UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008.
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM
TO
.
COMMISSION FILE NO. 1-32533
CRUSADER ENERGY GROUP INC.
(Exact name of registrant as specified in its charter)
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Nevada
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88-0349241
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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4747 Gaillardia Parkway
Oklahoma City, Oklahoma 73142
(Address of principal executive offices, including zip code)
(405) 285-7555
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
At August 13, 2008, the number of outstanding shares of the issuers common stock was 198,194,958.
CRUSADER ENERGY GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
AVAILABLE INFORMATION
Crusader
makes available free of charge on or through its Internet Web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material
has been electronically filed with, or furnished to, the Securities
and Exchange Commission (SEC). The companys Internet
address is
http://www.crusaderenergy.com
and such filings are also available
at the SECs Web site,
http://www.sec.gov.
Crusader also posts on its Internet
Web site under the heading, Investor Information, other materials of
general interest to investors including any current investor meeting information or
Crusader conference or analyst presentations.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Federal securities
laws and regulations. Forward-looking statements are estimates and predictions by management about
the future outcome of events and conditions that could affect Crusaders business, financial
condition and results of operations. We use words such as, will, should, could, plans,
expects, likely, anticipates, intends, believes, estimates, may, and other words of
similar expression to indicate forward-looking statements.
There is no assurance that the estimates and predictions contained in our forward-looking
statements will occur or be achieved as predicted. Any number of factors could cause actual
results to differ materially from those referred to in a forward-looking statement, including
drilling risks, operating hazards and other uncertainties inherent in the exploration for, and
development and production of, oil and natural gas; volatility in oil and natural gas prices,
including the adverse impact of lower prices on the amount of our cash flow available to meet
capital expenditures, our ability to borrow and raise capital and on the values attributed to our
proven reserves; drilling and operating risks in the unconventional shales and other reservoirs in
which we operate, including uncertainties in interpreting engineering, reservoir and reserve data;
the availability of technical personnel and drilling equipment; the timing and installation of
processing and treatment facilities, third-party pipelines and other transportation facilities and
equipment; changes in interest rates; and increasing production costs and other expenses.
Further information on risks and uncertainties affecting our business is described under Risk
Factors in this report and are also available in our reports filed with the Securities and Exchange
Commission (SEC) which are incorporated by this reference as though fully set forth herein. We
undertake no obligation to publicly update or revise any forward-looking statement.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Crusader Energy Group Inc.
CONSOLIDATED BALANCE SHEETS (see Note 1)
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(Unaudited)
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June 30,
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December 31,
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2008
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2007
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ASSETS
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CURRENT ASSETS
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Cash and cash equivalents
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$
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10,936,633
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$
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7,941,663
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Accounts receivable
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Accrued oil and gas production revenue
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17,940,658
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7,581,187
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Joint interest billings
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16,008,130
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14,045,470
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Other
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1,607
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770,584
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Prepaid and other assets
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1,770,724
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126,450
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Total current assets
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46,657,752
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30,465,354
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OIL AND GAS PROPERTIES AT COST, net,
based on full cost accounting ($136,438,772 and $12,558,796
excluded from amortization at 2008 and 2007, respectively)
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574,225,420
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243,560,456
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Other assets
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14,633,928
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5,199,199
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$
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635,517,100
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$
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279,225,009
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LIABILITIES AND MEMBERS/STOCKHOLDERS EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$
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18,744,460
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$
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11,856,699
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Accrued liabilities
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16,084,992
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5,934,262
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Derivative financial instruments
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18,247,696
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1,775,617
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Total current liabilities
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53,077,148
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19,566,578
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LONG-TERM LIABILITIES
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Asset retirement obligations
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1,100,038
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718,316
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Derivative financial instruments
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4,532,710
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403,883
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Other
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215,778
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Deferred tax liabilities, net
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39,271,859
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Notes payable
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130,000,000
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67,000,000
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Total long-term liabilities
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174,904,607
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68,337,977
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COMMITMENTS AND CONTINGENCIES (Note 9)
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MEMBERS EQUITY
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191,320,454
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STOCKHOLDERS EQUITY
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Common stock, $.01 par value, 500,000,000 authorized;
198,194,958 shares issued and outstanding at June 30, 2008
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1,981,950
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Additional paid-in capital
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523,019,071
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Accumulated deficit
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(117,465,676
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)
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Total Stockholders Equity
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407,535,345
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$
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635,517,100
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$
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279,225,009
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The accompanying notes are an integral part of these statements.
3
Crusader Energy Group Inc.
CONSOLIDATED STATEMENT OF OPERATIONS (see Note 1)
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(Unaudited)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2008
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2007
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2008
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2007
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OPERATING REVENUES
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Gas sales
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$
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12,567,181
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$
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5,434,107
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$
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20,829,699
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$
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9,552,790
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Oil sales
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13,184,508
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3,894,122
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21,655,551
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6,619,372
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Other
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394,795
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157,467
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728,788
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342,572
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Total operating revenue
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26,146,484
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9,485,696
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43,214,038
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16,514,734
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OPERATING COSTS AND EXPENSES
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Lease operating
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1,558,378
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826,461
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3,050,448
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1,245,480
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Production taxes
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1,681,044
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571,474
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2,771,619
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1,002,996
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General and administrative
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108,767,228
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949,642
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110,371,878
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1,763,444
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Depreciation, depletion and amortization
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5,938,330
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4,003,696
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11,507,123
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7,286,065
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Accretion of asset retirement obligations
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14,316
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5,676
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27,544
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11,352
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Total operating costs and expenses
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117,959,296
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6,356,949
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127,728,612
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11,309,337
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Income (loss) from operations
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(91,812,812
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)
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3,128,747
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(84,514,574
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)
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5,205,397
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OTHER (EXPENSE) INCOME
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Interest expense
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(1,590,061
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)
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(559,524
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)
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(3,100,490
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)
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(935,182
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)
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Interest income and other
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34,806
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27,236
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123,457
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43,320
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Risk management
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(15,012,339
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)
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1,626,816
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(20,206,968
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)
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(717,130
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Total other (expenses) income
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(16,567,594
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)
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1,094,528
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(23,184,001
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)
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(1,608,992
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)
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Income (loss) before income taxes
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(108,380,406
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)
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4,223,275
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(107,698,575
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)
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3,596,405
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Income tax expense
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11,826,824
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11,826,824
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NET INCOME (LOSS)
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$
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(120,207,230
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)
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$
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4,223,275
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$
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(119,525,399
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)
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$
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3,596,405
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EARNINGS (LOSS) PER SHARE
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Basic and Diluted
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$
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(1.15
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)
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$
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(1.17
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)
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WEIGHTED AVERAGE SHARES OUTSTANDING
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Basic and Diluted
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|
104,411,866
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102,255,933
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PRO FORMA INFORMATION (NOTE 2)
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Historical income (loss) from operations before income taxes
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$
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4,223,275
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$
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3,596,405
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Pro forma provision (benefit) for income taxes
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(1,642,854
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)
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(1,399,002
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)
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Pro forma net income (loss)
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$
|
2,580,421
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$
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2,197,403
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PRO FORMA EARNINGS PER SHARE
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Basic and Diluted
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$
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0.03
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$
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0.02
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WEIGHTED AVERAGE SHARES OUTSTANDING
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|
|
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Basic and Diluted
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100,100,000
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|
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100,100,000
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|
|
|
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|
The accompanying notes are an integral part of these statements.
4
Crusader Energy Group Inc.
Consolidated Statement of Members/Stockholders Equity (see Note 1)
(Unaudited)
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|
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|
|
|
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|
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|
|
Common Stock
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Additional
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Total
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Members
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Number of
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$.01 Par
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Paid In
|
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Accumulated
|
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Stockholders
|
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Equity
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Shares
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Value
|
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Capital
|
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|
Deficit
|
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|
Equity
|
|
Balance as of January 1, 2008
|
|
$
|
191,320,454
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|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
191,320,454
|
|
Net loss through June 25, 2008
|
|
|
(2,059,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(2,059,723
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)
|
Effect of
business combination with Westside Energy Corp.
|
|
|
(189,260,731
|
)
|
|
|
198,194,958
|
|
|
|
1,981,950
|
|
|
|
412,204,785
|
|
|
|
|
|
|
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224,926,004
|
|
Stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,814,286
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|
|
|
|
|
|
|
110,814,286
|
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Net loss, June 26, 2008 through June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117,465,676
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)
|
|
|
(117,465,676
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)
|
|
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|
|
|
|
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|
|
|
|
|
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|
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|
Balance as of June 30, 2008
|
|
$
|
|
|
|
|
198,194,958
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|
|
$
|
1,981,950
|
|
|
$
|
523,019,071
|
|
|
$
|
(117,465,676
|
)
|
|
$
|
407,535,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
Crusader Energy Group Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS (see Note 1)
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(119,525,399
|
)
|
|
$
|
3,596,405
|
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities, net of effect of business
combination:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
11,507,123
|
|
|
|
7,286,065
|
|
Accretion of asset retirement obligations
|
|
|
27,544
|
|
|
|
11,352
|
|
Amortization of loan costs
|
|
|
164,458
|
|
|
|
26,960
|
|
Deferred income taxes
|
|
|
11,826,824
|
|
|
|
|
|
Stock compensation
|
|
|
106,677,219
|
|
|
|
|
|
Change in assets and liabilities
|
|
|
|
|
|
|
|
|
(Increase) decrease in
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,027,941
|
)
|
|
|
(4,155,811
|
)
|
Derivative financial instruments
|
|
|
16,999,318
|
|
|
|
2,064,604
|
|
Prepaid assets and other
|
|
|
1,346,677
|
|
|
|
115,081
|
|
Increase (decrease) in
|
|
|
|
|
|
|
|
|
Accounts payable, accrued liabilities and other
|
|
|
(16,856,426
|
)
|
|
|
3,511,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
9,139,397
|
|
|
|
12,455,736
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
3,505,625
|
|
|
|
|
|
Oil and gas property costs
|
|
|
(44,713,870
|
)
|
|
|
(36,662,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(41,208,245
|
)
|
|
|
(36,662,840
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payment of loan costs
|
|
|
(976,629
|
)
|
|
|
(50,000
|
)
|
Payments on debt borrowings
|
|
|
(26,959,553
|
)
|
|
|
|
|
Proceeds from debt borrowings
|
|
|
63,000,000
|
|
|
|
27,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
35,063,818
|
|
|
|
27,750,000
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
2,994,970
|
|
|
|
3,542,896
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
7,941,663
|
|
|
|
5,122,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
10,936,633
|
|
|
$
|
8,665,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for interest
|
|
$
|
1,658,413
|
|
|
$
|
595,417
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
6
Crusader Energy Group Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS CONTINUED
(Unaudited)
Noncash investing and financing activities
:
During 2008 and 2007, the Company recorded a net asset and related liability of $354,178 and
$29,111 associated with the asset retirement obligations on oil and gas properties (see Note 6).
The amounts recorded in 2008 included $270,980 assumed in the business acquisitions (see Note 1).
At June 30, 2008 and 2007, accounts payable and accrued liabilities consisted of $16,729,209 and
$18,144,799 related to oil and gas acquisition and development costs, respectively.
On June 26, 2008, in conjunction with the business acquisitions (see Note 1), the estimated fair
market values of the assets acquired and liabilities assumed were as follows:
|
|
|
|
|
Estimated fair value of assets acquired:
|
|
|
|
|
Current assets, net of cash acquired
|
|
$
|
32,862,173
|
|
Oil and gas properties
|
|
|
290,147,850
|
|
Deferred tax asset
|
|
|
20,416,136
|
|
Other long-term assets
|
|
|
2,343,940
|
|
|
|
|
|
Total fair value of assets
|
|
|
345,770,099
|
|
Liabilities:
|
|
|
|
|
Current liabilities
|
|
|
34,318,350
|
|
Note payable
|
|
|
34,650,225
|
|
Deferred tax liabilities
|
|
|
47,649,125
|
|
Other long-term liabilities
|
|
|
312,826
|
|
|
|
|
|
Net value of assets acquired
|
|
$
|
228,839,573
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
7
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 1: Nature of Operations and Acquisition of Businesses
Knight Energy Group, LLC (Knight) was formed on August 29, 2006, and its major operations
consist of the acquisition, exploration, production, and sale of crude oil and natural gas with
an area of concentration in Oklahoma and Texas. On December 31, 2007, Westside Energy
Corporation (Westside), a public company traded on the American Stock Exchange, entered into a
definitive agreement to combine with several affiliated privately-held entities, including
Knight, Knight Energy Group II, LLC (Knight II), RCH Upland Acquisition, LLC (RCH), Hawk
Energy Fund I, LLC (Hawk) and other entities acquired (consisting of Knight Energy Management,
LLC, Crusader Energy Group, LLC and Crusader Management Corporation) (with Knight II, Hawk, RCH
and the other entities acquired collectively referred to as the Crusader Entities). On June 26,
2008, the business combination contemplated by the contribution agreement (the Westside
Transaction) was completed and Westside changed its name to Crusader Energy Group Inc.
