agreement, each of the Stockholders hereby
releases and forever discharges, effective as of the Closing Date, the Company
and its directors, officers, employees and agents, from any and all rights,
claims, demands, judgments, obligations, liabilities and damages, whether
accrued or unaccrued, asserted or unasserted, and whether known or unknown
arising out of or resulting from such Stockholder's (i) status as a holder of an
equity interest in the Company; and (ii) employment, service, consulting or
other similar agreement entered into with the Company prior to Closing, to the
extent that the bases for claims under any such agreement that survives the
Closing arise prior to the Closing, provided, however, the foregoing shall not
release any obligations of Parent set forth in this Agreement.
5.14 No Securities Transactions. Neither the Company nor any Stockholder
or any of their affiliates, directly or indirectly, shall engage in any
transactions involving the securities of Parent prior to the time of the making
of a public announcement of the transactions contemplated by this Agreement. The
Company shall use its reasonable best efforts to require each of its officers,
directors, employees, agents and representatives to comply with the foregoing
requirement.
5.15 No Claim Against Trust Fund. The Company and the Stockholders
acknowledge that, if the transactions contemplated by this Agreement, or a
similar transaction, are not consummated by Parent by May 18, 2006, Parent will
be obligated to return to its stockholders the amounts being held in the Trust
Fund. Accordingly, the Company and the Stockholders hereby waive all rights
against Parent to collect from the Trust Fund any moneys that may be owed to
them by Parent for any reason whatsoever, including but not limited to a breach
of
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this Agreement by Parent or any negotiations, agreements or understandings with
Parent, and will not seek recourse against the Trust Fund for any reason
whatsoever.
5.16 Disclosure of Certain Matters. Each of Parent and the Company will
provide the other with prompt written notice of any event, development or
condition that (a) would cause any of such party's representations and
warranties to become untrue or misleading or which may affect its ability to
consummate the transactions contemplated by this Agreement, (b) had it existed
or been known on the date hereof would have been required to be disclosed under
this Agreement, (c) gives such party any reason to believe that any of the
conditions set forth in Article VI will not be satisfied, (d) is of a nature
that is or may be materially adverse to the operations, prospects or condition
(financial or otherwise) of Parent or the Company, or (e) would require any
amendment or supplement to the Proxy Statement. The parties shall have the
obligation to supplement or amend the Company Schedules and Parent Schedules
(the "Disclosure Schedules") being delivered concurrently with the execution of
this Agreement and annexed hereto with respect to any matter hereafter arising
or discovered which, if existing or known at the date of this Agreement, would
have been required to be set forth or described in the Disclosure Schedules. The
obligations of the parties to amend or supplement the Disclosure Schedules being
delivered herewith shall terminate on the Closing Date. Notwithstanding any such
amendment or supplementation, for purposes of Sections 6.2(a), 6.3(a),
7.1(a)(i), 8.1(d) and 8.1(e), the representations and warranties of the parties
shall be made with reference to the Disclosure Schedules as they exist at the
time of execution of this Agreement, subject to such anticipated changes as are
set forth in Schedule 4.1 or otherwise expressly contemplated by this Agreement
or which are set forth in the Disclosure Schedules as they exist on the date of
this Agreement.
5.17 Nasdaq Listing. Parent and the Company shall use their reasonable
best efforts to obtain the listing for trading on Nasdaq of the Parent Common
Stock, the class of warrants issued in Parent's initial public offering and the
Units issued in Parent's initial public offering (each Unit consisting of one
share of Parent Common Stock and two such warrants). If such listing is not
obtained by the Closing, the parties shall continue to use their best efforts
after the Closing to obtain such listing.
5.18 Company Actions. The Company shall use its best efforts to take such
actions as are necessary to fulfill its obligations under this Agreement and to
enable Parent and Merger Sub to fulfill its obligations hereunder.
ARTICLE VI
CONDITIONS TO THE TRANSACTION
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) No Order. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree,
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injunction or other order (whether temporary, preliminary or permanent)
which is in effect and which has the effect of making the Merger illegal
or otherwise prohibiting consummation of the Merger, substantially on the
terms contemplated by this Agreement.
(b) Stockholder Approval. The Parent Stockholder Approval, the Name
Change Amendment and the Capitalization Amendment shall have been duly
approved and adopted by the stockholders of Parent by the requisite vote
under the laws of the State of Delaware and the Parent Charter Documents
and an executed copy of an amendment to Parent's Certificate of
Incorporation reflecting the Name Change Amendment and the Capitalization
Amendment shall have been filed with the Delaware Secretary of State to be
effective as of the Closing.
(c) Parent Common Stock. Holders of twenty percent (20%) or more of
the shares of Parent Common Stock issued in Parent's initial public
offering of securities and outstanding immediately before the Closing
shall not have exercised their rights to convert their shares into a pro
rata share of the Trust Fund in accordance with Parent's Charter
Documents.
(d) Stock Quotation or Listing. The Parent Common Stock at the
Closing will be quoted on the OTC BB or listed for trading on NASDAQ, if
the application for such listing is approved, and there will be no action
or proceeding pending or threatened against Parent by the NASD to prohibit
or terminate the quotation of Parent Common Stock on the OTC BB or the
trading thereof on NASDAQ.
6.2 Additional Conditions to Obligations of Company. The obligations of
the Company to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) Representations and Warranties. Each representation and warranty
of Parent contained in this Agreement that is qualified as to materiality
shall have been true and correct (i) as of the date of this Agreement and
(ii) subject to the provisions of the last sentence of Section 5.16, on
and as of the Closing Date with the same force and effect as if made on
the Closing Date. Each representation and warranty of Parent contained in
this Agreement that is not qualified as to materiality shall have been
true and correct (i) in all material respects as of the date of this
Agreement and (ii) in all material respects on and as of the Closing Date
with the same force and effect as if made on the Closing Date. The Company
shall have received a certificate with respect to the foregoing signed on
behalf of Parent by an authorized officer of Parent ("Parent Closing
Certificate").
(b) Agreements and Covenants. Parent shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Closing Date, except to the extent that any failure to
perform or comply (other than a willful failure to perform or comply or
failure to perform or comply with an agreement or covenant reasonably
within the control
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of Parent) does not, or will not, constitute a Material Adverse Effect
with respect to Parent, and the Parent Closing Certificate shall include a
provision to such effect.
(c) No Litigation. No action, suit or proceeding shall be pending or
threatened before any Governmental Entity which is reasonably likely to
(i) prevent consummation of any of the transactions contemplated by this
Agreement, (ii) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation or (iii) affect
materially and adversely or otherwise encumber the title of the shares of
Parent Common Stock to be issued by Parent in connection with the Merger
and no order, judgment, decree, stipulation or injunction to any such
effect shall be in effect.
(d) Consents. Parent shall have obtained all consents, waivers and
approvals required to be obtained by Parent in connection with the
consummation of the transactions contemplated hereby, other than consents,
waivers and approvals the absence of which, either alone or in the
aggregate, could not reasonably be expected to have a Material Adverse
Effect on Parent and the Parent Closing Certificate shall include a
provision to such effect.
(e) Material Adverse Effect. No Material Adverse Effect with respect
to Parent shall have occurred since the date of this Agreement.
(f) SEC Compliance. Immediately prior to Closing, Parent shall be in
compliance with the reporting requirements under the Exchange Act.
(g) Opinion of Counsel. The Company shall have received from
Graubard Miller, counsel to Parent, an opinion of counsel in substantially
the form of Exhibit I annexed hereto.
(h) Other Deliveries. At or prior to Closing, Parent shall have
delivered to the Company (i) copies of resolutions and actions taken by
Parent's board of directors and stockholders in connection with the
approval of this Agreement and the transactions contemplated hereunder,
and (ii) such other documents or certificates as shall reasonably be
required by the Company and its counsel in order to consummate the
transactions contemplated hereunder.
(i) Press Release. Parent shall have delivered the Press Release to
the Company, in a form reasonably acceptable to the Company.
(j) Resignations. The persons listed on Schedule 6.2(j) shall have
resigned from all of their positions and offices with Parent.
(k) Trust Fund. Parent shall have made appropriate arrangements with
Continental to have the Trust Fund, which shall contain no less than the
amount referred to in Section 3.25, dispersed to Parent immediately upon
the Closing.
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(l) Registration Rights Agreement. The Registration Rights Agreement
shall be in full force and effect.
6.3 Additional Conditions to the Obligations of Parent. The obligations of
Parent to consummate and effect the Merger shall be subject to the satisfaction
at or prior to the Closing Date of each of the following conditions, any of
which may be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. Each representation and warranty
of the Company contained in this Agreement that is qualified as to
materiality shall have been true and correct (i) as of the date of this
Agreement and (ii) subject to the provisions of the last sentence of
Section 5.16, on and as of the Closing Date with the same force and effect
as if made on the Closing Date. Each representation and warranty of the
Company contained in this Agreement that is not qualified as to
materiality shall have been true and correct (i) in all material respects
as of the date of this Agreement and (ii) in all material respects on and
as of the Closing Date with the same force and effect as if made on the
Closing Date. The Parent shall have received a certificate with respect to
the foregoing signed on behalf of the Company by an authorized officer of
Parent ("Company Closing Certificate").
(b) Agreements and Covenants. The Company and the Stockholders shall
have performed or complied in all material respects with all agreements
and covenants required by this Agreement to be performed or complied with
by them at or prior to the Closing Date except to the extent that any
failure to perform or comply (other than a willful failure to perform or
comply or failure to perform or comply with an agreement or covenant
reasonably within the control of Company) does not, or will not,
constitute a Material Adverse Effect on the Company, and the Company
Closing Certificate shall include a provision to such effect.
(c) No Litigation. No action, suit or proceeding shall be pending or
threatened before any Governmental Entity which is reasonably likely to
(i) prevent consummation of any of the transactions contemplated by this
Agreement, (ii) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation or (iii) affect
materially and adversely the right of Parent to own, operate or control
any of the assets and operations of the Surviving Corporation following
the Merger and no order, judgment, decree, stipulation or injunction to
any such effect shall be in effect.
(d) Consents. The Company shall have obtained all consents, waivers,
permits and approvals required to be obtained by the Company in connection
with the consummation of the transactions contemplated hereby, other than
consents, waivers and approvals the absence of which, either alone or in
the aggregate, could not reasonably be expected to have a Material Adverse
Effect on the Company and the Company Closing Certificate shall include a
provision to such effect.
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(e) Material Adverse Effect. No Material Adverse Effect with respect
to the Company shall have occurred since the date of this Agreement.
(f) Employment Agreement. An Employment Agreement between the
Company and, Larry E. Lee, in the form of Exhibit J, shall be in full
force and effect.
(g) Opinion of Counsel. Parent shall have received from McAfee &
Taft A Professional Corporation, counsel to the Company, an opinion of
counsel in substantially the form of Exhibit K annexed hereto.
(h) Comfort Letters. Parent shall have received "comfort" letters in
the customary form from BDO Seidman, LLP, and UHY, LLP, dated the date of
distribution of the Proxy Statement and the Closing Date (or such other
date or dates reasonably acceptable to Parent) with respect to certain
financial statements and other financial information included in the Proxy
Statement.
(i) Company Indebtedness. The Adjusted Indebtedness for Borrowed
Money of the Company, including the Subsidiaries, shall not exceed
$125,000,000. As used herein, the term "Adjusted Indebtedness for Borrowed
Money" shall mean the sum of all indebtedness of the Company for borrowed
money, less the amount of any cash deposits posted by the Company as
security in connection with outstanding Company hedging contracts, and
less the positive difference, if any, between $30,000,000 and the
Aggregate Cash Number.
(j) Other Deliveries. At or prior to Closing, the Company shall have
delivered to Parent: (i) copies of resolutions and actions taken by the
Company's board of directors and stockholders in connection with the
approval of this Agreement and the transactions contemplated hereunder,
and (ii) such other documents or certificates as shall reasonably be
required by Parent and its counsel in order to consummate the transactions
contemplated hereunder.
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification of Parent and Company.
(a) Subject to the terms and conditions of this Article VII
(including without limitation the limitations set forth in Section 7.4),
Parent, the Company and their respective representatives, successors and
permitted assigns (the "Parent Indemnitees") shall be indemnified,
defended and held harmless from and against all Losses asserted against,
resulting to, imposed upon, or incurred by any Parent Indemnitee by reason
of, arising out of or resulting from:
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(i) the inaccuracy or breach of any representation or warranty
of Company contained in or made pursuant to this Agreement, any
Schedule or any certificate delivered by the Company to Parent
pursuant to this Agreement with respect hereto or thereto in
connection with the Closing;
(ii) the non-fulfillment or breach of any covenant or
agreement of the Company contained in this Agreement; and
(iii) the matters alleged in the action entitled Sacket v.
Great Plains Pipeline et. al., District Court of Woods County,
Oklahoma, Case No. CJ-2002-70. (the "Great Plains Claim").
(b) As used in this Article VII, the term "Losses" shall include all
losses, liabilities, damages, judgments, awards, orders, penalties,
settlements, costs and expenses (including, without limitation, interest,
penalties, court costs and reasonable legal fees and expenses) including
those arising from any demands, claims, suits, actions, costs of
investigation, notices of violation or noncompliance, causes of action,
proceedings and assessments whether or not made by third parties or
whether or not ultimately determined to be valid. Solely for the purpose
of determining the amount of any Losses (and not for determining any
breach) for which any party may be entitled to indemnification pursuant to
Article VII, any representation or warranty contained in this Agreement
that is qualified by a term or terms such as "material," "materially," or
"Material Adverse Effect" shall be deemed made or given without such
qualification and without giving effect to such words.
7.2 Indemnification of Third Party Claims. The indemnification obligations
and liabilities under this Article VII with respect to actions, proceedings,
lawsuits, investigations, demands or other claims brought against Parent by a
Person other than the Company (a "Third Party Claim") shall be subject to the
following terms and conditions:
(a) Notice of Claim. Parent, acting through the Committee, will give
the Representative prompt written notice after receiving written notice of
any Third Party Claim or discovering the liability, obligation or facts
giving rise to such Third Party Claim (a "Notice of Claim") which Notice
of Third Party Claim shall set forth (i) a brief description of the nature
of the Third Party Claim, (ii) the total amount of the actual
out-of-pocket Loss or the anticipated potential Loss (including any costs
or expenses which have been or may be reasonably incurred in connection
therewith), and (iii) whether such Loss may be covered (in whole or in
part) under any insurance and the estimated amount of such Loss which may
be covered under such insurance, and the Representative shall be entitled
to participate in the defense of Third Party Claim.
(b) Defense. The Representative shall have the right, at his option
(subject to the limitations set forth in subsection 7.2(c) below), by
written notice to Parent, to assume the entire control of, subject to the
right of Parent to participate (at its expense and with counsel of its
choice) in, the defense, compromise or settlement of the Third Party Claim
as to which such Notice of Claim has been given, and shall be entitled to
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appoint a recognized and reputable counsel reasonably acceptable to Parent
to be the lead counsel in connection with such defense. If the
Representative is permitted and elects to assume the defense of a Third
Party Claim:
(i) the Representative shall diligently and in good faith
defend such Third Party Claim and shall keep Parent reasonably
informed of the status of such defense; provided, however, that in
the case of any settlement providing for remedies other than
monetary damages for which indemnification is provided, Parent shall
have the right to approve the settlement, which approval will not be
unreasonably withheld; and
(ii) Parent shall cooperate fully in all respects with the
Representative in any such defense, compromise or settlement
thereof, including, without limitation, the selection of counsel,
and Parent shall make available to the Representative all pertinent
information and documents under its control.
(c) Limitations of Right to Assume Defense. The Representative shall
not be entitled to assume control of such defense if (i) the Third Party
Claim relates to or arises in connection with any criminal proceeding,
action, indictment, allegation or investigation; (ii) the Third Party
Claim seeks an injunction or equitable relief against Parent; or (iii)
there is a reasonable probability that a Third Party Claim may materially
and adversely affect Parent other than as a result of money damages or
other money payments.
(d) Other Limitations. Failure to give prompt Notice of Claim or to
provide copies of relevant available documents or to furnish relevant
available data shall not affect the Representative's duty or obligations
under this Article VII, except to the extent (and only to the extent that)
such failure shall have adversely affected the ability of the
Representative to defend against or reduce the Stockholders' liability or
caused or increased such liability or otherwise caused the damages for
which the Stockholders are obligated to be greater than such damages would
have been had Parent given the Representative prompt notice hereunder. So
long as the Representative is defending any such action actively and in
good faith, Parent shall not settle such action. Parent shall make
available to the Representative all relevant records and other relevant
materials required by them and in the possession or under the control of
Parent, for the use of the Representative and its representatives in
defending any such action, and shall in other respects give reasonable
cooperation in such defense.
(e) Failure to Defend. If the Representative, promptly after
receiving a Notice of Claim, fails to defend such Third Party Claim
actively and in good faith, Parent will (upon further written notice) have
the right to undertake the defense, compromise or settlement of such Third
Party Claim as it may determine in its reasonable discretion, provided
that the Representative shall have the right to approve any settlement,
which approval will not be unreasonably withheld or delayed.
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(f) Parent's Rights. Anything in this Section 7.3 to the contrary
notwithstanding, the Representative shall not, without the written consent
of Parent, settle or compromise any action or consent to the entry of any
judgment which does not include as an unconditional term thereof the
giving by the claimant or the plaintiff to Parent of a full and
unconditional release from all liability and obligation in respect of such
action without any payment by Parent.
(g) Representative Consent. Unless the Representative has consented
to a settlement of a Third Party Claim, the amount of the settlement shall
not be a binding determination of the amount of the Loss and such amount
shall be determined in accordance with the provisions of the Escrow
Agreement.
7.3 Insurance Effect. To the extent that any Losses that are subject to
indemnification pursuant to this Article VII are covered by insurance, Parent
shall use commercially reasonable efforts to obtain the maximum recovery under
such insurance; provided that Parent shall nevertheless be entitled to bring a
claim for indemnification under this Article VII in respect of such Losses and
the time limitations set forth in Section 7.4 hereof for bringing a claim of
indemnification under this Agreement shall be tolled during the pendency of such
insurance claim. The existence of a claim by Parent for monies from an insurer
or against a third party in respect of any Loss shall not, however, delay any
payment pursuant to the indemnification provisions contained herein and
otherwise determined to be due and owing. If Parent has received the payment
required by this Agreement from the Representative in respect of any Loss and
later receives proceeds from insurance or other amounts in respect of such Loss,
then it shall hold such proceeds or other amounts in trust for the benefit of
the Stockholders and shall pay to the Representative, as promptly as practicable
after receipt, a sum equal to the amount of such proceeds or other amount
received, up to the aggregate amount of any payments received from the Escrow
Account pursuant to this Agreement in respect of such Loss. Notwithstanding any
other provisions of this Agreement, it is the intention of the parties that no
insurer or any other third party shall be (i) entitled to a benefit it would not
be entitled to receive in the absence of the foregoing indemnification
provisions, or (ii) relieved of the responsibility to pay any claims for which
it is obligated.
7.4 Limitations on Indemnification.
(a) Survival: Time Limitation. The representations, warranties,
covenants and agreements in this Agreement or in any writing delivered by
the Company to Parent in connection with this Agreement (including the
certificate required to be delivered by the Company pursuant to Section
6.3(a)) shall survive the Closing until June 30, 2007 (the "Survival
Period"), except that the representations and warranties set forth in
Sections 2.14 and 2.16 shall not survive the Closing and any claims for
indemnification with respect to the warranties set forth in Sections 2.14
and 2.16 shall be made in accordance with the provisions of Sections 5.3
and 5.4. The indemnification and other obligations under this Article VII
shall survive for the same Survival Period and shall terminate with the
expiration of such Survival Period, except that: (i) any claims for breach
of representation or warranty made by a party hereunder by filing a demand
for arbitration under Section 10.12 shall be preserved until final
resolution thereof despite the
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subsequent expiration of the Survival Period, (ii) any claims set forth in
a Notice of Claim sent prior to the expiration of such Survival Period
shall survive until final resolution thereof and (iii) any claim for
indemnification with respect to the Great Plains Claim shall survive until
same is fully adjudicated, settled, dismissed or otherwise resolved in its
entirety with respect to the Company and its Subsidiaries and Affiliates.
Except as set forth in clause (ii) and (iii) above, no claim for
indemnification under this Article VII shall be brought after the end of
the applicable Survival Period.
(b) Deductible. No amount shall be payable under Article VII unless
and until the aggregate amount of all indemnifiable Losses otherwise
payable exceeds $1,000,000 (the "Deductible"), in which event the amount
payable shall only be the amount in excess of the amount of the
Deductible. Notwithstanding the foregoing, the Deductible shall not apply
to indemnifiable Losses arising out of the Great Plains Claim.
(c) Aggregate Amount Limitation. The aggregate liability for Losses
pursuant to Section 7.1 shall not in any event exceed the Escrow Shares,
and Parent shall have no claim against the Company's stockholders other
than for the Escrow Shares (and any proceeds of the Escrow Shares or
distributions with respect to the Escrow Shares).
7.5 Exclusive Remedy. Parent hereby acknowledges and agrees that, from and
after the Closing, its sole remedy with respect to any and all claims for money
damages arising out of or relating to this Agreement shall be pursuant and
subject to the requirements of the indemnification provisions set forth in this
Article VII. Notwithstanding any of the foregoing, nothing contained in this
Article VII shall in any way impair, modify or otherwise limit Parent's or
Company's right to bring any claim, demand or suit against the other party based
upon such other party's actual fraud or intentional or willful misrepresentation
or omission, it being understood that a mere breach of a representation and
warranty, without intentional or willful misrepresentation or omission, does not
constitute fraud.
7.6 Damages; No Adjustment to Merger Consideration. Amounts paid for
indemnification under Article VII shall constitute damages paid by the
Stockholders for breach of contract and not as an adjustment to the value of the
shares of Parent Common Stock issued by Parent as a result of the Merger.
7.7 Representative Capacities; Application of Escrow Shares. The parties
acknowledge that the Representative's obligations under this Article VII are
solely as a representative of the Company's stockholders in the manner set forth
in the Escrow Agreement with respect to the obligations to indemnify Parent
under this Article VII and that the Representative shall have no personal
responsibility for any expenses incurred by him in such capacity and that all
payments to Parent as a result of such indemnification obligations shall be made
solely from, and to the extent of, the Escrow Shares. Out-of-pocket expenses of
the Representative for attorneys' fees and other costs shall be borne in the
first instance by Parent, which may make a claim for reimbursement thereof
against the Escrow Shares upon the claim with respect to which such expenses are
incurred becoming an Established Claim (as defined in the Escrow Agreement). The
parties further acknowledge that all actions to be taken by Parent pursuant to
this Article VII shall be taken on its behalf by the Committee in accordance
with the
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provisions of the Escrow Agreement. The Escrow Agent, pursuant to the Escrow
Agreement after the Closing, may apply all or a portion of the Escrow Shares to
satisfy any claim for indemnification pursuant to this Article VII. The Escrow
Agent will hold the remaining portion of the Escrow Shares until final
resolution of all claims for indemnification or disputes relating thereto.
ARTICLE VIII
TERMINATION
8.1 Termination. This Agreement may be terminated at any time prior to the
Closing:
(a) by mutual written agreement of Parent and the Company at any
time;
(b) by either Parent or the Company if the Proxy Statement shall not
have been mailed to the record owners of Parent Common Stock on or before
February 14, 2006;
(c) by either Parent or the Company if a Governmental Entity shall
have issued an order, decree or ruling or taken any other action, in any
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree, ruling or other action is
final and nonappealable;
(d) by the Company, upon a material breach of any representation,
warranty, covenant or agreement on the part of Parent set forth in this
Agreement, or if any representation or warranty of Parent shall have
become untrue, in either case such that the conditions set forth in
Article VI would not be satisfied as of the time of such breach or as of
the time such representation or warranty shall have become untrue,
provided, that if such breach by Parent is curable by Parent prior to the
Closing Date, then the Company may not terminate this Agreement under this
Section 8.1(d) for thirty (30) days after delivery of written notice from
the Company to Parent of such breach, provided Parent continues to
exercise commercially reasonable efforts to cure such breach (it being
understood that the Company may not terminate this Agreement pursuant to
this Section 8.1(d) if it shall have materially breached this Agreement or
if such breach by Parent is cured during such thirty (30)-day period);
(e) by Parent, upon a material breach of any representation,
warranty, covenant or agreement on the part of the Company set forth in
this Agreement, or if any representation or warranty of the Company shall
have become untrue, in either case such that the conditions set forth in
Article VI would not be satisfied as of the time of such breach or as of
the time such representation or warranty shall have become untrue,
provided, that if such breach is curable by the Company prior to the
Closing Date, then Parent may not terminate this Agreement under this
Section 8.1(e) for thirty (30) days after delivery of written notice from
Parent to the Company of such breach, provided the Company continues to
exercise commercially reasonable efforts to cure such breach (it
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being understood that Parent may not terminate this Agreement pursuant to
this Section 8.1(e) if it shall have materially breached this Agreement or
if such breach by the Company is cured during such thirty (30)-day
period);
(f) by either Parent or the Company, if, at the Special Meeting
(including any adjournments thereof), this Agreement and the transactions
contemplated thereby shall fail to be approved and adopted by the
affirmative vote of the holders of Parent Common Stock required under
Parent's certificate of incorporation, or the holders of 20% or more of
the number of shares of Parent Common Stock issued in Parent's initial
public offering and outstanding as of the date of the record date of the
Special Meeting exercise their rights to convert the shares of Parent
Common Stock held by them into cash in accordance with Parent's
certificate of incorporation; or
(g) By either the Company or Parent pursuant to Section 5.4(a) or by
Parent pursuant to Section 5.4(b).
