SEC Company Response from WARREN RESOURCES INC (CIK 0000892986) — Nov 17, 2005
WARREN RESOURCES INC (CIK 0000892986)
Date: Nov. 17, 2005 · CIK: 0000892986 · Accession: 0001104659-05-056387
AI Filing Summary & Sentiment
File numbers found in text: 333-125835
Referenced dates: October 24, 2005
Letter
Division of Corporation Finance Securities and Exchange Commission Filed on June 15, 2005 File No. 333-125835 Form 10-K for Fiscal Year Ended December 31, 2004 SEC File No. 0-33275
Dear Ms. Sifford:
This letter responds on behalf of Warren Resources, Inc. (the “Company”) to comments made by the Staff of the Commission in its letter dated October 24, 2005 and subsequent telephone conferences with the Staff on October 21, 2005, October 28, 2005, and November 7, 2005, regarding the Company’s letter to you dated September 22, 2005.
Form 10-K for the Fiscal Year Ended December 31, 2004
Consolidated Balance Sheets,
8% Convertible Preferred Stock, page F-3
In response to the Staff’s comment regarding the classification of the Company’s 8% convertible preferred stock as permanent equity on and after December 31, 2004 rather than its classification as temporary equity on the balance sheets for those same time periods, we concur that temporary equity classification is appropriate since the redemption feature of the preferred stock can result in a situation where at times the Company would be presumed to economically choose to settle in cash as opposed to common shares. Specifically, as previously shown in the redemption analysis attached to our September 22, 2005 letter, this condition would occur when the Company’s stock price is above $15 per share since settling in shares below that amount is more economic and settling in cash above that amount would be more economic up to the ceiling price (i.e., $16 per share in the redemption analysis) at which point the Company can force redemption. As requested, the Company has assessed the materiality from a quantitative and qualitative basis under SAB 99 of the misclassification of the preferred stock as permanent equity rather than temporary equity later within this letter.
The Company believes that, subsequent to the initial public offering on December 17, 2004, the redemption feature associated with the 8% convertible preferred stock results in an embedded derivative that would be required to be separated from the host preferred stock and accounted for as a liability under SFAS 133. As a result, the Company assessed the materiality from a quantitative and qualitative basis under SAB 99 relating to the redemption feature.
The Company has estimated the fair value of the embedded redemption feature at each reporting period after the initial public offering (December 17, 2004) to determine the effect of this value adjustment has on the reported financial statements at December 31, 2004, March 31, 2005 and June 30, 2005, respectively. The initial estimated liability was approximately $327,000 which results in a reduction to temporary equity, at December 17, 2004 and had nominal change through December 31, 2004. The Company’s reported equity ranged from approximately $155,847,000 to $165,001,000 in the reporting periods after the initial public offering and this misstatement of approximately $327,000 or .21% of reported equity is clearly immaterial to the balance sheets. Also, the estimated fair value of the embedded redemption feature was a liability of approximately $285,000 and $68,000 at March 31, 2005 and June 30, 2005, respectively. Additionally as outlined in the table below, the Company’s reported net loss applicable to common stockholders would have been reduced for each reporting period; however, reported net loss per share would not have changed.
Net Loss applicable
Net Loss applicable
Basic and
Basic and
to common
to common
Diluted
Diluted
stockholders
Stockholders
EPS (As
EPS (As
(As Reported)
(As Adjusted)
Reported)
Adjusted)
Year Ended December 31, 2004
$
(16,551,184
)
$
(16,553,455
)
$
(0.84
)
$
(0.84
)
Three Months ended March 31, 2005
$
(3,368,538
)
$
(3,343,079
)
$
(0.10
)
$
(0.10
)
Three Months ended June 30, 2005
$
(2,984,684
)
$
(2,952,156
)
$
(0.08
)
$
(0.08
)
Six Months ended June 30, 2005
$
(6,353,222
)
$
(6,327,656
)
$
(0.18
)
$
(0.18
)
As such, the Company believes that the effect of recording the redemption feature as a liability under FAS 133 is clearly immaterial to the financial statements reported after the initial public offering on a quantitative and qualitative basis under SAB 99.