(Crusader or the Company). For accounting purposes, the Westside Transaction was treated as
a reverse acquisition with Knight as the acquirer and Westside and the Crusader Entities as the
acquired parties, as described more fully below. As such, the historical financial statements
of Crusader are Knights historical financial statements. The acquisitions have been accounted
for using the purchase method and the results of operations for Westside and Crusader Entities
are included subsequent to June 26, 2008. The accompanying financial statements include the
Companys accounts and the accounts of its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
The aggregate purchase price paid by Knight in the Westside Transaction was approximately
$228,840,000, consisting of unregistered common stock (valued at the closing price ($2.27) of
Westside common stock on January 2, 2008, the announcement date of the Westside Transaction),
cash and warrants assumed (see table below). The operations of the acquired entities consist
of the acquisition, exploration, production and sale of crude oil and natural gas with an area of
concentration in Oklahoma and Texas. Knight completed the business combinations for the
following reasons:
|
|
|
additional opportunities to transfer its horizontal drilling expertise;
|
|
|
|
|
attractive acreage in areas such as the Barnett Shale in the Fort Worth Basin, Bakken
Shale in the Williston Basin and various shale plays in the Permian Basin;
|
|
|
|
|
expected synergies (elimination of Westside general and administrative expenses and
Knight II management fee);
|
|
|
|
|
appealing route to becoming a publicly traded company; and
|
|
|
|
|
enhanced access to public markets to execute its business strategy.
|
8
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 1: Nature of Operations and Acquisition of Businesses Continued
The preliminary allocation of the purchase price and the estimated fair market values of the
assets acquired and liabilities assumed are subject to modification and are shown below. The
purchase price allocation is preliminary because certain items, such as the determination of the
final tax bases and the fair value of certain assets and liabilities as of the acquisition date,
have not been completed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Westside
|
|
Knight II
|
|
Hawk
|
|
RCH
|
|
Entities
|
|
Total
|
|
|
|
Preliminary calculation and allocation of
purchase price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued
|
|
|
26,471,274
|
|
|
|
53,223,684
|
|
|
|
14,700,000
|
|
|
|
3,700,000
|
|
|
|
|
|
|
|
98,094,958
|
|
Westside closing stock price
|
|
$
|
2.27
|
|
|
$
|
2.27
|
|
|
$
|
2.27
|
|
|
$
|
2.27
|
|
|
$
|
2.27
|
|
|
$
|
2.27
|
|
|
|
|
Fair value of common stock issued
|
|
$
|
60,089,792
|
|
|
$
|
120,817,763
|
|
|
$
|
33,369,000
|
|
|
$
|
8,399,000
|
|
|
$
|
|
|
|
$
|
222,675,555
|
|
Plus cash consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501,000
|
|
|
|
501,000
|
|
Plus merger cost
|
|
|
920,894
|
|
|
|
1,851,568
|
|
|
|
511,390
|
|
|
|
128,717
|
|
|
|
|
|
|
|
3,412,569
|
|
Plus warrants assumed
|
|
|
2,250,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,250,449
|
|
|
|
|
Total purchase price
|
|
|
63,261,135
|
|
|
|
122,669,331
|
|
|
|
33,880,390
|
|
|
|
8,527,717
|
|
|
|
501,000
|
|
|
|
228,839,573
|
|
Plus fair value of liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
5,886,977
|
|
|
|
19,638,912
|
|
|
|
8,792,461
|
|
|
|
|
|
|
|
|
|
|
|
34,318,350
|
|
Note payable
|
|
|
34,650,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,650,225
|
|
Deferred tax liabilities
|
|
|
31,377,741
|
|
|
|
|
|
|
|
11,863,524
|
|
|
|
4,407,860
|
|
|
|
|
|
|
|
47,649,125
|
|
Other long-term liabilities
|
|
|
146,660
|
|
|
|
42,985
|
|
|
|
94,181
|
|
|
|
29,000
|
|
|
|
|
|
|
|
312,826
|
|
|
|
|
Total purchase price plus liabilities assumed
|
|
$
|
135,322,738
|
|
|
$
|
142,351,228
|
|
|
$
|
54,630,556
|
|
|
$
|
12,964,577
|
|
|
$
|
501,000
|
|
|
$
|
345,770,099
|
|
|
|
|
|
Fair value of assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
4,051,513
|
|
|
$
|
26,198,728
|
|
|
$
|
2,611,932
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
32,862,173
|
|
Oil and gas properties
|
|
|
114,803,907
|
|
|
|
110,435,298
|
|
|
|
51,944,068
|
|
|
|
12,964,577
|
|
|
|
|
|
|
|
290,147,850
|
|
Deferred tax asset
|
|
|
16,406,657
|
|
|
|
4,009,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,416,136
|
|
Other long-term assets
|
|
|
60,661
|
|
|
|
1,707,723
|
|
|
|
74,556
|
|
|
|
|
|
|
|
501,000
|
|
|
|
2,343,940
|
|
|
|
|
Total fair value of assets acquired
|
|
$
|
135,322,738
|
|
|
$
|
142,351,228
|
|
|
$
|
54,630,556
|
|
|
$
|
12,964,577
|
|
|
$
|
501,000
|
|
|
$
|
345,770,099
|
|
|
|
|
9
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 1: Nature of Operations and Acquisition of Businesses Continued
The following summary presents unaudited pro forma consolidated results of operations for the
three and six months ended June 30, 2008 and 2007, respectively, as if the acquisitions
comprising the Westside Transaction had occurred as of January 1, 2007. The pro forma results are
for illustrative purposes only and include adjustments in addition to the pre-acquisition
historical results, such as increased depreciation, depletion and amortization expense resulting
from the allocation of fair value to oil and gas properties acquired
and change in tax status. The unaudited pro forma
information is not necessarily indicative of the operating results that would have occurred if
the acquisitions had been consummated at that date, nor is it necessarily indicative of future
operating results. During the three and six months ended June 30, 2008, the Company recognized
$106,677,219 of compensation expense related to a significant, non-recurring grant of stock
options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
26,146,484
|
|
|
$
|
9,485,696
|
|
|
$
|
32,930,826
|
|
|
$
|
12,606,283
|
|
Income (loss) from continuing operations
|
|
|
(91,812,812
|
)
|
|
|
3,128,747
|
|
|
|
(88,615,725
|
)
|
|
|
3,571,863
|
|
Net income (loss)
|
|
|
(120,207,230
|
)
|
|
|
2,580,421
|
|
|
|
(118,116,226
|
)
|
|
|
2,530,683
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(1.15
|
)
|
|
$
|
0.03
|
|
|
$
|
(1.13
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
|
1,178,599
|
|
|
|
761,394
|
|
|
|
1,910,580
|
|
|
|
1,159,095
|
|
Oil (Bbls)
|
|
|
108,307
|
|
|
|
63,210
|
|
|
|
120,602
|
|
|
|
73,351
|
|
Mcfe
|
|
|
1,828,441
|
|
|
|
1,140,654
|
|
|
|
2,634,192
|
|
|
|
1,599,201
|
|
Mcfe/day
|
|
|
20,093
|
|
|
|
12,535
|
|
|
|
28,947
|
|
|
|
17,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
43,214,038
|
|
|
$
|
16,514,734
|
|
|
$
|
56,782,721
|
|
|
$
|
22,291,351
|
|
|
Income (loss) from continuing operations
|
|
|
(84,514,574
|
)
|
|
|
5,205,397
|
|
|
|
(78,103,243
|
)
|
|
|
6,052,796
|
|
Net income (loss)
|
|
|
(119,525,399
|
)
|
|
|
2,197,403
|
|
|
|
(115,326,234
|
)
|
|
|
2,911,634
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(1.17
|
)
|
|
$
|
0.02
|
|
|
$
|
(1.13
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
|
2,164,410
|
|
|
|
1,403,412
|
|
|
|
3,623,418
|
|
|
|
2,159,276
|
|
Oil (Bbls)
|
|
|
197,927
|
|
|
|
112,065
|
|
|
|
222,471
|
|
|
|
130,483
|
|
Mcfe
|
|
|
3,351,972
|
|
|
|
2,075,802
|
|
|
|
4,958,244
|
|
|
|
2,942,174
|
|
Mcfe/day
|
|
|
18,417
|
|
|
|
11,469
|
|
|
|
27,243
|
|
|
|
16,255
|
|
10
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 2: Summary of Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited interim financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and with the instructions to Form 10-Q as prescribed by the SEC
for smaller reporting companies and do not include all of the financial information and
disclosures required by GAAP. The financial information as of June 30, 2008 and for the three and
six months ended June 30, 2008 and 2007 is unaudited. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring accruals, considered
necessary for a fair presentation of the results of the interim periods. The results of
operations for the three and six months ended June 30, 2008 are not necessarily indicative of the
results of operations that will be realized for the year ended December 31, 2008. The interim
financial statements should be read in conjunction with the financial statements as of December
31, 2007 and notes thereto, included in the proxy statement filed with the SEC on May 28, 2008.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 these estimates. Significant estimates affecting these financial statements include
estimates for quantities of proved oil and gas reserves, period end oil and gas sales and
expenses, and asset retirement obligations, and are subject to change.
Income Taxes
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, (SFAS No. 109) the Company follows the asset and liability method of accounting for
income taxes, under which the Company recognizes deferred tax assets and liabilities 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 were measured using enacted tax rates expected to apply to taxable income in the
years in which the Company expects to recover or settle those temporary differences.
11
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 2: Summary of Significant Accounting Policies Continued
Income Taxes Continued
As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are
adjusted through the provision for income taxes. Deferred tax assets are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The classification of current and noncurrent
deferred tax assets and liabilities is based primarily on the classification of the assets and
liabilities generating the difference.
As a result of our conversion to a taxable corporation on June 26, 2008, as part of the Westside
Transaction, a charge to income tax provision of approximately $36,156,000 was made to record
deferred taxes for the differences between the tax basis and financial reporting basis of our
assets and liabilities.
Pro Forma Income Taxes
Prior to consummating the Westside Transaction (see Note 1), the Company (i.e. Knight) was a
limited liability company and classified as a partnership for income tax purposes. Accordingly,
income taxes on net earnings were payable by the members and are not reflected in historical
financial statements. Pro forma adjustments are reflected to provide for income taxes in
accordance with SFAS No. 109. For unaudited pro forma income tax calculations, deferred tax
assets and liabilities were recognized for the future tax consequences attributable to
differences between the assets and liabilities and were measured using enacted tax rates expected
to apply to taxable income in the years in which the Company expects to recover or settle those
temporary differences. The pro forma tax effects assume the Company had been a taxable entity in
the periods presented. Management believes that these assumptions provide a reasonable basis for
presenting the pro forma tax effects.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing the net earnings (loss) applicable
to common stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings (loss) per share are based on the assumption that stock options and
warrants are converted into common shares using the treasury stock method. Conversion or exercise
is not assumed if the results are antidilutive.
Potential common shares of 35,000,000 and 501,392 relating to options and warrants, respectively,
were excluded from the computations of diluted earnings (loss) per share because they are
antidilutive for the three and six months ended June 30, 2008.
12
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 2: Summary of Significant Accounting Policies Continued
Pro Forma Earnings (Loss) Per Share
Pro forma earnings (loss) per basic and diluted common share is computed based on the weighted
average pro forma number of basic and diluted shares assumed to be outstanding during the
periods. Pro forma basic and diluted earnings (loss) per share is presented for the historical
three and six months ended June 30, 2007 on the basis of 100,100,000 shares issued to Knight in
the Westside Transaction on June 26, 2008.
Stock-based Compensation
SFAS No. 123(R), Share-based Payment requires the Company to measure the costs of employee
services received in exchange for an award of equity instruments based on the grant-date fair
value of the award. That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award.
The fair value of each stock option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following assumptions used for grants in 2008: no
expected dividends, volatility ranging from 54% to 50%, risk-free interest rates ranging from
2.36% to 3.34% and expected lives ranging from 1 year to 4 years. The volatility assumptions were
developed using a peer group of similar energy companies and our stock price. The weighted
average fair value of the options issued in 2008 was $3.17. Based upon the provisions of the
grant, no future service was required and as such, the total fair value of the grant was
recognized during the second quarter of 2008.
Recently Issued Accounting Standards
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161
requires additional disclosures about derivative and hedging activities and is effective for
fiscal years and interim periods beginning after November 15, 2008. The Company is evaluating the
impact the adoption of SFAS No. 161 will have on its financial statement disclosures. However,
the Companys adoption of SFAS No. 161 will not affect its current accounting for derivative and
hedging activities.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
. This statement requires
assets acquired and liabilities assumed to be measured at fair value as of the acquisition date,
acquisition-related costs incurred prior to the acquisition to be expensed and contractual
contingencies to be recognized at fair value as of the acquisition date. This statement is
effective for financial statements issued for fiscal years beginning after December 15, 2008.
The Company is currently assessing the impact, if any, the adoption of this statement will have
on our financial position, results of operations or cash flows.
13
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 3: Notes Payable
Notes payable consisted of the following at June 30 and December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Revolving line of credit with Union Bank of California
(UBOC), bearing interest at an adjusted rate as defined
in the agreement (5.50% and 7.07% at June 30, 2008 and
December 31, 2007) payable quarterly, principal and any
unpaid interest due October 4, 2010, collateralized by the
Companys oil and gas properties.
|
|
$
|
100,000,000
|
|
|
$
|
37,000,000
|
|
|
|
|
|
|
|
|
|
|
Subordinated term facility with UnionBancal Equities, Inc.
an
affiliate of UBOC, quarterly interest due at an adjusted
rate as defined in the agreement (8.50% and 10.07% at June
30, 2008 and December 31, 2007), lump sum principal payment
and any unpaid interest due August 31, 2012, collateralized
by a second mortgage on the Companys oil and gas
properties.
|
|
|
30,000,000
|
|
|
|
30,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
130,000,000
|
|
|
$
|
67,000,000
|
|
|
|
|
|
|
|
|
During the second quarter of 2008, the Companys loan agreement was amended to provide for a
revolving line of credit equal to the lesser of $200,000,000 or the borrowing base, as defined, and
a subordinated term facility equal to $30,000,000. The borrowing base was re-determined and was
increased to $100,000,000. Additionally, the variable borrowing rate, as defined, was adjusted and
generally calls for the London Interbank Offered Rate (LIBOR) plus 2.00% on the revolving line
of credit and LIBOR plus 5.00% on the subordinated term facility.
The agreements also have certain financial covenants which provide for, among other things,
maintaining a certain current ratio (excluding fair value of derivative financial instruments),
minimum reserve coverage and leverage ratio, and certain reporting requirements, as defined. The
Company was in compliance with the financial covenants as of June 30, 2008 and December 31, 2007.
At June 30, 2008 and December 31, 2007, the Companys notes payable are classified as long-term and
$100,000,000 matures in the year ended December 31, 2010 and $30,000,000 in the year ended December
31, 2012.
On July 18, 2008, the Company entered into a five-year $250,000,000 second lien term facility with
JPMorgan Chase Bank, N.A., as administrative agent. The second lien term facility replaced our
existing $30,000,000 second lien term facility with UnionBanCal Equities, Inc. The second lien
term loan facility bears interest at the lesser of: (a) LIBOR (subject to a floor of 3.50%) plus
7.75% or (b) the reference rate, as defined, plus 6.75% and matures on July 18, 2013. At July 18,
2008, the effective rate was 11.25%. The second lien term facility is secured by substantially all
of the proved oil and gas assets and all personal property of the Company and its subsidiaries and
by guarantees of each of the Companys subsidiaries.
14
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 3: Notes Payable Continued
The second lien term facility proceeds were used to refinance a portion of the outstanding debt
under the revolving line of credit with Union Bank of California and to retire the subordinated
term facility and will be used to fund the Companys drilling activity, acquisitions, and general
corporate purposes. In connection with this transaction, the revolving line of credit was
amended to equal the lesser of $140,000,000 or the borrowing base, as defined, and the borrowing
base was reduced to $70,000,000. The reduction in the loan commitment and borrowing base was a
result of one of our participating banks leaving the syndication. As a result, the Company will
expense deferred financing costs related to its previous revolving and term credit facilities of
approximately $1,000,000 as a loss on debt extinguished during the third quarter of 2008.
Note 4: Derivative Transactions
SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
, as amended, requires
that the Company recognize a derivative as either an asset or a liability measured at fair value.
The accounting for changes in the fair value of a derivative depends on the use of the
derivative and the resulting designation. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the change in fair value
of the hedged assets, liabilities or firm commitments through income or recognized in other
comprehensive income until the hedged item is recognized in income. The ineffective portion of a
hedges change in fair value will be immediately recognized in income.