8.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 8.1 above will be effective immediately upon (or, if the
termination is pursuant to Section 8.1(d) or Section 8.1(e) and the proviso
therein is applicable, thirty (30) days after) the delivery of written notice of
the terminating party to the other parties hereto. In the event of the
termination of this Agreement as provided in Section 8.1, this Agreement shall
be of no further force or effect and the Merger shall be abandoned, except for
and subject to the following: (i) Sections 5.7, 5.15, 8.2, 8.3 and 8.4 and
Article X (General Provisions) shall survive the termination of this Agreement,
and (ii) nothing herein shall relieve any party from liability for any breach of
this Agreement, including a breach by a party electing to terminate this
Agreement pursuant to Section 8.1(b) caused by the action or failure to act of
such party constituting a principal cause of or resulting in the failure of the
Merger to occur on or before the date stated therein.
8.3 Termination Fee. If (a) Parent wrongfully fails or refuses to
consummate the Merger or the Company terminates this Agreement pursuant to
Section 8.1(d) and (b) Parent consummates a merger or other business combination
with another entity on or before May 18, 2006, Parent shall pay the Company,
concurrently with the consummation of such merger or other business combination,
a cash termination fee of $7,500,000, payment of which shall be in full
satisfaction of all other rights of the Company for damages under this Agreement
or otherwise.
8.4 Fees and Expenses. All fees and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses whether or not the Merger is consummated.
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ARTICLE IX
DEFINED TERMS
Terms defined in this Agreement are organized alphabetically as follows,
together with the Section and, where applicable, paragraph, number in which
definition of each such term is located:
"AAA" Section 10.12
"Adjusted Indebtedness for Borrowed Money" Section 6.3(i)
"Adjustment" Section 5.3(a)
"Adverse Condition/Conditions" Section 5.3(a)
"Affiliate" Section 10.2(f)
"Aggregate Cash Number" Section 1.6(a)
"Aggregate Parent Common Stock Number" Section 1.6(a)
"Aggregate Threshold" Section 5.3(b)
"Agreement" Section 1.2
"Applicable Environmental Law" Section 2.16(e)
"Approvals" Section 2.1
"Assets" Section 2.16(a)
"Audited Financial Statements" Section 2.7(a)
"Blue Sky Laws" Section 1.16(c)
"Capitalization Amendment" Section 5.1(a)
"Certificate of Incorporation; Bylaws" Section 1.4
"Certificate of Merger" Section 1.2
"Certificates" Section 1.6(b)
"Charter Documents" Section 2.1
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"Closing" Section 1.2
"Closing Date" Section 1.2
"Code" Recital C
"Company" Heading
"Company Closing Certificate" Section 6.3(a)
"Company Common Stock" Section 1.6(a)
"Company Contracts" Section 2.19(a)
"Company Intellectual Property" Section 2.18
"Company Products" Section 2.18
"Company Registered Intellectual Property" Section 2.18
"Company Schedule" Article II Preamble
"Company Stock Options" Section 2.3(a)
"Corporate Records" Section 2.1(c)
"Continental" Section 5.5(b)
"Cure Date" Section 5.4(a)
"DGCL" Recital A
"Deductible" Section 7.4(c)
"Defensible Title" Section 2.14(b)
"Disclosure Schedules" Section 5.16
"Effect of the Merger" Section 1.3
"Effective Time" Section 1.2
"Environmental Properties/Environmental Property" Section 4.3(a)(i)
"Escrow Agreement" Section 1.14
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"Escrow Period" Section 1.14
"Escrow Shares" Section 1.14
"Exchange Act" Section 1.16(c)
"Great Plains Claim" Section 7.1(a)(iii)
"Governmental Action/Filing" Section 2.21
"Governmental Entity" Section 1.16(c)
"Insider" Section 2.19(a)(i)
"Insurance Policies" Section 2.20
"Intellectual Property" Section 2.18
"Knowledge" Section 10.2(e)
"Leased Real Property" Section 2.14(c)
"Legal Requirements" Section 10.2(c)
"Lien" Section 10.2(e)
"Losses" Section 7.1(b)
"Material Adverse Effect" Section 10.2(a)
"Material Company Contracts" Section 2.19(a)
"Merger" Section 1.1
"Merger Consideration" Section 5.3(a)
"Merger Form 8-K Section 5.5(a)
"Merger Sub" Heading
"Merger Sub Common Stock" Section 1.6(d)
"Mineral Properties/Mineral Property" Section 2.14
"Name Change Amendment" Section 5.1(a)
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"NASD" Section 3.23
"Notice Date" Section 5.3(a)
"Notice of Claim" Section 7.2(a)
"OTC BB" Section 3.23
"Outstanding Company Stock Number" Section 1.6(a)
"Owned Real Property" Section 2.14(c)
"Parent" Heading
"Parent Closing Certificate" Section 6.2(a)
"Parent Common Stock" Section 1.6(a)
"Parent Contracts" Section 3.19(a)
"Parent Convertible Securities" Section 3.3(a)
"Parent Indemnitees" Section 7.1
"Parent Plan" Section 5.1
"Parent Preferred Stock" Section 3.3
"Parent SEC Reports" Section 3.7(a)
"Parent Schedule" Article III Preamble
"Parent Stock Options" Section 3.3(a)
"Parent Warrants" Section 3.3(a)
"Patents" Section 2.18
"Permitted Encumbrances" Section 2.14(b)(iii)
"Person" Section 10.2(d)
"Personal Property" Section 2.14(c)
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"Plans" Section 2.11(a)
"Press Release" Section 5.5(a)
"Properties" Section 5.3(a)
"Property Threshold" Section 5.3(b)
"Proxy Statement" Section 5.1
"Registered Intellectual Property" Section 2.18
"Registration Rights Agreement" Section 1.15
"Representative" Section 1.14
"Returns" Section 2.15(b)(i)
"Routine Operating Contracts" Section 2.19(a)
"Special Meeting" Section 5.1(a)
"Stockholder/Stockholders" Heading
"Subject Party" Section 5.7(b)(iii)
"Subsidiary/Subsidiaries" Section 2.2
"Survival Period" Section 7.4(a)
"Surviving Corporation" Section 1.1
"Tax/Taxes" Section 2.15(a)
"Third Party Claim" Section 7.2
"Titled Properties/Titled Property" Section 4.2
"Trademarks" Section 2.18
"Trust Fund" Section 3.25
"U.S. GAAP" Section 2.7(a)
"Unaudited Financial Statements" Section 2.7(b)
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ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
if to Parent, to:
Tremisis Energy Acquisition Corporation
1775 Broadway, Suite 604
New York, New York 10019
Attention: Lawrence S. Coben, Chairman and CEO
212-397-1464 telephone
775-576-9560 telecopy
with a copy to:
David Alan Miller, Esq.
Graubard Miller
405 Lexington Avenue
New York, New York 10174-1901
212-818-8661 telephone
212-818-8881 telecopy
if to the Company or Stockholders, to:
RAM Energy, Inc.
5100 E. Skelly Drive, Suite 650
Tulsa, Oklahoma 74135
Attention: Larry E. Lee, President and CEO
918-663-2800 telephone
918-663-9540 telecopy
with a copy to:
McAfee & Taft
211 North Robinson, 10th Floor
Oklahoma City, Oklahoma 73102-7103
Attention: C. David Stinson, Esq.
405-552-2266 telephone
405-235-0439 telecopy
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10.2 Interpretation. When a reference is made in this Agreement to an
Exhibit or Schedule, such reference shall be to an Exhibit or Schedule to this
Agreement unless otherwise indicated. When a reference is made in this Agreement
to Sections or subsections, such reference shall be to a Section or subsection
of this Agreement. Unless otherwise indicated the words "include," "includes"
and "including" when used herein shall be deemed in each case to be followed by
the words "without limitation." The table of contents and headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. When reference is made herein
to "the business of" an entity, such reference shall be deemed to include the
business of all direct and indirect Subsidiaries of such entity. Reference to
the Subsidiaries of an entity shall be deemed to include all direct and indirect
Subsidiaries of such entity. For purposes of this Agreement:
(a) the term "Material Adverse Effect" when used in connection with
an entity means any change, event, violation, inaccuracy, circumstance or
effect, individually or when aggregated with other changes, events,
violations, inaccuracies, circumstances or effects, that is materially
adverse to the business, assets (including intangible assets), revenues,
financial condition or results of operations of such entity, it being
understood that none of the following alone or in combination shall be
deemed, in and of itself, to constitute a Material Adverse Effect: (i)
changes attributable to the public announcement or pendency of the
transactions contemplated hereby, (ii) changes in general national or
regional economic conditions, (iii) any SEC rulemaking requiring enhanced
disclosure of reverse merger transactions with a public shell, or (iv)
changes in economic conditions in the oil and gas industry generally,
including changes in current sale and future prices for oil and gas;
(b) the term "Legal Requirements" means any federal, state, local,
municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation,
ruling or requirement issued, enacted, adopted, promulgated, implemented
or otherwise put into effect by or under the authority of any Governmental
Entity and all requirements set forth in applicable Company Contracts or
Parent Contracts;
(c) the term "Person" shall mean any individual, corporation
(including any non-profit corporation), general partnership, limited
partnership, limited liability partnership, joint venture, estate, trust,
company (including any limited liability company or joint stock company),
firm or other enterprise, association, organization, entity or
Governmental Entity;
(d) the term "knowledge" means actual knowledge or awareness as to a
specified fact or event of a Person that is an individual or of an
executive officer or director of a Person that is a corporation or of a
Person in a similar capacity of an entity other than a corporation.
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(e) the term "Lien" means any mortgage, pledge, security interest,
encumbrance, lien, restriction or charge of any kind (including, without
limitation, any conditional sale or other title retention agreement or
lease in the nature thereof, any sale with recourse against the seller or
any Affiliate of the seller, or any agreement to give any security
interest);
(f) the term "Affiliate" means, as applied to any Person, any other
Person directly or indirectly controlling, controlled by or under direct
or indirect common control with, such Person. For purposes of this
definition, "control" (including with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as
applied to any Person, means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies
of such Person, whether through the ownership of voting securities, by
contract or otherwise; and
(g) all monetary amounts set forth herein are referenced in United
States dollars, unless otherwise noted.
10.3 Counterparts; Facsimile Signatures. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other party, it being
understood that all parties need not sign the same counterpart. Delivery by
facsimile to counsel for the other party of a counterpart executed by a party
shall be deemed to meet the requirements of the previous sentence.
10.4 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Schedules hereto (a)
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
it being understood that the letter of intent between Parent and the Company
dated August 25, 2005 is hereby terminated in its entirety and shall be of no
further force and effect; and (b) are not intended to confer upon any other
person any rights or remedies hereunder (except as specifically provided in this
Agreement).
10.5 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
10.6 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed
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cumulative with and not exclusive of any other remedy conferred hereby, or by
law or equity upon such party, and the exercise by a party of any one remedy
will not preclude the exercise of any other remedy. The parties hereto agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to seek an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
10.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware regardless of the law that
might otherwise govern under applicable principles of conflicts of law thereof.
10.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
10.9 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the first sentence of this Section 10.9, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
10.10 Amendment. This Agreement may be amended by the parties hereto at
any time by execution of an instrument in writing signed on behalf of each of
the parties.
10.11 Extension; Waiver. At any time prior to the Closing, any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
10.12 Arbitration. Except with respect to pre-Closing disputes between the
parties with respect to title and environmental issues, the procedures for
resolution of which are set out in Section 5.4 as the exclusive means for
resolving such disputes, any disputes or claims arising under or in connection
with this Agreement or the transactions contemplated hereunder shall be resolved
by binding arbitration. Notice of a demand to arbitrate a dispute by either
party shall be given in writing to the other at their last known address.
Arbitration shall be commenced by the filing by a party of an arbitration demand
with the American
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Arbitration Association ("AAA"). The arbitration and resolution of the dispute
shall be resolved by a single arbitrator appointed by the AAA pursuant to AAA
rules. The arbitration shall in all respects be governed and conducted by
applicable AAA rules, and any award and/or decision shall be conclusive and
binding on the parties. The arbitration shall be conducted in Dallas, Texas. The
arbitrator shall supply a written opinion supporting any award, and judgment may
be entered on the award in any court of competent jurisdiction. Each party shall
pay its own fees and expenses for the arbitration, except that any costs and
charges imposed by the AAA and any fees of the arbitrator for his services shall
be assessed against the losing party by the arbitrator. In the event that
preliminary or permanent injunctive relief is necessary or desirable in order to
prevent a party from acting contrary to this Agreement or to prevent irreparable
harm prior to a confirmation of an arbitration award, then either party is
authorized and entitled to commence a lawsuit solely to obtain equitable relief
against the other pending the completion of the arbitration in a court having
jurisdiction over the parties. Each party hereby consents to the exclusive
jurisdiction of the federal and state courts located in the State of Oklahoma,
Oklahoma or Tulsa County, for such purpose. All rights and remedies of the
parties shall be cumulative and in addition to any other rights and remedies
obtainable from arbitration.
[The remainder of this page has been intentionally left blank.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
TREMISIS ENERGY ACQUISITION CORPORATION
By: s/Lawrence S. Coben
------------------------------------
Lawrence S. Coben, Chairman & CEO
RAM ENERGY ACQUISITION, INC.
By: s/Lawrence S. Coben
------------------------------------
Lawrence S. Coben, Chairman & CEO
RAM ENERGY, INC.
By: s/Larry E. Lee
------------------------------------
Larry E. Lee, President & CEO
STOCKHOLDERS:
[See separate signature pages.]
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STOCKHOLDER SIGNATURE PAGE TO MERGER AGREEMENT
s/Larry E. Lee
------------------------------------
Larry E. Lee
DANISH KNIGHTS, A LIMITED PARTNERSHIP,
A Texas Limited Partnership
By: Dannebrog Corp., General Partner
By: s/Britani Talley Bowman
------------------------------------
Britani Talley Bowman, President
The undersigned agrees that, upon exercise of the stock option referred to
in Section 1.13 of the foregoing Agreement, he shall be considered to be, and
shall be, a Stockholder (as defined therein) for all purposes of such Agreement,
including without limitation Section 1.16 thereof.
s/C. David Stinson
------------------------------------
C. David Stinson
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APPENDIX I
Additional Representations Regarding Business
1. Operation of Wells.
(a) Except as stated on Schedule I-1, all wells on or constituting a
part of the Properties (the "Wells") have been in all material respects
drilled and (if completed) completed, operated and produced in accordance
with generally accepted oil and gas field practices and in compliance in
all material respects with applicable oil and gas leases and applicable
Laws. In all material respects, the Wells have been drilled and completed
within the limits permitted by contract, pooling or unit agreement. No
Well is subject to penalties on allowables because of any overproduction
or any other violation of applicable Laws that would prevent such Well
from being entitled to its full legal and regular allowable from and after
the Closing Date as prescribed by any Governmental Authority.
(b) With respect to the oil, gas and other mineral leases, unit
agreements, pooling agreements, communitization agreements and other
documents creating interests comprising the Properties, the Company has
fulfilled all requirements in all material respects for filings,
certificates, disclosures of parties in interest, and other similar
matters contained in (or otherwise applicable thereto by law) such leases
or other documents and is fully qualified to own such leases or other
interests.
2. Commitments. Except as described on Schedule I-2, there are no
contracts, commitments or agreements binding on the Company that require future
expenditures by the Company on or with respect to any Property of more than the
sum of $25,000.
3. Payment for Future Production. The Company is not obligated, by virtue
of a prepayment arrangement, make-up right under a production sales contract
containing a "take or pay" or similar provision, production payment or any other
arrangement, to deliver hydrocarbons, or proceeds from the sale thereof,
attributable to the Properties at some future time without then or thereafter
receiving the full contract price therefor.
4. Gas Balancing. Except as set forth on Schedule 1-4, the Company has no
obligation to deliver gas (or cash in lieu thereof) from the Properties to other
owners of interests or to gatherers, transporters or processors as a result of
past production by the Company or its predecessors in excess of the share to
which they were entitled.
5. Calls on Production. No Person has any call upon, option to purchase,
or similar right to obtain production from the Properties at a price less than
the prevailing price in the field.
6. Non-Competition Commitments. There are no agreements or arrangements
that will be binding on the Company or the Properties after Closing that limit
the freedom of the
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owner of the Properties to compete in any line of business or with any Person or
in any geographical area, except customary area of mutual interest provisions.
7. Production Sales Agreements. Except as set forth on Schedule 2.19(e),
there are no agreements or arrangements for the sale of oil, gas or other
minerals attributable to the Properties that may be not terminated at will
without penalty by the Company after Closing on notice of sixty (60) days or
less.
8. Lease Provisions. All rents, royalties, overriding royalty interests
and other payments due under each of such leases have been promptly and fully
paid, except amounts that are being held in suspense as a result of title issues
and that do not provide any third party a right to cancel a lease, and except
for such amounts as in the aggregate would not have a Material Adverse Effect on
the Company. There are no express obligations to drill additional wells in order
to maintain in force and effect the rights of the Company in any Property other
than customary provisions for the conduct of continuous drilling operations for
the perpetuation of leases.
9. Compliance with Laws. During the period of ownership by the Company,
the Properties have been operated in material compliance with all applicable
Laws, regulations, rules, orders, judgments and decrees of all Governmental
Authorities and courts having jurisdiction, and all Wells thereon have been
drilled and completed within the boundaries of the applicable lease or unit and
in compliance with all applicable spacing regulations, and all other applicable
Laws and regulations.
10. Claims. Except as set forth on Schedule 2.10, there is no claim,
demand, action, administrative proceeding, lawsuit or governmental inquiry
relating to the Properties pending, or, to the knowledge of the Company
threatened.
11. Permits. The Company has, and to the knowledge of the Company, each
other Person who operates a Property has, obtained all permits, licenses,
franchises, authorities, consents and approvals necessary for owning and
operating the Properties and has made all material filings with all governmental
bodies having jurisdiction necessary for owning and operating the Properties,
and all such permits, licenses, franchises, authorities, consents, approvals and
filings are in full force and effect.
12. [Intentionally Omitted.]
13. Preferential Rights of Purchase and Consents to Assignment. No
material Property is subject to any preferential right of purchase, right of
first refusal or other agreement that gives a third party the right to purchase
a Property as a result of the Merger or requires the consent of any third party
to consummate the Merger.
14. Status of Payout Accounts. Various of the Properties describe
interests before a payout ("BPO") or after a payout ("APO"). Attached as
Schedule I-14 is a schedule setting forth the status of the respective payout
accounts described thereon, as of the dates stated
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thereon. To the knowledge of the Company, the BPO and APO amounts set forth
therein accurately reflect the status of all BPO and APO accounts.
15. Reserve Reports. The Company has delivered to the Parent copies of two
reserve reports, both with an effective date of June 30, 2005. These reports
were prepared by Forrest A. Garb & Associates, Inc. ("Garb"), dated August 15,
2005 and by Williamson Petroleum Consultants, Inc. ("Williamson"), dated August
16, 2005 (collectively "Reserve Reports"). All properties included in the
Reserve Reports are described on Schedule 2.14(a). The Parent engaged
Netherland, Sewell & Associates, Inc. ("NSAI") to review the Reserve Reports and
issue an opinion letter; such letter being dated September 30, 2005. All
production, pressure, engineering, geologic, economic evaluation, and other
information supplied by or on behalf of the Company to Garb, Williamson and NSAI
was at the time supplied accurate in all material respects. None of the
properties in the Reserve Reports have been disposed of in whole or in part as
of the date hereof.
16. Hedging. Except as set forth on Schedule I-16, the Company is not a
party to any oil or natural gas or other futures or options trading agreement or
any price swaps, hedges, futures or similar instruments (collectively,
"Futures/Swaps"). To the knowledge of the Company, none of the operators of the
Properties has subjected the Properties to any Futures/Swaps.
17. Seismic Data; Permits. Except as set forth in Schedule I-17, the
Company is not a party to any contract or agreement with a seismic vendor. The
Company is in possession of and has good title to the proprietary data described
on Schedule I-17.
18. Previously Owned Properties. Except as set forth on Schedule I-18, the
Company has no obligations or liabilities, contingent or otherwise, with respect
to any properties previously owned or leased by the Company but not currently
owned or leased.
19. Operatorship. The Company has no knowledge of any pending vote, or any
requests for a vote (whether written or oral), to have the Company removed as
the named "operator" from any of the Properties for which the Company is
currently designated as the "operator."
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INDEX OF EXHIBITS AND SCHEDULES
Exhibits
Exhibit A - Certificate of Incorporation of Merger Sub
Exhibit B - By-Laws of Merger Sub
Exhibit C - Form of Agreement with C. David Stinson
Exhibit D - Form of Escrow Agreement
Exhibit E - Form of Registration Rights Agreement
Exhibit F - Form of Parent Plan
Exhibit G - Form of Voting Agreement
Exhibit H - Form of Lock-Up Agreement
Exhibit I - Form of Opinion of Graubard Miller
Exhibit J - Form of Employment Agreement for Larry E. Lee
Exhibit K - Form of Opinion of McAfee & Taft, A Professional Corporation
Schedules
---------
Schedule 1.15 - Affiliates of the Company
Schedule 2 - Company Disclosure Schedule
Schedule 3 - Parent Disclosure Schedule
Schedule 4.1 - Permitted Parent and Company Actions
Schedule 5.2 - Directors and Officers of Parent and Company
Schedule 6.2(j) - Parent Resignations
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SCHEDULE 1.15
RULE 145 AFFILIATES OF THE COMPANY
Danish Knights, A Limited Partnership
Larry E. Lee
C. David Stinson
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SCHEDULE 2
COMPANY DISCLOSURE SCHEDULE
(Information Furnished Separately)
Schedule 2.1 - Organization and Qualification
Schedule 2.2 - Subsidiaries
Schedule 2.3 - Capitalization
Schedule 2.5 - No Conflict
Schedule 2.6 - Non-Compliance with Legal Requirements
Schedule 2.7 - Financial Statements
Schedule 2.8 - No Undisclosed Liabilities
Schedule 2.9 - Absence of Certain Changes or Events
Schedule 2.10 - Litigation
Schedule 2.11 - Employee Benefit Plans
Schedule 2.13 - Restrictions on Business Activities
Schedule 2.14 - Title to Property
Schedule 2.15 - Taxes
Schedule 2.16 - Environmental Matters
Schedule 2.17 - Brokers; Third Party Expenses
Schedule 2.18 - Intellectual Property
Schedule 2.19 - Agreements, Contacts and Commitments
Schedule 2.20 - Insurance
Schedule 2.22 - Interested Party Transactions
Appendix I Schedules - (Listed on following page)
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Appendix I Schedules
Schedule I-1 Operation of Wells
Schedule I-2 Commitments
Schedule I-4 Gas Balancing
Schedule I-14 Status of Payout Accounts
Schedule I-16 Hedging
Schedule I-17 Seismic Data; Permits
Schedule I-18 Previously Owned Properties
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SCHEDULE 3
PARENT DISCLOSURE SCHEDULE
(Information Furnished Separately)
Schedule 3.3 - Capitalization
Schedule 3.14 - Title to Property
Schedule 3.19 - Agreements, Contracts and Commitments
Schedule 3.26 - Governmental Filings
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SCHEDULE 4.1
COMPANY AND PARENT PERMITTED ACTIONS
Company Permitted Actions:
(d) Pursuant to Section 7.16 of the Second Amended and Restated Loan and
Security Agreement dated May 24, 2005, by and among the Company, as Borrower,
the Financial Institutions named therein, as Lenders, Wells Fargo Foothill,
Inc., as Arranger and Administrative Agent, and Ableco Finance LLC, as
Documentation Agent (as amended, the "Loan Agreement"), the Company may not pay
or accrue total cash compensation during any calendar year to officers and
senior management employees in an aggregate amount in excess of 120% of that
paid or accrued during the preceding calendar year to all such persons. Pursuant
to Section 7.11 of the Loan Agreement, the Company is permitted to pay dividends
on its Common Stock, so long as when added to the amount of cash compensation
paid to all officers and senior management employees of the Company during any
year, the total amount so paid does not exceed the aggregate limitation on
compensation under Section 7.16. Prior to the Closing, the Company will continue
to pay ordinary quarterly dividends to the Stockholders consistent with
historical practices and within the restrictions imposed under the Loan
Agreement.