As requested by the Staff, the Company has also assessed the materiality of the misstatement of the preferred stock as permanent equity rather than temporary equity from a quantitative and qualitative basis under SAB 99. Attached as Exhibit A hereto are the Company’s balance sheets as of December 31, 2004, March 31, 2005 and June 30, 2005 “as reported” and “as if reclassified”. It should be noted that subsequent to December 31, 2004 over 89% of the issued preferred shares were voluntarily converted by the holders into common equity and cash has never been used to settle the instrument. Management expects the majority of the remaining preferred shares to be settled through voluntary or forced conversion prior to the redemption date. At December 31, 2004, the value of the Company’s preferred stock issued and outstanding was $77.3 million. The Company determined this might be quantitatively significant to the financial statement. (Note: At November 16, 2005, the value of the Company’s preferred stock issued and outstanding was $8,362,548.) As the Company has always charged dividends and accretion on the preferred shares against earnings before determining net loss applicable to common
shareholders, the effects of classifying the preferred stock as temporary equity would have no impact on net income or earnings per share.
As per SAB 99 the Company also must assess qualitative factors when determining if an item is material and significant and if a reasonable person would consider it important and if the judgment of that person relying on the report would be changed or influenced by the inclusion or correction of the item. The Company reviewed the qualitative factors it determined appropriate and determined that the classification of the preferred stock to temporary equity from permanent equity would not be material due to the following factors:
1. The classification of the preferred stock as permanent equity instead of temporary equity does not mask a change in earnings, income, expenses or other trends, as the Company has always charged dividends and accretion on the preferred shares against income and earnings before determining net loss applicable to the common stockholders;
2. The classification of the preferred stock as permanent equity instead of temporary equity does not hide a failure to meet analysts’ consensus expectations for the enterprise;
3. The classification of the preferred stock as permanent equity instead of temporary equity does not change a loss into income or vice versa, as net loss applicable to the common stockholders has always included dividends and accretion on the preferred shares;
4. The classification of the preferred stock as permanent equity instead of temporary equity does not concern a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability;
5. The classification of the preferred stock as permanent equity instead of temporary equity does not affect the registrant’s compliance with regulatory requirements;
6. The classification of the preferred stock as permanent equity instead of temporary equity does not affect the registrant’s compliance with loan covenants or other contractual requirements;
7. The classification of the preferred stock as permanent equity instead of temporary equity does not have the effect of increasing management’s compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation;
8. The classification of the preferred stock as permanent equity instead of temporary equity does not involve concealment of an unlawful transaction; and
9. Over 89% of preferred shares outstanding at December 31, 2004 have been voluntarily converted to common stock subsequent to that date and cash has never been used to settle. At November 16, 2005, the value of the Company’s preferred stock was only $8,362,548 and is expected to be voluntarily or force converted before the redemption date.
Additionally, the classification of the preferred stock as permanent equity rather than temporary equity was not done with any improper intentions, nor in any way to “manage” the Company’s earnings. The Company’s intentions are corroborated by the fact that the classification was undertaken openly, with proper intentions of being compliant, in fully audited financial statements in all the Company’s 1934 Act filings since initial issuance of the preferred stock in 2002.
Therefore, after review and analysis of the facts and relevant circumstances and applying the guidance of SAB 99, the Company and its financial management believe that there is no material difference to the financial statements by classifying and presenting the preferred stock as permanent equity rather than as temporary equity for the six months ended June 30, 2005, the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002.
General Information
Please do not hesitate to call me at (212) 697-9660 if you have any questions or need any additional information. Thank you for your attention to this filing. We look forward to hearing from you shortly.