The results of operations and operating cash flows are impacted by changes in market prices for
oil and gas. To mitigate a portion of this exposure, the Company has entered into certain
derivative instruments, none of which were designated as cash flow hedges. As of June 30, 2008
and 2007, the Companys derivative instruments were comprised of collars, fixed price swaps and
basis protection swaps.
Collars contain a fixed floor price (put) and ceiling price (call). If the market price exceeds
the call strike price or falls below the put strike price, the Company receives the fixed price
and pays the market price. If the market price is between the call and the put strike price, no
payments are due from either party.
In fixed-price swap instruments, the Company receives a fixed-price for the hedged commodity and
pays a floating market price to the counterparty. The fixed-price payment and the floating-price
payment are netted, resulting in a net amount due to or from the counterparty.
Basis protection swaps are arrangements that guarantee a price differential for natural gas from
a specified delivery point. For Mid-Continent basis protection swaps, which have negative
differentials to NYMEX, the Company receives a payment from the counterparty if the price
differential is greater than the stated terms of the contract and pays the counterparty if the
price differential is less than the stated terms of the contract.
15
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 4: Derivative Transactions Continued
These instruments are recorded at fair value and changes in fair value, including settlements,
have been reported as risk management income (expense) in the consolidated statement of
operations. The following table provides a summary of the components (cash and non-cash) of risk
management income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Gains (losses) from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements with counterparty
|
|
$
|
(2,322,562
|
)
|
|
$
|
433,724
|
|
|
$
|
(3,207,650
|
)
|
|
$
|
1,347,474
|
|
Changes in fair value
|
|
|
(12,689,777
|
)
|
|
|
1,193,092
|
|
|
|
(16,999,318
|
)
|
|
|
(2,064,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(15,012,339
|
)
|
|
$
|
1,626,816
|
|
|
$
|
(20,206,968
|
)
|
|
$
|
(717,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008, the Company has the following hedging transactions with three financial
counterparties in the form of costless collars, fixed-price swaps, and basis protection swaps:
|
|
|
Collar covering 145,000 Mmbtu of natural gas per month from July 2008 through
December 2008 with a floor of $8.00 and a cap of $10.50 per Mmbtu;
|
|
|
|
|
Collar covering 60,000 Mmbtu of natural gas per month from July 2008 through December
2008 with a floor of $8.00 and a cap of $10.10 per Mmbtu;
|
|
|
|
|
Fixed price swaps covering 10,000 Mmbtu of natural gas per month from July 2008
through December 2008 with a fixed price of $7.45 per Mmbtu;
|
|
|
|
|
Collar ranging from 70,000 to 77,500 Mmbtu of natural gas per month from July 2008
through February 2009 with a floor of $8.00 and a cap of $10.35 per Mmbtu;
|
|
|
|
|
Collar ranging from 28,000 to 31,000 Mmbtu of natural gas per month from July 2008
through February 2009 with a floor of $9.00 and a cap of $12.50 per Mmbtu;
|
|
|
|
|
Collar covering 11,200 barrels of oil per month from July 2008 through December 2008
with a floor of $67.00 and a cap of $71.60 per Bbl;
|
|
|
|
|
Collar covering 6,000 barrels of oil per month from July 2008 through December 2008
with a floor of $92.00 and a cap of $99.90 per Bbl;
|
|
|
|
|
Collar covering 130,000 Mmbtu of natural gas per month from January 2009 through
December 2009 with a floor of $8.00 and a cap of $9.50 per Mmbtu;
|
|
|
|
|
Collar covering 17,000 Mmbtu of natural gas per month from January 2009 through
December 2009 with a floor of $8.00 and a cap of $10.05 per Mmbtu;
|
|
|
|
|
Collar covering 6,000 barrels of oil per month from January 2009 through December
2009 with a floor of $67.00 and a cap of $79.00 per Bbl;
|
|
|
|
|
Collar covering 4,000 barrels of oil per month from January 2009 through December
2009 with a floor of $80.00 and a cap of $102.65 per Bbl;
|
|
|
|
|
Basis protection swaps covering 145,000 Mmbtu of natural gas per month from July 2008
through December 2008 with an average location differential of $1.11; and
|
|
|
|
|
Basis protection swaps covering 130,000 Mmbtu of natural gas per month from January
2009 through December 2009 with an average location differential of $.76.
|
16
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 4: Derivative Transactions Continued
Fair Value Measurements
SFAS No. 157,
Fair Value Measurements
(as amended) (SFAS No. 157), defines fair value,
establishes a framework for measuring fair value, outlines a fair value hierarchy based on inputs
used to measure fair value and enhances disclosure requirements for fair value measurements. The
Company has not applied the provisions of SFAS No. 157 to nonrecurring, nonfinancial assets and
liabilities as allowed under FASB Staff Position No. 157-2.
Fair value is defined as the price at which an asset could be exchanged in a current transaction
between knowledgeable, willing parties. A liabilitys fair value is defined as the amount that
would be paid to transfer the liability to a new obligor, not the amount that would be paid to
settle the liability with the creditor. Where available, fair value is based on observable market
prices or parameters or derived from such prices or parameters. Where observable prices or inputs
are not available, use of unobservable prices or inputs are used to estimate the current fair
value, often using an internal valuation model. These valuation techniques involve some level of
management estimation and judgment, the degree of which is dependent on the item being valued.
Beginning January 1, 2008, assets and liabilities recorded at fair value in the consolidated
balance sheets are categorized based upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levelsdefined by SFAS No. 157 and directly related to the
amount of subjectivity associated with the inputs to fair valuation of these assets and
liabilitiesare as follows:
Level IInputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.
Level IIInputs (other than quoted prices included in Level I) are either directly or
indirectly observable for the asset or liability through correlation with market data at the
measurement date and for the duration of the instruments anticipated life.
Level IIIInputs reflect managements best estimate of what market participants would use in
pricing the asset or liability at the measurement date. Consideration is given to the risk
inherent in the valuation technique and the risk inherent in the inputs to the model.
The fair value of our derivative contracts are measured using Level II inputs, and are determined
by either market prices on an active market for similar assets or by prices quoted by a broker or
other market-corroborated prices, including analysis of formal pricing curves on national
exchanges.
Our asset retirement obligation is measured using primarily Level III inputs. The significant
unobservable inputs to this fair value measurement include estimates of plugging and abandonment
costs, inflation rate and well life. The inputs are calculated based on historical data as well as
current estimated costs. See Note 6 for a rollforward of the asset retirement obligation.
17
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 4: Derivative Transactions Continued
The estimated fair values of derivatives included in the consolidated balance sheets at June 30,
2008 and December 31, 2007 are summarized below. The increase in the net derivative liability from
December 31, 2007 to June 30, 2008 is primarily attributable to the effect of higher natural gas
and oil prices, partially offset by cash settlements of derivatives during the period and new
derivatives entered during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
June 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Significant
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Other
|
|
|
Significant
|
|
|
Other
|
|
|
Significant
|
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Derivative Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas basis protection swaps
|
|
$
|
1,117,749
|
|
|
$
|
|
|
|
$
|
1,475,042
|
|
|
$
|
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas derivative instruments
|
|
|
(11,380,797
|
)
|
|
|
|
|
|
|
(41,470
|
)
|
|
|
|
|
Oil derivative instruments
|
|
|
(12,517,358
|
)
|
|
|
|
|
|
|
(3,613,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative liability
|
|
$
|
(22,780,406
|
)
|
|
$
|
|
|
|
$
|
(2,179,500
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligation
|
|
$
|
|
|
|
$
|
1,100,038
|
|
|
$
|
|
|
|
$
|
718,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5: Stockholders Equity
In connection with the acquisition as described in Note 1, Crusader issued 171,723,684 million
shares of unregistered common stock to the following entities: Knight Energy Group I Holding Co.,
LLC received 100,100,000 shares, Knight Energy Group II Holding Company, LLC received 53,223,684
shares, Hawk Energy Fund I Holding Company, LLC received 14,700,000 shares and RCH Energy
Opportunity Fund I, L.P. received 3,700,000 shares. None of the shares may be sold or otherwise
transferred until the six-month anniversary of the consummation of the business combination.
Additionally, Crusader assumed 501,392 warrants in the acquisition of Westside and their fair value
were estimated using the Black-Scholes options-pricing model. A summary of the outstanding
warrants and the assumptions used to estimate their fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Black
|
|
|
|
|
Number of
|
|
Exercise
|
|
|
Remaining
|
|
|
Risk Free
|
|
|
|
|
|
|
Expected
|
|
|
Scholes
|
|
|
Estimated
|
|
Warrants
|
|
Price
|
|
|
Term
|
|
|
Rate
|
|
|
Volatility
|
|
|
Dividend
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
166,392
|
|
$
|
0.50
|
|
|
|
2/28/2009
|
|
|
|
2.36
|
%
|
|
|
58.50
|
%
|
|
None
|
|
$
|
5.15
|
|
|
$
|
856,573
|
|
100,000
|
|
$
|
0.50
|
|
|
|
5/7/2009
|
|
|
|
2.36
|
%
|
|
|
55.27
|
%
|
|
None
|
|
$
|
5.15
|
|
|
|
515,008
|
|
235,000
|
|
$
|
2.00
|
|
|
|
10/29/2009
|
|
|
|
2.63
|
%
|
|
|
52.53
|
%
|
|
None
|
|
$
|
3.74
|
|
|
|
878,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,250,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 5: Stockholders Equity Continued
The Company has the following stock-based compensation plans:
2004 Consultant Plan
The Consultant Plan provides for the granting of shares of common stock to certain outside
consultants who assisted in the development and success of Westsides business. There are
3,000,000 shares of common stock authorized to be awarded pursuant to the plan, of which 500,000
were registered with the SEC. The plan expires on April 15, 2014, or when no further shares are
available for issuance, whichever comes first. As a result of the business combination as
described in Note 1, any then outstanding awards under the plan either became fully vested or were
forfeited due to the change in control. Any vested shares were included in the common stock issued
to Westside and treated as business combination consideration, as no future service was required.
No grants have been made since June 26, 2008.
2005 Director Stock Plan
The Director Stock Plan provides for the granting of shares of common stock to non-employee members
of the Board of Directors to provide them with incentives for their service to the Company. There
are 500,000 shares of common stock authorized to be awarded pursuant to this plan. Awards may be
made under the plan until there are no further shares available for issuance or until March 30,
2015, whichever occurs first. Under the plan, each non-employee director receives a certain number
of shares upon becoming a director, and annual awards thereafter, provided that the individual is
still a director of the Company. Certain of the awards are also subject to time vesting, also
provided that the individual is still a director of the Company. Effective January 1, 2008, the
Board determined to cease making grants under this plan and now may make grants to non-employee
directors at such times and in such amounts as the Board determines appropriate. As a result of
the business combination as described in Note 1, any then outstanding awards under the plan either
became fully vested or were forfeited due to the change in control. Any vested shares were
included in the common stock issued to Westside and treated as business combination consideration,
as no future service was required. No grants have been made since June 26, 2008.
2007 Equity Incentive Plan
The Equity Incentive Plan provides for the granting of incentive stock options, non-qualified
options, stock grants and stock-based awards to attract and retain the services of employees,
consultants, and directors of the Company and its subsidiaries. There are 2,000,000 shares
authorized to be awarded under the plan. The plan has a termination date of July 9, 2017. As a
result of the business combination as described in Note 1, any then outstanding awards under the
plan either became fully vested or were forfeited due to the change in control. Any vested shares
were included in the common stock issued to Westside and treated as business combination
consideration, as no future service was required. No grants have been made since June 26, 2008.
2008 Long Term Incentive Plan
The Long Term Incentive Plan provides for the granting of incentive stock options, non-qualified
options, restricted stock awards, restricted stock units, and stock appreciation rights to attract
and retain employees, directors, and consultants of the Company. The plan was approved by the
shareholders of Westside on June 26, 2008. There are 37,310,000 shares authorized to be awarded
under the plan. Pursuant to this plan and in connection with the acquisitions described in Note 1,
Crusader issued options to purchase 35,000,000 shares of common stock, exercisable at $3.00 per
share, to certain employees. The exercise price was determined at December 31, 2007, concurrent
with the execution of the contribution agreement setting forth the terms of the business
combination. The outstanding options vested immediately upon issuance and expire 4.5 years from
the date of grant. Pursuant to the terms of the grant, the options are subject to a mandatory
exercise program of 25% each year beginning in 2009.
19
Crusader Energy Group Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 5: Stockholders Equity Continued
The following table provides information related to stock option activity during the current
quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
Average
|
|
Weighted
|
|
|
|
|
Shares
|
|
Exercise
|
|
Average
|
|
Aggregate
|
|
|
Underlying
|
|
Price
|
|
Contract
|
|
Intrinsic
|
|
|
Options
|
|
Per Share
|
|
Life in Years
|
|
Value(a)
|
Outstanding at January 1, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
35,000,000
|
|
|
$
|
3.00
|
|
|
|
4.5
|
|
|
$
|
92,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
35,000,000
|
|
|
$
|
3.00
|
|
|
|
4.5
|
|
|
$
|
122,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2008
|
|
|
35,000,000
|
|
|
$
|
3.00
|
|
|
|
4.5
|
|
|
$
|
122,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The intrinsic value of a stock option is the amount by which the current market value
or the market value upon exercise of the underlying stock option exceeds the exercise price
of the option.
|
To the extent compensation cost relates to employees directly involved in natural gas and oil
exploration and development activities, such amounts are capitalized to natural gas and oil
properties which totaled approximately $4,137,000, during the three and six months ended June 30,
2008, respectively. Amounts not capitalized are recognized as general and administrative expenses
and totaled approximately $106,677,000 during the three and six months ended June 30, 2008,
respectively.
Note 6: Asset Retirement Obligation
The Companys asset retirement obligations relate to estimated future plugging and abandonment
expenses or disposal of its oil and gas properties and related facilities. These obligations to
abandon and restore properties are based upon estimated future costs which may change based upon
future inflation rates and changes in statutory remediation rules. The following table provides a
summary of the Companys asset retirement obligations:
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended June
|
|
|
|
30, 2008
|
|
Balance as of December 31, 2007
|
|
$
|
718,316
|
|
Liabilities incurred in current period
|
|
|
83,198
|
|
Liabilities assumed in business combination
|
|
|
270,980
|
|
Accretion expense
|
|
|
27,544
|
|
|
|
|
|
Balance as of June 30, 2008
|
|
$
|
1,100,038
|
|
|
|
|
|
20
Crusader Energy Group Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 7: Income Taxes
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Current taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Deferred taxes
|
|
|
11,826,824
|
|
|
|
|
|
|
|
11,826,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
11,826,824
|
|
|
$
|
|
|
|
$
|
11,826,824
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
15,551,856
|
|
|
$
|
|
|
Stock option expense
|
|
|
25,938,106
|
|
|
|
|
|
Derivatives
|
|
|
8,381,942
|
|
|
|
|
|
Other
|
|
|
48,466
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
49,920,370
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment, principally
due to differences in depreciation
|
|
|
(89,192,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(39,271,859
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
Upon the conversion from a limited liability company to a corporation in conjunction with becoming
a public company, the Company incurred a one-time charge to operations in the second quarter of
2008 of approximately $36,156,000 to record deferred taxes upon change in tax status.
