Mark-to-market
gain (loss) on derivatives, net was ($0.6) million in 2004 comprised of (1) $1.0
million of realized loss on net settled derivatives and (2) $0.4 million of net
unrealized gain on the derivatives. There were no such gains reported in 2003.
Income taxes increased to $7.0 million in 2004 from
$5.1 million in 2003 due to the increase in pre-tax income. Dividends
and accretion of discount on preferred stock decreased to $0.4 million in 2004
from $0.7 million in 2003 as a result of the conversion of all of the Series B
Preferred Stock into common stock during the second quarter of 2004. Net
Income available to common shareholders before cumulative effect of change in
accounting principle for 2004 increased to $10.8 million from $7.3 million in
2003 primarily as a result of the factors described above. Liquidity
and Capital Resources During 2005, we made capital
expenditures in excess of our net cash flows provided by operating activities,
using the proceeds from the Second Lien Credit Facility, $9.0 million from the
sale of certain oil and natural gas properties, $2.4 million of proceeds from
the exercise of warrants and stock options, $17.2 million of net proceeds from
the Private Placement and $3.6 million in net proceeds from the issuance of additional
Senior Secured Notes. For future capital expenditures in 2006, we expect to use
cash on hand, largely generated from the Second Lien Credit Facility, and cash
generated by operating activities and available draws on the First Lien Credit
Facility to partially fund our planned drilling expenditures and fund leasehold
costs and geological and geophysical costs on our exploration projects in 2006.
We may need to seek other financing alternatives to fund our 2006 capital expenditures
program, including possible debt or equity financings. We
may not be able to obtain adequate financing on terms that would be acceptable
to us. If we cannot obtain adequate financing, we anticipate that we may be required
to limit or defer our planned natural gas and oil exploration and development
program, thereby adversely affecting the recoverability and ultimate value of
our natural gas and oil properties. Our liquidity position
was enhanced by the increase in availability of funds under the First Lien Credit
Facility before entering into the Second Lien Credit Facility, the $144.6 million
net proceeds from the Second Lien Credit Facility, the $17.0 million net proceeds
from the Private Placement and the $9.0 million of net proceeds from the property
sale in February 2005. Our other primary sources of liquidity have included funds
generated by operations, proceeds from the issuance of various securities, including
our common stock, preferred stock and warrants, and borrowings, under our credit
facilities, and through the issuance of senior subordinated notes. Cash
flows provided by operating activities were $33.6 million, $32.5 million and $38.8
million for 2003, 2004 and 2005, respectively. The decrease in cash flows provided
by operations in 2004 as compared to 2003 was primarily due to a smaller increase
in trade payables, partially offset by higher operating income, generally due
to record production and record commodity prices realized in 2004. The increase
in cash flows provided by operations in 2005 as compared to 2004 was primarily
due to higher oil and gas revenues generated from increased production and higher
commodity prices. Estimated maturities of long-term
debt are $1.5 million in 2006, $1.5 million in 2007, $1.5 million in each of the
years 2006 through 2009 and the remainder in 2010. The following table sets forth
estimates of our contractual obligations as of December 31, 2005: 
We
have planned capital expenditures in 2006 of approximately $140 to $145 million,
of which $117.5 million is expected to be used for drilling activities in our
project areas and the balance is expected to be used to fund 3-D seismic surveys,
land acquisitions and capitalized interest and overhead costs. We plan to drill
approximately 26 gross wells (11.7 net) in the onshore Gulf Coast area, 49 gross
wells (35 net) in our Barnett Shale and 40 gross wells (39.5 net) in our East
Texas, primarily in our | 