Very truly yours,
/s/ Timothy A. Larkin
Show Raw Text
CORRESP 1 filename1.htm Warren Resources, Inc. 32nd Floor 489 Fifth Avenue New York, New York 10017 November 16, 2005 Ms. April Sifford Branch Chief Division of Corporation Finance Securities and Exchange Commission 450 5th Street, N.W. - Judiciary Plaza Washington, D.C. 20549-0405 Attn: Gary Newberry Re: Warren Resources, Inc. Registration Statement on Form S-3 Filed on June 15, 2005 File No. 333-125835 Form 10-K for Fiscal Year Ended December 31, 2004 SEC File No. 0-33275 Dear Ms. Sifford: This letter responds on behalf of Warren Resources, Inc. (the “Company”) to comments made by the Staff of the Commission in its letter dated October 24, 2005 and subsequent telephone conferences with the Staff on October 21, 2005, October 28, 2005, and November 7, 2005, regarding the Company’s letter to you dated September 22, 2005. Form 10-K for the Fiscal Year Ended December 31, 2004 Consolidated Balance Sheets, 8% Convertible Preferred Stock, page F-3 In response to the Staff’s comment regarding the classification of the Company’s 8% convertible preferred stock as permanent equity on and after December 31, 2004 rather than its classification as temporary equity on the balance sheets for those same time periods, we concur that temporary equity classification is appropriate since the redemption feature of the preferred stock can result in a situation where at times the Company would be presumed to economically choose to settle in cash as opposed to common shares. Specifically, as previously shown in the redemption analysis attached to our September 22, 2005 letter, this condition would occur when the Company’s stock price is above $15 per share since settling in shares below that amount is more economic and settling in cash above that amount would be more economic up to the ceiling price (i.e., $16 per share in the redemption analysis) at which point the Company can force redemption. As requested, the Company has assessed the materiality from a quantitative and qualitative basis under SAB 99 of the misclassification of the preferred stock as permanent equity rather than temporary equity later within this letter. 1 The Company believes that, subsequent to the initial public offering on December 17, 2004, the redemption feature associated with the 8% convertible preferred stock results in an embedded derivative that would be required to be separated from the host preferred stock and accounted for as a liability under SFAS 133. As a result, the Company assessed the materiality from a quantitative and qualitative basis under SAB 99 relating to the redemption feature. The Company has estimated the fair value of the embedded redemption feature at each reporting period after the initial public offering (December 17, 2004) to determine the effect of this value adjustment has on the reported financial statements at December 31, 2004, March 31, 2005 and June 30, 2005, respectively. The initial estimated liability was approximately $327,000 which results in a reduction to temporary equity, at December 17, 2004 and had nominal change through December 31, 2004. The Company’s reported equity ranged from approximately $155,847,000 to $165,001,000 in the reporting periods after the initial public offering and this misstatement of approximately $327,000 or .21% of reported equity is clearly immaterial to the balance sheets. Also, the estimated fair value of the embedded redemption feature was a liability of approximately $285,000 and $68,000 at March 31, 2005 and June 30, 2005, respectively. Additionally as outlined in the table below, the Company’s reported net loss applicable to common stockholders would have been reduced for each reporting period; however, reported net loss per share would not have changed. Net Loss applicable Net Loss applicable Basic and Basic and to common to common Diluted Diluted stockholders Stockholders EPS (As EPS (As (As Reported) (As Adjusted) Reported) Adjusted) Year Ended December 31, 2004 $ (16,551,184 ) $ (16,553,455 ) $ (0.84 ) $ (0.84 ) Three Months ended March 31, 2005 $ (3,368,538 ) $ (3,343,079 ) $ (0.10 ) $ (0.10 ) Three Months ended June 30, 2005 $ (2,984,684 ) $ (2,952,156 ) $ (0.08 ) $ (0.08 ) Six Months ended June 30, 2005 $ (6,353,222 ) $ (6,327,656 ) $ (0.18 ) $ (0.18 ) As such, the Company believes that the effect of recording the redemption feature as a liability under FAS 133 is clearly immaterial to the financial statements reported after the initial public offering on a quantitative and qualitative basis under SAB 99. As requested by the Staff, the Company has also assessed the materiality of the misstatement of the preferred stock as permanent equity rather than temporary equity from a quantitative and qualitative basis under SAB 99. Attached as Exhibit A hereto are the Company’s balance sheets as of December 31, 2004, March 