(d)-(e) Prior to the Closing, the Company shall be permitted to (i) pay an
extraordinary dividend to the Stockholders, and/or (ii) redeem such number of
outstanding shares of Company Common Stock as the Company shall determine;
provided that the aggregate amount paid by the Company pursuant to (i) and (ii)
shall not exceed an amount equal to the difference between $40,000,000 and the
Aggregate Cash Number. Ordinary dividends paid pursuant to the immediately
preceding paragraph of this Schedule 4.1 shall not be counted in determining the
maximum amount of dividends/redemption payments that may be made pursuant to
this paragraph.
(h)-(i) During the period prior to the Closing, the Company may (i) negotiate
for and consummate the sale, farmout or other disposition of oil and gas
properties in the ordinary course of business, (ii) negotiate for and consummate
the purchase of oil and gas properties in the ordinary course of business, and
(iii) investigate the possible acquisition of, but not negotiate for, acquire or
become contractually obligated to acquire, oil and gas properties, or the stock
of companies owning oil and gas properties, in any transaction which if
consummated would be other than in the ordinary course of business. As used
herein, the term "ordinary course or business" shall mean a sale or farmout
transaction involving the disposition of Company properties have a PV-10 value
(based on the June 30, 2005 reserve report) of less than $20 million, or a
transaction involving the acquisition of oil and gas properties, or the stock of
a company that owns oil and gas properties, for a purchase price consideration
of less than $20 million and that does not involve equity securities of the
Company.
(k) The RWG Energy, Inc. 401k Plan (in effect when RWG, formerly WG Energy
Holdings, Inc. was acquired by the Company in 2004) will be terminated effective
December 31, 2005. All participants in the Plan will be given the opportunity to
rollover their Plan balances into the Company 401k Plan. The RWG Energy, Inc.
Cafeteria Plan will be terminated effective
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December 31, 2005. Effective January 1, 2006, all participants in the Plan will
be given the opportunity to participate in the Company Cafeteria Plan.
(v) The President/CEO and Chairman of the Company historically have been
provided vehicles for business and personal use. Prior to the Closing, the
President/CEO and the family of the Chairman (who died unexpectedly on October
7, 2005) shall be offered the right to purchase from the Company the vehicles so
provided at each vehicle's book value, as reflected on the books of the Company.
The offices of the Company contain various items of furniture and art that were
selected by or currently are used by the President/CEO or, prior to his death,
the Chairman. Prior to the Closing, the President/CEO and the family of the
Chairman shall be offered the right to purchase from the Company such items of
furniture and art at each such item's book value, as reflected on the books of
the Company; provided, however, that (i) during the period the President/CEO
serves the Company in such capacity, items purchased by the President/CEO shall
remain in the Company's Tulsa office without charge by or reimbursement to the
President/CEO, and (ii) during the period the Company maintains an Oklahoma City
office, the items purchased by the family of the Chairman shall remain in the
Company's Oklahoma City office without charge by or reimbursement to the family
of the Chairman.
Parent Permitted Actions:
None
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SCHEDULE 5.2
DIRECTORS AND OFFICERS OF PARENT AND THE COMPANY
From and after the Closing, the following persons will the be the Directors and
Officers of Parent and the Company:
Directors
Larry E. Lee, Chairman
Sean P. Lane
Gerald R. Marshall
John M. Reardon
An independent director to be designated prior to Closing by the Stockholders
Officers
Larry E. Lee, Chairman, President and Chief Executive Officer
John M. Longmire, Senior Vice President and Chief Financial Officer
Larry G. Rampey, Senior Vice President
Drake N. Smiley, Senior Vice President
John L. Cox, Vice President, Secretary and Treasurer
Carol Gifford, Assistant Secretary
A-81
SCHEDULE 6.2(j)
PARENT RESIGNATIONS
All Directors and Officers of Parent who are in office immediately prior
to the Closing shall resign effective as of the Closing.
A-82
Annex B
AMENDMENT NO. 1
TO
MERGER AGREEMENT
AMENDMENT NO. 1, dated November 11, 2005, to the Agreement and Plan of
Merger ("Merger Agreement"), dated as of October 20, 2005, by and among Tremisis
Energy Acquisition Corporation, RAM Energy Acquisition, Inc., RAM Energy, Inc.
("RAM"), and each of the Stockholders of RAM.
IT IS HEREBY AGREED, that the Merger Agreement is immediately amended as
follows:
1. Subsection (a) of Section 1.6 is hereby restated in its entirety as
follows:
"(a) Conversion of Company Common Stock. Other than any shares to be
canceled pursuant to Section 1.6(c), each share of common stock, par value
$10.00, of the Company ("Company Common Stock") issued and outstanding
immediately prior to the Effective Time will be automatically converted
(subject to Section 1.6(f)) into the right to receive on the Closing Date
(i) that number of shares of common stock, par value $0.0001, of Parent
("Parent Common Stock") determined by dividing the Aggregate Parent Common
Stock Number by the Outstanding Company Stock Number, and (ii) that amount
of cash determined by dividing the Aggregate Cash Number by the
Outstanding Company Stock Number. The term "Aggregate Parent Common Stock
Number" shall mean 25,600,000. The term "Outstanding Company Stock Number"
shall mean the number of shares of Company Common Stock outstanding on the
Closing Date, after giving effect to all stock option exercises
contemplated hereby. The term "Aggregate Cash Number" shall mean the
lesser of (I) $30,000,000, and (II) the amount of cash distributed to
Parent from the Trust Fund at the Closing (after payment to those
stockholders of Parent who elect to have their shares converted to cash in
accordance with Parent's Charter Documents (as defined in Section 2.1(a)),
less the sum of all expenses reasonably incurred by Parent in connection
with the transaction contemplated hereby, and less the sum of $1,000,000
which shall be retained by Parent for working capital requirements."
2. Subsection (i) of Section 6.3 is hereby restated in its entirety as
follows:
"(i) Company Indebtedness. The Adjusted Indebtedness for Borrowed Money of
the Company, including the Subsidiaries, shall not exceed $125,000,000. As
used herein, the term "Adjusted Indebtedness for Borrowed Money" shall
mean the sum of all indebtedness of the Company for borrowed money, less
(1) the amount of any cash deposits posted by the Company as security in
connection with outstanding Company hedging contracts, (2) the positive
difference, if any, between $30,000,000 and the Aggregate Cash Number and
(3) an amount up to
$6.0 million for aggregate fees, costs and expenses paid by the Company in
connection with replacing, enhancing or improving its existing credit
facilities in a manner that, on the whole, is quantitatively more
beneficial to the Company.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
the Merger Agreement to be executed as of the date first written above.
TREMISIS ENERGY ACQUISITION CORPORATION
By: ___________________________________
Lawrence S. Coben
Chairman & CEO
RAM ENERGY ACQUISITION, INC.
By: ___________________________________
Lawrence S. Coben
Chairman & CEO
RAM ENERGY, INC.
By: ___________________________________
Larry E. Lee
President & CEO
STOCKHOLDERS:
[See separate signature pages.]
B-3
STOCKHOLDER SIGNATURE PAGE TO AMENDMENT NO. 1
TO MERGER AGREEMENT
______________________________________
Larry E. Lee
DANISH KNIGHTS, A LIMITED PARTNERSHIP,
A Texas Limited Partnership
By: Dannebrog Corp., General Partner
By: __________________________________
Britani Talley Bowman
President
The undersigned agrees that, upon exercise of the stock option referred to in
Section 1.13 of the Merger Agreement, he shall be considered to be, and shall
be, a Stockholder (as defined therein) for all purposes of such Merger
Agreement, as amended hereby.
______________________________________
C. David Stinson
B-4
Annex C
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TREMISIS ENERGY ACQUISITION CORPORATION
--------------------------------
Pursuant to Section 245 of the
Delaware General Corporation Law
--------------------------------
Tremisis Energy Acquisition Corporation, a corporation existing under the
laws of the State of Delaware (the "Corporation"), by its Chairman of the Board
and Chief Executive Officer, hereby certifies as follows:
1. The name of the Corporation is "Tremisis Energy Acquisition
Corporation."
2. The Corporation's Certificate of Incorporation was filed in the office
of the Secretary of State of the State of Delaware on February 5, 2004.
3. This Amended Restated Certificate of Incorporation restates, integrates
and amends the Amended and Restated Certificate of Incorporation of the
Corporation.
4. This Amended and Restated Certificate of Incorporation was duly adopted
by the directors and stockholders of the Corporation in accordance with the
applicable provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware ("GCL").
5. The text of the Amended and Restated Certificate of Incorporation of
the Corporation is hereby amended and restated to read in full as follows:
FIRST: The name of the corporation is RAM Energy Resources, Inc.
(hereinafter sometimes referred to as the "Corporation").
SECOND: The registered office of the Corporation is to be located at 9
East Loockerman Street, Kent County, Dover, Delaware. The name of its registered
agent at that address is National Corporate Research, Ltd.
THIRD: The purpose of the Corporation shall be to engage in any lawful act
or activity for which corporations may be organized under the GCL.
FOURTH: The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is 101,000,000 of which
100,000,000 shares shall be Common Stock of the par value of $.0001 per share
and 1,000,000 shares shall be Preferred Stock of the par value of $.0001 per
share.
A. Preferred Stock. The Board of Directors is expressly granted authority
to issue shares of the Preferred Stock, in one or more series, and to fix for
each such series such voting powers, full or limited, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issue of such series (a "Preferred Stock Designation") and as
may be permitted by the GCL. The number of authorized shares of Preferred Stock
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors (the "Voting
Stock"), voting together as a single class, without a separate vote of the
holders of the Preferred Stock, or any series thereof, unless a vote of any such
holders is required pursuant to any Preferred Stock Designation.
B. Common Stock. Except as otherwise required by law or as otherwise
provided in any Preferred Stock Designation, the holders of the Common Stock
shall exclusively possess all voting power and each share of Common Stock shall
have one vote.
FIFTH: The name and mailing address of the sole incorporator of the
Corporation are as follows:
Name Address
---- -------
Jeffrey M. Gallant Graubard Miller
The Chrysler Building
405 Lexington Avenue, 19th Floor
New York, NY 10174
SIXTH: The Board of Directors shall be divided into three classes: Class
A, Class B and Class C. The number of directors in each class shall be as nearly
equal as possible. At the first election of directors by the incorporator, the
incorporator shall elect a Class C director for a term expiring at the
Corporation's third Annual Meeting of Stockholders. The Class C director shall
then elect additional Class A, Class B and Class C directors. The directors in
Class A shall be elected for a term expiring at the first Annual Meeting of
Stockholders, the directors in Class B shall be elected for a term expiring at
the second Annual Meeting of Stockholders and the
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directors in Class C shall be elected for a term expiring at the third Annual
Meeting of Stockholders. Commencing at the first Annual Meeting of Stockholders,
and at each annual meeting thereafter, directors elected to succeed those
directors whose terms expire shall be elected for a term of office to expire at
the third succeeding annual meeting of stockholders after their election. Except
as the GCL may otherwise require, in the interim between annual meetings of
stockholders or special meetings of stockholders called for the election of
directors and/or the removal of one or more directors and the filling of any
vacancy in that connection, newly created directorships and any vacancies in the
Board of Directors, including unfilled vacancies resulting from the removal of
directors for cause, may be filled by the vote of a majority of the remaining
directors then in office, although less than a quorum (as defined in the
Corporation's Bylaws), or by the sole remaining director. All directors shall
hold office until the expiration of their respective terms of office and until
their successors shall have been elected and qualified. A director elected to
fill a vacancy resulting from the death, resignation or removal of a director
shall serve for the remainder of the full term of the director whose death,
resignation or removal shall have created such vacancy and until his successor
shall have been elected and qualified.
SEVENTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. Election of directors need not be by ballot unless the by-laws of the
Corporation so provide.
B. The Board of Directors shall have the power, without the assent or vote
of the stockholders, to make, alter, amend, change, add to or repeal the by-laws
of the Corporation as provided in the by-laws of the Corporation.
C. The directors in their discretion may submit any contract or act for
approval or ratification at any annual meeting of the stockholders or at any
meeting of the stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or be ratified by
the vote of the holders of a majority of the stock of the Corporation which is
represented in person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in person or
by proxy) shall be as valid and binding upon the Corporation and upon all the
stockholders as though it had been approved or ratified by every stockholder of
the Corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors' interests, or for any other reason.
D. In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this Certificate of Incorporation, and to any by-laws from time to
time made by the stockholders; provided, however, that no by-law so made shall
C-3
invalidate any prior act of the directors which would have been valid if such
by-law had not been made.
EIGHTH: A. A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
GCL is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the GCL, as so amended. Any repeal or modification of this paragraph A by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation with respect to events occurring
prior to the time of such repeal or modification.
B. The Corporation, to the full extent permitted by Section 145 of
the GCL, as amended from time to time, shall indemnify all persons whom it may
indemnify pursuant thereto. Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative, or
investigative action, suit or proceeding for which such officer or director may
be entitled to indemnification hereunder shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized hereby.
NINTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
C-4
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by Lawrence S. Coben, its Chairman of
the Board and Chief Executive Officer, as of this __ day of ________, 200_.
----------------------------------
Name: Lawrence S. Coben.
Title: Chairman of the Board and
Chief Executive Officer
C-5
Annex D
RAM ENERGY RESOURCES, INC.
2006 LONG-TERM INCENTIVE PLAN
ARTICLE I
PURPOSE
SECTION 1.1 Purpose. This 2006 Long-Term Incentive Plan (the "Plan") is
established by RAM Energy Resources, Inc., a Delaware corporation (the
"Company") to create incentives which are designed to motivate Participants to
put forth maximum effort toward the success and growth of the Company and to
enable the Company to attract and retain experienced individuals who by their
position, ability and diligence are able to make important contributions to the
Company's success. Toward these objectives, the Plan provides for the grant of
Options, Restricted Stock Awards, SARs, Performance Units and Performance
Bonuses to Eligible Employees and the grant of Nonqualified Stock Options,
Restricted Stock Awards, SARs and Performance Units to Consultants and Eligible
Directors, subject to the conditions set forth in the Plan.
SECTION 1.2 Establishment. The Plan is effective as of ___________, 2006
and for a period of ten years thereafter. The Plan shall continue in effect
until all matters relating to the payment of Awards and administration of the
Plan have been settled. The Plan is subject to approval by the holders of a
majority of the outstanding shares of Common Stock, present, or represented, and
entitled to vote at a meeting called for such purposes, which approval must
occur within the period ending twelve months after the date the Plan is adopted
by the Board. Pending such approval by the shareholders, Awards under the Plan
may be granted, but no such Awards may be exercised prior to receipt of
shareholder approval. In the event shareholder approval is not obtained within a
twelve-month period, all Awards granted shall be void.
SECTION 1.3 Shares Subject to the Plan. Subject to the limitations set
forth in the Plan, Awards may be made under this Plan for a total of 2,400,000
shares of the Company's common stock, par value $.0001 per share (the "Common
Stock"). A maximum of 1,200,000 shares of Common Stock of the total authorized
under this Section 1.3 may be granted as Incentive Stock Options. The
limitations of this Section 1.3 shall be subject to the adjustment provisions of
Article X.
ARTICLE II
DEFINITIONS
SECTION 2.1 "Account" means the recordkeeping account established by the
Company to which will be credited an Award of Performance Units to a
Participant.
SECTION 2.2 "Affiliated Entity" means any corporation, partnership,
limited liability company or other form of legal entity in which a majority of
the partnership or other similar interest thereof is owned or controlled,
directly or indirectly, by the Company or one or more of its Subsidiaries or
Affiliated Entities or a combination thereof. For purposes hereof, the Company,
a Subsidiary or an Affiliated Entity shall be deemed to have a majority
ownership interest in a partnership or limited liability company if the Company,
such Subsidiary or Affiliated Entity shall be allocated a majority of
partnership or limited liability company gains or
losses or shall be or control a managing director or a general partner of such
partnership or limited liability company.
SECTION 2.3 "Award" means, individually or collectively, any Option,
Restricted Stock Award, SAR, Performance Unit or Performance Bonus granted under
the Plan to an Eligible Employee by the Board or any Nonqualified Stock Option,
Performance Unit SAR or Restricted Stock Award granted under the Plan to a
Consultant or an Eligible Director by the Board pursuant to such terms,
conditions, restrictions, and/or limitations, if any, as the Board may establish
by the Award Agreement or otherwise.
SECTION 2.4 "Award Agreement" means any written instrument that
establishes the terms, conditions, restrictions, and/or limitations applicable
to an Award in addition to those established by this Plan and by the Board's
exercise of its administrative powers.
SECTION 2.5 "Board" means the Board of Directors of the Company and, if
the Board has appointed a Committee as provided in Section 3.1, the term "Board"
shall include such Committee.
SECTION 2.6 "Change of Control Event" means each of the following:
(i) Any transaction in which shares of voting securities of
the Company representing more than 50% of the total combined voting power of all
outstanding voting securities of the Company are issued by the Company, or sold
or transferred by the shareholders of the Company as a result of which those
persons and entities who beneficially owned voting securities of the Company
representing more than 50% of the total combined voting power of all outstanding
voting securities of the Company immediately prior to such transaction cease to
beneficially own voting securities of the Company representing more than 50% of
the total combined voting power of all outstanding voting securities of the
Company immediately after such transaction;
(ii) The merger or consolidation of the Company with or into
another entity as a result of which those persons and entities who beneficially
owned voting securities of the Company representing more than 50% of the total
combined voting power of all outstanding voting securities of the Company
immediately prior to such merger or consolidation cease to beneficially own
voting securities of the Company representing more than 50% of the total
combined voting power of all outstanding voting securities of the surviving
corporation or resulting entity immediately after such merger of consolidation ;
or
(iii) The sale of all or substantially all of the Company's
assets to an entity of which those persons and entities who beneficially owned
voting securities of the Company representing more than 50% of the total
combined voting power of all outstanding voting securities of the Company
immediately prior to such asset sale do not beneficially own voting securities
of the purchasing entity representing more than 50% of the total combined voting
power of all outstanding voting securities of the purchasing entity immediately
after such asset sale.
D-2
SECTION 2.7 "Code" means the Internal Revenue Code of 1986, as amended.
References in the Plan to any section of the Code shall be deemed to include any
amendments or successor provisions to such section and any regulations under
such section.
SECTION 2.8 "Committee" means the Committee appointed by the Board as
provided in Section 3.1.
SECTION 2.9 "Common Stock" means the common stock, par value $.00001 per
share, of the Company, and after substitution, such other stock as shall be
substituted therefore as provided in Article X.
SECTION 2.10 "Consultant" means any person who is engaged by the Company,
a Subsidiary or an Affiliated Entity to render consulting or advisory services.
SECTION 2.11 "Date of Grant" means the date on which the grant of an Award
is authorized by the Board or such later date as may be specified by the Board
in such authorization.
SECTION 2.12 "Disability" means the Participant is unable to continue
employment by reason of any medically determinable physical or mental impairment
which can be expected to result in death or can be expected to last for a
continuous period of not less than 12 months. For purposes of this Plan, the
determination of Disability shall be made in the sole and absolute discretion of
the Board.
SECTION 2.13 "Eligible Employee" means any employee of the Company, a
Subsidiary, or an Affiliated Entity as approved by the Board.
SECTION 2.14 "Eligible Director" means any member of the Board who is not
an employee of the Company, a Subsidiary or an Affiliated Entity.
SECTION 2.15 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
SECTION 2.16 "Fair Market Value" means (A) during such time as the Common
Stock is registered under Section 12 of the Exchange Act, the closing price of
the Common Stock as reported by an established stock exchange or automated
quotation system on the day for which such value is to be determined, or, if no
sale of the Common Stock shall have been made on any such stock exchange or
automated quotation system that day, on the next preceding day on which there
was a sale of such Common Stock, or (B) during any such time as the Common Stock
is not listed upon an established stock exchange or automated quotation system,
the mean between dealer "bid" and "ask" prices of the Common Stock in the
over-the-counter market on the day for which such value is to be determined, as
reported by the National Association of Securities Dealers, Inc., or (C) during
any such time as the Common Stock cannot be valued pursuant to (A) or (B) above,
the fair market value shall be as determined by the Board considering all
relevant information including, by example and not by limitation, the services
of an independent appraiser.
D-3
SECTION 2.17 "Incentive Stock Option" means an Option within the meaning
of Section 422 of the Code.
SECTION 2.18 "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
SECTION 2.19 "Option" means an Award granted under Article V of the Plan
and includes both Nonqualified Stock Options and Incentive Stock Options to
purchase shares of Common Stock.
SECTION 2.20 "Participant" means an Eligible Employee, a Consultant or an
Eligible Director to whom an Award has been granted by the Board under the Plan.
SECTION 2.21 "Performance Bonus" means the cash bonus which may be granted
to Eligible Employees under Article IX of the Plan.
SECTION 2.22 "Performance Units" means those monetary units that may be
granted to Eligible Employees, Consultants or Eligible Directors pursuant to
Article VIII hereof.
SECTION 2.23 "Plan" means [Parent] Corporation 2006 Long-Term Incentive
Plan.
SECTION 2.24 "Restricted Stock Award" means an Award granted to an
Eligible Employee, Consultant or Eligible Director under Article VI of the Plan.
SECTION 2.25 "Retirement" means the termination of an Eligible Employee's
employment with the Company, a Subsidiary or an Affiliated Entity on or after
attaining age 62.
SECTION 2.26 "SAR" means a stock appreciation right granted to an Eligible
Employee, Consultant or Eligible Director under Article VII of the Plan.
SECTION 2.27 "Subsidiary" shall have the same meaning set forth in Section
424 of the Code.
ARTICLE III
ADMINISTRATION
SECTION 3.1 Administration of the Plan by the Board. The Board shall
administer the Plan. The Board may, by resolution, appoint a committee to
administer the Plan and delegate its powers described under this Section 3.1 for
purposes of Awards granted to Eligible Employees and Consultants.
Subject to the provisions of the Plan, the Board shall have exclusive
power to:
(a) Select Eligible Employees and Consultants to participate in the Plan.
(b) Determine the time or times when Awards will be made to Eligible
Employees or Consultants.
D-4
(c) Determine the form of an Award, whether an Incentive Stock Option,
Nonqualified Stock Option, Restricted Stock Award, SAR, Performance Unit,
or Performance Bonus, the number of shares of Common Stock or Performance
Units subject to the Award, the amount and all the terms, conditions
(including performance requirements), restrictions and/or limitations, if
any, of an Award, including the time and conditions of exercise or
vesting, and the terms of any Award Agreement, which may include the
waiver or amendment of prior terms and conditions or acceleration or early
vesting or payment of an Award under certain circumstances determined by
the Board.
(d) Determine whether Awards will be granted singly or in combination.
(e) Accelerate the vesting, exercise or payment of an Award or the
performance period of an Award.
(f) Determine whether and to what extent a Performance Bonus may be
deferred, either automatically or at the election of the Participant or
the Board.
(g) Take any and all other action it deems necessary or advisable for the
proper operation or administration of the Plan.
SECTION 3.2 Administration of Grants to Eligible Directors. The Board
shall have the exclusive power to select Eligible Directors to participate in
the Plan and to determine the number of Nonqualified Stock Options, Performance
Units, SARs or shares of Restricted Stock awarded to Eligible Directors selected
for participation. If the Board appoints a committee to administer the Plan, it
may delegate to the committee administration of all other aspects of the Awards
made to Eligible Directors.
SECTION 3.3 Board to Make Rules and Interpret Plan. The Board in its sole
discretion shall have the authority, subject to the provisions of the Plan, to
establish, adopt, or revise such rules and regulations and to make all such
determinations relating to the Plan, as it may deem necessary or advisable for
the administration of the Plan. The Board's interpretation of the Plan or any
Awards and all decisions and determinations by the Board with respect to the
Plan shall be final, binding, and conclusive on all parties.
SECTION 3.4 Section 162(m) Provisions. The Company intends for the Plan
and the Awards made thereunder to qualify for the exception from Section 162(m)
of the Code for "qualified performance based compensation" if it is determined
by the Board that such qualification is necessary for an Award. Accordingly, the
Board shall make determinations as to performance targets and all other
applicable provisions of the Plan as necessary in order for the Plan and Awards
made thereunder to satisfy the requirements of Section 162(m) of the Code.
