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conjunction with the Restatement of the Quarterly information above, the respective
Form 10-Qs as previously filed for the Quarterly periods ended March 31, 2005,
June 30, 2005, and September 30, 2005 should no longer be relied upon. 4.
INVESTMENT IN PINNACLE GAS RESOURCES, INC. The Pinnacle
Transaction On June 23, 2003, pursuant to a Subscription
and Contribution Agreement by and among the Company and its wholly-owned subsidiary,
CCBM, Inc., Rocky Mountain Gas, Inc. (“RMG”) and the Credit Suisse First Boston
Private Equity entities, named therein (the “CSFB Parties”), CCBM and RMG contributed
their respective interests, having a estimated fair value of approximately $7.5
million each, in (1) leases in the Clearmont, Kirby, Arvada and Bobcat project
areas and (2) oil and natural gas reserves in the Bobcat project area to a newly
formed entity, Pinnacle Gas Resources, Inc., a Delaware corporation. In exchange
for the contribution of these assets, CCBM and RMG each received 37.5% of the
common stock of Pinnacle (“Pinnacle Common Stock”) as of the closing date and
options to purchase Pinnacle Common Stock (“Pinnacle Stock Options”). The Company
accounts for its interest in Pinnacle using the equity method. CCBM no longer
has a drilling obligation in connection with the oil and natural gas leases contributed
to Pinnacle. Simultaneously with the contribution of
these assets, the CSFB Parties contributed approximately $17.6 million of cash
to Pinnacle in return for the Redeemable Preferred Stock of Pinnacle (“Pinnacle
Preferred Stock”), 25% of the Pinnacle Common Stock as of the closing date and
warrants to purchase Pinnacle Common Stock (“Pinnacle Warrants”). The CSFB Parties
also agreed to contribute additional cash, under certain circumstances, of up
to approximately $11.8 million to Pinnacle to fund future drilling, development
and acquisitions. The CSFB Parties currently have greater than 50% of the voting
power of the Pinnacle capital stock through their ownership of Pinnacle Common
Stock and Pinnacle Preferred Stock and their nominees constitute a majority of
Pinnacle’s Board of Directors. Immediately following
the contribution and funding, Pinnacle used approximately $6.2 million of the
proceeds from the funding to acquire an approximate 50% working interest in existing
leases and acreage prospective for coalbed methane development in the Powder River
Basin of Wyoming from Gastar Exploration, Ltd. Pinnacle also agreed to fund up
to $14.9 million of future drilling and development costs on these properties
on behalf of Gastar prior to December 31, 2005. The drilling and development work
will be done under the terms of an earn-in joint venture agreement between Pinnacle
and Gastar. The majority of these leases are part of, or adjacent to, the Bobcat
project area. All of CCBM and RMG’s interests in the Bobcat project area, the
only producing coalbed methane property owned by CCBM prior to the transaction,
were contributed to Pinnacle. Prior to and in connection
with its contribution of assets to Pinnacle, CCBM paid RMG approximately $1.8
million in cash as part of its outstanding purchase obligation on the coalbed
methane property interests CCBM previously acquired from RMG. As of June 30, 2003,
approximately $1.1 million of the remaining balance of CCBM’s obligation to RMG
was scheduled to be paid in monthly installments of approximately $52,805 through
November 2004 and a balloon payment on December 31, 2004. All of these amounts
have been paid. The RMG note was secured solely by CCBM’s interests in the remaining
oil and natural gas leases | |