31, 2005 and June 30, 2005 “as reported” and “as if reclassified”. It should be noted that subsequent to December 31, 2004 over 89% of the issued preferred shares were voluntarily converted by the holders into common equity and cash has never been used to settle the instrument. Management expects the majority of the remaining preferred shares to be settled through voluntary or forced conversion prior to the redemption date. At December 31, 2004, the value of the Company’s preferred stock issued and outstanding was $77.3 million. The Company determined this might be quantitatively significant to the financial statement. (Note: At November 16, 2005, the value of the Company’s preferred stock issued and outstanding was $8,362,548.) As the Company has always charged dividends and accretion on the preferred shares against earnings before determining net loss applicable to common 2 shareholders, the effects of classifying the preferred stock as temporary equity would have no impact on net income or earnings per share. As per SAB 99 the Company also must assess qualitative factors when determining if an item is material and significant and if a reasonable person would consider it important and if the judgment of that person relying on the report would be changed or influenced by the inclusion or correction of the item. The Company reviewed the qualitative factors it determined appropriate and determined that the classification of the preferred stock to temporary equity from permanent equity would not be material due to the following factors: 1. The classification of the preferred stock as permanent equity instead of temporary equity does not mask a change in earnings, income, expenses or other trends, as the Company has always charged dividends and accretion on the preferred shares against income and earnings before determining net loss applicable to the common stockholders; 2. The classification of the preferred stock as permanent equity instead of temporary equity does not hide a failure to meet analysts’ consensus expectations for the enterprise; 3. The classification of the preferred stock as permanent equity instead of temporary equity does not change a loss into income or vice versa, as net loss applicable to the common stockholders has always included dividends and accretion on the preferred shares; 4. The classification of the preferred stock as permanent equity instead of temporary equity does not concern a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability; 5. The classification of the preferred stock as permanent equity instead of temporary equity does not affect the registrant’s compliance with regulatory requirements; 6. The classification of the preferred stock as permanent equity instead of temporary equity does not affect the registrant’s compliance with loan covenants or other contractual requirements; 7. The classification of the preferred stock as permanent equity instead of temporary equity does not have the effect of increasing management’s compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation; 8. The classification of the preferred stock as permanent equity instead of temporary equity does not involve concealment of an unlawful transaction; and 9. Over 89% of preferred shares outstanding at December 31, 2004 have been voluntarily converted to common stock subsequent to that date and cash has never been used to settle. At November 16, 2005, the value of the Company’s preferred stock was only $8,362,548 and is expected to be voluntarily or force converted before the redemption date. Additionally, the classification of the preferred stock as permanent equity rather than temporary equity was not done with any improper intentions, nor in any way to “manage” the Company’s earnings. The Company’s intentions are corroborated by the fact that the classification was undertaken openly, with proper intentions of being compliant, in fully audited financial statements in all the Company’s 1934 Act filings since initial issuance of the preferred stock in 2002. 3 Therefore, after review and analysis of the facts and relevant circumstances and applying the guidance of SAB 99, the Company and its financial management believe that there is no material difference to the financial statements by classifying and presenting the preferred stock as permanent equity rather than as temporary equity for the six months ended June 30, 2005, the three months ended March 31, 2005 and the years ended December 31, 2004, 2003 and 2002. General Information Please do not hesitate to call me at (212) 697-9660 if you have any questions or need any additional information. Thank you for your attention to this filing. We look forward to hearing from you shortly. Very truly yours, /s/ Timothy A. Larkin Timothy A. Larkin, Executive Vice President & Chief Financial Officer 4 EXHIBIT A Warren