ARTICLE IV
GRANT OF AWARDS
SECTION 4.1 Grant of Awards. Awards granted under this Plan shall be
subject to the following conditions:
D-5
(a) Subject to Article X, the aggregate number of shares of Common Stock
made subject to the grant of Options and/or SARs to any Eligible Employee in any
calendar year may not exceed 100,000.
(b) Subject to Article X, the aggregate number of shares of Common Stock
made subject to the grant of Restricted Stock Awards and Performance Unit Awards
to any Eligible Employee in any calendar year may not exceed 100,000.
(c) The maximum amount made subject to the grant of Performance Bonuses to
any Eligible Employee in any calendar year may not exceed $500,000.
(d) Any shares of Common Stock related to Awards which terminate by
expiration, forfeiture, cancellation or otherwise without the issuance of shares
of Common Stock or are exchanged in the Board's discretion for Awards not
involving Common Stock, shall be available again for grant under the Plan and
shall not be counted against the shares authorized under Section 1.3.
(e) Common Stock delivered by the Company in payment of an Award
authorized under Articles V and VI of the Plan may be authorized and unissued
Common Stock or Common Stock held in the treasury of the Company.
(f) The Board shall, in its sole discretion, determine the manner in which
fractional shares arising under this Plan shall be treated.
(g) Separate certificates or a book-entry registration representing Common
Stock shall be delivered to a Participant upon the exercise of any Option.
(h) The Board shall be prohibited from canceling, reissuing or modifying
Awards if such action will have the effect of repricing the Participant's Award.
(i) Eligible Directors may only be granted Nonqualified Stock Options,
Restricted Stock Awards, SARs or Performance Units under this Plan.
(j) Subject to Article X, the aggregate number of shares of Common Stock
made subject to the grant of Options to any individual Eligible Director in any
calendar year may not exceed 10,000.
(k) Subject to Article X, in no event shall more than 10,000 shares of
Restricted Stock be awarded to any individual Eligible Director in any calendar
year.
(l) The maximum term of any Award shall be ten years.
ARTICLE V
STOCK OPTIONS
SECTION 5.1 Grant of Options. The Board may, from time to time, subject to
the provisions of the Plan and such other terms and conditions as it may
determine, grant Options to Eligible Employees. These Options may be Incentive
Stock Options or Nonqualified Stock
D-6
Options, or a combination of both. The Board may, subject to the provisions of
the Plan and such other terms and conditions as it may determine, grant
Nonqualified Stock Options to Eligible Directors and Consultants. Each grant of
an Option shall be evidenced by an Award Agreement executed by the Company and
the Participant, and shall contain such terms and conditions and be in such form
as the Board may from time to time approve, subject to the requirements of
SECTION 5.2 Conditions of Options. Each Option so granted shall be subject
to the following conditions:
(a) Exercise Price. As limited by Section 5.2(e) below, each Option shall
state the exercise price which shall be set by the Board at the Date of Grant;
provided, however, no Option shall be granted at an exercise price which is less
than the Fair Market Value of the Common Stock on the Date of Grant.
(b) Form of Payment. The exercise price of an Option may be paid (i) in
cash or by check, bank draft or money order payable to the order of the Company;
(ii) by delivering shares of Common Stock having a Fair Market Value on the date
of payment equal to the amount of the exercise price, but only to the extent
such exercise of an Option would not result in an adverse accounting charge to
the Company for financial accounting purposes with respect to the shares used to
pay the exercise price unless otherwise determined by the Board; or (iii) a
combination of the foregoing. In addition to the foregoing, the Board may permit
an Option granted under the Plan to be exercised by a broker-dealer acting on
behalf of a Participant through procedures approved by the Board.
(c) Exercise of Options. Options granted under the Plan shall be
exercisable, in whole or in such installments and at such times, and shall
expire at such time, as shall be provided by the Board in the Award Agreement.
Exercise of an Option shall be by written notice to the Secretary of the Company
at least two business days in advance of such exercise stating the election to
exercise in the form and manner determined by the Board. Every share of Common
Stock acquired through the exercise of an Option shall be deemed to be fully
paid at the time of exercise and payment of the exercise price.
(d) Other Terms and Conditions. Among other conditions that may be imposed
by the Board, if deemed appropriate, are those relating to (i) the period or
periods and the conditions of exercisability of any Option; (ii) the minimum
periods during which Participants must be employed by the Company, its
Subsidiaries, or an Affiliated Entity, or must hold Options before they may be
exercised; (iii) the minimum periods during which shares acquired upon exercise
must be held before sale or transfer shall be permitted; (iv) conditions under
which such Options or shares may be subject to forfeiture; (v) the frequency of
exercise or the minimum or maximum number of shares that may be acquired at any
one time; (vi) the achievement by the Company of specified performance criteria;
and (vii) non-compete and protection of business matters.
(e) Special Restrictions Relating to Incentive Stock Options. Options
issued in the form of Incentive Stock Options shall only be granted to Eligible
Employees of the Company or a Subsidiary, and not to Eligible Employees of an
Affiliated Entity unless such entity shall be
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considered as a "disregarded entity" under the Code and shall not be
distinguished for federal tax purposes from the Company or the applicable
Subsidiary.
(f) Application of Funds. The proceeds received by the Company from the
sale of Common Stock pursuant to Options will be used for general corporate
purposes.
(g) Shareholder Rights. No Participant shall have a right as a shareholder
with respect to any share of Common Stock subject to an Option prior to purchase
of such shares of Common Stock by exercise of the Option.
ARTICLE VI
RESTRICTED STOCK AWARDS
SECTION 6.1 Grant of Restricted Stock Awards. The Board may, from time to
time, subject to the provisions of the Plan and such other terms and conditions
as it may determine, grant a Restricted Stock Award to Eligible Employees,
Consultants or Eligible Directors. Restricted Stock Awards shall be awarded in
such number and at such times during the term of the Plan as the Board shall
determine. Each Restricted Stock Award shall be subject to an Award Agreement
setting forth the terms of such Restricted Stock Award and may be evidenced in
such manner as the Board deems appropriate, including, without limitation, a
book-entry registration or issuance of a stock certificate or certificates. .
SECTION 6.2 Conditions of Restricted Stock Awards. The grant of a
Restricted Stock Award shall be subject to the following:
(a) Restriction Period. Restricted Stock Awards granted to an Eligible
Employee shall require the holder to remain in the employment of the Company, a
Subsidiary, or an Affiliated Entity for a prescribed period. Restricted Stock
Awards granted to Consultants or Eligible Directors shall require the holder to
provide continued services to the company for a period of time. These employment
and service requirements are collectively referred to as a "Restriction Period".
The Board or the Committee, as the case may be, shall determine the Restriction
Period or Periods which shall apply to the shares of Common Stock covered by
each Restricted Stock Award or portion thereof. In addition to any time vesting
conditions determined by the Board or the Committee, as the case may be,
Restricted Stock Awards may be subject to the achievement by the Company of
specified performance criteria based upon the Company's achievement of all or
any of the operational, financial or stock performance criteria set forth on
Exhibit A annexed hereto, as may from time to time be established by the Board
or the Committee, as the case may be. At the end of the Restriction Period,
assuming the fulfillment of any other specified vesting conditions, the
restrictions imposed by the Board or the Committee, as the case may be shall
lapse with respect to the shares of Common Stock covered by the Restricted Stock
Award or portion thereof. In addition to acceleration of vesting upon the
occurrence of a Change of Control Event as provided in Section 11.6, the Board
or the Committee, as the case may be, may, in its discretion, accelerate the
vesting of a Restricted Stock Award in the case of the death, Disability or
Retirement of the Participant who is an Eligible Employee or resignation of a
Participant who is a Consultants or an Eligible Director.
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(b) Restrictions. The holder of a Restricted Stock Award may not sell,
transfer, pledge, exchange, hypothecate, or otherwise dispose of the shares of
Common Stock represented by the Restricted Stock Award during the applicable
Restriction Period. The Board shall impose such other restrictions and
conditions on any shares of Common Stock covered by a Restricted Stock Award as
it may deem advisable including, without limitation, restrictions under
applicable Federal or state securities laws, and may legend the certificates
representing Restricted Stock to give appropriate notice of such restrictions.
(c) Rights as Shareholders. During any Restriction Period, the Board may,
in its discretion, grant to the holder of a Restricted Stock Award all or any of
the rights of a shareholder with respect to the shares, including, but not by
way of limitation, the right to vote such shares and to receive dividends. If
any dividends or other distributions are paid in shares of Common Stock, all
such shares shall be subject to the same restrictions on transferability as the
shares of Restricted Stock with respect to which they were paid.
ARTICLE VII
STOCK APPRECIATION RIGHTS
SECTION 7.1 Grant of SARs. The Board may from time to time, in its sole
discretion, subject to the provisions of the Plan and subject to other terms and
conditions as the Board may determine, grant a SAR to any Eligible Employee,
Consultant or Eligible Director. SARs may be granted in tandem with an Option,
in which event, the Participant has the right to elect to exercise either the
SAR or the Option. Upon the Participant's election to exercise one of these
Awards, the other tandem Award is automatically terminated. SARs may also be
granted as an independent Award separate from an Option. Each grant of a SAR
shall be evidenced by an Award Agreement executed by the Company and the
Participant and shall contain such terms and conditions and be in such form as
the Board may from time to time approve, subject to the requirements of the
Plan. The exercise price of the SAR shall not be less than the Fair Market Value
of a share of Common Stock on the Date of Grant of the SAR.
SECTION 7.2 Exercise and Payment. SARs granted under the Plan shall be
exercisable in whole or in installments and at such times as shall be provided
by the Board in the Award Agreement. Exercise of a SAR shall be by written
notice to the Secretary of the Company at least two business days in advance of
such exercise. The amount payable with respect to each SAR shall be equal in
value to the excess, if any, of the Fair Market Value of a share of Common Stock
on the exercise date over the exercise price of the SAR. Payment of amounts
attributable to a SAR shall be made in shares of Common Stock.
SECTION 7.3 Restrictions. In the event a SAR is granted in tandem with an
Incentive Stock Option, the Board shall subject the SAR to restrictions
necessary to ensure satisfaction of the requirements under Section 422 of the
Code. In the case of a SAR granted in tandem with an Incentive Stock Option to
an Eligible Employee who owns more than 10% of the combined voting power of the
Company or its Subsidiaries on the date of such grant, the amount payable with
respect to each SAR shall be equal in value to the applicable percentage of the
excess, if any, of the Fair Market Value of a share of Common Stock on the
exercise date over the exercise price of the SAR, which exercise price shall not
be less than 110% of the Fair Market Value of a share of Common Stock on the
date the SAR is granted.
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ARTICLE VIII
PERFORMANCE UNITS
SECTION 8.1 Grant of Awards. The Board may, from time to time, subject to
the provisions of the Plan and such other terms and conditions as it may
determine, grant Performance Units to Eligible Employees, Consultants and
Eligible Directors. Each Award of Performance Units shall be evidenced by an
Award Agreement executed by the Company and the Participant, and shall contain
such terms and conditions and be in such form as the Board may from time to time
approve, subject to the requirements of Section 8.2.
SECTION 8.2 Conditions of Awards. Each Award of Performance Units shall be
subject to the following conditions:
(a) Establishment of Award Terms. Each Award shall state the target,
maximum and minimum value of each Performance Unit payable upon the achievement
of performance goals.
(b) Achievement of Performance Goals. The Board shall establish
performance targets for each Award for a period of no less than a year based
upon some or all of the operational, financial or performance criteria listed in
Exhibit A attached. The Board shall also establish such other terms and
conditions as it deems appropriate to such Award. The Award may be paid out in
cash or Common Stock as determined in the sole discretion of the Board.
ARTICLE IX
PERFORMANCE BONUS
SECTION 9.1 Grant of Performance Bonus. The Board may from time to time,
subject to the provisions of the Plan and such other terms and conditions as the
Board may determine, grant a Performance Bonus to certain Eligible Employees
selected for participation. The Board will determine the amount that may be
earned as a Performance Bonus in any period of one year or more upon the
achievement of a performance target established by the Board. The Board shall
select the applicable performance target(s) for each period in which a
Performance Bonus is awarded. The performance target shall be based upon all or
some of the operational, financial or performance criteria more specifically
listed in Exhibit A attached.
SECTION 9.2 Payment of Performance Bonus. In order for any Participant to
be entitled to payment of a Performance Bonus, the applicable performance
target(s) established by the Board must first be obtained or exceeded. Payment
of a Performance Bonus shall be made within 60 days of the Board's certification
that the performance target(s) has been achieved unless the Participant has
previously elected to defer payment pursuant to a nonqualified deferred
compensation plan adopted by the Company. Payment of a Performance Bonus may be
made in either cash or Common Stock as determined in the sole discretion of the
Board.
ARTICLE X
STOCK ADJUSTMENTS
In the event that the shares of Common Stock, as constituted on the
effective date of the Plan, shall be changed into or exchanged for a different
number or kind of shares of stock or other securities of the Company or of
another corporation (whether by reason of merger,
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consolidation, recapitalization, reclassification, stock split, spin-off,
combination of shares or otherwise), or if the number of such shares of Common
Stock shall be increased through the payment of a stock dividend, or a dividend
on the shares of Common Stock, or if rights or warrants to purchase securities
of the Company shall be issued to holders of all outstanding Common Stock, then
there shall be substituted for or added to each share available under and
subject to the Plan, and each share theretofore appropriated under the Plan, the
number and kind of shares of stock or other securities into which each
outstanding share of Common Stock shall be so changed or for which each such
share shall be exchanged or to which each such share shall be entitled, as the
case may be, on a fair and equivalent basis in accordance with the applicable
provisions of Section 424 of the Code; provided, however, with respect to
Options, in no such event will such adjustment result in a modification of any
Option as defined in Section 424(h) of the Code. In the event there shall be any
other change in the number or kind of the outstanding shares of Common Stock, or
any stock or other securities into which the Common Stock shall have been
changed or for which it shall have been exchanged, then if the Board shall, in
its sole discretion, determine that such change equitably requires an adjustment
in the shares available under and subject to the Plan, or in any Award,
theretofore granted, such adjustments shall be made in accordance with such
determination, except that no adjustment of the number of shares of Common Stock
available under the Plan or to which any Award relates that would otherwise be
required shall be made unless and until such adjustment either by itself or with
other adjustments not previously made would require an increase or decrease of
at least 1% in the number of shares of Common Stock available under the Plan or
to which any Award relates immediately prior to the making of such adjustment
(the "Minimum Adjustment"). Any adjustment representing a change of less than
such minimum amount shall be carried forward and made as soon as such adjustment
together with other adjustments required by this Article X and not previously
made would result in a Minimum Adjustment. Notwithstanding the foregoing, any
adjustment required by this Article X which otherwise would not result in a
Minimum Adjustment shall be made with respect to shares of Common Stock relating
to any Award immediately prior to exercise, payment or settlement of such Award.
No fractional shares of Common Stock or units of other securities shall be
issued pursuant to any such adjustment, and any fractions resulting from any
such adjustment shall be eliminated in each case by rounding downward to the
nearest whole share.
ARTICLE XI
GENERAL
SECTION 11.1 Amendment or Termination of Plan. The Board may alter,
suspend or terminate the Plan at any time. In addition, the Board may, from time
to time, amend the Plan in any manner, but may not without shareholder approval
adopt any amendment which would (i) increase the aggregate number of shares of
Common Stock available under the Plan (except by operation of Article X), (ii)
materially modify the requirements as to eligibility for participation in the
Plan, or (iii) materially increase the benefits to Participants provided by the
Plan.
SECTION 11.2 Termination of Employment; Termination of Service. If an
Eligible Employee's employment with the Company, a Subsidiary or an Affiliated
Entity terminates as a result of death, Disability or Retirement, the Eligible
Employee (or personal representative in the case of death) shall be entitled to
purchase all or any part of the shares subject to any (i) vested Incentive Stock
Option for a period of up to three months from such date of termination (one
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year in the case of death or Disability (as defined above) in lieu of the
three-month period), and (ii) vested Nonqualified Stock Option during the
remaining term of the Option. If an Eligible Employee's employment terminates
for any other reason, the Eligible Employee shall be entitled to purchase all or
any part of the shares subject to any vested Option for a period of up to three
months from such date of termination. In no event shall any Option be
exercisable past the term of the Option. The Board may, in its sole discretion,
accelerate the vesting of unvested Options in the event of termination of
employment of any Participant.
In the event a Consultant ceases to provide services to the Company or an
Eligible Director terminates service as a director of the Company, the unvested
portion of any Award shall be forfeited unless otherwise accelerated pursuant to
the terms of the Eligible Director's Award Agreement or by the Board. The
Consultant or Eligible Director shall have a period of three years following the
date he ceases to provide consulting services or ceases to be a director, as
applicable, to exercise any Nonqualified Stock Options which are otherwise
exercisable on his date of termination of service.
SECTION 11.3 Limited Transferability - Options. The Board may, in its
discretion, authorize all or a portion of the Nonqualified Stock Options granted
under this Plan to be on terms which permit transfer by the Participant to (i)
the ex-spouse of the Participant pursuant to the terms of a domestic relations
order, (ii) the spouse, children or grandchildren of the Participant ("Immediate
Family Members"), (iii) a trust or trusts for the exclusive benefit of such
Immediate Family Members, or (iv) a partnership or limited liability company in
which such Immediate Family Members are the only partners or members. In
addition there may be no consideration for any such transfer. The Award
Agreement pursuant to which such Nonqualified Stock Options are granted
expressly provide for transferability in a manner consistent with this
paragraph. Subsequent transfers of transferred Nonqualified Stock Options shall
be prohibited except as set forth below in this Section 11.3. Following
transfer, any such Nonqualified Stock Options shall continue to be subject to
the same terms and conditions as were applicable immediately prior to transfer,
provided that for purposes of Section 11.2 hereof the term "Participant" shall
be deemed to refer to the transferee. The events of termination of employment of
Section 11.2 hereof shall continue to be applied with respect to the original
Participant, following which the Nonqualified Stock Options shall be exercisable
by the transferee only to the extent, and for the periods specified in Section
11.2 hereof. No transfer pursuant to this Section 11.3 shall be effective to
bind the Company unless the Company shall have been furnished with written
notice of such transfer together with such other documents regarding the
transfer as the Board shall request. With the exception of a transfer in
compliance with the foregoing provisions of this Section 11.3, all other types
of Awards authorized under this Plan shall be transferable only by will or the
laws of descent and distribution; however, no such transfer shall be effective
to bind the Company unless the Board has been furnished with written notice of
such transfer and an authenticated copy of the will and/or such other evidence
as the Board may deem necessary to establish the validity of the transfer and
the acceptance by the transferee of the terms and conditions of such Award.
SECTION 11.4 Withholding Taxes. Unless otherwise paid by the Participant,
the Company, its Subsidiaries or any of its Affiliated Entities shall be
entitled to deduct from any payment under the Plan, regardless of the form of
such payment, the amount of all applicable income and employment taxes required
by law to be withheld with respect to such payment or
D-12
may require the Participant to pay to it such tax prior to and as a condition of
the making of such payment. In accordance with any applicable administrative
guidelines it establishes, the Board may allow a Participant to pay the amount
of taxes required by law to be withheld from an Award by (i) directing the
Company to withhold from any payment of the Award a number of shares of Common
Stock having a Fair Market Value on the date of payment equal to the amount of
the required withholding taxes or (ii) delivering to the Company previously
owned shares of Common Stock having a Fair Market Value on the date of payment
equal to the amount of the required withholding taxes. However, any payment made
by the Participant pursuant to either of the foregoing clauses (i) or (ii) shall
not be permitted if it would result in an adverse accounting charge with respect
to such shares used to pay such taxes unless otherwise approved by the Board.
SECTION 11.5 Change of Control. Notwithstanding any other provision in
this Plan to the contrary, Awards granted under the Plan to any Eligible
Employee, Consultant or Eligible Director shall be immediately vested, fully
earned and exercisable upon the occurrence of a Change of Control Event.
SECTION 11.6 Amendments to Awards. Subject to the limitations of Article
IV, such as the prohibition on repricing of Options, the Board may at any time
unilaterally amend the terms of any Award Agreement, whether or not presently
exercisable or vested, to the extent it deems appropriate. However, amendments
which are adverse to the Participant shall require the Participant's consent.
SECTION 11.7 Regulatory Approval and Listings. Regulatory Approval and
Listings. As soon as practicable following approval by the shareholders of the
Company of the Plan as provided in Section 1.2 of the Plan, in the sole
discretion of the Board, the Company shall use its best efforts to file with the
Securities and Exchange Commission and keep continuously effective, a
Registration Statement on Form S-8 with respect to shares of Common Stock
subject to Awards hereunder. Notwithstanding anything contained in this Plan to
the contrary, the Company shall have no obligation to issue shares of Common
Stock under this Plan prior to the obtaining of any approval from, or
satisfaction of any waiting period or other condition imposed by, any
governmental agency which the Board shall, in its sole discretion, determine to
be necessary or advisable. In addition, and notwithstanding anything contained
in this Plan to the contrary, at such time as the Company is subject to the
reporting requirements of Section 12 of the Exchange Act, the Company shall have
no obligation to issue shares of Common Stock under this Plan prior to:
(a) the admission of such shares to listing on the stock exchange on which
the Common Stock may be listed; and
(b) the completion of any registration or other qualification of such
shares under any state or Federal law or ruling of any governmental body which
the Board shall, in its sole discretion, determine to be necessary or advisable.
SECTION 11.8 Right to Continued Employment. Participation in the Plan
shall not give any Eligible Employee any right to remain in the employ of the
Company, any Subsidiary, or any Affiliated Entity. The Company or, in the case
of employment with a Subsidiary or an Affiliated
D-13
Entity, the Subsidiary or Affiliated Entity reserves the right to terminate any
Eligible Employee at any time. Further, the adoption of this Plan shall not be
deemed to give any Eligible Employee or any other individual any right to be
selected as a Participant or to be granted an Award.
SECTION 11.9 Reliance on Reports. Each member of the Board and each member
of the Board shall be fully justified in relying or acting in good faith upon
any report made by the independent public accountants of the Company and its
Subsidiaries and upon any other information furnished in connection with the
Plan by any person or persons other than himself or herself. In no event shall
any person who is or shall have been a member of the Board be liable for any
determination made or other action taken or any omission to act in reliance upon
any such report or information or for any action taken, including the furnishing
of information, or failure to act, if in good faith.
SECTION 11.10 Construction. Masculine pronouns and other words of
masculine gender shall refer to both men and women. The titles and headings of
the sections in the Plan are for the convenience of reference only, and in the
event of any conflict, the text of the Plan, rather than such titles or
headings, shall control.
SECTION 11.11 Governing Law. The Plan shall be governed by and construed
in accordance with the laws of the State of Oklahoma except as superseded by
applicable Federal law.
SECTION 11.12 Other Laws. The Board may refuse to issue or transfer any
shares of Common Stock or other consideration under an Award if, acting in its
sole discretion, it determines that the issuance or transfer of such shares or
such other consideration might violate any applicable law or regulation or
entitle the Company to recover the same under Section 16(b) of the Exchange Act,
and any payment tendered to the Company by a Participant, other holder or
beneficiary in connection with the exercise of such Award shall be promptly
refunded to the relevant Participant, holder or beneficiary.
SECTION 11.13 No Trust or Fund Created. Neither the Plan nor an Award
shall create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company and a Participant or any other
person. To the extent that a Participant acquires the right to receive payments
from the Company pursuant to an Award, such right shall be no greater than the
right of any general unsecured creditor of the Company.
D-14
EXHIBIT A
2006 Long-Term Incentive Plan
Performance Criteria
Operational Criteria may include:
o Reserve additions/replacements
o Finding & development costs
o Production volume
o Production Costs
Financial Criteria may include:
o Earnings (Net income, Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), Earnings per share)
o Cash flow
o Operating income o General and Administrative Expenses
o Debt to equity ratio
o Debt to cash flow
o Debt to EBITDA o EBITDA to Interest
o Return on Assets
o Return on Equity
o Return on Invested Capital
o Profit returns/margins
o Midstream margins
Stock Performance Criteria:
o Stock price appreciation
o Total stockholder return
o Relative stock price performance
D-15
Annex E
[LOGO] GILFORD
SECURITIES
INCORPORATED Since 1979
--------------------------------------------------------------------------------
September 22, 2005
Board of Directors
Tremisis Energy Acquisition Corporation
1775 Broadway, Suite 604
New York, New York 10019
Board of Directors:
Gilford Securities Incorporated ("Gilford") has been advised that Tremisis
Energy Acquisition Corporation (the "Company") will enter into an Agreement and
Plan of Merger (the "Agreement") by and among RAM Energy Acquisition, Inc., RAM
Energy, Inc., ("RAM"), and each of the stockholders of RAM Energy, Inc., (the
"Stockholders") whereby the Company will purchase all of the issued and
outstanding shares of capital stock of RAM (the "Shares") from the Stockholders
(the "Proposed Transaction") for aggregate consideration of approximately
$300,000,000 (the "Consideration"). Gilford has been retained by the Board of
Directors to render an opinion as to whether, on the date of such opinion, the
Consideration is fair, from a financial point of view, to the Company's
stockholders, and the fair market value of RAM is at least equal to 80% of the
net assets of the Company.