In assessing its ability to realize deferred tax assets, the Company considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets depends on the generation of future taxable income
during the periods in which those temporary differences become deductible. The Company considers
the scheduled reversal of deferred tax liabilities and projected future taxable income in making
this assessment. The Company believes it is more likely than not that it will realize the benefits
of these deductible differences.
21
Crusader Energy Group Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 7: Income Taxes Continued
The provision for income taxes on continuing operations differs from the amounts computed by
applying the federal income tax rate of 35% to net income(loss). The differences are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Expected tax expense (benefit)
|
|
$
|
(37,933,142
|
)
|
|
$
|
|
|
|
$
|
(37,694,501
|
)
|
|
$
|
|
|
State income taxes
|
|
|
(4,226,836
|
)
|
|
|
|
|
|
|
(4,200,244
|
)
|
|
|
|
|
Conversion to corporation
|
|
|
36,155,611
|
|
|
|
|
|
|
|
36,155,611
|
|
|
|
|
|
Loss
attributable to nontaxable entity
|
|
|
1,066,465
|
|
|
|
|
|
|
|
801,232
|
|
|
|
|
|
Non-deductible stock compensation expenses
|
|
|
17,168,652
|
|
|
|
|
|
|
|
17,168,652
|
|
|
|
|
|
Other
|
|
|
(403,926
|
)
|
|
|
|
|
|
|
(403,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,826,824
|
|
|
$
|
|
|
|
$
|
11,826,824
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8: Related Party Transactions
Prior to the Westside Transaction on June 26, 2008, general and administrative expenses and a fee
for usage of property and equipment (including furniture and fixtures, office furniture and
fixtures and vehicles) were charged to the Company monthly from a related entity, Crusader
Management Corporation (CMC). During the three and six months ended June 30, 2008 and 2007,
the Company incurred approximately $2,097,000 and $4,035,000 and $1,151,000 and $2,089,000,
respectively, for its share of expenses related to a personnel services agreement executed with
CMC. Upon closing the acquisition as described in Note 1, CMC became a wholly-owned subsidiary
of the Company.
Included in joint interest billings at December 31, 2007 was approximately $6,261,000, owed by
affiliates. Upon closing the acquisition as described in Note 1, the affiliates became
wholly-owned subsidiaries of the Company.
Note 9: Commitments and Contingencies
Prior to the Westside Transaction on June 26, 2008, the Company executed a personnel services
agreement with CMC to provide all management, employee and other administrative services as
necessary from time to time to operate the business of the Company. Upon closing the acquisition
as described in Note 1, CMC became a wholly-owned subsidiary of the Company, and the existing
personnel services agreement was terminated and a new personnel services agreement was entered
into between the Company and CMC.
CMC has a retirement plan covering substantially all qualified employees under section 401(k) of
the Internal Revenue Code with a matching policy to contribute for each participant a required
matching contribution equal to 100% of the participants contribution up to 4% of each employees
annual compensation and 50% of the participants contribution on the next 2% of each employees
annual compensation. CMCs contributions vest immediately. Knight and Crusaders expenses under
the plan were approximately $49,700, and $26,100 and $93,000 and $49,600 for the three and six
months ended June 30, 2008 and 2007, respectively, which were a component of the cost allocated
through the CMC personnel services agreement (see Note 8).
22
Crusader Energy Group Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 9: Commitments and Contingencies Continued
On December 28, 2007, CMC entered into an agreement with Le Norman Properties, LLC, to lease
approximately 24,000 net square feet of office space located in Oklahoma City, Oklahoma for an
initial term of five years. Le Norman Properties is wholly-owned by David D. Le Norman, who is a
director, president and chief executive officer of the Company. The Company assumed the
obligations under this lease. The lease calls for annual base rent of $624,000 plus expenses
related to maintenance, taxes, insurance and utilities. The Company has an option to renew the
lease for two additional five year terms for a base rent in an amount equal to the fair market
rent for comparable buildings in the area.
The following table summarizes the Companys future minimum payments under non-cancellable
operating lease agreements at June 30, 2008:
|
|
|
|
|
Year ending December 31
|
|
|
|
|
2008
|
|
$
|
312,000
|
|
2009
|
|
|
624,000
|
|
2010
|
|
|
624,000
|
|
2011
|
|
|
624,000
|
|
2012
|
|
|
624,000
|
|
Thereafter
|
|
|
156,000
|
|
|
|
|
|
|
|
$
|
2,964,000
|
|
|
|
|
|
The Company acquired an unsecured Revolving Note and an exploration agreement with Alpine Energy,
LP (Alpine) as a result of acquiring Knight II. The unsecured Revolving Note has a maturity
date of June 30, 2010. Under the terms of the note and subject to approval by the Company,
Alpine may borrow up to $10,000,000 at a floating interest rate equal
to the ninety day LIBOR
plus 4.00% per annum. At June 30, 2008, the outstanding balance of $8,859,000 was included in
other assets in the consolidated balance sheets. The interest rate at June 30, 2008 was
6.46%. Interest is due and payable monthly, in arrears, on the first day of each month. As a
condition to the agreement, Alpine must use all advances from the note for expenditures related
to certain prospects, as defined in the agreement. If Alpine fails to repay the note, the
Companys only source of repayment is limited to the oil and gas sales from certain oil and gas
properties, as defined in the agreement.
The Alpine exploration agreement, covering certain prospects, calls for monthly payments of
$200,000 through June 2009. Future commitments related to this agreement are as follows:
$1,200,000 for the remainder of the year 2008 and $1,200,000 for the year ended December 31,
2009.
Unsecured Standby Letters of Credit (Letters) are used in lieu of surety bonds with various
city, state and federal agencies for liabilities of the operation of oil and gas properties and
to our derivative counter party. The Company had various Letters outstanding totaling $1,690,000
as of June 30, 2008, which were issued by a bank where our cash and cash equivalents reside.
23
Crusader Energy Group Inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 9: Commitments and Contingencies Continued
The Company is involved in certain litigation arising in the normal course of business.
Management does not believe that the outcome of these matters will have a material impact on the
financial position or results of operations of the Company.
Note 10: Subsequent Events
On July 30, 2008, the Company entered into the following derivative instruments:
|
|
|
Collar covering 1,560 barrels of oil per month from September 2008 through December
2008 with a floor of $100.00 and a cap of $160.00 per Bbl;
|
|
|
|
|
Premium put covering 15,150 MMBTUs of gas per month from September 2008 through
December 2008 with a floor of $8.00;
|
|
|
|
|
Collar covering 3,600 barrels of oil per month from January 2009 through December
2009 with a floor of $100.00 and a cap of $164.00 per Bbl;
|
|
|
|
|
Premium put covering 86,377 MMBTUs of gas per month from January 2009 through
December 2009 with a floor of $8.00;
|
|
|
|
|
Collar covering 9,600 barrels of oil per month from January 2010 through December
2010 with a floor of $100.00 and a cap of $161.75 per Bbl; and
|
|
|
|
|
Premium put covering 178,749 MMBTUs of gas per month from January 2010 through
December 2010 with a floor of $8.00.
|
The total premium paid related to the gas put instruments was approximately $2,200,000 and the
other instruments were costless at inception.
On August 5, 2008, the Company also entered into an interest rate swap covering $125,000,000 of
long-term debt from August 2008 through February 2011 at a fixed interest rate of 3.74%, with a
floating rate based on 3-month LIBOR.
On August 12, 2008, the Company also entered into an interest rate swap covering $125,000,000 of
long-term debt from August 2008 through February 2011 at a fixed interest rate of 3.68%, with a
floating rate based on 3-month LIBOR.
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following information together with the information presented elsewhere in
this Quarterly Report on Form 10-Q and with the audited financial statements as of December 31,
2007 and notes thereto, included in the proxy statement filed with the Securities and Exchange
Commission (SEC) on May 28, 2008.
Overview
Crusader is an oil and gas company with assets focused in various producing domestic basins.
The Company has a primary focus on the development of unconventional resource plays which includes
the application of horizontal drilling and cutting edge completion technology aimed at developing
shale and tight sand reservoirs. The Crusader assets are located in various domestic basins, the
majority of which are in the Anadarko Basin and Central Uplift, Ft. Worth Basin Barnett Shale,
Delaware Basin, Val Verde Basin, and the Bakken Shale of the Williston Basin.
Segment reporting is not applicable to Crusader as it has a single company-wide management
team that administers all properties as a whole rather than by discrete operating segments.
Crusader tracks only basic operational data by area. Crusader does not maintain complete separate
financial statement information by area. Crusader measures financial performance as a single
enterprise and not on an area-by-area basis. Crusader seeks to increase reserves and production
through internally generated drilling projects, coupled with complementary acquisitions. Crusader
uses the full cost method of accounting for its oil and gas activities.
On December 31, 2007, Westside Energy Corporation (Westside), a public company traded on the
American Stock Exchange, entered into a definitive agreement to combine with several affiliated
privately-held entities, including Knight, Knight Energy Group II, LLC (Knight II), RCH Upland
Acquisition, LLC (RCH), Hawk Energy Fund I, LLC (Hawk) and other entities acquired (consisting
of Knight Energy Management, LLC, Crusader Energy Group, LLC and Crusader Management Corporation)
(with Knight II, Hawk, RCH and the other entities acquired collectively referred to as the
Crusader Entities). On June 26, 2008, the business combination contemplated by the contribution
agreement (the Westside Transaction) was completed and Westside changed its name to Crusader
Energy Group Inc. (Crusader or the Company). For accounting purposes, the Westside Transaction
was treated as a reverse acquisition with Knight as the acquirer and Westside and the Crusader
Entities as the acquired parties. As such, the historical financial statements of Crusader are
Knights historical financial statements which were included in the proxy statement filed with the
Securities and Exchange Commission on May 28, 2008. The acquisitions have been accounted for using
the purchase method and the results of operations for Westside and Crusader Entities are included
subsequent to June 26, 2008.
The aggregate purchase price paid by Knight in the Westside Transaction was approximately
$228.8 million, consisting of unregistered common stock (valued at the closing price ($2.27) of
Westside common stock on January 2, 2008, the announcement date of the Westside Transaction), cash
and warrants assumed. The contribution agreement also called for certain Crusader employees to
receive stock options totaling 35 million shares with an exercise price of $3.00 which were granted
on June 26, 2008 and resulted in a non-cash stock compensation expense of approximately $106.7
million. When the contribution agreement was executed in December 2007 and the grant of 35 million options to
management at an exercise price of $3.00 was agreed to, Westside stock closed at $1.92 per share;
36% below the $3.00 strike price. In addition, because the market price of the Westside stock was
above $3.00 per share at closing, rather than being exercisable immediately the options are
exercisable over 4 years beginning in 2009. We believe that the structuring of managements
consideration and incentive in the form of stock options benefits the combined Company by resulting
in the contribution of $105.0 million in capital to the Company in the event all of the options are
exercised and aligning the interests of our employees, management team and stockholders.
25
The operations of Westside and the Crusader Entities consist of the acquisition, exploration,
production and sale of crude oil and natural gas with an area of concentration in Oklahoma and
Texas. Knight completed the business combinations for the following reasons:
|
|
|
additional opportunities to transfer its horizontal drilling expertise;
|
|
|
|
|
attractive acreage in areas such as the Barnett Shale in the Fort Worth Basin, Bakken
Shale in the Williston Basin and various shale plays in the Permian Basin;
|
|
|
|
|
expected synergies (elimination of Westside G&A and Knight II management fee);
|
|
|
|
|
appealing route to becoming a publicly-traded company; and
|
|
|
|
|
enhanced access to public markets to execute its business strategy.
|
The following summary presents unaudited pro forma consolidated production volumes for the three
and six months ended June 30, 2008 and 2007, respectively, as if the acquisitions comprising the
Westside Transaction had occurred as of January 1, 2007. The pro forma results are for
illustrative purposes only. The unaudited pro forma information is not necessarily indicative of
the operating results that would have occurred if the acquisitions had been consummated at that
date, nor is it necessarily indicative of future operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Production volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
|
1,178,599
|
|
|
|
761,394
|
|
|
|
1,910,580
|
|
|
|
1,159,095
|
|
Oil (Bbls)
|
|
|
108,307
|
|
|
|
63,210
|
|
|
|
120,602
|
|
|
|
73,351
|
|
Mcfe
|
|
|
1,828,441
|
|
|
|
1,140,654
|
|
|
|
2,634,192
|
|
|
|
1,599,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Production volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas (Mcf)
|
|
|
2,164,410
|
|
|
|
1,403,412
|
|
|
|
3,623,418
|
|
|
|
2,159,276
|
|
Oil (Bbls)
|
|
|
197,927
|
|
|
|
112,065
|
|
|
|
222,471
|
|
|
|
130,483
|
|
Mcfe
|
|
|
3,351,972
|
|
|
|
2,075,802
|
|
|
|
4,958,244
|
|
|
|
2,942,174
|
|
26
Revenue and Expense Drivers
Revenue Drivers
Crude Oil and Natural Gas Sales.
Crusaders revenues are generated from production of crude
oil and natural gas which are substantially dependent on prevailing prices. Crusaders future
production is impacted by its drilling success, acquisitions and decline curves on existing
production. Prices for oil and gas are subject to large fluctuations in response to relatively
minor changes in the supply of or demand for oil and gas, market uncertainty and a variety of
additional factors beyond Crusaders control. Crusader enters into derivative instruments for a
portion of its oil and gas production to achieve a more predictable cash flow and to reduce its
exposure to adverse fluctuations in the prices of oil and gas.
Crusader generally sells its oil and gas at current market prices determined at the wellhead.
Crusader is required to pay gathering and transportation costs with respect to substantially all of
its products. Crusader markets its products in several different ways depending upon a number of
factors, including the availability of purchasers for the product at the wellhead, the availability
and cost of pipelines near the well, market prices, pipeline constraints and operational
flexibility.
Operating Expenses
Crusaders operating expenses primarily involve the expense of operating and maintaining its
wells.
|
|
|
Lease Operating.
Crusaders lease operating expenses include repair
and maintenance costs, contract labor and supervision, workover costs,
electrical power and fuel costs and other expenses necessary to
maintain its operations. Crusaders lease operating expenses are
driven in part by the type of commodity produced, the level of
maintenance activity and the geographical location of its properties.
Ad valorem taxes represent property taxes.
|
|
|
|
|
Production Taxes.