Resources, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS As if Reclassified June 30, June 30, 2005 2005 (Unaudited) (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 56,800,596 $ 56,800,596 Accounts receivable - trade 2,180,063 2,180,063 Accounts receivable from affiliated partnerships 128,150 128,150 Trading securities 108,429 108,429 Restricted investments in U.S. Treasury Bonds - available for sale, at fair value (amortized cost of $563,440 in 2005 and $5,944,587 in 2004) 680,162 680,162 Other current assets 537,358 537,358 Total current assets 60,434,758 60,434,758 Other Assets Oil and gas properties - at cost, based on successful efforts method of accounting, net of accumulated depreciation, depletion and amortization 134,085,489 134,085,489 Property and equipment - at cost, net 561,921 561,921 Restricted investments in U.S. Treasury Bonds - available for sale, at fair value (amortized cost of $5,783,579 in 2005 and $10,778,899 in 2004) 7,105,197 7,105,197 Deferred bond offering costs, net of accumulated amortization of $5,422,694 in 2005 and $4,080,257 in 2004) 1,018,375 1,018,375 Goodwill 3,430,246 3,430,246 Other assets 6,761,147 6,761,147 Total other assets 152,962,375 152,962,375 $ 213,397,133 $ 213,397,133 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Current maturities of debentures $ 1,714,350 $ 1,714,350 Current maturities of other long-term liabilities 356,697 356,697 Accounts payable and accruals 13,406,883 13,406,883 Deferred income - turnkey drilling contracts with affiliated partnerships 7,918,183 7,918,183 Total current liabilities 23,396,113 23,396,113 Long-Term Liabilities Debentures, less current portion 15,429,150 15,429,150 Other long-term liabilities, less current portion 3,489,378 3,489,378 18,918,528 18,918,528 Minority Interest 7,543,362 7,543,362 8% convertible preferred stock, par value $.0001; authorized 10,000,000 shares, issued and outstanding, 1,475,120 shares in 2005 and 6,560,809 shares in 2004 (aggregate liquidation preference $17,701,440 in 2005 and $78,729,708 in 2004) 17,355,119 Stockholders’ Equity 8% convertible preferred stock, par value $.0001; authorized 10,000,000 shares, issued and outstanding, 1,475,120 shares in 2005 and 6,560,809 shares in 2004 (aggregate liquidation preference $17,701,440 in 2005 and $78,729,708 in 2004) 17,355,119 Common Stock - $.0001 par value; authorized, 100,000,000 shares; issued, 41,928,774 in 2005 and 34,347,854 shares in 2004 4,193 4,193 Additional paid-in capital 226,842,399 226,842,399 Accumulated deficit (80,800,075 ) (80,800,075 ) Accumulated other comprehensive income, net of applicable income taxes of $576,000 in 2005 and $576,000 in 2004 865,549 865,549 164,267,185 146,912,066 Less common stock in Treasury - at cost; 632,250 shares in 2005 and 2004 728,055 728,055 Total stockholders’ equity 163,539,130 146,184,011 $ 213,397,133 $ 213,397,133 As if Reclassified March 31, March 31, 2005 2005 (Unaudited) (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 61,207,699 $ 61,207,699 Accounts receivable - trade 1,735,666 1,735,666 Accounts receivable from affiliated partnerships 135,772 135,772 Trading securities 43,795 43,795 Restricted investments in U.S. Treasury Bonds - available for sale, at fair value (amortized cost of $6,095,961 in 2005 and $5,944,587 in 2004) 6,352,762 6,352,762 Other current assets 178,896 178,896 Total current assets 69,654,590 69,654,590 Other Assets Oil and gas properties - at cost, based on successful efforts method of accounting, net of accumulated depreciation, depletion and amortization 132,491,151 132,491,151 Property and equipment - at cost, net 437,890 437,890 Restricted investments in U.S. Treasury Bonds - available for sale, at fair value (amortized cost of $5,742,186 in 2005 and $10,778,899 in 2004) 6,639,819 6,639,819 Deferred bond offering costs, net of accumulated amortization of $4,914,142 in 2004 and $4,080,257 in 2004) 1,526,927 1,526,927 Goodwill 3,430,246 3,430,246 Other assets 3,926,893 3,926,893 Total other assets 148,452,926 148,452,926 $ 218,107,516 $ 218,107,516 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Current maturities of debentures $ 14,803,050 $ 14,803,050 Current maturities of other long-term liabilities 354,679 354,679 Accounts payable and accrued expenses 8,681,801 8,681,801 Deferred income - turnkey drilling contracts with affiliated partnerships 9,629,072 9,629,072 Total current liabilities 33,468,602 33,468,602 Long-Term Liabilities Debentures, less current portion 15,847,650 15,847,650 Other long-term liabilities, less current portion 3,470,986 3,470,986 19,318,636 19,318,636 Minority Interest 9,473,420 9,473,420 8% convertible preferred stock, par value $.0001; authorized 10,000,000 shares, issued and outstanding, 6,517,960 shares in 2005 and 6,560,809 shares in 2004 (aggregate liquidation preference $78,215,520 in 2005 and $78,729,708 in 200