Our opinion is necessarily based upon information made available to us as of the
date hereof and upon financial, economic, market and other conditions as they
exist and can be evaluated on the date hereof. It should also be understood that
we disclaim any undertaking or obligation to advise any person of any change in
any matter affecting this opinion which may come or be brought to our attention
after the date of this opinion.
In rendering this opinion, Gilford has not been requested to give, and has not
made (i) an opinion addressing the relative merits of the Proposed Transaction
as compared to other business combinations that might be available to the
Company or the Company's underlying business decision to effect the Proposed
Transaction, or (ii) an opinion on matters of a legal, regulatory, tax or
accounting nature related to the Transaction. Gilford has not been engaged to
seek alternatives to the Proposed Transaction that might exist for the Company.
In arriving at our opinion, Gilford has, among other things:
1. reviewed the Agreement;
2. reviewed publicly available financial information and other data
with respect to the Company, including the Annual Report on Form
10-KSB for the year ended December 31, 2004, the Form 10-QSBs filed
on May 16 and August 15, 2005, and the Registration Statement on
Form S-1 filed on March 12, 2004, and amendments thereto;
3. reviewed financial and other information with respect to RAM,
including the Annual Report For the year 2004, which included the
audited financial statements for the years
777 Third Avenue, New York, New York 10017
Phone 212.888.6400 Fax 212.223.1683
www.GilfordSecurities.com
TEGY Opinion Letter September 22, 2005
--------------------------------------------------------------------------------
ended December 31, 2003 and 2004, the Pro Forma Combined Statements
of Operations for the years ended December 31, 2003 and 2004 taking
into account the acquisition of WG Energy Holdings, Inc, the draft
unaudited financial statements for the six months ended June 30,
2004, the RAM PV10 reserve reports as of June 30, 2005 and other
financial information and projections prepared by RAM management and
its advisors;
4. considered the historical financial results and present financial
condition of both the Company and RAM;
5. reviewed and analyzed certain financial characteristics of companies
that were deemed to have characteristics comparable to RAM;
6. reviewed and analyzed the cash flows of RAM and prepared a
discounted cash flow analysis;
7. reviewed and discussed with representatives of the Company and RAM
management certain financial and operating information furnished,
including financial analyses with respect to their respective
business and operations; and
8. performed such other analyses and examinations as were deemed
appropriate.
Gilford, as part of its brokerage, research and investment banking practice, is
regularly engaged in the valuation of securities and the evaluation of
transactions in connection with mergers and acquisitions as well as business
valuations for other corporate purposes.
Gilford did not assume responsibility for verifying, and did not independently
verify, any financial information or other information concerning the Company or
RAM furnished to it by the Company or RAM, or the publicly-available financial
and other information regarding the Company or RAM and any subsidiaries thereof.
Gilford has assumed that all such information is accurate and complete and has
no reason to believe otherwise. Gilford has further relied on the assurances of
management of the Company and RAM that they are not aware of any facts that
would make such financial or other information relating to such entities
inaccurate or misleading. With the exception of RAM corporate offices located in
Tulsa, OK we have not made a physical inspection of the properties and
facilities of the Company or RAM and have not made or obtained any evaluations
or appraisals of either company's assets and liabilities (contingent or
otherwise). Gilford has not attempted to confirm whether the Company or RAM have
good title to their respective assets.
Gilford assumed that the Proposed Transaction will be consummated in a manner
that complies in all respects with the applicable provisions of the Securities
Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and
all other applicable federal and state statues, rules and regulations. We
further assume that the Proposed Transaction will be consummated substantially
in accordance with the terms set forth in the Agreement, without any further
material amendments thereto, and without waiver by the Company of any of the
conditions to any obligations or in the alternative that any such amendments,
revisions or waivers thereto will not be detrimental to the Company or to its
stockholders.
Our opinion is for the use and benefit of the Company's Board of Directors in
connection with its consideration of the Proposed Transaction and is not
intended to be and does not constitute a recommendation to any Company
stockholder as to how such stockholder should vote with respect to the Proposed
Transaction. We do not express any opinion as to the underlying valuation or
future performance of either the Company or RAM or the price at which any of the
Company's securities would trade at any time in the future.
E-2
TEGY Opinion Letter September 22, 2005
--------------------------------------------------------------------------------
Based upon and subject to the foregoing, it is our opinion that, as of the date
of this letter, the Consideration is fair, from a financial point of view, to
the Company's stockholders, and the fair market value of RAM is at least equal
to 80% of the net assets of the Company.
In connection with our services, we have previously received a retainer and will
receive the balance of our fee upon the breaking of the Company escrow account.
In addition, the Company has agreed to indemnify us for certain liabilities that
may arise out of the rendering this opinion.
This letter is solely for the information of the Board of Directors of the
Company and may not be relied upon by any other person or used for any other
purpose, reproduced, disseminated, quoted from or referred to without Gilford's
prior written consent; provided, however, this letter may be referred to and
reproduced in its entirety in proxy materials sent to the Stockholders in
connection with the solicitation of approval for the Proposed Transaction.
Very truly yours,
GILFORD SECURITIES INCORPORATED
E-3
Annex F
AMENDED AND RESTATED VOTING AGREEMENT
AMENDED AND RESTATED VOTING AGREEMENT, dated as of this 28th day of
November, 2005 ("Agreement"), among each of the persons listed under the caption
"RAM Group" on Exhibit A attached hereto (the "RAM Group"), each of the persons
listed under the caption "Founders Group" on Exhibit A attached hereto (the
"Founders Group") and Tremisis Energy Acquisition Corporation, a Delaware
corporation ("Tremisis"). Each of the RAM Group and the Founders Group is
sometimes referred to herein as a "Group". For purposes of this Agreement, each
person who is a member of either the RAM Group or the Founders Group is referred
to herein individually as a "Stockholder" and collectively as the
"Stockholders".
WHEREAS, as of October 20, 2005, each of Tremisis, RAM Energy, Inc. (the
"Company"), a Delaware corporation, RAM Acquisition, Inc. ("Merger Sub"), a
Delaware corporation, and the Stockholders who are members of the RAM Group
entered into an Agreement and Plan of Merger (as amended by Amendment thereto
dated November 11, 2005, the "Merger Agreement") that provides, inter alia, upon
the terms and subject to the conditions thereof, for the merger of Merger Sub
with and into the Company, with the Company being the surviving entity and
becoming a wholly owned subsidiary of Tremisis (the "Merger");
WHEREAS, as of the date hereof, each Stockholder who is a member of the
Founders Group owns beneficially and of record shares of common stock of
Tremisis, par value $0.0001 per share ("Tremisis Common Stock"), as set forth
opposite such stockholder's name on Exhibit A hereto (all such shares and any
shares of which ownership of record or the power to vote is hereafter acquired
by any of the Stockholders, whether by purchase, conversion or exercise, prior
to the termination of this Agreement being referred to herein as the "Shares");
WHEREAS, at the Effective Time, all shares of Company Common Stock
beneficially owned by each Stockholder who is a member of the RAM Group shall be
converted into the right to receive and shall be exchanged for his, her or its
pro rata portion of the cash and shares of Tremisis Common Stock to be issued to
the Company's security holders as consideration in the Merger;
WHEREAS, as a condition to the consummation of the Merger Agreement, the
Stockholders have agreed, severally, to enter into this Agreement; and
WHEREAS, capitalized terms used but not defined in this Agreement shall
have the meanings ascribed to them in the Merger Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements and covenants set forth herein and in the Merger Agreement, and
intending to be legally bound hereby, the parties hereto hereby agree as
follows:
ARTICLE I
VOTING OF SHARES FOR DIRECTORS
SECTION 1.01 Vote in Favor of the Directors. During the term of this
Agreement, each Stockholder agrees to vote the Shares of Tremisis Common Stock
he, she or it now owns, or will hereafter acquire prior to the termination of
this Agreement, for the election and re-election of the following persons as
directors of Tremisis:
(a) Three (3) persons, (i) two (2) of whom shall at all times be
"independent directors," within the meaning of the NASDAQ rules, and (ii) all of
whom shall be designees of the RAM Group; with one (1) of such designees to
stand for election in 2006 ("Class A Director"), who shall initially be Larry E.
Lee; one (1) of such designees to stand for election in 2007 ("Class B
Director"), who shall initially be Gerald R. Marshall; and one (1) of such
designees to stand for election 2008 ("Class C Director"), who shall initially
be John M. Reardon (collectively, the "RAM Directors"); and
(b) One (1) person who shall be an "independent director" within the
meaning of the NASDAQ rules and who shall be the designee of the Founders Group,
which designee initially shall be Sean P. Lane, who shall be elected as a Class
A Director (the "Founders Director," and together with RAM Directors, the
"Director Designees").
Neither the Stockholders, nor any of the officers, directors,
stockholders, members, managers, partners, employees or agents of any
Stockholder, makes any representation or warranty as to the fitness or
competence of any Director Designee to serve on the Board of Directors by virtue
of such party's execution of this Agreement or by the act of such party in
designating or voting for such Director Designee pursuant to this Agreement.
Any Director Designee may be removed from the Board of Directors in the
manner allowed by law and Tremisis' governing documents except that each
Stockholder agrees that he, she or it will not, as a stockholder, vote for the
removal of any director who is a member of Group of which such Stockholder is
not a member. If a director is removed or resigns from office, the remaining
directors of the Group of which the vacating director is a member shall be
entitled to appoint the successor.
SECTION 1.02 Vote in Favor of Stock Option Plan. During the term of this
Agreement, each Stockholder agrees to vote the Shares of Tremisis Common Stock
he, she or it now owns, or hereafter acquires prior to the termination of this
Agreement, in favor of the adoption of the Parent Plan (as defined in the Merger
Agreement).
SECTION 1.03 Obligations of Tremisis. Tremisis shall take all necessary
and desirable actions within its control during the term of this Agreement to
provide for the Tremisis Board of Directors to be comprised of four (4) members
and to enable the election to the Board of Directors of the Director Designees.
SECTION 1.04 Term of Agreement. The obligations of the Stockholders
pursuant to this Agreement shall terminate immediately following the election or
re-election of directors at the annual meeting of Tremisis that will be held in
2008.
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SECTION 1.05 Obligations as Director and/or Officer. Nothing in this
Agreement shall be deemed to limit or restrict any director or officer of
Tremisis from acting in his or her capacity as such director or officer or from
exercising his or her fiduciary duties and responsibilities, it being agreed and
understood that this Agreement shall apply to each Stockholder solely in his or
her capacity as a stockholder of Tremisis and shall not apply to his or her
actions, judgments or decisions as a director or officer of Tremisis if he or
she is such a director or officer.
SECTION 1.06 Transfer of Shares. If a member of the RAM Group desires to
transfer his, her or its Shares to a permitted transferee pursuant to the
Lock-Up Agreement dated October 20, 2005, executed by such member, or if a
member of the Founders Group desires to transfer his or its shares to a
permitted transferee pursuant to the Escrow Agreement dated as of May 12, 2004,
it shall be a condition to such transfer that the transferee agree to be bound
by the provisions of this Agreement. This Agreement shall in no way restrict the
transfer on the public market of Shares that are not subject to the Lock-Up
Agreement or the Escrow Agreement, and any such transfers on the public market
of Shares not subject to the provisions of the Lock-Up Agreement or the Escrow
Agreement, as applicable, shall be free and clear of the restrictions in this
Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES;
COVENANTS OF THE STOCKHOLDERS
Each Stockholder hereby severally represents warrants and covenants as
follows:
SECTION 2.01 Authorization. Such Stockholder has full legal capacity and
authority to enter into this Agreement and to carry out such Stockholder's
obligations hereunder. This Agreement has been duly executed and delivered by
such Stockholder, and (assuming due authorization, execution and delivery by
Tremisis and the other Stockholders) this Agreement constitutes a legal, valid
and binding obligation of such Stockholder, enforceable against such Stockholder
in accordance with its terms.
SECTION 2.02 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by such Stockholder
does not, and the performance of this Agreement by such Stockholder will not,
(i) conflict with or violate any Legal Requirement applicable to such
Stockholder or by which any property or asset of such Stockholder is bound or
affected, or (ii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any right of termination, amendment, acceleration or cancellation
of, or result in the creation of any encumbrance on any property or asset of
such Stockholder, including, without limitation, the Shares, pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation.
(b) The execution and delivery of this Agreement by such Stockholder
does not, and the performance of this Agreement by such Stockholder will not,
require any
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consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, domestic or foreign, except (i)
for applicable requirements, if any, of the Exchange Act, and (ii) where the
failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, would not prevent or materially delay the
performance by such Stockholder of such Stockholder's obligations under this
Agreement.
SECTION 2.03 Title to Shares. Such Stockholder is the legal and beneficial
owner of its Shares, or will be the legal beneficial owner of the Shares that
such Stockholder will receive as a result of the Merger, free and clear of all
liens and other encumbrances except certain restrictions upon the transfer of
such Shares.
ARTICLE III
GENERAL PROVISIONS
SECTION 3.01 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be given (and shall be deemed to
have been duly given upon receipt) by delivery in person, by overnight courier
service, by telecopy, or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other addresses as shall be specified by notice given in accordance
with this Section 3.01):
(a) If to Tremisis:
Tremisis Energy Acquisition Corporation
1775 Broadway, Suite 604
New York, New York 10019
Attention: Lawrence S. Coben
Telecopy No.: 212-253-4047
with a mandatory copy to
Graubard Miller
405 Lexington Avenue
New York, NY 10174-1901
Attention: David Alan Miller, Esq.
Telecopy No.: 212-818-8881
(b) If to any Stockholder, to the address set forth opposite his, her or
its name on Exhibit A.
SECTION 3.02 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
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SECTION 3.03 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 3.04 Entire Agreement. This Amended and Restated Voting Agreement
amends and replaces in its entirety the Voting Agreement dated October 20, 2005
among the parties. This Agreement constitutes the entire agreement of the
parties and supersedes all prior agreements and undertakings, both written and
oral, between the parties, or any of them, with respect to the subject matter
hereof. This Agreement may not be amended or modified except in an instrument in
writing signed by, or on behalf of, the parties hereto.
SECTION 3.05 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or in equity.
SECTION 3.06 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of Delaware applicable to
contracts executed in and to be performed in that State.
SECTION 3.07 Disputes. All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined exclusively in any
state or federal court in Delaware.
SECTION 3.08 No Waiver. No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
SECTION 3.09 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
SECTION 3.10 Waiver of Jury Trial. Each of the parties hereto irrevocably
and unconditionally waives all right to trial by jury in any action, proceeding
or counterclaim (whether based in contract, tort or otherwise) arising out of or
relating to this Agreement or the Actions of the parties hereto in the
negotiation, administration, performance and enforcement thereof.
SECTION 3.11 Merger Agreement. All references to the Merger Agreement
herein shall be to such agreement as may be amended by the parties thereto from
time to time.
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Signature Page to Amended and Restated Voting Agreement dated November 28, 2005
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
TREMISIS ENERGY ACQUISITION CORPORATION
By: ___________________________________
Name: Lawrence S. Coben
Title: Chairman and CEO
STOCKHOLDERS:
The Founders Group:
_______________________________________
Lawrence S. Coben
_______________________________________
Isaac Kier
The RAM Group:
DANISH KNIGHTS, A LIMITED PARTNERSHIP
a Texas limited partnership
By: Dannebrog Corporation., a Texas corporation,
General Partner
By: ___________________________________
Name: Britani Talley Bowman
Title: President
_______________________________________
Larry E. Lee
_______________________________________
C. David Stinson
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EXHIBIT A
STOCKHOLDERS
The Founders Group:
Name and Address Number of Shares
---------------- ----------------
Lawrence S. Coben 1,008,334
1775 Broadway, Suite 604
New York, N.Y. 10019
Isaac Kier 183,334
1775 Broadway, Suite 604
New York, N.Y. 10019
The RAM Group:
Name and Address
----------------
Danish Knights, A Limited Partnership
c/o Britani Talley Bowman
3155 E. 86th Street
Tulsa, OK 74137
Larry E. Lee
5100 E. Skelly Drive, Suite 650
Tulsa, OK 74135
C. David Stinson
211 North Robinson, 10th Floor
Oklahoma City, OK 73102-7103
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Annex G
ESCROW AGREEMENT
ESCROW AGREEMENT ("Agreement") dated [Closing Date] is executed and
delivered by and among TREMISIS ENERGY ACQUISITION CORPORATION, a Delaware
corporation ("Tremisis"), Larry E. Lee, as the RAM stockholders' Representative,
being the representative of the former stockholders of RAM Energy, Inc., a
Delaware corporation (the "Representative"), and CONTINENTAL STOCK TRANSFER &
TRUST COMPANY, as escrow agent (the "Escrow Agent").
Tremisis, RAM Energy, Inc. ("RAM"), the stockholders of RAM, and RAM
Energy Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of
Tremisis ("Merger Subsidiary"), are the parties to an Agreement and Plan of
Merger and Reorganization dated as of October 20, 2005 (the "Merger Agreement")
pursuant to which the Merger Subsidiary has merged with and into RAM so that RAM
has become a wholly-owned subsidiary of Tremisis. Pursuant to the Merger
Agreement, Tremisis is to be indemnified in certain respects. The parties desire
to establish an escrow fund as collateral security for the indemnification
obligations under the Merger Agreement. The Representative has been designated
pursuant to the Merger Agreement to represent all of the former stockholders of
RAM (the "Stockholders") and each Permitted Transferee (as hereinafter defined)
of the Stockholders (the Stockholders and all such Permitted Transferees are
hereinafter referred to collectively as the "Owners"), and to act on their
behalf for purposes of this Agreement. Capitalized terms used herein which are
not otherwise defined herein shall have the meanings ascribed to them in the
Merger Agreement.
The parties agree as follows:
1. (a) Concurrently with the execution hereof, each of the Stockholders is
delivering to the Escrow Agent, to be held in escrow pursuant to the terms of
this Agreement, stock certificates issued in the name of such Stockholder
representing twelve and one-half percent (12.5%) of the total number of shares
of Parent Common Stock received by such Stockholder pursuant to the Merger
Agreement, together with ten (10) assignments separate from certificate,
executed in blank by such Stockholder. The shares of Parent Common Stock
represented by the stock certificates so delivered by the Stockholders to the
Escrow Agent are herein referred to in the aggregate as the "Escrow Fund." The
Escrow Agent shall maintain a separate account for each Stockholder's, and
subsequent to any transfer permitted pursuant to Paragraph 1(e) hereof, each
Owner's, portion of the Escrow Fund.
(b) The Escrow Agent hereby agrees to act as escrow agent and to hold,
safeguard and disburse the Escrow Fund pursuant to the terms and conditions
hereof. It shall treat the Escrow Fund as a trust fund in accordance with the
terms of this Agreement and not as the property of Tremisis. The Escrow Agent's
duties hereunder shall terminate upon its distribution of the entire Escrow Fund
in accordance with this Agreement.
(c) Except as herein provided, the Owners shall retain all of their rights
as stockholders of Tremisis with respect to shares of Parent Common Stock
constituting the Escrow Fund during the period the Escrow Fund is held by the
Escrow Agent (the "Escrow Period"), including, without limitation, the right to
vote their shares of Parent Common Stock included in the Escrow Fund.
(d) During the Escrow Period, all dividends payable in cash with respect
to the shares of Parent Common Stock included in the Escrow Fund shall be paid
to the Owners, but all dividends payable in stock or other non-cash property
("Non-Cash Dividends") shall be delivered to the Escrow Agent to hold in
accordance with the terms hereof. As used herein, the term "Escrow Fund" shall
be deemed to include the Non-Cash Dividends distributed thereon, if any.
(e) During the Escrow Period, no sale, transfer or other disposition may
be made of any or all of the shares of Parent Common Stock in the Escrow Fund
except (i) to a Permitted Transferee (as hereinafter defined), (ii) by virtue of
the laws of descent and distribution upon death of any Owner, or (iii) pursuant
to a qualified domestic relations order; provided, however, that such permissive
transfers may be implemented only upon the respective transferee's written
agreement to be bound by the terms and conditions of this Agreement. As used in
this Agreement, the term Permitted Transferee shall include: (x) members of a
Stockholder's "Immediate Family;" (y) an entity in which (A) a Stockholder
and/or members of a Stockholder's Immediate Family beneficially own 100% of such
entity's voting and non-voting equity securities, or (B) a Stockholder and/or a
member of such Stockholder's Immediate Family is a general partner and in which
such Stockholder and/or members of such Stockholder's Immediate Family
beneficially own 100% of all capital accounts of such entity; and (z) a
revocable trust established by a Stockholder during his lifetime for the benefit
of such Stockholder or for the exclusive benefit of all or any of such
Stockholder's Immediate Family. As used in this Agreement, the term "Immediate
Family" means, with respect to any Stockholder, a spouse, parents, lineal
descendants, the spouse of any lineal descendant, and brothers and sisters (or a
trust, all of whose current beneficiaries are members of an Immediate Family of
the Stockholder). In connection with and as a condition to each permitted
transfer, the Permitted Transferee shall deliver to the Escrow Agent an
assignment separate from certificate executed by the transferring Stockholder,
or where applicable, an order of a court of competent jurisdiction, evidencing
the transfer of shares to the Permitted Transferee, together with ten (10)
assignments separate from certificate executed in blank by the Permitted
Transferee with respect to the shares transferred to the Permitted Transferee.
Upon receipt of such documents, the Escrow Agent shall deliver to Tremisis the
original stock certificate out of which the assigned shares are to be
transferred, together with the executed assignment separate from certificate
executed by the transferring Stockholder, or a copy of the applicable court
order, and shall request that Tremisis issue new certificates representing (m)
the number of shares, if any, that continue to be owned by the transferring
Stockholder, and (n) the number of shares owned by the Permitted Transferee as
the result of such transfer. Tremisis, the transferring Stockholder and the
Permitted Transferee shall cooperate in all respects with the Escrow Agent in
documenting each such transfer and in effectuating the result intended to be
accomplished thereby. During the Escrow Period, no Owner shall pledge
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or grant a security interest in such Owner's shares of Parent Common Stock
included in the Escrow Fund or grant a security interest in their rights under
this Agreement.
2. (a) Tremisis, acting through the current or former member of Tremisis'
Board of Directors who has been appointed by Tremisis to take all necessary
actions and make all decisions on behalf of Tremisis with respect to its rights
to indemnification under the Merger Agreement (the "Committee"), may make a
claim for indemnification pursuant to the Merger Agreement ("Indemnity Claim")
against the Escrow Fund by giving notice (a "Notice") to the Representative
(with a copy to the Escrow Agent) specifying (i) the covenant, representation,
warranty, agreement, undertaking or obligation contained in the Merger Agreement
which it asserts has been breached or otherwise entitles Tremisis to
indemnification, (ii) in reasonable detail, the nature and dollar amount of any
Indemnity Claim, and (iii) whether the Indemnity Claim results from a Third
Party Claim against Tremisis. The Committee also shall deliver to the Escrow
Agent (with a copy to the Representative), concurrently with its delivery to the
Escrow Agent of the Notice, a certification as to the date on which the Notice
was delivered to the Representative.
(b) If the Representative shall give a notice to the Committee (with
a copy to the Escrow Agent) (a "Counter Notice"), within 30 days following the
date of receipt (as specified in the Committee's certification) by the
Representative of a copy of the Notice, disputing whether the Indemnity Claim is
indemnifiable under the Merger Agreement, the Committee and the Representative
shall attempt to resolve such dispute by voluntary settlement as provided in
paragraph 2(c) below. If no Counter Notice with respect to an Indemnity Claim is
received by the Escrow Agent from the Representative within such 30-day period,
the Indemnity Claim shall be deemed to be an Established Claim (as hereinafter
defined) for purposes of this Agreement.
(c) If the Representative delivers a Counter Notice to the Escrow
Agent, the Committee and the Representative shall, during the period of 60 days
following the delivery of such Counter Notice or such greater period of time as
the parties may agree to in writing (with a copy to the Escrow Agent), attempt
to resolve the dispute with respect to which the Counter Notice was given. If
the Committee and the Representative shall reach a settlement with respect to
any such dispute, they shall jointly deliver written notice of such settlement
to the Escrow Agent specifying the terms thereof. If the Committee and the
Representative shall be unable to reach a settlement with respect to a dispute,
such dispute shall be resolved by arbitration pursuant to paragraph 2(d) below.