Production taxes represent the taxes paid on
produced oil and gas based on a percentage of market prices (price
received from purchaser) or at fixed rates established by federal,
state or local taxing authorities.
|
|
|
|
|
General and Administrative Expenses.
General and administrative
expenses include employee compensation and benefits, professional fees
for legal, accounting and other advisory services and corporate
overhead.
|
|
|
|
|
Depreciation, Depletion and Amortization.
Depreciation, depletion and
amortization represent the expensing of the capitalized costs of
Crusaders oil and gas properties, using a units of production method,
and Crusaders other property and equipment.
|
Other Expenses and Income
Other Expenses and Income consist of the following:
Interest Income
. Crusader generates interest income from its cash deposits.
Interest Expense.
Crusaders interest expense reflects its borrowing costs under its revolving
line of credit and its subordinated term facility.
Risk Management.
The results of operations and operating cash flows are impacted by changes in
market prices for oil and gas. To mitigate a portion of this exposure, Crusader has entered into
certain derivative instruments which have not been designated as cash flow hedges for financial
reporting purposes. Generally, Crusaders derivative instruments are comprised of collars that
guarantee a price based on a floor and ceiling as defined by the instrument. These instruments are
recorded at fair value and changes in fair value, including settlements, have been reported as risk
management in the statement of operations.
27
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Results of Operations
The following schedule reflects the historical operations of Crusader for the three months
ended June 30, 2008 and 2007, respectively. The operations of the acquired entities (Westside,
Knight II, Hawk, RCH and the other entities acquired) are included in the historical operations
from June 27, 2008 to June 30, 2008 and did not materially contribute to Crusaders operating
results.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
Gas sales
|
|
$
|
12,567,181
|
|
|
$
|
5,434,107
|
|
Oil sales
|
|
|
13,184,508
|
|
|
|
3,894,122
|
|
Other
|
|
|
394,795
|
|
|
|
157,467
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
26,146,484
|
|
|
|
9,485,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
Lease operating
|
|
|
1,558,378
|
|
|
|
826,461
|
|
Production taxes
|
|
|
1,681,044
|
|
|
|
571,474
|
|
General and administrative
|
|
|
108,767,228
|
|
|
|
949,642
|
|
Depreciation, depletion and amortization
|
|
|
5,938,330
|
|
|
|
4,003,696
|
|
Accretion of asset retirement obligations
|
|
|
14,316
|
|
|
|
5,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
117,959,296
|
|
|
|
6,356,949
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(91,812,812
|
)
|
|
|
3,128,747
|
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,590,061
|
)
|
|
|
(559,524
|
)
|
Interest income and other
|
|
|
34,806
|
|
|
|
27,236
|
|
Risk management
|
|
|
(15,012,339
|
)
|
|
|
1,626,816
|
|
|
|
|
|
|
|
|
|
Total other (expenses) income
|
|
|
(16,567,594
|
)
|
|
|
1,094,528
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(108,380,406
|
)
|
|
|
4,223,275
|
|
Income tax expense
|
|
|
11,826,824
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(120,207,230
|
)
|
|
$
|
4,223,275
|
|
|
|
|
Revenues
. Revenues for the three months ended June 30, 2008 increased $16.7 million, to $26.1
million as compared to $9.5 million for the three months ended June 30, 2007. Revenue growth was
due primarily to continued drilling success and increase of realized prices received. Production of
oil and gas increased by 45,097 bbls of oil and 417,205 Mcf of gas,
respectively, (71% and 55%)
during the same three month period in 2008 to 108,307 Bbls of oil and 1,178,599 Mcf of gas,
respectively.
28
The following table highlights production growth by certain projects.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended June 30,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Project
|
|
Operations
|
|
Basin
|
|
Mcf
|
|
Bbls
|
|
Mcf
|
|
Bbls
|
Cleveland Sand
|
|
Operated
|
|
Anadarko
|
|
|
422,910
|
|
|
|
48,736
|
|
|
|
170,048
|
|
|
|
23,314
|
|
N. Barnett
|
|
Operated
|
|
Ft. Worth
|
|
|
112,030
|
|
|
|
12,963
|
|
|
|
27,462
|
|
|
|
4,700
|
|
Eureka
|
|
Non-Operated
|
|
Anadarko
|
|
|
152,435
|
|
|
|
1,640
|
|
|
|
32,405
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
687,375
|
|
|
|
63,339
|
|
|
|
229,915
|
|
|
|
28,034
|
|
Production from remaining projects
|
|
|
491,224
|
|
|
|
44,968
|
|
|
|
531,479
|
|
|
|
35,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production for the period
|
|
|
1,178,599
|
|
|
|
108,307
|
|
|
|
761,394
|
|
|
|
63,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices received for oil and gas increased by 98% and 49%, respectively. The average sales
price for oil and gas for the three months ended June 30, 2008 were $121.73 per Bbl and $10.66 per
Mcf, respectively, as compared to average sales price for oil and gas for the three months ended
June 30, 2007 of $61.61 per Bbl and $7.14 per Mcf, respectively.
Lease Operating
E
xpenses
. Lease operating expenses for the three months ended June 30, 2008
increased $.7 million, or 89%, to $1.6 million as compared to $.8 million for the three months
ended June 30, 2007 and increased 18% per Mcfe during the three months ended June 30, 2008 to $.85
per Mcfe as compared to $.72 per Mcfe during the three months ended June 30, 2007. The increase in
lease operating expenses on a gross dollar basis is primarily a result of increased well count,
while the increase on an Mcfe basis was primarily due to increases in produced water volumes and
associated hauling and disposal costs and to a lesser extent third-party vendor costs rising due to
demand for services and general increase in cost of fuel, raw materials, and labor during the first
three months of 2008 compared to the same period in 2007.
Production Taxes.
Production taxes for the three months ended June 30, 2008 increased $1.1
million, or 194%, to $1.7 million as compared to $.6 million for the three months ended June 30,
2007 due to increased oil and gas sales during 2008. Production taxes as a percentage of revenues
were 6.4% and 6.0% for the three months ended June 30, 2008 and 2007, respectively.
General and Administrative Expenses
. G&A for the three months ended June 30, 2008 increased
$107.8 million, or 11,354%, to $108.8 million as compared
to $1.0 million for the three months ended
June 30, 2007. The increase in G&A was driven primarily by a non-cash stock compensation expense of
approximately $106.7 million, employee count and employee-related costs as a result of hiring
additional professional staff (petroleum engineers, geologists, landmen and other professionals)
which resulted in an increase of approximately 20 employees, awarding of annual compensation
increases and increase in benefit costs (primarily health insurance premiums) during the last half
of 2007 and continuing into 2008 which totaled approximately $.7 million, an increase in
professional fees of approximately $.2 million and an increase in rent expense of $.1 million.
Depreciation, Depletion and Amortization
. DD&A for the three months ended June 30, 2008
increased $1.9 million, or 48%, to $5.9 million as compared to $4.0 million for the three months
ended June 30, 2007. DD&A on a per Mcfe basis for the three months ended June 30, 2008 decreased 8%
to $3.25 per Mcfe, as compared to $3.51 per Mcfe for the three months ended June 30, 2007. The
increase in DD&A expense for the three months ended June 30, 2008 was due to an increase in volumes
partially offset by a reduced depletion rate.
Income (loss) from Operations.
Due to the factors described above, loss from operations
increased $94.9 million, or 3,034%, to $(91.8) million for the three months ended June 30, 2008
compared to income from operations of $3.1 million for the three months ended June 30, 2007.
Excluding the effect of stock compensation expense, income from operations increased $11.7
million, or 375%, to $14.9 million for the three months ended June 30, 2008 compared to the three
months ended June 30,
2007.
29
Other (Expense) Income
.
The increase in interest expense of approximately $1.0 million for the three months ended June
30, 2008 compared to the same period in 2007 was a result of Knights outstanding debt balance, for
the respective periods, increased from $43.8 million to $130.0 million.
The increase in risk management expense for the three months ended June 30, 2008 compared to
the same period in 2007 was a result of the change in fair value of Knights open derivative
contracts during the respective periods, as a result of increasing commodity prices and
expectations of commodity prices in excess of the prices in our derivative agreements.
Income (loss) before income taxes.
Due to the factors described above, loss before income
taxes increased $112.6 million, or 2,666%, to $(108.4) million for the three months ended June 30,
2008 compared to income before income taxes of $4.2 million for the three months ended June 30,
2007.
Income Tax Expense.
Increase in income tax expense was a result of a one-time charge of
approximately $36.2 million due to a change in tax status from a partnership to a corporation.
This was partially offset by the deferred tax benefit of approximately $(25.9) million related to
stock option expense.
Net
Income (Loss)
. Due to the factors described above, net loss of $(120.2) million was
recognized for the three months ended June 30, 2008 compared to net income of $4.2 million for the
three months ended June 30, 2007.
Excluding the effect of stock compensation expense and the change in tax status, net loss of
$(1.7) million would have been recognized for the three months ended June 30, 2008, primarily due
to the significant non-cash unrealized losses associated with the oil and gas derivative contracts.
30
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Results of Operations
The following schedule reflects the historical operations of Crusader for the six months ended
June 30, 2008 and 2007, respectively. The operations of the acquired entities (Westside, Knight
II, Hawk, RCH and other entities acquired) are included in the historical operations from June 27,
2008 to June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
OPERATING REVENUES
|
|
|
|
|
|
|
|
|
Gas sales
|
|
$
|
20,829,699
|
|
|
$
|
9,552,790
|
|
Oil sales
|
|
|
21,655,551
|
|
|
|
6,619,372
|
|
Other
|
|
|
728,788
|
|
|
|
342,572
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
43,214,038
|
|
|
|
16,514,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
Lease operating
|
|
|
3,050,448
|
|
|
|
1,245,480
|
|
Production taxes
|
|
|
2,771,619
|
|
|
|
1,002,996
|
|
General and administrative
|
|
|
110,371,878
|
|
|
|
1,763,444
|
|
Depreciation, depletion and amortization
|
|
|
11,507,123
|
|
|
|
7,286,065
|
|
Accretion of asset retirement obligations
|
|
|
27,544
|
|
|
|
11,352
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
127,728,612
|
|
|
|
11,309,337
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(84,514,574
|
)
|
|
|
5,205,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,100,490
|
)
|
|
|
(935,182
|
)
|
Interest income and other
|
|
|
123,457
|
|
|
|
43,320
|
|
Risk management
|
|
|
(20,206,968
|
)
|
|
|
(717,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expenses) income
|
|
|
(23,184,001
|
)
|
|
|
(1,608,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(107,698,575
|
)
|
|
|
3,596,405
|
|
Income tax expense
|
|
|
11,826,824
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(119,525,399
|
)
|
|
$
|
3,596,405
|
|
|
|
|
|
|
|
|
Revenues
.
Revenues for the six months ended June 30, 2008 increased $26.7 million, or 162%,
to $43.2 million as compared to $16.5 million for the six months ended June 30, 2007. Revenue
growth was due primarily to continued drilling success and increase of realized prices received.
Production of oil and gas increased by 85,862 bbls of oil and 760,998 Mcf of gas, respectively,
(77% and 54%) during the same six month period in 2008 to 197,927 Bbls of oil and 2,164,410 Mcf of
gas, respectively.
31
The following table highlights production growth by certain projects.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30,
|
|
|
|
|
|
|
2008
|
|
2007
|
Project
|
|
Operations
|
|
Basin
|
|
Mcf
|
|
Bbls
|
|
Mcf
|
|
Bbls
|
Cleveland Sand
|
|
Operated
|
|
Anadarko
|
|
|
723,035
|
|
|
|
89,235
|
|
|
|
343,571
|
|
|
|
48,335
|
|
N. Barnett
|
|
Operated
|
|
Ft. Worth
|
|
|
226,336
|
|
|
|
30,772
|
|
|
|
32,766
|
|
|
|
6,032
|
|
Biscuit Hill
|
|
Operated
|
|
Anadarko
|
|
|
8,926
|
|
|
|
43,438
|
|
|
|
4,039
|
|
|
|
37,997
|
|
Eureka
|
|
Non-Operated
|
|
Anadarko
|
|
|
220,602
|
|
|
|
1,640
|
|
|
|
56,506
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,178,899
|
|
|
|
165,085
|
|
|
|
436,882
|
|
|
|
92,424
|
|
Production from remaining projects
|
|
|
985,511
|
|
|
|
32,842
|
|
|
|
966,530
|
|
|
|
19,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total production for the period
|
|
|
2,164,410
|
|
|
|
197,927
|
|
|
|
1,403,412
|
|
|
|
112,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices received for oil and gas increased by 85% and 41%, respectively. The average sales
price for oil and gas for the six months ended June 30, 2008 were $109.41 per Bbl and $9.62 per
Mcf, respectively, as compared to average sales price for oil and gas for the six months ended June
30, 2007 of $59.07 per Bbl and $6.81 per Mcf, respectively.
Lease Operating
E
xpenses
. Lease operating expenses for the six months ended June 30, 2008
increased $1.8 million, or 145%, to $3.1 million as compared to $1.2 million for the six months
ended June 30, 2007 and increased 52% per Mcfe during the six months ended June 30, 2008 to $.91
per Mcfe as compared to $.60 per Mcfe during the six months ended June 30, 2007. The increase in
lease operating expenses on a gross dollar basis is primarily a result of an increased well count,
while the increase on an Mcfe basis was primarily due to increases in produced water volumes and
associated hauling and disposal costs and to a lesser extent third-party vendor costs rising due to
demand for services and general increase in cost of fuel, raw materials, and labor during the first
six months of 2008 compared to the same period in 2007.
Production Taxes.
Production taxes for the six months ended June 30, 2008 increased $1.8
million, or 176%, to $2.8 million as compared to $1.0 million for the six months ended June 30,
2007 due to increased oil and gas sales during 2008. Production taxes as a percentage of revenues
were 6.4% and 6.1% for the six months ended June 30, 2008 and 2007, respectively.
General and Administrative Expenses
. G&A for the six months ended June 30, 2008 increased
$108.6 million, or 6,159%, to $110.4 million as compared to $1.8 million for the six months ended
June 30, 2007. The increase in G&A was driven primarily by a non-cash stock compensation expense of
approximately $106.7 million, employee count and employee-related costs as a result of hiring
additional professional staff (petroleum engineers, geologists, landmen and other professionals)
which resulted in an increase of approximately 20 employees, awarding of annual compensation
increases and increase in benefit costs (primarily health insurance premiums) during the last half
of 2007 and continuing into 2008 which totaled approximately $1.3 million, an increase in
accounting fees of approximately $.4 million and an increase in rent expense of $.1 million.
