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Proved reserve estimates prepared by others
may be substantially higher or lower than the Company's estimates.
Because these estimates depend on many assumptions, all of which
may differ from actual results, reserve quantities actually recovered
may be significantly different than estimated. Material revisions
to reserve estimates may be made depending on the results of drilling,
testing, and rates of production.
You should not assume that the present value
of future net cash flows is the current market value of the Company's
estimated proved reserves. In accordance with SEC requirements,
the Company based the estimated discounted future net cash flows
from proved reserves on market prices and costs on the date of the
estimate.
The Company's rate of recording depreciation,
depletion and amortization expense for proved properties is dependent
on the Company's estimate of proved reserves. If these reserve estimates
decline, the rate at which the Company records these expenses will
increase.
The Company's full cost ceiling test
also depends on the Company's estimate of proved reserves. If these
reserve estimates decline, the Company may be subjected to a full
cost ceiling write-down.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid
investments with maturities of three months or less when purchased.
REVENUE RECOGNITION AND NATURAL GAS IMBALANCES
The Company follows the sales method of accounting
for revenue recognition and natural gas imbalances, which recognizes
over and under lifts of natural gas when sold, to the extent sufficient
natural gas reserves or balancing agreements are in place. Natural
gas sales volumes are not significantly different from the Company's
share of production.
FINANCING COSTS
Long-term debt financing costs of $0.5 million
and $1.6 million are included in other assets as of December 31,
2003 and 2004, respectively, and are being amortized using the effective
yield method over the term of the loans (through September 30, 2007
for the credit facility and through December 15, 2008 for both the
Senior Subordinated Notes payable and the Senior Subordinated Secured
Notes payable).
SUPPLEMENTAL CASH FLOW INFORMATION
The Statement of Cash Flows for the year ended
December 31, 2002 does not reflect the following non-cash transactions:
the $2.5 million acquisition of seismic data, the $0.5 million acquisition
of oil and natural gas properties through the issuance of common
stock, and the $0.6 million reduction of oil and natural gas properties
for the amount of insurance recoveries expected to be received related
to difficulties encountered in the drilling of a well. The Statement
of Cash Flows for the year ended December 31, 2003 does not include
the acquisition of $1.2 million of seismic data through the issuance
of common stock, and the $0.2 million non-cash cumulative effect
recorded in connection with the implementation of Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations." The Statement of Cash Flows for the year ended December
31, 2004 does not include the net exercise of $0.7 million of warrants
and the conversion of $7.5 million of preferred stock into common
stock and the $0.3 relinquishment of interests in certain leases
to RMG in lieu of principal payments on a note payable.
FINANCIAL INSTRUMENTS
The Company's recorded financial instruments
consist of cash, receivables, payables and long-term debt. The carrying
amount of cash, receivables and payables approximates fair value
because of the short-term nature of these items. The carrying amount
of bank debt approximates fair value as this borrowing bears interest
at variable interest rates. The fair value of the 9% Senior Subordinated
Notes payable and the 10% Senior Subordinated Secured Notes payable
at December 31, 2004 was $28.8 million and $18.0 million, respectively.
Fair values of these subordinated notes payable were determined
based upon interest rates available to the Company at December 31,
2004 with similar terms.
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