(d) If the Committee and the Representative cannot resolve a dispute
prior to expiration of the 60-day period referred to in paragraph 2(c) above (or
such longer period as the parties may have agreed to in writing), then such
dispute shall be submitted (and either party may submit such dispute) for
arbitration before a single arbitrator in Dallas, Texas, in accordance with the
commercial arbitration rules of the American Arbitration Association then in
effect and the provisions of Section 10.12 of the Merger Agreement to the extent
that such provisions do not conflict with the provisions of this paragraph. The
Committee and the Representative shall attempt to
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agree upon an arbitrator; if they shall be unable to agree upon an arbitrator
within 10 days after the dispute is submitted for arbitration, then either the
Committee or the Representative, upon written notice to the other, may apply for
appointment of such arbitrator by the American Arbitration Association. Each
party shall pay the fees and expenses of counsel used by it and 50% of the fees
and expenses of the arbitrator and of other expenses of the arbitration. The
arbitrator shall render his decision within 90 days after his appointment and
may award costs to either the Committee or the Representative if, in his sole
opinion reasonably exercised, the claims made by any other party had no
reasonable basis and were arbitrary and capricious. Such decision and award
shall be in writing and shall be final and conclusive on the parties, and
counterpart copies thereof shall be delivered to each of the parties. Judgment
may be obtained on the decision of the arbitrator so rendered in any Oklahoma
state sitting in Oklahoma or Tulsa County, or any federal court sitting in
Oklahoma having jurisdiction, and may be enforced in accordance with the law of
the State of Oklahoma. If the arbitrator shall fail to render his decision or
award within such 90-day period, either the Committee or the Representative may
apply to any Oklahoma state court sitting in Oklahoma or Tulsa County, or any
federal court sitting in Oklahoma then having jurisdiction, by action,
proceeding or otherwise, as may be proper to determine the matter in dispute
consistently with the provisions of this Agreement. The parties consent to the
exclusive jurisdiction of the Oklahoma courts sitting in Oklahoma or Tulsa
County, Oklahoma, or any federal court having jurisdiction and sitting in
Oklahoma, for this purpose. The prevailing party (or either party, in the case
of a decision or award rendered in part for each party) shall send a copy of the
arbitration decision or of any judgment of the court to the Escrow Agent.
(e) As used in this Agreement, "Established Claim" means any (i)
Indemnification Claim deemed established pursuant to the last sentence of
paragraph 2(b) above, (ii) Indemnification Claim resolved in favor of Tremisis
by settlement pursuant to paragraph 2(c) above, resulting in a dollar award to
Tremisis, (iii) Indemnification Claim established by the decision of an
arbitrator pursuant to paragraph 2(d) above, resulting in a dollar award to
Tremisis, (iv) Third Party Claim which has been sustained by a final
determination (after exhaustion of any appeals) of a court of competent
jurisdiction, or (v) Third Party Claim which the Committee and the
Representative have jointly notified the Escrow Agent has been settled in
accordance with the provisions of the Merger Agreement.
(f) (i) Promptly after an Indemnity Claim becomes an Established
Claim, the Committee and the Representative shall jointly deliver a notice to
the Escrow Agent (a "Joint Notice") directing the Escrow Agent to pay to
Tremisis, and the Escrow Agent promptly shall pay to Tremisis, an amount equal
to the aggregate dollar amount of the Established Claim (or, if at such time
there remains in the Escrow Fund less than the full amount so payable, the full
amount remaining in the Escrow Fund).
(ii) Payment of an Established Claim shall be made in shares
of Parent Common Stock, pro rata from the account maintained on behalf of each
Owner. For purposes of each payment, such shares shall be valued at the "Fair
Market Value" (as defined below). However, in no event shall the Escrow Agent be
required to calculate
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Fair Market Value or make a determination of the number of shares to be
delivered to Tremisis in satisfaction of any Established Claim; rather, such
calculation shall be included in and made part of the Joint Notice. The Escrow
Agent shall transfer to Tremisis out of the Escrow Fund that number of shares of
Parent Common Stock necessary to satisfy each Established Claim, as set out in
the Joint Notice. Any dispute between the Committee and the Representative
concerning the calculation of Fair Market Value or the number of shares
necessary to satisfy any Established Claim, or any other dispute regarding a
Joint Notice, shall be resolved between the Committee and the Representative in
accordance with the procedures specified in paragraph 2(d) above, and shall not
involve the Escrow Agent. Each transfer of shares in satisfaction of an
Established Claim shall be made by the Escrow Agent delivering to Tremisis one
or more stock certificates held in each Owner's account evidencing not less than
such Owner's pro rata portion of the aggregate number of shares specified in the
Joint Notice, together with assignments separate from certificate executed in
blank by such Owner and completed by the Escrow Agent in accordance with
instructions included in the Joint Notice. Upon receipt of the stock
certificates and assignments, Tremisis shall deliver to the Escrow Agent new
certificates representing the number of shares owned by each Owner after such
payment. The parties hereto (other than the Escrow Agent) agree that the
foregoing right to make payments of Established Claims in shares of Parent
Common Stock may be made notwithstanding any other agreements restricting or
limiting the ability of any Owner to sell any shares of Tremisis stock or
otherwise. The Committee and the Representative shall be required to exercise
utmost good faith in all matters relating to the preparation and delivery of
each Joint Notice. As used herein, "Fair Market Value" means the average
reported closing price for the Parent Common Stock for the ten trading days
ending on the last trading day prior to the day the Established Claim is paid.
(iii) Notwithstanding anything herein to the contrary, at such
time as an Indemnification Claim has become an Established Claim, the
Representative shall have the right to substitute for the Escrow Shares that
otherwise would be paid in satisfaction of such claim (the "Claim Shares"), cash
in an amount equal to the Fair Market Value of the Claim Shares ("Substituted
Cash"). In such event (i) the Joint Notice shall include a statement describing
the substitution of Substituted Cash for the Claim Shares, and (ii)
substantially contemporaneously with the delivery of such Joint Notice, the
Representative shall cause currently available funds to be delivered to the
Escrow Agent in an amount equal to the Substituted Cash. Upon receipt of such
Joint Notice and Substituted Cash, the Escrow Agent shall (y) in payment of the
Established Claim described in the Joint Notice, deliver the Substituted Cash to
Tremisis in lieu of the Claim Shares, and (z) cause the Claim Shares to be
returned to the Representative.
3. On the first Business Day after June 30, 2007, upon receipt of a Joint
Notice, the Escrow Agent shall distribute and deliver to each Owner certificates
representing the shares of Parent Common Stock then in such Owner's account in
the Escrow Fund, unless at such time there are any Indemnity Claims with respect
to which Notices have been received but which have not been resolved pursuant to
Section 2 hereof or in respect of which the Escrow Agent has not been notified
of, and received a copy of, a final determination (after exhaustion of any
appeals) by a court of competent
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jurisdiction, as the case may be (in either case, "Pending Claims"), and which,
if resolved or finally determined in favor of Tremisis, would result in a
payment to Tremisis, in which case the Escrow Agent shall retain, and the total
amount of such distributions to such Owner shall be reduced by, the "Pending
Claims Reserve" (as hereafter defined). The Committee shall certify to the
Escrow Agent the Fair Market Value to be used in calculating the Pending Claims
Reserve and the number of shares of Parent Common Stock to be retained therefor.
Thereafter, if any Pending Claim becomes an Established Claim, the Committee and
the Representative shall deliver to the Escrow Agent a Joint Notice directing
the Escrow Agent to pay to Tremisis an amount in respect thereof determined in
accordance with paragraph 2(f) above, and to deliver to each Owner shares of
Parent Common Stock then in such owner's account in the Escrow Fund having a
Fair Market Value equal to the amount by which the remaining portion of his
account in the Escrow Fund exceeds the then Pending Claims Reserve (determined
as set forth below), all as specified in a Joint Notice. If any Pending Claim is
resolved against Tremisis, the Committee and the Representative shall deliver to
the Escrow Agent a Joint Notice directing the Escrow Agent to pay to each Owner
the amount by which the remaining portion of his account in the Escrow Fund
exceeds the then Pending Claims Reserve. Upon resolution of all Pending Claims,
the Committee and the Representative shall deliver to the Escrow Agent a Joint
Notice directing the Escrow Agent shall pay to such Owner the remaining portion
of his or her account in the Escrow Fund.
"Pending Claims" shall automatically include the Great Plains Claim (as
defined in the Merger Agreement) if same has not been adjudicated, settled,
dismissed or otherwise resolved in its entirety with respect to RAM and its
subsidiaries and affiliates prior to June 30, 2007.
As used herein, the "Pending Claims Reserve" shall mean, at the time any
such determination is made, that number of shares of Parent Common Stock in the
Escrow Fund having a Fair Market Value equal to (i) the sum of the aggregate
dollar amounts claimed to be due with respect to all Pending Claims (as shown in
the Notices of such Claims), other than the Great Plains Claim, plus (ii) (a)
the aggregate dollar amount of the potential liability of RAM and its
subsidiaries and affiliates in connection with the Great Plains Claim, if such
potential liability is reasonably quantifiable as of June 30, 2007 or (b) if
such potential liability is not reasonably quantifiable, the lesser of (1) 50%
of the number of shares originally constituting the Escrow Fund and (2) the
number of shares contained in the Escrow Fund that are not otherwise subject to
the Pending Claims Reserve and would be otherwise releasable to the
Stockholders.
4. The Escrow Agent, the Committee and the Representative shall cooperate
in all respects with one another in the calculation of any amounts determined to
be payable to Tremisis and the Owners in accordance with this Agreement and in
implementing the procedures necessary to effect such payments.
5. (a) The Escrow Agent undertakes to perform only such duties as are
expressly set forth herein. It is understood that the Escrow Agent is not a
trustee or fiduciary and is acting hereunder merely in a ministerial capacity.
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(b) The Escrow Agent shall not be liable for any action taken or
omitted by it in good faith and in the exercise of its own best judgment, and
may rely conclusively and shall be protected in acting upon any order, notice,
demand, certificate, opinion or advice of counsel (including counsel chosen by
the Escrow Agent), statement, instrument, report or other paper or document (not
only as to its due execution and the validity and effectiveness of its
provisions, but also as to the truth and acceptability of any information
therein contained) which is believed by the Escrow Agent to be genuine and to be
signed or presented by the proper person or persons. The Escrow Agent shall not
be bound by any notice or demand, or any waiver, modification, termination or
rescission of this Agreement unless evidenced by a writing delivered to the
Escrow Agent signed by the proper party or parties and, if the duties or rights
of the Escrow Agent are affected, unless it shall have given its prior written
consent thereto.
(c) The Escrow Agent's sole responsibility upon receipt of any
notice requiring any payment to Tremisis pursuant to the terms of this Agreement
or, if such notice is disputed by the Committee or the Representative, the
settlement with respect to any such dispute, whether by virtue of joint
resolution, arbitration or determination of a court of competent jurisdiction,
is to pay to Tremisis the amount specified in such notice, and the Escrow Agent
shall have no duty to determine the validity, authenticity or enforceability of
any specification or certification made in such notice.
(d) The Escrow Agent shall not be liable for any action taken by it
in good faith and believed by it to be authorized or within the rights or powers
conferred upon it by this Agreement, and may consult with counsel of its own
choice and shall have full and complete authorization and indemnification under
Section 5(g), below, for any action taken or suffered by it hereunder in good
faith and in accordance with the opinion of such counsel.
(e) The Escrow Agent may resign at any time and be discharged from
its duties as escrow agent hereunder by its giving the other parties hereto
written notice and such resignation shall become effective as hereinafter
provided. Such resignation shall become effective at such time that the Escrow
Agent shall turn over the Escrow Fund to a successor escrow agent appointed
jointly by the Committee and the Representative. If no new escrow agent is so
appointed within the 60 day period following the giving of such notice of
resignation, the Escrow Agent may deposit the Escrow Fund with any court it
reasonably deems appropriate.
(f) In the event of a dispute between the parties as to the proper
disposition of the Escrow Fund, the Escrow Agent shall be entitled (but not
required) to deliver the Escrow Fund into the United States District Court for
the Southern District of New York and, upon giving notice to the Committee and
the Representative of such action, shall thereupon be relieved of all further
responsibility and liability.
(g) The Escrow Agent shall be indemnified and held harmless by
Tremisis from and against any expenses, including counsel fees and
disbursements, or
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loss suffered by the Escrow Agent in connection with any action, suit or other
proceeding involving any claim which in any way, directly or indirectly, arises
out of or relates to this Agreement, the services of the Escrow Agent hereunder,
or the Escrow Fund held by it hereunder, other than expenses or losses arising
from the gross negligence or willful misconduct of the Escrow Agent. Promptly
after the receipt by the Escrow Agent of notice of any demand or claim or the
commencement of any action, suit or proceeding, the Escrow Agent shall notify
the other parties hereto in writing. In the event of the receipt of such notice,
the Escrow Agent, in its sole discretion, may commence an action in the nature
of interpleader in an appropriate court to determine ownership or disposition of
the Escrow Fund or it may deposit the Escrow Fund with the clerk of any
appropriate court and be relieved of any liability with respect thereto or it
may retain the Escrow Fund pending receipt of a final, non-appealable order of a
court having jurisdiction over all of the parties hereto directing to whom and
under what circumstances the Escrow Fund are to be disbursed and delivered.
(h) The Escrow Agent shall be entitled to reasonable compensation
from Tremisis for all services rendered by it hereunder. The Escrow Agent shall
also be entitled to reimbursement from Tremisis for all expenses paid or
incurred by it in the administration of its duties hereunder including, but not
limited to, all counsel, advisors' and agents' fees and disbursements and all
taxes or other governmental charges.
(i) From time to time on and after the date hereof, the Committee
and the Representative shall deliver or cause to be delivered to the Escrow
Agent such further documents and instruments and shall do or cause to be done
such further acts as the Escrow Agent shall reasonably request to carry out more
effectively the provisions and purposes of this Agreement, to evidence
compliance herewith or to assure itself that it is protected in acting
hereunder.
(j) Notwithstanding anything herein to the contrary, the Escrow
Agent shall not be relieved from liability hereunder for its own gross
negligence or its own willful misconduct.
6. This Agreement expressly sets forth all the duties of the Escrow Agent
with respect to any and all matters pertinent hereto. No implied duties or
obligations shall be read into this Agreement against the Escrow Agent. The
Escrow Agent shall not be bound by the provisions of any agreement among the
parties hereto except this Agreement and shall have no duty to inquire into the
terms and conditions of any agreement made or entered into in connection with
this Agreement, including, without limitation, the Merger Agreement.
7. This Agreement shall inure to the benefit of and be binding upon the
parties and their respective heirs, successors, assigns and legal
representatives, shall be governed by and construed in accordance with the law
of Delaware applicable to contracts made and to be performed therein except that
issues relating to the rights and obligations of the Escrow Agent shall be
governed by and construed in accordance with the law of New York applicable to
contracts made and to be performed therein. This
G-8
Agreement cannot be changed or terminated except by a writing signed by the
Committee, the Representative and the Escrow Agent.
8. The Committee and the Representative each hereby consents to the
exclusive jurisdiction of the Oklahoma state courts sitting in Oklahoma or Tulsa
County and federal courts sitting in Oklahoma with respect to any claim or
controversy arising out of this Agreement. Service of process in any action or
proceeding brought against the Committee or the Representative in respect of any
such claim or controversy may be made upon it by registered mail, postage
prepaid, return receipt requested, at the address specified in Section 9, with a
copy delivered by nationally recognized overnight carrier to Graubard Miller,
The Chrysler Building, 405 Lexington Avenue, New York, N.Y. 10174-1901,
Attention: David Alan Miller, Esq.
9. All notices and other communications under this Agreement shall be in
writing and shall be deemed given if given by hand or delivered by nationally
recognized overnight carrier, or if given by telecopier and confirmed by mail
(registered or certified mail, postage prepaid, return receipt requested), to
the respective parties as follows:
A. If to the Committee, to it at
c/o Tremisis Energy Acquisition Corporation
1775 Broadway, Suite 604
New York, New York 10019
Attention: Lawrence S. Coben
Telecopier No.: 212-253-4047
with a copy to:
Graubard Miller
The Chrysler Building
405 Lexington Avenue
New York, New York 10174-1901
Attention: David Alan Miller, Esq.
Telecopier No.: 212-818-8881
B. If to the Representative, to him at
Larry E. Lee
Meridian Tower, Suite 650
5100 East Skelly Drive
Tulsa, OK 74135
Telecopier No.: 918-663-9214
with a copy to:
C. David xStinson
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McAfee & Taft, A Professional Corporation
211 North Robinson, 10th Floor
Oklahoma City, Oklahoma 73102-7103
Telecopier No.: 405-235-9439
C. If to the Escrow Agent, to it at:
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Attention: Steven G. Nelson
Telecopier No.: 212-509-5150
or to such other person or address as any of the parties hereto shall specify by
notice in writing to all the other parties hereto.
10. (a) If this Agreement requires a party to deliver any notice or other
document, and such party refuses to do so, the matter shall be submitted to
arbitration pursuant to paragraph 3(d) of this Agreement.
(b) All notices delivered to the Escrow Agent shall refer to the
provision of this Agreement under which such notice is being delivered and, if
applicable, shall clearly specify the aggregate dollar amount due and payable to
Tremisis.
(c) This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original instrument and all of which
together shall constitute a single agreement.
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement on the date first above written.
TREMISIS ENERGY ACQUISITION CORPORATION
By: _____________________________________
Name:
Title:
THE REPRESENTATIVE
_________________________________________
Name: Larry E. Lee
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ESCROW AGENT
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
By: _____________________________________
Name: Steven G. Nelson
Title: Chairman
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Annex H
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
_______________, 2006 (the "Effective Date"), by and between [PARENT]
CORPORATION, a Delaware corporation (the "Company"), and LARRY E. LEE, an
individual (the "Executive").
WHEREAS, the Board of Directors of the Company (the "Board"), has
determined that it is in the best interests of the Company and its shareholders
to assure that the Company will have the continued dedication of the Executive;
WHEREAS, the Board believes it is important to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened loss of employment, and to encourage the
Executive's full attention and dedication to the affairs of the Company during
the term of this Agreement and upon the occurrence of such event;
WHEREAS, the Board also believes the Company is best served by providing
the Executive with compensation arrangements which provide the Executive with
individual financial security and which are competitive with those of other
corporations; and
WHEREAS, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company, for the period commencing on the Effective Date and ending on the third
anniversary of such date (the "Employment Period").
2. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, secretarial and administrative support, titles and
reporting requirements), authority, duties and responsibilities shall be that of
President and Chief Executive Officer, and (B) unless the Executive consents to
the contrary, the Executive's services shall be performed at the Company's
principal executive offices in Tulsa, Oklahoma.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal business hours to
the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A)
serve on civic or charitable boards or committees, (B) deliver lectures, fulfill
speaking engagements or teach at educational institutions and (C) manage
personal investments, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Base Salary") at least equal to $450,000.
Such Base Salary shall be payable monthly in cash. Base Salary shall be computed
prior to any reductions for (i) any deferrals of compensation made pursuant to
Sections 125 or 401(k) of the Code or pursuant to any other program or
arrangement provided by the Company and (ii) any withholding, income or
employment taxes. During the Employment Period, the Base Salary shall be
reviewed at least annually and shall be increased at any time and from time to
time as shall be determined by the Board. Any increase in Base Salary shall not
serve to limit or reduce any other obligation to the Executive under this
Agreement. Base Salary shall not be reduced after any such increase.
(ii) Bonus. In addition to Base Salary, the Executive may be
paid, for any fiscal year during the Employment Period, a bonus ("Bonus"),
either pursuant to the incentive compensation plan of the Company or otherwise
as may be determined by the Board.
(iii) Incentive, Savings and Retirement Plans. In addition to
Base Salary and Bonus, the Executive shall be entitled to participate during the
Employment Period in all incentive, savings and retirement plans, practices,
supplemental retirement plan policies and programs applicable to other key
management employees of the Company and its subsidiaries.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its subsidiaries
(including, without limitation, any medical, prescription, dental, disability,
salary continuance, employee life, group life, accidental death and travel
accident insurance plans and programs).
(v) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable business
expenses incurred by the Executive in accordance with the policies, practices
and procedures of the Company and its subsidiaries provided to other key
management employees of the Company and its subsidiaries.
(vi) Automobile. During the Employment Period, the Executive
shall be entitled to the use of a Company-owned automobile commensurate with his
position as President and Chief Executive Officer of the Company (the make,
model, cost and frequency of replacement of which shall be subject to approval
by the Board), and reimbursement by the Company for all reasonable expenses
related to the use and operation of such automobile.
(vii) Office and Support Staff. During the Employment Period,
the Executive shall be entitled to an office or offices of a size and with
furnishings and other
H-2
appointments, and to secretarial and other assistance, commensurate with his
position as President and Chief Executive Officer of the Company.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with Company policies.
(ix) Effect of Increases. Any increase in Base Salary, Bonus
or any other benefit or perquisite described in the foregoing Sections
(i)-(viii) shall in no way diminish any obligation of the Company under the
Agreement.
3. Termination.
(a) Death or Disability. This Agreement shall terminate
automatically upon the Executive's death. If the Company determines in good
faith that the Disability of the Executive has occurred (pursuant to the
definition of "Disability" set forth below), it will give to the Executive
written notice of its intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall terminate effective on
the 30th day after the date of such notice (the "Disability Effective Date"),
provided that, within such time period, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" means disability (either physical or mental) which (i) materially
and adversely affects Executive's ability to perform the duties required of his
office, and (ii) at least 26 weeks after its commencement, is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative (such
agreement as to acceptability not to be withheld unreasonably).
(b) Cause. The Company may terminate the Executive's employment for
"Cause." For purposes of this Agreement, termination of the Executive's
employment by the Company for Cause shall mean termination for one of the
following reasons: (i) the conviction of the Executive of a felony by a federal
or state court of competent jurisdiction; (ii) an act or acts of dishonesty
taken by the Executive and intended to result in substantial personal enrichment
of the Executive at the expense of the Company; or (iii) the Executive's failure
to follow a direct, reasonable and lawful written order from the Board, within
the reasonable scope of the Executive's duties, which failure is not cured
within 30 days. Further, for purposes of this Section (b), )the Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of a majority of the Board (excluding Executive if Executive is
then a member of the Board) at a meeting of the Board called and held for such
purpose (after reasonable notice to the Executive and an opportunity for the
Executive, together with the Executive's counsel, to be heard before the Board),
finding that in the good faith opinion of the Board the Executive was guilty of
conduct set forth in clauses (i), (ii) or (iii) above and specifying the
particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" means:
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices, titles
and reporting
H-3
requirements), authority, duties or responsibilities as contemplated by Section
2(a) of this Agreement, or any other action by the Company which results in a
diminution in such position, compensation, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
within ten (10) days after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 2(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company within ten (10) days after receipt of notice thereof
given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than that described in Section 2(a)(i)(B) hereof,
except for periodic travel reasonably required in the performance of the
Executive's responsibilities;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this Agreement;
or
(v) any failure by the Company to comply with and satisfy
Section 10(c) of this Agreement.
For purposes of this Section 3(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive unless such determination is
rejected by vote of a majority of the Board (excluding Executive if Executive is
then a member of the Board), in which event Executive may refer the
determination of "Good Reason" to binding arbitration by and between the Company
and the Executive conducted pursuant to the Commercial Arbitration Rules of the
American Arbitration Association ("AAA") by a single arbitrator appointed by the
AAA. The decision of the arbitrator in such matter shall be final, unappealable
and binding upon the Company and the Executive.
(d) Notice of Termination. Any termination by the Company for Cause
or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provisions in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than 15 days after the giving
of such notice). The failure by the Company or the Executive to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Cause or Good Reason shall not waive any right of the Company or the Executive
hereunder or preclude the Company or the Executive from asserting such fact or
circumstance in enforcing its or his rights hereunder.
(e) Date of Termination. "Date of Termination" means the date of
receipt of the Notice of Termination by either the Company or the Executive as
the case may be or
H-4
any later date specified therein; provided, however, that if the Executive's
employment is terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be.