Depreciation, Depletion and Amortization
. DD&A for the six months ended June 30, 2008
increased $4.2 million, or 58%, to $11.5 million as compared to $7.3 million for the six months
ended June 30, 2007. DD&A on a per Mcfe basis for the six months ended June 30, 2008 decreased 2%
to $3.43 per Mcfe, as compared to $3.51 per Mcfe for the six months ended June 30, 2007. The
increase in DD&A expense for the six months ended June 30, 2008 was due to an increase in volumes.
Income (loss) from Operations.
Due to the factors described above, loss from operations
increased $89.7 million, or 1,724%, to $(84.5) million for the six months ended June 30, 2008
compared to income from operations of $5.2 million for the six months ended June 30, 2007.
Excluding the effect of stock compensation expense, income from operations increased $17.0
million, or 326%, to $22.2 million for the six months ended June 30, 2008 compared to the six
months ended June 30, 2007.
32
Other (Expense) Income
.
The increase in interest expense for the six months ended June 30, 2008 compared to the same
period in 2007 was a result of Knights outstanding debt balance, for the respective periods,
increasing from $43.8 million to $130.0 million.
The increase in risk management expense for the six months ended June 30, 2008 compared to the
same period in 2007 was a result of the change in fair value of Knights open derivative contracts
during the respective periods, as a result of increasing commodity prices and expectations of
commodity prices in excess of the prices in our derivative agreements.
Income (loss) before income taxes.
Due to the factors described above, loss before income
taxes increased $111.3 million, or 3,095%, to $(107.7) million for the six months ended June 30,
2008 compared to income before income taxes of $3.6 million for the six months ended June 30, 2007.
Income Tax Expense.
Increase in income tax expense was a result of a one-time charge of
approximately $36.2 million due to a change in tax status from a partnership to a corporation.
This was partially offset by the deferred tax benefit of approximately $(25.9) million related to
stock option expense.
Net
Income
. Due to the factors described above, net loss of $(119.5) million was recognized
for the six months ended June 30, 2008 compared to net income of $3.6 million for the six months
ended June 30, 2007.
Excluding the effect of stock compensation expense and the change in tax status, net loss of
$(1.0) million would have been recognized for the six months ended June 30, 2008, primarily due to
the significant non-cash unrealized losses associated with the oil and gas derivative contracts.
Liquidity and Capital Resources
Overview
Crusaders business is capital intensive. Historically, Crusader has funded its operations
through private equity offerings, bank debt and cash flows from operations. Our sources of cash
for the six months ended June 30, 2008 were from operations and financing activities.
On July 18, 2008, the Company entered into a five-year $250.0 million second lien term
facility with JPMorgan Chase Bank, N.A., as administrative agent. The second lien term facility
replaced our existing $30 million second lien term facility with UnionBanCal Equities, Inc. The
second lien term loan facility bears interest at the lesser of: (a) LIBOR (subject to a floor of
3.50%) plus 7.75% or (b) the reference rate, as defined, plus 6.75% and matures on July 18, 2013.
At July 18, 2008, the effective rate was 11.25%.
The second lien term facility proceeds were used to refinance a portion of the outstanding
debt under the revolving line of credit with Union Bank of California and to retire the
subordinated term facilities and will be used to fund the Companys drilling activity, acquisitions
and general corporate purposes. In connection with this transaction, the revolving line of credit
was amended to equal the lesser of $140.0 million or the borrowing base, as defined and reduced the
borrowing base to $70.0 million. The reduction in the loan commitment and borrowing base was a
result of one of our participating banks leaving the syndication. As a result, the Company will
expense deferred financing costs related to its previous revolving and term credit facilities of
approximately $1.0 million as a loss on debt extinguished during the third quarter of 2008.
Management is currently interviewing lenders for a replacement and anticipates the loan commitment
and borrowing base to be increased to their original amounts when the replacement facility is
closed.
Crusaders consummation of the $250.0 million second lien term facility is expected to provide
the necessary capital, along with cash flows generated from operating activities, to grow our
production, reserve base and enhance cash flows from operating activities for the foreseeable
future. Additionally, our financial flexibility provides us the ability to acquire additional oil
and gas acreage if the opportunity presents itself and to continue to make complementary
acquisitions to our existing properties for future development.
33
Virtually all of Crusaders capital expenditures are made based on current economic conditions
and expected future oil and gas prices. Crusader makes capital expenditures to develop existing oil
and gas reserves as well as to acquire additional reserves. Crusader may also elect to or elect not
to participate in capital expenditures on properties operated by others. Crusader may adjust its
annual exploration and development capital expenditure levels according to liquidity and the other
sources of operating capital as economic conditions change. When Crusader determines that a project
involves more risk than it can accept alone or more capital than is commercially prudent to commit,
such as certain of its exploration projects, Crusader may take on additional partners.
Crusaders cash flows from operating activities are significantly affected by changes in oil
and gas prices. Accordingly, its cash flows from operating activities would be significantly
reduced by lower oil and gas prices, which may reduce its exploration and development capital
expenditure levels. Lower oil and gas prices also may reduce Crusaders borrowing base under its
senior credit facility which may further reduce its ability to obtain funds. Consequently, in an
effort to minimize fluctuations in Crusaders cash flows and to reduce its exposure to adverse
fluctuations in the prices of oil and gas, Crusader enters into derivative instrument arrangements
for a portion of its forecasted oil and gas production. Currently, Crusader has hedged a portion
of its oil and gas production through 2010.
Cash Flows
Operating Activities.
For the six months ended June 30, 2008, net cash provided by operating activities decreased
$3.3 million to $9.1 million as compared to $12.4 million for the six months ended June 30, 2007.
The decrease in net cash provided by operating activities was primarily due to increased employee
count and general increase in lease operating expenses due to increased demand for services.
Investing Activities.
For the six months ended June 30, 2008, net cash used in investing activities increased $4.5
million, or 12%, to $41.2 million as compared to $36.7 million of net cash used in investing
activities for the six months ended June 30, 2007. Net cash used in investing activities in 2008
was comprised of $(3.5) million obtained in the Westside Transaction and $44.7 million of
expenditures on oil and gas properties as compared to $36.7 million of expenditures on oil and gas
properties in 2007. We participated in the drilling of 38 gross wells (11.56 net wells) in the
2008 period compared to 33 gross wells (8.34 net wells) in the 2007 period, respectively.
Financing Activities.
For the six months ended June 30, 2008, net cash provided by financing activities increased
$7.3 million, or 26%, to $35.1 million as compared to $27.8 million of net cash provided by
financing activities for the six months ended June 30, 2007. This increase was due to increased
borrowings to partially fund our development program.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operation are based upon
the consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. Preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. There have been no changes to our critical accounting policies
from those described in our audited financial statements for the year ended December 31, 2007, and
notes thereto, included in the proxy statement filed with the SEC on May 28, 2008.
34
Recently Issued Accounting Standards
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 requires
additional disclosures about derivative and hedging activities and is effective for fiscal years
and interim periods beginning after November 15, 2008. The Company is evaluating the impact the
adoption of SFAS No. 161 will have on its financial statement disclosures. However, the Companys
adoption of SFAS No. 161 will not affect its current accounting for derivative and hedging
activities.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
. This statement
requires assets acquired and liabilities assumed to be measured at fair value as of the acquisition
date, acquisition-related costs incurred prior to the acquisition to be expensed and contractual
contingencies to be recognized at fair value as of the acquisition date. This statement is
effective for financial statements issued for fiscal years beginning after December 15, 2008. We
are currently assessing the impact, if any, the adoption of this statement will have on our
financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4T. Controls and Procedures.
(a)
Evaluation of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information
required to be disclosed by us in our reports filed under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, summarized and reported within the time
periods specified by SEC rules and forms. Disclosure controls are also designed with the objective
of ensuring that this information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Additionally, in designing the disclosure controls and
procedures, our management was required to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures.
Based on an evaluation as of the end of the period covered by this report, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to provide
reasonable assurance that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures.
(b)
Changes in Internal Controls
On June 26, 2008, the business combination with Westside and the Crusader Entities was
concluded. The Crusader Entities used the same accounting system and were supervised by the same
personnel as the Company. We are in the process of integrating Westsides accounting and other
information into our systems. As a result, we are reviewing our systems and controls to address
any changes required for changes in transaction volume or type. We believe we are taking the
necessary steps for our internal control environment to be effective.
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
.
Not applicable.
Item 1A. Risk Factors
The following risk factors amend and restate in their entirety the risk factors set forth in
our Annual Report on Form 10-KSB filed with the SEC on April 1, 2008.
Prices for oil and natural gas are volatile, and low prices could have a material adverse impact on
our business.
Our revenues and profitability and the carrying value of our properties depend substantially
on prevailing prices for oil and natural gas. Prices also affect the amount of cash flow available
to us for capital expenditures as well as our ability to borrow and raise additional capital. The
amount we can borrow under our senior revolving credit facility is subject to periodic
redetermination based upon the value of our proven reserves of oil and natural gas at the time of
redetermination. Lower prices may reduce the value of our oil and natural gas properties.
Historically, the markets, and therefore the prices, for oil and natural gas have been
volatile which is likely to continue in the future. Among the factors that can cause volatility
are:
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the domestic and foreign supply of oil and natural gas;
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the ability of members of the Organization of Petroleum Exporting
Countries and other producing countries to agree upon and maintain oil prices
and production levels;
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political instability, armed conflict or terrorist attacks, whether or
not in oil or natural gas producing regions;
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the level of consumer product demand;
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the growth of consumer product demand in emerging markets, such as
China and India;
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labor unrest in oil and natural gas producing regions;
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weather conditions, including hurricanes and other natural occurrences
that affect the supply and/or demand of oil and natural gas;
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the price and availability of alternative fuels;
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the price of foreign imports;
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worldwide economic conditions; and
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the availability of liquid natural gas imports.
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These external factors and the volatile nature of the energy markets make it difficult to
estimate future prices of oil and natural gas.
We may be required to take non-cash asset writedowns if oil and natural gas prices decline.
We may be required under full cost accounting rules to writedown the carrying value of oil and
natural gas properties if oil and natural gas prices decline or if there are substantial downward
adjustments to our estimated proved reserves, increases in our estimates of development costs or
deterioration in our exploration results. We utilize the full cost method of accounting for oil and
natural gas exploration and development activities. Under full cost accounting,
36
we are required by SEC regulations to perform a ceiling test each quarter. The ceiling test is an
impairment test and generally establishes a maximum, or ceiling, of the book value of oil and
natural gas properties that is equal to the expected after tax present value (discounted at 10%) of
the future net cash flows from proved reserves, including the effect of cash flow hedges when hedge
accounting is applied, calculated using prevailing oil and natural gas prices on the last day of
the period or a subsequent higher price under certain limited circumstances. If the net book value
of oil and natural gas properties (reduced by any related net deferred income tax liability and
asset retirement obligation) exceeds the ceiling limitation, SEC regulations require us to impair
or writedown the book value of our oil and natural gas properties. Depending on the magnitude, a
ceiling test writedown could negatively affect our results of operations. As ceiling test
computations involve the prevailing oil and natural gas prices, as of a fixed date, it is
impossible to predict the likelihood, timing and magnitude of any future impairments. To the extent
finding and development costs continue to increase, we will become more susceptible to ceiling test
writedowns in lower price environments.
Unless we replace our current production with new reserves, our reserves and future production will
decline, which would adversely affect our financial condition, results of operations and cash
flows.
In general, the volume of production from oil and natural gas properties declines as reserves
are depleted. Our reserves will decline as they are produced unless we acquire properties with
proved reserves or conduct successful development and exploration activities. Thus, our future oil
and natural gas production and, therefore, our cash flow and income are highly dependent upon our
level of success in finding or acquiring additional reserves. However, we cannot assure you that
our future acquisition, development and exploration activities will result in any specific amount
of additional proved reserves or that we will be able to drill productive wells at acceptable
costs.
The successful acquisition of producing properties requires an assessment of a number of
factors. These factors include recoverable reserves, future oil and natural gas prices, operating
costs and potential environmental and other liabilities, title issues and other factors. Such
assessments are inexact and their accuracy is inherently uncertain. In connection with such
assessments, we perform a review of the subject properties that we believe is thorough. However,
there is no assurance that such a review will reveal all existing or potential problems or allow us
to fully assess the deficiencies and capabilities of such properties. We cannot assure you that we
will be able to acquire properties at acceptable prices because the competition for producing oil
and natural gas properties is intense and many of our competitors have financial and other
resources that are substantially greater than those available to us.
Our bank lenders can limit our borrowing capabilities, which may materially impact our operations.
The borrowing base limitation under our senior revolving credit facility is semi-annually
redetermined. Redeterminations are based upon a number of factors, including oil and natural gas
prices and reserve levels. Upon a redetermination, our borrowing base could be substantially
reduced. We utilize cash flow from operations, bank borrowings and debt and equity financings to
fund our development, acquisition and exploration activities. A reduction in our borrowing base
could limit these activities. In addition, we may significantly alter our capitalization in order
to make future acquisitions or develop our properties. These changes in capitalization may
significantly increase our level of debt or equity. If we incur additional debt for these or other
purposes, the risks related to carrying debt that we now face could intensify. A higher level of
debt also increases the risk that we may default on our debt obligations. Our ability to meet our
debt obligations and to reduce our level of debt will depend to a significant extent on our future
performance which is affected by a number of economic, financial, business and other factors, many
of which are beyond our control. Our level of debt affects our operations in several important
ways, including the following:
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a portion of our cash flow from operations is used to pay interest on borrowings;
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the covenants contained in the agreements governing our debt limit our
ability to borrow additional funds, pay dividends, dispose of assets or issue
shares of preferred stock and otherwise may affect our flexibility in planning
for, and reacting to, changes in business conditions;
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a high level of debt may impair our ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes;
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a more leveraged financial position would make us more vulnerable to
economic downturns and could limit our ability to withstand competitive
pressures; and
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any debt that we incur under our senior revolving credit facility will
be at variable rates which make us vulnerable to increases in interest rates.
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Our business is capital intensive and will require us to generate substantial cash flow to finance our capital expenditures.
Our business activities require substantial capital. We intend to finance our capital
expenditures in the future primarily through cash flow from operations as well as additional
borrowings under our senior revolving credit facility. We cannot assure you that our business will
generate cash flow sufficient to satisfy our capital needs or to enable us to obtain adequate
financing on acceptable terms or at all. Future cash flows and the availability of financing will
be subject to a number of variables, such as:
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the level of production from our existing wells;
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prevailing and projected prices of oil and natural gas;
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our success in locating and producing new reserves;
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our success in timely developing proved undeveloped reserves; and
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general economic, financial, competitive, legislative, regulatory and
other factors beyond our control.
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If we are unable to generate sufficient cash flow from operations to fund our budgeted
drilling expenditures and/or we are not able to borrow additional funds under our existing credit
facilities, we may be forced to reduce such expenditures or obtain additional financing through the
issuance of additional debt and/or equity. We cannot assure you that any additional financing will
be available to us on acceptable terms or at all. Issuing equity securities to satisfy our
financing requirements could cause substantial dilution to our existing stockholders. The level of
our debt financing could also materially affect our operations.