4. Obligations of the Company upon Termination.
(a) Death. If the Executive's employment is terminated by reason of
the Executive's death, this Agreement shall terminate without further
obligations to the Executive's legal representatives under this Agreement, other
than those obligations accrued or earned and vested (if applicable) by the
Executive as of the Date of Termination, including, for this purpose (i) the
Executive's annual full Base Salary through the Date of Termination at the rate
in effect on the Date of Termination, (ii) the product of the Bonus (defined in
Section 2(b)(ii)) paid to the Executive for the last full fiscal year and a
fraction, the numerator of which is the number of days in the current fiscal
year through the Date of Termination, and the denominator of which is 365, (iii)
the amount equal to the Executive's current Base Salary for twelve (12) months
or such shorter period as may remain in the Employment Period, and (iv) any
compensation previously deferred by the Executive (together with any accrued
interest thereon) and not yet paid by the Company and any accrued vacation pay
not yet paid by the Company (such amounts specified in clauses (i), (ii), (iii)
and (iv) are hereinafter referred to as "Accrued Obligations"). All such Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
(b) Disability. If the Executive's employment is terminated by
reason of the Executive's Disability, this Agreement shall terminate without
further obligations to the Executive, other than those obligations accrued or
earned and vested (if applicable) by the Executive as of the Date of
Termination, including for this purpose, all Accrued Obligations. All such
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination.
(c) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated by the Company for Cause, or by the Executive for Other than
Good Reason, this Agreement shall terminate without further obligations to the
Executive other than the obligation to pay to the Executive the Base Salary
accrued through the Date of Termination plus the vested amount of any
compensation previously deferred by the Executive.
(d) Good Reason; Termination Other Than for Cause or Disability. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause, Disability, or death or if the Executive shall
terminate his employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the following
amounts:
A. to the extent not theretofore paid, the Executive's
Base Salary through the Date of Termination; and
H-5
B. the product of (i) an amount equal to the Bonus
paid to the Executive for the last full fiscal year (if any) ending during the
Employment Period or, if higher, the Bonus paid to the Executive for any full
fiscal year during the Employment Period (as applicable, the "Recent Bonus"),
and (ii) a fraction, the numerator of which is the number of days in the current
fiscal year through the Date of Termination and the denominator of which is 365;
and
C. the product obtained by multiplying two (2) times the
current Base Salary; and
D. in the case of compensation previously deferred by
the Executive, all vested amounts previously deferred and not yet paid by the
Company, and any accrued vacation pay not yet paid by the Company; and
(ii) for the remainder of the Employment Period, or such
longer period as any plan, program, practice or policy may provide, the Company
shall continue benefits to the Executive and/or the Executive's family equal to
those which would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 2(b)(iv) of this Agreement
if the Executive's employment had not been terminated, including, without
limitation, health insurance and life insurance, and for purposes of eligibility
for retiree benefits pursuant to such plans, practices, programs and policies,
the Executive shall be considered to have remained employed until the end of the
Employment Period and to have retired on the last day of such period.
5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plans, programs, policies or practices, provided by the
Company or any of its subsidiaries and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive may
have under any stock option or other agreements with the Company or any of its
subsidiaries. Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, policy, practice or program of the
Company or any of its subsidiaries at or subsequent to the Date of Termination
shall be payable in accordance with such plan, policy, practice or program.
6. Acceleration of Vesting. In the event that the Company has any type of
plan, program or arrangement which include, by example, not by limitation, stock
option plans, restricted stock award plans, phantom stock plans and supplemental
retirement income plans (the "Other Plans") and the Executive is not 100% vested
in his benefits in the Other Plans at the time of his termination of employment,
and the Executive would otherwise be entitled to the payment of benefits
pursuant to the terms of this Agreement, then, the Executive shall be deemed to
be 100% vested and non-forfeitable in his benefits in the Other Plans; provided,
no acceleration of vesting shall occur in the Other Plans if (i) termination of
the Executive's employment is by the Company for Cause or by the Employee for
Other than Good Reason, (ii) such act would result in the disqualification of or
otherwise adversely affect the tax qualified status of such Other Plans or the
participants in such Other Plans, or (iii) acceleration is not permitted by the
terms of the Other Plans. Further, in the event that the Company is unable to
accelerate vesting in the Other Plans because such acceleration would adversely
effect the tax status of any of the Other Plans or the participants in such
Other Plans, then, the Company shall pay to the Executive the amount equal to
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the benefits which have been lost due to the inability to accelerate vesting in
the Other Plans; and such additional amounts shall be paid at the same time in
the same manner as benefits would otherwise be paid pursuant to the terms of
this Agreement.
7. Full Settlement. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement. The
Company agrees to pay, to the full extent permitted by law, all legal fees and
expenses which the Executive may reasonably incur as a result of any contest
(regardless of the outcome thereof) by the Company or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to Section 8 of this
Agreement), plus in each case interest at the applicable Federal rate provided
for in Section 7872(f)(2) of the Code.
8. Certain Additional Payments by the Company.
(a) No payments made pursuant to this Agreement are contingent upon
a change in control as defined in Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"). Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment or
distribution by the Company to or for the benefit of the Executive, whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, including, by example and not by way of limitation,
acceleration by the Company of the date of vesting or payment or rate of payment
under any plan, program or arrangement of the Company (a "Payment"), would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all income and excise taxes with respect to the Payment (including
any interest or penalties imposed with respect to such taxes), and specifically
including any Excise Tax imposed on the Gross-Up Payment, the Executive retains
an amount of the Gross-Up Payment equal to the Excise Tax imposed on the
Payment.
(b) Subject to the provisions of Section 8(c), all determinations
required to be made under this Section 8, including whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment, shall be made by a public
accounting firm designated by the Company (the "Accounting Firm") which shall
provide detailed supporting calculations both to the Company and the Executive
within 15 business days of the receipt of notice from the Executive that there
has been a Payment which would be subject to the Excise Tax, or such earlier
time as is requested by the Company. The initial Gross-Up Payment, if any, as
determined pursuant to this Section 8(b), shall be paid to the Executive within
five days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with an opinion that he has substantial authority
not to report any Excise Tax on his federal income tax return. Any determination
by the Accounting Firm shall be binding upon the Company and the Executive. As a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been
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made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 8(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive knows of
such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. The Executive shall not pay
such claim prior to the expiration of the 30-day period following the date on
which he gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 8(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income
tax, including interest or penalties with respect thereto, imposed with respect
to such advance or with respect to any imputed income with respect to such
advance; and further
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provided that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 8(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 8(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 8(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of thirty days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
9. Confidential Information; Non-Solicitation.
(a) The Executive shall hold in a fiduciary capacity for the benefit
of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its subsidiaries, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its subsidiaries and which shall
not be or become public knowledge (other than by acts by the Executive or his
representatives in violation of this Agreement). After termination of the
Executive's employment with the Company, the Executive shall not, without the
prior written consent of the Company, communicate or divulge any such
information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 9 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
(b) Executive agrees that, during his employment with the Company
and for a period of one (1) year from the date of termination of this Agreement
for any reason, Executive will not, directly or indirectly, solicit, or hire, or
attempt to solicit or hire any employee of the Company; provided, however, that
there shall be excepted from the foregoing prohibition Executive's personal
assistant.
10. Successors.
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
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(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
11. Indemnification and Insurance. The Executive shall be indemnified and
held harmless by the Company during the term of this Agreement and following any
termination of this Agreement for any reason whatsoever in the same manner as
would any other key management employee of the Company with respect to acts or
omissions occurring prior to (a) the termination of this Agreement or (b) the
termination of employment of the Executive. In addition, during the term of this
Agreement and for a period of five years following the termination of this
Agreement for any reason whatsoever, the Executive shall be covered by a Company
held Directors and Officers liability insurance policy covering acts or
omissions occurring prior to (a) the termination of this Agreement or (b) the
termination of employment of the Executive. Provided, in no event will the
obligation of the Company to indemnify the Executive or provide Directors and
Officers insurance to the Executive under this Section be less than the
obligation and insurance coverage which the Company had to the Executive
immediately prior to the occurrence of the Executive's Date of Termination.
12. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Oklahoma, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: At his last known address evidenced on the Company's
payroll records
If to the Company:
[Parent] Corporation
Meridian Tower, Suite 650
5100 E. Skelly Drive
Tulsa, OK 74135
Attention: _________________________
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With a copy to: McAfee & Taft A Professional Corporation
10th Floor, Two Leadership Square
Oklahoma City, Oklahoma 73102
Attention: C. David Stinson, Esq.
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with
any provision hereof shall not be deemed to be a waiver of such provision or any
other provision thereof.
(f) This Agreement contains the entire understanding of the Company
and the Executive with respect to the subject matter hereof.
13. No Trust. No obligation of the Company under this Agreement shall be
construed as creating a trust, escrow or other secured or segregated fund, in
favor of the Executive or his beneficiary. The status of the Executive and his
beneficiary with respect to any liabilities assumed by the Company hereunder
shall be solely those of unsecured creditors of the Company. Any asset acquired
or held by the Company in connection with liabilities assumed by it hereunder,
shall not be deemed to be held under any trust, escrow or other secured or
segregated fund for the benefit of the Executive or his beneficiary or to be
security for the performance of the obligations of the Company, but shall be,
and remain a general, unpledged, unrestricted asset of the Company at all times
subject to the claims of general creditors of the Company.
14. No Assignability. Neither the Executive nor his beneficiary, nor any
other person shall acquire any right to or interest in any payments payable
under this Agreement, otherwise than by actual payment in accordance with the
provisions of this Agreement, or have any power to transfer, assign, anticipate,
pledge, mortgage or otherwise encumber, alienate or transfer any rights
hereunder in advance of any of the payments to be made pursuant to this
Agreement or any portion thereof which is expressly declared to be nonassignable
and nontransferable. No right or benefit hereunder shall in any manner be liable
for or subject to the debts, contracts, liabilities, or torts of the person
entitled to such benefit.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed in its name on its behalf, all as of the day and year
first above written.
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"EXECUTIVE'
________________________________________
Larry E. Lee
"COMPANY"
[PARENT] CORPORATION
By _____________________________________
Name: _______________________________
Title: ______________________________
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Annex I
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into as
of the [Closing Date], by and among: Tremisis Energy Acquisition Corporation, a
Delaware corporation (the "Company"), and the undersigned parties listed under
Investor on the signature page hereto (each, an "Investor" and collectively, the
"Investors").
WHEREAS, the Investors, formerly stockholders of RAM Energy, Inc., a
Delaware corporation ("RAM"), have received shares of Common Stock in exchange
for the shares of stock of RAM formerly held by them in connection with a merger
by which RAM has become a wholly owned subsidiary of the Company (the "Merger");
WHEREAS, the Investors and the Company desire to enter into this Agreement
to provide the Investors with certain rights relating to the registration of
shares of Common Stock held by them;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. DEFINITIONS. The following capitalized terms used herein have the
following meanings:
"Agreement" means this Agreement, as amended, restated,
supplemented, or otherwise modified from time to time.
"Closing Date" shall mean the date the Merger is consummated.
"Commission" means the Securities and Exchange Commission, or any
other federal agency then administering the Securities Act or the Exchange Act.
"Common Stock" means the common stock, par value $0.0001 per share,
of the Company.
"Company" is defined in the preamble to this Agreement.
"Demand Registration" is defined in Section 2.1.1.
"Demanding Holder" is defined in Section 2.1.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder,
all as the same shall be in effect at the time.
"Form S-3" is defined in Section 2.3.
"Indemnified Party" is defined in Section 4.3.
"Indemnifying Party" is defined in Section 4.3.
"Investor" is defined in the preamble to this Agreement.
"Investor Indemnified Party" is defined in Section 4.1.
"Maximum Number of Shares" is defined in Section 2.2.2.
"Merger" is defined in the first recital to this Agreement.
"Notices" is defined in Section 6.3.
"Piggy-Back Registration" is defined in Section 2.2.1.
"RAM" is defined in the first recital to this Agreement.
"Register," "registered" and/or "registration" means a registration
effected by preparing and filing a registration statement or similar document in
compliance with the requirements of the Securities Act, and the applicable rules
and regulations promulgated thereunder, and such registration statement becoming
effective.
"Registrable Securities" mean all of the shares of Common Stock
issued to Investors in the Merger. Registrable Securities include any warrants,
shares of capital stock or other securities of the Company issued as a dividend
or other distribution with respect to or in exchange for or in replacement of
such shares of Common Stock. As to any particular Registrable Securities, such
securities shall cease to be Registrable Securities when: (a) a Registration
Statement with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall have been sold,
transferred, disposed of or exchanged in accordance with such Registration
Statement; (b) such securities shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent public distribution of them
shall not require registration under the Securities Act; (c) such securities
shall have ceased to be outstanding, or (d) such securities are freely salable
under Rule 144(k) without volume limitations.
"Registration Statement" means a registration statement filed by the
Company with the Commission in compliance with the Securities Act and the rules
and regulations promulgated thereunder for a public offering and sale of Common
Stock (other than a registration statement on Form S-4 or Form S-8, or their
successors, or any registration statement covering only securities proposed to
be issued in exchange for securities or assets of another entity).
"Release Date" means the date that is two years after the Closing
Date.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder, all as the
same shall be in effect at the time.
"Underwriter" means a securities dealer who purchases any
Registrable Securities as principal in an underwritten offering and not as part
of such dealer's market-making activities.
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2. REGISTRATION RIGHTS.
2.1 Demand Registration.
2.1.1. Request for Registration. At any time and from time to
time, but not prior to three (3) months following any underwritten public
offering by the Company, and, except for registrations effected pursuant to
Section 2.3, not earlier than the Release Date, the holders of a
majority-in-interest of the Registrable Securities held by the Investors or the
transferees of the Investors, may make a written demand for registration under
the Securities Act of all or part of their Registrable Securities (a "Demand
Registration"); provided, however, that during the period ending December 31,
2008, no such demand shall be made except with the prior written consent of
holders of Registrable Securities owing 80% of the then outstanding Registrable
Securities. Any demand for a Demand Registration shall specify the number of
shares of Registrable Securities proposed to be sold and the intended method(s)
of distribution thereof. Each Demand Registration, other than one effected
pursuant to Section 2.3, shall be subject to an aggregate price threshold of not
less than $10,000,000. The Company will notify all holders of Registrable
Securities of the demand, and each holder of Registrable Securities who wishes
to include all or a portion of such holder's Registrable Securities in the
Demand Registration (each such holder including shares of Registrable Securities
in such registration, a "Demanding Holder") shall so notify the Company within
thirty (30) days after the receipt by the holder of the notice from the Company.
Upon any such request, the Demanding Holders shall be entitled to have their
Registrable Securities included in the Demand Registration, subject to the
provisos set forth in Section 3.1.1. The Company shall not be obligated to
effect more than an aggregate of two (2) Demand Registrations under this Section
2.1.1 in respect of Registrable Securities other than those effected pursuant to
Section 2.3.
2.1.2. Effective Registration. A registration will not count
as a Demand Registration until the Registration Statement filed with the
Commission with respect to such Demand Registration has been declared effective
and the Company has complied with all of its obligations under this Agreement
with respect thereto; provided, however, that if, after such Registration
Statement has been declared effective, the offering of Registrable Securities
pursuant to a Demand Registration is interfered with by any stop order or
injunction of the Commission or any court, the Registration Statement with
respect to such Demand Registration will be deemed not to have been declared
effective, unless and until, (i) such stop order or injunction is removed,
rescinded or otherwise terminated, and (ii) a majority-in-interest of the
Demanding Holders thereafter elect to continue the offering; provided, further,
that the Company shall not be obligated to file a second Registration Statement
until a Registration Statement that has been filed is counted as a Demand
Registration or is terminated.
2.1.3. Underwritten Offering. If a majority-in-interest of the
Demanding Holders so elect and such holders so advise the Company as part of
their written demand for a Demand Registration, the offering of such Registrable
Securities pursuant to such Demand Registration shall be in the form of an
underwritten offering. In such event, the right of any holder to include its
Registrable Securities in such registration shall be conditioned upon such
holder's participation in such underwriting and the inclusion of such holder's
Registrable Securities in the underwriting to the extent provided herein. All
Demanding Holders proposing to distribute their securities through such
underwriting shall enter into an underwriting agreement
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in customary form with the Underwriter or Underwriters selected for such
underwriting by a majority-in-interest of the holders initiating the Demand
Registration.
2.2 Piggy-Back Registration.
2.2.1. Piggy-Back Rights. If at any time on or after the
Closing Date the Company proposes to file a Registration Statement under the
Securities Act with respect to an offering of equity securities, or securities
or other obligations exercisable or exchangeable for, or convertible into,
equity securities, by the Company for its own account or for stockholders of the
Company for their account (or by the Company and by stockholders of the
Company), other than a Registration Statement (i) filed in connection with any
employee stock option or other benefit plan, (ii) for an exchange offer or
offering of securities solely to the Company's existing stockholders, (iii) for
an offering of debt that is convertible into equity securities of the Company or
(iv) for a dividend reinvestment plan, then the Company shall (x) give written
notice of such proposed filing to the holders of Registrable Securities as soon
as practicable but in no event less than twenty (20) days before the anticipated
filing date, which notice shall describe the amount and type of securities to be
included in such offering, the intended method(s) of distribution, and the name
of the proposed managing Underwriter or Underwriters, if any, of the offering,
and (y) offer to the holders of Registrable Securities in such notice the
opportunity to register the sale of such number of shares of Registrable
Securities as such holders may request in writing within ten (10) days following
receipt of such notice (a "Piggy-Back Registration"). The Company shall cause
such Registrable Securities to be included in such registration and shall use
its best efforts to cause the managing Underwriter or Underwriters of a proposed
underwritten offering to permit the Registrable Securities requested to be
included in a Piggy-Back Registration to be included on the same terms and
conditions as any similar securities of the Company and to permit the sale or
other disposition of such Registrable Securities in accordance with the intended
method(s) of distribution thereof. All holders of Registrable Securities
proposing to distribute their securities through a Piggy-Back Registration that
involves an Underwriter or Underwriters shall enter into an underwriting
agreement in customary form with the Underwriter or Underwriters selected for
such Piggy-Back Registration.
2.2.2. Reduction of Offering. If the managing Underwriter or
Underwriters for a Piggy-Back Registration that is to be an underwritten
offering advises the Company and the holders of Registrable Securities in
writing that the dollar amount or number of shares of Common Stock which the
Company desires to sell, taken together with shares of Common Stock, if any, as
to which registration has been demanded pursuant to written contractual
arrangements with persons other than the holders of Registrable Securities
hereunder, the Registrable Securities as to which registration has been
requested under this Section 2.2, and the shares of Common Stock, if any, as to
which registration has been requested pursuant to the written contractual
piggy-back registration rights of other stockholders of the Company, exceeds the
maximum number of shares that, in the reasonable judgment of the Underwriters,
can be effectively sold in the market at that time ("Maximum Number of Shares"),
then the Company shall include in any such registration:
(i) If the registration is undertaken for the Company's
account: (A) first, the shares of Common Stock or other securities that the
Company desires to sell that can be sold without exceeding the Maximum Number of
Shares; (B) second, to the extent that
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the Maximum Number of Shares has not been reached under the foregoing clause
(A), the shares of Common Stock, if any, including the Registrable Securities,
as to which registration has been requested pursuant to written contractual
piggy-back registration rights of security holders (pro rata in accordance with
the number of shares of Common Stock which each such person has actually
requested to be included in such registration, regardless of the number of
shares of Common Stock with respect to which such persons have the right to
request such inclusion) that can be sold without exceeding the Maximum Number of
Shares; and
(ii) If the registration is a "demand" registration
undertaken at the demand of persons other than the holders of Registrable
Securities pursuant to written contractual arrangements with such persons, (A)
first, the shares of Common Stock for the account of the demanding persons that
can be sold without exceeding the Maximum Number of Shares; (B) second, to the
extent that the Maximum Number of Shares has not been reached under the
foregoing clause (A), the shares of Common Stock or other securities that the
Company desires to sell that can be sold without exceeding the Maximum Number of
Shares; and (C) third, to the extent that the Maximum Number of Shares has not
been reached under the foregoing clauses (A) and (B), the shares of Common
Stock, if any, including the Registrable Securities, as to which registration
has been requested pursuant to written contractual piggy-back registration
rights of security holders (pro rata in accordance with the number of shares of
Common Stock which each such person has actually requested to be included in
such registration, regardless of the number of shares of Common Stock with
respect to which such persons have the right to request such inclusion).
2.2.3. Withdrawal. Any holder of Registrable Securities may
elect to withdraw such holder's request for inclusion of Registrable Securities
in any Piggy-Back Registration by giving written notice to the Company of such
request to withdraw prior to the effectiveness of the Registration Statement.
The Company may also elect to withdraw a registration statement at any time
prior to the effectiveness of the Registration Statement. Notwithstanding any
such withdrawal, the Company shall pay expenses incurred by the holders of
Registrable Securities in connection with such Piggy-Back Registration as
provided in Section 3.3.
2.3 Registrations on Form S-3. The holders of Registrable Securities
may at any time and from time to time request in writing that the Company
register the resale of any or all of such Registrable Securities on Form S-3 or
any similar short-form registration which may be available at such time ("Form
S-3"); provided, however, that during the period ending December 31, 2008, no
such request shall be made except with the prior written consent of holders of
Registrable Securities owing 80% of the then outstanding Registrable Securities.
The number of shares of Common Stock received by the Investors in the Merger
that shall be eligible for sale under a Form S-3 shall be limited to (a) 20% of
such shares during the period commencing on the day that is six (6) months after
the Closing Date and continuing through the day immediately preceding the day
that is one (1) year after the Closing Date, (b) an additional 20% (an aggregate
of 40%) of such shares during the period commencing on the day that is one year
after the Closing Date and continuing through the day immediately preceding the
day that is eighteen (18) months after the Closing Date, and (c) an additional
20% (an aggregate of 60%) of such shares during the period commencing on the day
that is eighteen (18) months after the Closing Date and continuing through the
day immediately preceding the day that is two (2) years
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after the Closing Date; and provided, further, however, that the Company shall
not be obligated to effect such request through an underwritten offering. Upon
receipt of such written request, the Company will promptly give written notice
of the proposed registration to all other holders of Registrable Securities,
and, as soon as practicable thereafter, effect the registration of all or such
portion of such holder's or holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other holder or holders joining in such request as are specified in a
written request given within fifteen (15) days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect any such registration pursuant to this Section 2.3: (i) if
Form S-3 is not available for such offering; or (ii) if the holders of the
Registrable Securities, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at any aggregate price to the
public of less than $10,000,000. Registrations effected pursuant to this Section
2.3 shall not be counted as Demand Registrations effected pursuant to Section
2.1. Registrable Securities registered pursuant to a Form S-3 registration under
this Section shall still remain subject to the limitations of the Lock-Up
Agreements dated October 20, 2005, executed by the Investors in favor of the
Company.
3. REGISTRATION PROCEDURES.
3.1 Filings; Information. Whenever the Company is required to effect
the registration of any Registrable Securities pursuant to Section 2, the
Company shall use its best efforts to effect the registration and sale of such
Registrable Securities in accordance with the intended method(s) of distribution
thereof as expeditiously as practicable, and in connection with any such
request:
3.1.1. Filing Registration Statement. The Company shall, as
expeditiously as possible and in any event within sixty (60) days after receipt
of a request for a Demand Registration pursuant to Section 2.1, prepare and file
with the Commission a Registration Statement on any form for which the Company
then qualifies or which counsel for the Company shall deem appropriate and which
form shall be available for the sale of all Registrable Securities to be
registered thereunder in accordance with the intended method(s) of distribution
thereof, and shall use its best efforts to cause such Registration Statement to
become and remain effective for the period required by Section 3.1.3; provided,
however, that the Company shall have the right to defer any Demand Registration
for up to thirty (30) days, and any Piggy-Back Registration for such period as
may be applicable to deferment of any demand registration to which such
Piggy-Back Registration relates, in each case if the Company shall furnish to
the holders a certificate signed by the Chief Executive Officer of the Company
stating that, in the good faith judgment of the Board of Directors of the
Company, it would be materially detrimental to the Company and its stockholders
for such Registration Statement to be effected at such time; provided further,
however, that the Company shall not have the right to exercise the right set
forth in the immediately preceding proviso more than once in any 365-day period
in respect of a Demand Registration hereunder.
3.1.2. Copies. The Company shall, prior to filing a
Registration Statement or prospectus, or any amendment or supplement thereto,
furnish without charge to the holders of Registrable Securities included in such
registration, and such holders' legal counsel,
I-6
copies of such Registration Statement as proposed to be filed, each amendment
and supplement to such Registration Statement (in each case including all
exhibits thereto and documents incorporated by reference therein), the
prospectus included in such Registration Statement (including each preliminary
prospectus), and such other documents as the holders of Registrable Securities
included in such registration or legal counsel for any such holders may request
in order to facilitate the disposition of the Registrable Securities owned by
such holders.