If our cash flows were to decrease due to lower oil and natural gas prices, decreased
production or other reasons, and if we could not obtain capital through our existing credit
facilities or otherwise, our ability to execute our development and acquisition plans, replace our
reserves or maintain production levels could be greatly limited.
We may not realize the benefits of integrating our business with the business of Westside.
To be successful after our June, 2008 business combination with Westside and the Crusader
Entities, we will need to combine and integrate the operations of the separate companies into one
company. Integration will require substantial management attention and could detract attention away
from the day-to-day business of the combined company. We could encounter difficulties in the
integration process, such as the loss of key employees or suppliers. If we cannot integrate the two
businesses successfully, we may fail to realize the benefits expected from the business
combination.
We may not be successful in acquiring, exploiting, developing or exploring for oil and gas
properties.
The successful acquisition, exploitation or development of, or exploration for, oil and gas
properties requires an assessment of recoverable reserves, future oil and gas prices and operating
costs, potential environmental and other liabilities, and other factors. These assessments are
inexact. As a result, we may not recover the purchase price of a property from the sale of
production from the property, or may not realize an acceptable return from properties we acquire.
In addition, our exploitation and development and exploration operations may not result in any
increases in reserves. Our operations may be curtailed, delayed or canceled as a result of:
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capital or other factors, such as title defects;
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weather;
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compliance with governmental regulations or price controls;
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mechanical difficulties; or
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shortages or delays in the delivery of equipment.
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In addition, exploitation and development costs may greatly exceed initial estimates. In that
case, we would be required to make unanticipated expenditures of additional funds to develop these
projects, which could materially adversely affect our business, financial condition and results of
operations.
Furthermore, exploration for oil and gas has inherent and historically higher risk than
exploitation and development activities. Future reserve increases and production may be dependent
on our success in our exploration efforts, which may be unsuccessful.
Estimates of oil and gas reserves depend on many assumptions that may be inaccurate. Any material
inaccuracies could adversely affect the quantity and value of our oil and gas reserves.
The proved oil and gas reserve information included in our public filings are only estimates.
These estimates are based on reports prepared or audited by independent petroleum engineers. The
estimates were calculated using oil and gas prices in effect on the date indicated in the reports.
Any significant price changes will have a material effect on the quantity and present value of our
reserves.
Petroleum engineering is a subjective process of estimating underground accumulations of oil
and gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and
gas reserves and of future net cash flows depend upon a number of variable factors and assumptions,
including:
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historical production from the area compared with production from other
comparable producing areas;
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the assumed effects of regulations by governmental agencies;
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assumptions concerning future oil and gas prices; and
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assumptions concerning future operating costs, severance and excise
taxes, development costs and workover and remediation costs.
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Because all reserve estimates are to some degree subjective, each of the following
items may differ materially from those assumed in estimating reserves:
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the quantities of oil and gas that are ultimately recovered;
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the timing of the recovery of oil and gas reserves;
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the production and operating costs incurred; and
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the amount and timing of future development expenditures.
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Furthermore, different reserve engineers may make different estimates of reserves and cash
flows based on the same available data. Actual production, revenues and expenditures with respect
to reserves will vary from estimates and the variances may be material.
39
The discounted future net revenues included in our public filings should not be considered as
the market value of the reserves attributable to our properties. As required by the SEC, the
estimated discounted future net revenues from proved reserves are generally based on prices and
costs as of the date of the estimate, while actual future prices and costs may be materially higher
or lower. Actual future net revenues will also be affected by factors such as:
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the amount and timing of actual production;
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supply and demand for oil and gas; and
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changes in governmental regulations or taxation.
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In addition, the 10% discount factor, which the SEC requires to be used to calculate
discounted future net revenues for reporting purposes, is not intended to reflect the fair market
value of our reserves, which would include consideration of the cost of capital in effect from time
to time, risks associated with our business and the oil and gas industry in general and other
factors.
Our acquisition strategy could fail or present unanticipated problems for our business in the
future, which could adversely affect our ability to make acquisitions or realize anticipated
benefits of those acquisitions.
Our growth strategy includes acquiring oil and gas businesses and properties. We may not be
able to identify suitable acquisition opportunities or finance and complete any particular
acquisition successfully. Furthermore, acquisitions involve a number of risks and challenges,
including:
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diversion of managements attention;
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the need to integrate acquired operations;
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potential loss of key employees of the acquired companies;
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potential lack of operating experience in a geographic market of the
acquired business; and
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an increase in our expenses and working capital requirements.
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Any of these factors could adversely affect our ability to achieve anticipated levels of cash
flows from our acquired businesses or realize other anticipated benefits of those acquisitions.
Successful acquisitions require an assessment of a number of factors, including estimates of
recoverable reserves, exploration potential, future oil and natural gas prices, operating and
capital costs and potential environmental and other liabilities. Such assessments are inexact and
their accuracy is inherently uncertain. In connection with our assessments, we perform a review of
the acquired properties which we believe is generally consistent with industry practices. However,
such a review will not reveal all existing or potential problems. In addition, our review may not
permit us to become sufficiently familiar with the properties to fully assess their deficiencies
and capabilities. We do not inspect every well. Even when we inspect a well, we do not always
discover structural, subsurface and environmental problems, such as groundwater contamination, that
may exist or arise. We are generally not entitled to contractual indemnification for preclosing
liabilities, including environmental liabilities. Normally, we acquire interests in properties on
an as is basis with limited remedies for breaches of representations and warranties. As a result
of these factors, we may not be able to acquire oil and natural gas properties that contain
economically recoverable reserves or be able to complete such acquisitions on acceptable terms.
We depend substantially on the continued presence of key personnel for critical management
decisions and industry contacts.
Our success depends upon the continued contributions of our executive officers and key
employees, particularly with respect to providing the critical management decisions and contacts
necessary to manage and maintain growth within a highly competitive industry. Competition for
qualified personnel can be intense, particularly in the oil and natural gas industry, and there are
a limited number of people with the requisite knowledge and experience. Under
40
these conditions, we could be unable to attract and retain these personnel. The loss of the
services of any of our executive officers or other key employees for any reason could have a
material adverse effect on our business, operating results, financial condition and cash flows.
Our business is highly competitive.
The oil and natural gas industry is highly competitive in many respects, including
identification of attractive oil and natural gas properties for acquisition, drilling and
development, securing financing for such activities and obtaining the necessary equipment and
personnel to conduct such operations and activities. In seeking suitable opportunities, we compete
with a number of other companies, including large oil and natural gas companies and other
independent operators with greater financial resources, larger numbers of personnel and facilities,
and, in some cases, with more expertise. There can be no assurance that we will be able to compete
effectively with these entities.
Hedging transactions may limit our potential gains and increase our potential losses.
In order to manage our exposure to price risks in the marketing of our oil and natural gas
production, we have entered into oil and natural gas price hedging arrangements with respect to a
portion of our anticipated production. We will most likely enter into additional hedging
transactions in the future. While intended to reduce the effects of volatile oil and natural gas
prices, such transactions may limit our potential gains and increase our potential losses if oil
and natural gas prices were to rise substantially over the price established by the hedge. In
addition, such transactions may expose us to the risk of loss in certain circumstances, including
instances in which:
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our production is less than expected;
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there is a widening of price differentials between delivery points for
our production and the delivery point assumed in the hedge arrangement; or
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the counterparties to our hedging agreements fail to perform under the
contracts.
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Our oil and natural gas activities are subject to various risks which are beyond our control.
Our operations are subject to many risks and hazards incident to exploring and drilling for,
producing, transporting, marketing and selling oil and natural gas. Although we may take
precautionary measures, many of these risks and hazards are beyond our control and unavoidable
under the circumstances. Many of these risks or hazards could materially and adversely affect our
revenues and expenses, the ability of certain of our wells to produce oil and natural gas in
commercial quantities, the rate of production and the economics of the development of, and our
investment in, the prospects in which we have or will acquire an interest. Any of these risks and
hazards could materially and adversely affect our financial condition, results of operations and
cash flows. Such risks and hazards include:
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human error, accidents, labor force and other factors beyond our control that
may cause personal injuries or death to persons and destruction or damage to equipment
and facilities;
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blowouts, fires, hurricanes, pollution and equipment failures that may result
in damage to or destruction of wells, producing formations, production facilities,
equipment and the surrounding environment;
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unavailability of materials and equipment;
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engineering and construction delays;
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unanticipated transportation costs and delays;
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unfavorable weather conditions;
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|
hazards resulting from unusual or unexpected geological or
environmental conditions;
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41
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environmental and OSHA regulations and requirements;
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|
accidental leakage of produced liquids or drilling fluids, into the
environment;
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|
hazards resulting from the presence of hydrogen sulfide in gas we
produce;
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changes in laws and regulations, including laws and regulations
applicable to oil and natural gas activities or markets for the oil and natural
gas produced;
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fluctuations in supply and demand for oil and natural gas causing
variations of the prices we receive for our oil and natural gas production; and
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the availability of alternative fuels and the price at which they
become available.
|
As a result of these risks, expenditures, quantities and rates of production, revenues and
cash operating costs may be materially adversely affected and may differ materially from those
anticipated by us.
Governmental and environmental regulations could adversely affect our business.
Our business is subject to federal, state and local laws and regulations on taxation, the
exploration for and development, production and marketing of oil and natural gas and safety
matters. Many laws and regulations require drilling permits and govern the spacing of wells, rates
of production, prevention of waste, unitization and pooling of properties and other matters. These
laws and regulations have increased the costs of planning, designing, drilling, installing,
operating and abandoning our oil and natural gas wells and other facilities. In addition, these
laws and regulations, and any others that are passed by the jurisdictions where we have production,
could limit the total number of wells drilled or the allowable production from successful wells,
which could limit our revenues.
Our operations are also subject to complex environmental laws and regulations adopted by the
various jurisdictions in which we have or expect to have oil and natural gas operations. We could
incur liability to governments or third parties for any unlawful discharge of oil, natural gas or
other pollutants into the air, soil or water, including responsibility for remedial costs. We could
potentially discharge these materials into the environment in any of the following ways:
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|
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from a well or drilling equipment at a drill site;
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from gathering systems, pipelines, transportation facilities and
storage tanks;
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damage to oil and natural gas wells resulting from accidents during
normal operations; and
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blowouts, hurricanes, cratering and explosions.
|
Because the requirements imposed by laws and regulations are frequently changed, we cannot
assure you that laws and regulations enacted in the future, including changes to existing laws and
regulations, will not adversely affect our business. In addition, because we acquire interests in
properties that have been operated in the past by others, we may be liable for environmental damage
caused by the former operators.
We cannot be certain that the insurance coverage maintained by us will be adequate to cover all
losses that may be sustained in connection with all oil and natural gas activities.
We maintain general and excess liability policies, which we consider to be reasonable and
consistent with industry standards. These policies generally cover:
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personal injury;
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bodily injury;
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42
|
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third party property damage;
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medical expenses;
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legal defense costs;
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pollution in some cases;
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well blowouts in some cases; and
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workers compensation.
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As is common in the oil and natural gas industry, we will not insure fully against all risks
associated with our business either because such insurance is not available or because we believe
the premium costs are prohibitive. A loss not fully covered by insurance could have a materially
adverse effect on our financial position and results of operations. There can be no assurance that
the insurance coverage that we maintain will be sufficient to cover every claim made against us in
the future. A loss in connection with our oil and natural gas properties could have a materially
adverse effect on our financial position and results of operations to the extent that the insurance
coverage provided under our policies covers only a portion of any such loss.
Title to the properties in which we have an interest may be impaired by title defects.
We generally obtain title opinions on significant properties that we drill or acquire.
However, there is no assurance that we will not suffer a monetary loss from title defects or title
failure. Additionally, undeveloped acreage has greater risk of title defects than developed
acreage. Generally, under the terms of the operating agreements affecting our properties, any
monetary loss is to be borne by all parties to any such agreement in proportion to their interests
in such property. If there are any title defects or defects in assignment of leasehold rights in
properties in which we hold an interest, we will suffer a financial loss.
Part of our strategy involves exploratory drilling, including drilling in new or emerging plays. As
a result, our drilling results in these areas are uncertain, and the value of our undeveloped
acreage will decline if our drilling results are unsuccessful.
The results of our exploratory drilling in new or emerging plays, such as the Barnett Shale,
are more uncertain than drilling results in areas that are developed and have established
production. Since new or emerging plays and new formations have limited or no production history,
we are less able to use past drilling results in those areas to help predict our future drilling
results. As a result, our return on investment in these areas may be less than initially expected,
resulting in a decline in the value of our undeveloped acreage. We could incur material write downs
of unevaluated properties in the future if our drilling results are unsuccessful.
Our exploration and development drilling efforts and the operation of our wells may not be
profitable or achieve our targeted returns.
We require significant amounts of undeveloped leasehold acreage in order to further our
development efforts. Exploration, development, drilling and production activities are subject to
many risks, including the risk that commercially productive reservoirs will not be discovered. We
invest in property, including undeveloped leasehold acreage, which we believe will result in
projects that will add value over time. However, we cannot guarantee that all of our prospects will
result in viable projects or that we will not abandon our initial investments. Additionally, we
cannot guarantee that the leasehold acreage we acquire will be profitably developed, that new wells
drilled by us will be productive or that we will recover all or any portion of our investment in
such leasehold acreage or wells. Drilling for oil and natural gas may involve unprofitable efforts,
not only from dry wells but also from wells that are productive but do not produce sufficient net
reserves to return a profit after deducting operating and other costs. In addition, wells that are
profitable may not achieve our targeted rate of return. Our ability to achieve our target results
are dependent upon the current and future market prices for oil and natural gas, costs associated
with producing oil and natural gas and our ability to add reserves at an acceptable cost. We rely
to a significant extent on advanced technologies in identifying leasehold acreage prospects and in
conducting our exploration activities. The technologies we use do not allow us to
43
know conclusively prior to our acquisition of the acreage or the drilling of a well whether oil or
gas is present or may be produced economically. The use of new technologies also requires greater
pre-drilling expenditures than traditional drilling strategies.
In addition, we may not be successful in controlling and reducing our drilling and production
costs in order to improve our overall return. The cost of drilling, completing and operating a
well is often uncertain and cost factors can adversely affect the economics of a project. We cannot
predict the cost of drilling, and we may be forced to limit, delay or cancel drilling operations as
a result of a variety of factors, including:
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unexpected drilling conditions;
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pressure or irregularities in formations;
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equipment failures or accidents and shortages or delays in the
availability of drilling rigs and the delivery of equipment;
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adverse weather conditions, including hurricanes; and
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compliance with governmental requirements.
|
The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oil field
services could adversely affect our ability to execute our exploration and development plans on a
timely basis and within our budget.