3.1.3. Amendments and Supplements. The Company shall prepare
and file with the Commission such amendments, including post-effective
amendments, and supplements to such Registration Statement and the prospectus
used in connection therewith as may be necessary to keep such Registration
Statement effective and in compliance with the provisions of the Securities Act
until all Registrable Securities and other securities covered by such
Registration Statement have been disposed of in accordance with the intended
method(s) of distribution set forth in such Registration Statement (which period
shall not exceed the sum of one hundred eighty (180) days plus any period during
which any such disposition is interfered with by any stop order or injunction of
the Commission or any governmental agency or court) or such securities have been
withdrawn.
3.1.4. Notification. After the filing of a Registration
Statement, the Company shall promptly, and in no event more than two (2)
business days after such filing, notify the holders of Registrable Securities
included in such Registration Statement of such filing, and shall further notify
such holders promptly and confirm such advice in writing in all events within
two (2) business days of the occurrence of any of the following: (i) when such
Registration Statement becomes effective; (ii) when any post-effective amendment
to such Registration Statement becomes effective; (iii) the issuance or
threatened issuance by the Commission of any stop order (and the Company shall
take all actions required to prevent the entry of such stop order or to remove
it if entered); and (iv) any request by the Commission for any amendment or
supplement to such Registration Statement or any prospectus relating thereto or
for additional information or of the occurrence of an event requiring the
preparation of a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of the securities covered by such
Registration Statement, such prospectus will not contain an untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and promptly make
available to the holders of Registrable Securities included in such Registration
Statement any such supplement or amendment; except that before filing with the
Commission a Registration Statement or prospectus or any amendment or supplement
thereto, including documents incorporated by reference, the Company shall
furnish to the holders of Registrable Securities included in such Registration
Statement and to the legal counsel for any such holders, copies of all such
documents proposed to be filed sufficiently in advance of filing to provide such
holders and legal counsel with a reasonable opportunity to review such documents
and comment thereon, and the Company shall not file any Registration Statement
or prospectus or amendment or supplement thereto, including documents
incorporated by reference, to which such holders or their legal counsel shall
object.
3.1.5. State Securities Laws Compliance. The Company shall use
its best efforts to (i) register or qualify the Registrable Securities covered
by the Registration Statement under such securities or "blue sky" laws of such
jurisdictions in the United States as the holders
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of Registrable Securities included in such Registration Statement (in light of
their intended plan of distribution) may request and (ii) take such action
necessary to cause such Registrable Securities covered by the Registration
Statement to be registered with or approved by such other Governmental
Authorities as may be necessary by virtue of the business and operations of the
Company and do any and all other acts and things that may be necessary or
advisable to enable the holders of Registrable Securities included in such
Registration Statement to consummate the disposition of such Registrable
Securities in such jurisdictions; provided, however, that the Company shall not
be required to qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this paragraph (e) or subject
itself to taxation in any such jurisdiction.
3.1.6. Agreements for Disposition. The Company shall enter
into customary agreements (including, if applicable, an underwriting agreement
in customary form) and take such other actions as are reasonably required in
order to expedite or facilitate the disposition of such Registrable Securities.
The representations, warranties and covenants of the Company in any underwriting
agreement which are made to or for the benefit of any Underwriters, to the
extent applicable, shall also be made to and for the benefit of the holders of
Registrable Securities included in such registration statement. No holder of
Registrable Securities included in such registration statement shall be required
to make any representations or warranties in the underwriting agreement except,
if applicable, with respect to such holder's organization, good standing,
authority, title to Registrable Securities, lack of conflict of such sale with
such holder's material agreements and organizational documents, and with respect
to written information relating to such holder that such holder has furnished in
writing expressly for inclusion in such Registration Statement.
3.1.7. Cooperation. The principal executive officer of the
Company, the principal financial officer of the Company, the principal
accounting officer of the Company and all other officers and members of the
management of the Company shall cooperate fully in any offering of Registrable
Securities hereunder, which cooperation shall include, without limitation, the
preparation of the Registration Statement with respect to such offering and all
other offering materials and related documents, and participation in meetings
with Underwriters, attorneys, accountants and potential investors.
3.1.8. Records. The Company shall make available for
inspection by the holders of Registrable Securities included in such
Registration Statement, any Underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or other
professional retained by any holder of Registrable Securities included in such
Registration Statement or any Underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, as shall be
necessary to enable them to exercise their due diligence responsibility, and
cause the Company's officers, directors and employees to supply all information
requested by any of them in connection with such Registration Statement.
3.1.9. Opinions and Comfort Letters. The Company shall furnish
to each holder of Registrable Securities included in any Registration Statement
a signed counterpart, addressed to such holder, of (i) any opinion of counsel to
the Company delivered to any Underwriter and (ii) any comfort letter from the
Company's independent public accountants delivered to any Underwriter. In the
event no legal opinion is delivered to any Underwriter, the
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Company shall furnish to each holder of Registrable Securities included in such
Registration Statement, at any time that such holder elects to use a prospectus,
an opinion of counsel to the Company to the effect that the Registration
Statement containing such prospectus has been declared effective and that no
stop order is in effect.
3.1.10. Earnings Statement. The Company shall comply with all
applicable rules and regulations of the Commission and the Securities Act, and
make available to its stockholders, as soon as practicable, an earnings
statement covering a period of twelve (12) months, beginning within three (3)
months after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act
and Rule 158 thereunder.
3.1.11. Listing. The Company shall use its best efforts to
cause all Registrable Securities included in any registration to be listed on
such exchanges or otherwise designated for trading in the same manner as similar
securities issued by the Company are then listed or designated or, if no such
similar securities are then listed or designated, in a manner satisfactory to
the holders of a majority of the Registrable Securities included in such
registration.
3.2 Obligation to Suspend Distribution. Upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
3.1.4(iv), or, in the case of a resale registration on Form S-3 pursuant to
Section 2.3 hereof, upon any suspension by the Company, pursuant to a written
insider trading compliance program adopted by the Company's Board of Directors,
of the ability of all "insiders" covered by such program to transact in the
Company's securities because of the existence of material non-public
information, each holder of Registrable Securities included in any registration
shall immediately discontinue disposition of such Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such holder receives the supplemented or amended prospectus contemplated
by Section 3.1.4(iv) or the restriction on the ability of "insiders" to transact
in the Company's securities is removed, as applicable, and, if so directed by
the Company, each such holder will deliver to the Company all copies, other than
permanent file copies then in such holder's possession, of the most recent
prospectus covering such Registrable Securities at the time of receipt of such
notice.
3.3 Registration Expenses. The Company shall bear all costs and
expenses incurred in connection with any Demand Registration pursuant to Section
2.1, any Piggy-Back Registration pursuant to Section 2.2, and any registration
on Form S-3 effected pursuant to Section 2.3, and all expenses incurred in
performing or complying with its other obligations under this Agreement, whether
or not the Registration Statement becomes effective, including, without
limitation: (i) all registration and filing fees; (ii) fees and expenses of
compliance with securities or "blue sky" laws (including fees and disbursements
of counsel in connection with blue sky qualifications of the Registrable
Securities); (iii) printing expenses; (iv) the Company's internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees); (v) the fees and expenses incurred in connection with the listing of
the Registrable Securities as required by Section 3.1.11; (vi) National
Association of Securities Dealers, Inc. fees; (vii) fees and disbursements of
counsel for the Company and fees and expenses for independent certified public
accountants retained by the Company (including the expenses or
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costs associated with the delivery of any opinions or comfort letters requested
pursuant to Section 3.1.9); (viii) the fees and expenses of any special experts
retained by the Company in connection with such registration and (ix) the fees
and expenses of one legal counsel selected by the holders of a
majority-in-interest of the Registrable Securities included in such
registration. The Company shall have no obligation to pay any underwriting
discounts or selling commissions attributable to the Registrable Securities
being sold by the holders thereof, which underwriting discounts or selling
commissions shall be borne by such holders. Additionally, in an underwritten
offering, all selling stockholders and the Company shall bear the expenses of
the underwriter pro rata in proportion to the respective amount of shares each
is selling in such offering.
3.4 Information. The holders of Registrable Securities shall provide
such information as may reasonably be requested by the Company, or the managing
Underwriter, if any, in connection with the preparation of any Registration
Statement, including amendments and supplements thereto, in order to effect the
registration of any Registrable Securities under the Securities Act pursuant to
Section 2 and in connection with the Company's obligation to comply with federal
and applicable state securities laws.
4. INDEMNIFICATION AND CONTRIBUTION.
4.1 Indemnification by the Company. The Company agrees to indemnify
and hold harmless each Investor and each other holder of Registrable Securities,
and each of their respective officers, employees, affiliates, directors,
partners, members, attorneys and agents, and each person, if any, who controls
an Investor and each other holder of Registrable Securities (within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act) (each, an
"Investor Indemnified Party"), from and against any expenses, losses, judgments,
claims, damages or liabilities, whether joint or several, arising out of or
based upon any untrue statement (or allegedly untrue statement) of a material
fact contained in any Registration Statement under which the sale of such
Registrable Securities was registered under the Securities Act, any preliminary
prospectus, final prospectus or summary prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arising out of or based upon any omission (or alleged omission) to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Securities Act or
any rule or regulation promulgated thereunder applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration; and the Company shall promptly reimburse the Investor
Indemnified Party for any legal and any other expenses reasonably incurred by
such Investor Indemnified Party in connection with investigating and defending
any such expense, loss, judgment, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such expense, loss, claim, damage or liability arises out of or is based
upon any untrue statement or allegedly untrue statement or omission or alleged
omission made in such Registration Statement, preliminary prospectus, final
prospectus, or summary prospectus, or any such amendment or supplement, in
reliance upon and in conformity with information furnished to the Company, in
writing, by such selling holder expressly for use therein. The Company also
shall indemnify any Underwriter of the Registrable Securities, their officers,
affiliates, directors, partners, members and agents and each person who controls
such
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Underwriter on substantially the same basis as that of the indemnification
provided above in this Section 4.1.
4.2 Indemnification by Holders of Registrable Securities. Each
selling holder of Registrable Securities will, in the event that any
registration is being effected under the Securities Act pursuant to this
Agreement of any Registrable Securities held by such selling holder, indemnify
and hold harmless the Company, each of its directors and officers and each
underwriter (if any), and each other person, if any, who controls such selling
holder or such underwriter within the meaning of the Securities Act, against any
losses, claims, judgments, damages or liabilities, whether joint or several,
insofar as such losses, claims, judgments, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or
allegedly untrue statement of a material fact contained in any Registration
Statement under which the sale of such Registrable Securities was registered
under the Securities Act, any preliminary prospectus, final prospectus or
summary prospectus contained in the Registration Statement, or any amendment or
supplement to the Registration Statement, or arise out of or are based upon any
omission or the alleged omission to state a material fact required to be stated
therein or necessary to make the statement therein not misleading, if the
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by such selling holder expressly
for use therein, and shall reimburse the Company, its directors and officers,
and each such controlling person for any legal or other expenses reasonably
incurred by any of them in connection with investigation or defending any such
loss, claim, damage, liability or action. Each selling holder's indemnification
obligations hereunder shall be several and not joint and shall be limited to the
amount of any net proceeds actually received by such selling holder.
4.3 Conduct of Indemnification Proceedings. Promptly after receipt
by any person of any notice of any loss, claim, damage or liability or any
action in respect of which indemnity may be sought pursuant to Section 4.1 or
4.2, such person (the "Indemnified Party") shall, if a claim in respect thereof
is to be made against any other person for indemnification hereunder, notify
such other person (the "Indemnifying Party") in writing of the loss, claim,
judgment, damage, liability or action; provided, however, that the failure by
the Indemnified Party to notify the Indemnifying Party shall not relieve the
Indemnifying Party from any liability which the Indemnifying Party may have to
such Indemnified Party hereunder, except and solely to the extent the
Indemnifying Party is actually prejudiced by such failure. If the Indemnified
Party is seeking indemnification with respect to any claim or action brought
against the Indemnified Party, then the Indemnifying Party shall be entitled to
participate in such claim or action, and, to the extent that it wishes, jointly
with all other Indemnifying Parties, to assume control of the defense thereof
with counsel satisfactory to the Indemnified Party. After notice from the
Indemnifying Party to the Indemnified Party of its election to assume control of
the defense of such claim or action, the Indemnifying Party shall not be liable
to the Indemnified Party for any legal or other expenses subsequently incurred
by the Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that in any action in
which both the Indemnified Party and the Indemnifying Party are named as
defendants, the Indemnified Party shall have the right to employ separate
counsel (but no more than one such separate counsel) to represent the
Indemnified Party and its controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Indemnified Party against the Indemnifying Party, with the fees and
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expenses of such counsel to be paid by such Indemnifying Party if, based upon
the written opinion of counsel of such Indemnified Party, representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, consent to entry of judgment or effect
any settlement of any claim or pending or threatened proceeding in respect of
which the Indemnified Party is or could have been a party and indemnity could
have been sought hereunder by such Indemnified Party, unless such judgment or
settlement includes an unconditional release of such Indemnified Party from all
liability arising out of such claim or proceeding.
4.4 Contribution.
4.4.1. If the indemnification provided for in the foregoing
Sections 4.1, 4.2 and 4.3 is unavailable to any Indemnified Party in respect of
any loss, claim, damage, liability or action referred to herein, then each such
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such loss, claim, damage, liability or action in such proportion as is
appropriate to reflect the relative fault of the Indemnified Parties and the
Indemnifying Parties in connection with the actions or omissions which resulted
in such loss, claim, damage, liability or action, as well as any other relevant
equitable considerations. The relative fault of any Indemnified Party and any
Indemnifying Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such Indemnified Party or such Indemnifying Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
4.4.2. The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 4.4 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding Section
4.4.1. The amount paid or payable by an Indemnified Party as a result of any
loss, claim, damage, liability or action referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 4.4, no holder of Registrable
Securities shall be required to contribute any amount in excess of the dollar
amount of the net proceeds (after payment of any underwriting fees, discounts,
commissions or taxes) actually received by such holder from the sale of
Registrable Securities which gave rise to such contribution obligation. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
5. UNDERWRITING AND DISTRIBUTION.
5.1 Rule 144. The Company covenants that it shall file any reports
required to be filed by it under the Securities Act and the Exchange Act and
shall take such further action as the holders of Registrable Securities may
reasonably request, all to the extent required from time to time to enable such
holders to sell Registrable Securities without registration under the
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Securities Act within the limitation of the exemptions provided by Rule 144
under the Securities Act, as such Rules may be amended from time to time, or any
similar Rule or regulation hereafter adopted by the Commission.
6. MISCELLANEOUS.
6.1 Other Registration Rights. The Company represents and warrants
that, except as disclosed to Investors in the Agreement and Plan of Merger,
dated October __, 2005, pursuant to which the Merger was effected, no person,
other than a holder of the Registrable Securities, has any right to require the
Company to register any shares of the Company's capital stock for sale or to
include shares of the Company's capital stock in any registration filed by the
Company for the sale of shares of capital stock for its own account or for the
account of any other person.
6.2 Assignment; No Third Party Beneficiaries. This Agreement and the
rights, duties and obligations of the Company hereunder may not be assigned or
delegated by the Company in whole or in part. This Agreement and the rights,
duties and obligations of the holders of Registrable Securities hereunder may be
freely assigned or delegated by such holder of Registrable Securities in
conjunction with and to the extent of any transfer of Registrable Securities by
any such holder. This Agreement and the provisions hereof shall be binding upon
and shall inure to the benefit of each of the parties and their respective
successors and the permitted assigns of the Investor or holder of Registrable
Securities or of any assignee of the Investor or holder of Registrable
Securities. This Agreement is not intended to confer any rights or benefits on
any persons that are not party hereto other than as expressly set forth in
Article 4 and this Section 6.2.
6.3 Notices. All notices, demands, requests, consents, approvals or
other communications (collectively, "Notices") required or permitted to be given
hereunder or which are given with respect to this Agreement shall be in writing
and shall be personally served, delivered by reputable air courier service with
charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile,
addressed as set forth below, or to such other address as such party shall have
specified most recently by written notice. Notice shall be deemed given on the
date of service or transmission if personally served or transmitted by telegram,
telex or facsimile; provided, that if such service or transmission is not on a
business day or is after normal business hours, then such notice shall be deemed
given on the next business day. Notice otherwise sent as provided herein shall
be deemed given on the next business day following timely delivery of such
notice to a reputable air courier service with an order for next-day delivery.
To the Company:
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Tremisis Energy Acquisition Corporation
1775 Broadway
Suite 604
New York, New York 10019
Attention: Chairman
with a copy to:
Graubard Miller
405 Lexington Avenue
New York, NY 10174-1901
Attention: David Miller
To an Investor, to:
Larry E. Lee
RAM Energy, Inc.
5100 E. Skelly Drive
Suite 650
Tulsa, Oklahoma 74135
Danish Knights, A Limited Partnership
Attn: Britani Talley Bowman
8620 Berkwick Drive
Plano, TX 75025
C. David Stinson
McAfee & Taft, A Professional Corporation
211 North Robinson, 10th Floor
Oklahoma City, Oklahoma 73102-7103
with a copy to:
C. David Stinson
McAfee & Taft, A Professional Corporation
211 North Robinson, 10th Floor
Oklahoma City, Oklahoma 73102-7103
6.4 Severability. This Agreement shall be deemed severable, and the
invalidity or unenforceability of any term or provision hereof shall not affect
the validity or enforceability of this Agreement or of any other term or
provision hereof. Furthermore, in lieu of any such invalid or unenforceable term
or provision, the parties hereto intend that there shall be added as a part of
this Agreement a provision as similar in terms to such invalid or unenforceable
provision as may be possible and be valid and enforceable.
I-14
6.5 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
6.6 Entire Agreement. This Agreement (including all agreements
entered into pursuant hereto and all certificates and instruments delivered
pursuant hereto and thereto) constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements, representations, understandings, negotiations and discussions
between the parties, whether oral or written.
6.7 Modifications and Amendments. No amendment, modification or
termination of this Agreement shall be binding upon any party unless executed in
writing by such party.
6.8 Titles and Headings. Titles and headings of sections of this
Agreement are for convenience only and shall not affect the construction of any
provision of this Agreement.
6.9 Waivers and Extensions. Any party to this Agreement may waive
any right, breach or default which such party has the right to waive, provided
that such waiver will not be effective against the waiving party unless it is in
writing, is signed by such party, and specifically refers to this Agreement.
Waivers may be made in advance or after the right waived has arisen or the
breach or default waived has occurred. Any waiver may be conditional. No waiver
of any breach of any agreement or provision herein contained shall be deemed a
waiver of any preceding or succeeding breach thereof nor of any other agreement
or provision herein contained. No waiver or extension of time for performance of
any obligations or acts shall be deemed a waiver or extension of the time for
performance of any other obligations or acts.
6.10 Remedies Cumulative. In the event that the Company fails to
observe or perform any covenant or agreement to be observed or performed under
this Agreement, the Investor or any other holder of Registrable Securities may
proceed to protect and enforce its rights by suit in equity or action at law,
whether for specific performance of any term contained in this Agreement or for
an injunction against the breach of any such term or in aid of the exercise of
any power granted in this Agreement or to enforce any other legal or equitable
right, or to take any one or more of such actions, without being required to
post a bond. None of the rights, powers or remedies conferred under this
Agreement shall be mutually exclusive, and each such right, power or remedy
shall be cumulative and in addition to any other right, power or remedy, whether
conferred by this Agreement or now or hereafter available at law, in equity, by
statute or otherwise.
6.11 Governing Law. This Agreement shall be governed by, interpreted
under, and construed in accordance with the law of the State of Delaware,
without giving effect to any choice-of-law provisions thereof that would compel
the application of the substantive laws of any other jurisdiction.
6.12 Waiver of Trial by Jury. Each party hereby irrevocably and
unconditionally waives the right to a trial by jury in any action, suit,
counterclaim or other proceeding (whether based on contract, tort or otherwise)
arising out of, connected with or
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relating to this Agreement, the transactions contemplated hereby, or the actions
of the Investor in the negotiation, administration, performance or enforcement
hereof.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK.]
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IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be executed and delivered by their duly authorized representatives
as of the date first written above.
TREMISIS ENERGY
ACQUISITION CORPORATION
By: _________________________________________
Name: Lawrence S. Coben
Title: Chairman of the Board
INVESTORS:
_____________________________________________
Larry E. Lee
DANISH KNIGHTS, A LIMITED PARTNERSHIP,
A Texas Limited Partnership
By: Dannebrog Corporation, General Partner
By: _________________________________________
Britani Talley Bowman, President
_____________________________________________
C. David Stinson
I-17
FOLD AND DETACH HERE AND READ THE REVERSE SIDE
PROXY
Tremisis Energy Acquisition Corporation
1755 Broadway, Suite 604
New York, New York 10019
SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF TREMISIS ENERGY ACQUISITION CORPORATION
The undersigned appoints Lawrence S. Coben or Isaac Kier, as proxies, and
each of them with full power to act without the other, as proxies, each with the
power to appoint a substitute, and thereby authorizes either of them to
represent and to vote, as designated on the reverse side, all shares of common
stock of Tremisis held of record by the undersigned on _______ ___, 2006, at the
Special Meeting of Stockholders to be held on _______ ___, 2006, or any
postponement or adjournment thereof.
THIS PROXY REVOKES ALL PRIOR PROXIES GIVEN BY THE UNDERSIGNED BY EXECUTING
THIS PROXY CARD, THE UNDERSIGNED AUTHORIZES THE PROXIES TO VOTE IN THEIR
DISCRETION TO ADOPT THE AGREEMENT AND THE PLAN OF MERGER IF THE UNDERSIGNED HAS
NOT SPECIFIED HOW HIS, HER OR ITS SHARES SHOULD BE VOTED.
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTIONS ARE GIVEN, THIS
PROXY WILL BE VOTED "FOR" PROPOSAL NUMBERS 1, 2, 3, 4 & 5. THE TREMISIS BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSALS SHOWN ON THE REVERSE SIDE.
TREMISIS MAY POSTPONE THE SPECIAL MEETING TO SOLICIT ADDITIONAL VOTING
INSTRUCTIONS IN THE EVENT THAT A QUORUM IS NOT PRESENT OR UNDER OTHER
CIRCUMSTANCES IF DEEMED ADVISABLE BY THE TREMISIS BOARD OF DIRECTORS.
(Continued and to be signed on reverse side)
PROXY
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTIONS ARE GIVEN, THIS
PROXY WILL BE VOTED "FOR" PROPOSAL NUMBERS 1, 2, 3, 4 & 5. THE Tremisis BOARD OF
DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSALS.
1. To adopt the Agreement FOR AGAINST ABSTAIN
and Plan of Merger, as |_| |_| |_|
amended, among
Tremisis, RAM
Acquisition, Inc., RAM
Energy, Inc. and the
stockholders of RAM
Energy, Inc.
Only if you voted "AGAINST" Proposal Number 1 and you hold shares of Tremisis
common stock issued in the Tremisis initial public offering, you may exercise
your conversion rights and demand that Tremisis convert your shares of common
stock onto a pro rata portion of the trust account by marking the "Exercise
Conversion Rights" box below. If you exercise your conversion rights, then you
will be exchanging your shares of Tremisis common stock for cash and will no
longer own these shares. You will only be entitled to receive cash for these
shares if the merger is completed and you continue to hold these shares through
the effective time of the merger and the tender of your stock certificate to the
combined company. To exercise your conversion rights check the following box.
Failure to (a) vote against the adoption of the Agreement and Plan of Merger,
(b) check the following box and (c) submit this proxy in a timely manner will
result in the loss of your conversion rights.
I HEREBY EXERCISE MY CONVERSION RIGHTS |_|
2. To approve an amendment to the Certificate of FOR AGAINST ABSTAIN
Incorporation of Tremisis to change the name of |_| |_| |_|
Tremisis from Tremisis Energy Acquisition
Corporation to RAM Energy Holdings, Inc.
3. To consider and vote upon the approval of an |_| |_| |_|
amendment to the Certificate of Incorporation
of Tremisis to increase the number of
authorized shares of Tremisis common stock.
4. To consider and vote upon the approval of an |_| |_| |_|
amendment to the Certificate of Incorporation
of Tremisis to remove the preamble and Sections
A through D, inclusive, of Article Sixth from
the Certificate of Incorporation from and after
the closing of the merger, and to redesignate
Section E of Article Sixth as Article Sixth.
5. To approve the Tremisis 2006 Long-Term |_| |_| |_|
Incentive Plan.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT |_|
PLEASE MARK, DATE AND RETURN THIS PROXY PROMPTLY.
Signature_______________________Signature_______________________Date____________
Sign exactly as name appears on this proxy card. If shares are held jointly,
each holder should sign. Executors, administrators, trustees, guardians,
attorneys and agents should give their full titles. If stockholder is a
corporation, sign in full name by an authorized officer.