Our industry is cyclical and, from time to time, there is a shortage of drilling rigs,
equipment, supplies or qualified personnel. During these periods, the costs and delivery times of
rigs, equipment and supplies are substantially greater. In addition, the demand for, and wage rates
of, qualified drilling rig crews rise as the number of active rigs in service increases. As a
result of increasing levels of exploration and production in response to strong prices of oil and
natural gas, the demand for oilfield services has risen, and the costs of these services are
increasing, while the quality of these services may suffer. If the unavailability or high cost of
drilling rigs, equipment, supplies or qualified personnel were particularly severe in Texas and
Oklahoma, we could be materially and adversely affected because our operations and properties are
concentrated in those areas.
The marketability of our oil and natural gas production depends on services and facilities that we
typically do not own or control. The failure or inaccessibility of any such services or facilities
could result in a curtailment of production and revenues.
The marketability of our production depends in part upon the availability, proximity and
capacity of gathering systems, pipelines and processing facilities. Pursuant to interruptible or
short term transportation agreements, we generally deliver gas through gathering systems and
pipelines that we do not own. Under the interruptible transportation agreements, the transportation
of our gas may be interrupted due to capacity constraints on the applicable system, for maintenance
or repair of the system, or for other reasons as dictated by the particular agreements. If any of
the pipelines or other facilities become unavailable, we would be required to find a suitable
alternative to transport and process the gas, which could increase our costs and reduce the
revenues we might obtain from the sale of the gas.
We depend on the skill, ability and decisions of third party operators to a significant extent.
The success of the drilling, development and production of the oil and natural gas properties
in which we have or expect to have a non-operating working interest is substantially dependent upon
the decisions of such third-party operators and their diligence to comply with various laws, rules
and regulations affecting such properties. The failure of any third-party operator to make
decisions, perform their services, discharge their obligations, deal with regulatory agencies, and
comply with laws, rules and regulations, including environmental laws and regulations in a proper
manner with respect to properties in which we have an interest could result in material adverse
consequences to our interest in such properties, including substantial penalties and compliance
costs. Such adverse consequences could result in substantial liabilities to us or reduce the value
of our properties, which could negatively affect our results of operations.
44
New technologies may cause our current exploration and drilling methods to become obsolete.
The oil and gas industry is subject to rapid and significant advancements in technology,
including the introduction of new products and services using new technologies. As competitors use
or develop new technologies, we may be placed at a competitive disadvantage, and competitive
pressures may force us to implement new technologies at a substantial cost. In addition,
competitors may have greater financial, technical and personnel resources that allow them to enjoy
technological advantages and may in the future allow them to implement new technologies before we
can. One or more of the technologies that we currently use or that we may implement in the future
may become obsolete. We cannot be certain that we will be able to implement the use of technologies
on a timely basis or at a cost that is acceptable to us. If we are not able to utilize
technological advancements consistent with industry standards, our operations and financial
condition may be adversely affected.
We exist in a litigious environment.
Any counterparty could bring suit or allege a violation of an existing contract. This action
could delay the commencement of operations or could halt production until such alleged violations
are resolved by the courts. Not only could we incur significant legal and support expenses in
defending our rights, planned operations could be delayed which would impact our future operations
and financial condition. Such legal disputes could also distract management and other personnel
from their primary responsibilities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
|
i.
|
|
Information regarding the unregistered sale of
securities to the owners of the various entities acquired by the Company
pursuant to a contribution agreement dated December 31, 2007, was
previously provided in the Report on Form 8-K filed June 27, 2008.
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|
|
ii.
|
|
In addition, on June 24, 2008, Sterne, Agee & Leach,
the placement agent in a private placement completed in November, 2004,
exercised outstanding warrants and acquired 65,000 shares of common stock
at a per share purchase price of $2.00. Proceeds of the sales were used
for general corporate purposes. The sale was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended.
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(b)
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|
Not applicable.
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(c)
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|
Not applicable.
|
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Set forth below are the results of the voting with respect to the matters acted upon at our
2008 annual meeting of stockholders held on June 26, 2008.
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|
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|
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|
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Votes Cast
|
|
Votes Cast
|
|
Votes Withheld /
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|
Broker Non-
|
Matter Acted Upon
|
|
For
|
|
Against
|
|
Abstentions
|
|
Votes
|
1. Proposal to issue an
aggregate of approximately 171.7
million shares of common stock
to the owners of Knight Energy
Group, LLC, Knight Energy Group
II, LLC, Hawk Energy Fund I, LLC
and RCH Upland Acquisition, LLC
in exchange for all of the
equity ownership interests in
such entities pursuant to a
contribution agreement dated as
of December 31, 2007, among the
foregoing entities and certain
other affiliated entities.
|
|
18,805,571
|
|
14,021
|
|
13,615
|
|
5,305,180
|
45
|
|
|
|
|
|
|
|
|
|
|
Votes Cast
|
|
Votes Cast
|
|
Votes Withheld /
|
|
Broker Non-
|
Matter Acted Upon
|
|
For
|
|
Against
|
|
Abstentions
|
|
Votes
|
2. Proposal to adopt the
Companys 2008 Long Term
Incentive Plan (the 2008 LTIP)
and the grant of options to
purchase 35 million shares of
common stock under the 2008
LTIP.
|
|
18,713,006
|
|
106,986
|
|
13,215
|
|
5,305,180
|
|
|
|
|
|
|
|
|
|
3. Proposal to amend the
Companys articles of
incorporation to increase the
number of authorized shares of
common stock to 500 million.
|
|
18,763,551
|
|
51,141
|
|
18,515
|
|
5,305,180
|
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|
|
|
|
|
|
|
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4. Proposal to amend the
Companys articles of
incorporation to change its name
to Crusader Energy Group Inc.
|
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18,794,445
|
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14,347
|
|
24,415
|
|
5,305,180
|
|
|
|
|
|
|
|
|
|
5. Proposal to give discretion
to the Companys board of
directors to effect a
one-for-two reverse split of
common stock.
|
|
18,094,430
|
|
724,862
|
|
13,915
|
|
5,305,180
|
|
|
|
|
|
|
|
|
|
6. Election of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David D. Le Norman
|
|
23,500,455
|
|
|
|
637,932
|
|
|
|
|
|
|
|
|
|
|
|
Robert J. Raymond
|
|
23,510,455
|
|
|
|
627,932
|
|
|
|
|
|
|
|
|
|
|
|
Joe Colonnetta
|
|
24,106,216
|
|
|
|
32,171
|
|
|
|
|
|
|
|
|
|
|
|
James C. Crain
|
|
24,106,216
|
|
|
|
32,171
|
|
|
|
|
|
|
|
|
|
|
|
Robert H. Niehaus
|
|
23,381,553
|
|
|
|
756,834
|
|
|
|
|
|
|
|
|
|
|
|
Shirley A. Ogden
|
|
24,105,916
|
|
|
|
32,471
|
|
|
|
|
|
|
|
|
|
|
|
Phil D. Kramer
|
|
23,480,755
|
|
|
|
657,632
|
|
|
Item 5. Other Information.
|
(a)
|
|
Not applicable.
|
|
|
(b)
|
|
Incorporated herein by reference are the amendments to the Companys bylaws
regarding the process by which shareholders may make nominations to the Companys board
of directors as discussed in and as attached as an exhibit to the Companys Report on
Form 8-K filed on June 27, 2008.
|
Item 6. Exhibits.
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation, filed as the same numbered exhibit with
Crusader Energy Group Inc.s Form 8-K, filed June 27, 2008, Commission File No. 1-32533*
|
46
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
3.2
|
|
Second Amended and Restated Bylaws of Crusader Energy Group Inc., as amended, which were
approved by the Crusader Energy Group Inc. Board of Directors on June 26, 2008**
|
|
|
|
10.1
|
|
Second Amended and Restated Credit Agreement, dated June 26, 2008, among Crusader Energy
Group Inc., Union Bank of California, N.A., as administrative agent and as issuing lender, and
the lenders signatory thereto, filed as the same numbered exhibit with Crusader Energy Group
Inc.s Form 8-K, filed June 27, 2008, Commission File No. 1-32533*
|
|
|
|
10.2
|
|
Amended and Restated Subordinated Credit Agreement, dated June 26, 2008, among Crusader
Energy Group Inc., UnionBanCal Equities, Inc., as administrative agent, and the lenders
signatory thereto, filed as the same numbered exhibit with Crusader Energy Group Inc.s Form
8-K, filed June 27, 2008, Commission File No. 1-32533*
|
|
|
|
10.3
|
|
Personnel Services Agreement, dated June 26, 2008, between Crusader Energy Group Inc. and
Crusader Management Company, filed as the same numbered exhibit with Crusader Energy Group
Inc.s Form 8-K, filed June 27, 2008, Commission File No. 1-32533*
|
|
|
|
10.4
|
|
Crusader Energy Group Inc. 2008 Long Term Incentive Plan, filed as the same numbered exhibit
with Crusader Energy Group Inc.s Form 8-K, filed June 27, 2008, Commission File No. 1-32533,
which includes the Form of Option Award Agreement and supersedes (i) the Westside Energy
Corporation 2008 Long Term Incentive Plan, filed as Annex C to the Westside Energy Corporation
Definitive Proxy Statement (File No. 001-32533), filed May 28, 2008, which was incorporated by
reference as Exhibit 4.2 to the Westside Energy Corporation Registration Statement on Form
S-8, filed June 25, 2008, and (ii) the Form of Option Award Agreement under the Westside
Energy Corporation 2008 Long Term Incentive Plan, filed as Exhibit B to Annex C to the
Westside Energy Corporation Definitive Proxy Statement (File No. 001-32533), filed May 28,
2008, which was incorporated by reference as Exhibit 4.3 to the Westside Energy Corporation
Registration Statement on Form S-8, filed June 25, 2008*
|
|
|
|
10.5
|
|
Registration Rights Agreement, dated June 26, 2008, among Crusader Energy Group Inc., Knight
Energy Group I Holding Co., LLC, Knight Energy Group II Holding Company, LLC, Hawk Energy Fund
I Holding Company, LLC and RCH Energy Opportunity Fund I, L.P., filed as the same numbered
exhibit with Crusader Energy Group Inc.s Form 8-K, filed June 27, 2008, Commission File No.
1-32533*
|
|
|
|
10.6
|
|
Non-Transfer Agreement, dated June 26, 2008, between Crusader Energy Group Inc. and Knight
Energy Group I Holding Co., LLC, filed as the same numbered exhibit with Crusader Energy Group
Inc.s Form 8-K, filed June 27, 2008, Commission File No. 1-32533*
|
|
|
|
10.7
|
|
Non-Transfer Agreement, dated June 26, 2008, between Crusader Energy Group Inc. and Knight
Energy Group II Holding Company, LLC, filed as the same numbered exhibit with Crusader Energy
Group Inc.s Form 8-K, filed June 27, 2008, Commission
File No.
1-32533*
|
|
|
|
10.8
|
|
Non-Transfer Agreement, dated June 26, 2008, between Crusader Energy Group Inc. and Hawk
Energy Fund I Holding Company, LLC, filed as the same numbered exhibit with Crusader Energy
Group Inc.s Form 8-K, filed June 27, 2008, Commission
File No.
1-32533*
|
|
|
|
10.9
|
|
Non-Transfer Agreement, dated June 26, 2008, between Crusader Energy Group Inc. and RCH
Energy Opportunity Fund I, L.P., filed as the same numbered exhibit with Crusader Energy Group
Inc.s Form 8-K, filed June 27, 2008, Commission File No. 1-32533*
|
|
|
|
10.10
|
|
Services Agreement, dated June 26 2008, between Crusader Energy Group Inc. and Robert J.
Raymond, filed as the same numbered exhibit with Crusader Energy Group Inc.s Form 8-K filed
June 27, 2008, Commission File No. 1-32533*
|
|
|
|
10.11
|
|
Employment Agreement, dated June 26 ,2008, between Crusader Energy Group Inc. and David D.
Le Norman, filed as the same numbered exhibit with Crusader Energy Group Inc.s Form 8-K,
filed June 27, 2008, Commission File No. 1-32533*
|
47
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
10.12
|
|
Indemnification Agreement, dated June 26, 2008, between Crusader Energy Group Inc. and
Robert J. Raymond, together with a schedule identifying other substantially identical
agreements between Crusader Energy Group Inc. and each director and officer of Crusader Energy
Group Inc. identified on the schedule and identifying the material differences between each of
those agreements and the filed Indemnification Agreement, filed as the same numbered exhibit
with Crusader Energy Group Inc.s Form 8-K, filed June 27, 2008, Commission File No. 1-32533*
|
|
|
|
10.13
|
|
Business Opportunity Agreement, dated June 26, 2008, among Crusader Energy Group Inc. and
the parties listed on Exhibit A thereto, filed as the same numbered exhibit with Crusader
Energy Group Inc.s Form 8-K, filed June 27, 2008, Commission File No. 1-32533*
|
|
|
|
10.14
|
|
Second Lien Credit Agreement, dated July 17, 2008 and effective as of July 18, 2008, among
Crusader Energy Group Inc., JPMorgan Chase Bank, N.A., as administrative agent, and the
lenders signatory thereto, filed as the same numbered exhibit with Crusader Energy Group
Inc.s Form 8-K, filed July 21, 2008, Commission File No. 1-32533*
|
|
|
|
10.15
|
|
Amendment No. 1, dated as of July 18, 2008, among Crusader Energy Group Inc., Union Bank of
California, N.A., as administrative agent and issuing lender, and the lenders signatory
thereto, filed as the same numbered exhibit with Crusader Energy Group Inc.s Form 8-K, filed
July 21, 2008, Commission File No. 1-32533*
|
|
|
|
31.1
|
|
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002**
|
|
|
|
31.2
|
|
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002**
|
|
|
|
32.1
|
|
Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002**
|
|
|
|
32.2
|
|
Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002**
|
|
|
|
*
|
|
Incorporated by reference
|
|
**
|
|
Filed herewith
|
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRUSADER ENERGY GROUP, INC.
(Registrant)
|
|
|
|
|
|
|
|
|
|
Date: August 14, 2008
|
|
By:
|
|
/s/ David D. Le Norman
|
|
|
|
|
David D. Le Norman
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
Date: August 14, 2008
|
|
By:
|
|
/s/ John G. Heinen
|
|
|
|
|
John G. Heinen
|
|
|
|
|
Senior Vice President, Chief Financial Officer and Treasurer
|
|
|
|
|
(Principal Financial Officer)
|
|
|
INDEX TO EXHIBITS
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
3.2
|
|
Second Amended and Restated Bylaws of Crusader Energy Group Inc., as amended, which were
approved by the Crusader Energy Group Inc. Board of Directors on June 26, 2008
|
|
|
|
31.1
|
|
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
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