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of $2,179 including interest at 6.0% per annum.
The Company has the option to acquire the equipment at the conclusion
of the lease for $1 under all of these leases. Depreciation on the
capital leases for the years ended December 31, 2002, 2003 and 2004
amounted to $28,000, $48,000 and $46,000, respectively, and accumulated
depreciation on the leased equipment at December 31, 2003 and 2004
amounted to $78,000 and $124,000, respectively.
Senior Subordinated Notes and Related Securities
In December 1999, the Company consummated the
sale of $22.0 million principal amount of 9% Senior Subordinated
Notes due 2007 (the "Subordinated Notes") and $8.0 million of common
stock and warrants. The Company sold $17.6 million, $2.2 million,
$0.8 million, $0.8 million and $0.8 million principal amount of
Subordinated Notes; 2,909,092, 363,636, 121,212, 121,212 and 121,212
shares of the Company's common stock and 2,208,152, 276,019, 92,006,
92,006 and 92,006 Warrants to CB Capital Investors, L.P. (now known
as JPMorgan Partners (23A SBIC), L.P.), Mellon Ventures, L.P., Paul
B. Loyd, Jr., Steven A. Webster and Douglas A.P. Hamilton, respectively.
The Subordinated Notes were sold at a discount of $0.7 million,
which is being amortized over the life of the notes. Interest payments
are due quarterly commencing on March 31, 2000. As amended as described
below, the Subordinated Notes allow the Company, until December
2005, to increase the amount of the Subordinated Notes for 60% of
the interest which would otherwise be payable in cash. As of December
31, 2003 and December 31, 2004, the outstanding balance of the Subordinated
Notes had been increased by $5.3 million and $6.8 million respectively,
for such interest paid in kind. During 2004, Mellon Ventures, L.P.,
JPMorgan Partners (23A SBIC), Steven A. Webster and Douglas A. P.
Hamilton exercised warrants to purchase 276,019, 2,208,152, 92,006
and 92,006 shares of common stock, respectively, on a cashless exercise
basis for a total of 205,692, 1,684,949, 70,205 and 70,205 shares
of common stock, respectively, and Paul B. Loyd, Jr., exercised
warrants for cash to purchase 92,006 shares for a total of 92,006
shares of common stock. As a result, no warrants to purchase shares
of common stock remain outstanding from the warrants originally
issued in December 1999.
On June 7, 2004, an unaffiliated third party
(the "Subordinated Notes Purchaser") purchased all the outstanding
Subordinated Notes from the original note holders. In exchange for
a $0.4 million amendment fee, certain terms and conditions of the
Subordinated Notes were amended, to provide for, among other things,
(1) a one year extension of the maturity to December 15, 2008, (2)
a one year extension, through December 15, 2005, of the paid-in-kind
("PIK") interest option to pay-in-kind 60% of the interest due each
period by increasing the principal balance by a like amount (the
"PIK option"), (3) an additional one year option to extend the PIK
option through December 15, 2006 at an annual interest rate on the
deferred amount of 10% and the payment of a one-time amendment fee
equal to 0.5% of the principal then outstanding and (4) additional
flexibility to obtain a separate project financing facility in the
future. The amendment fee will be amortized over the remaining life
of the Note.
The Company is subject to certain covenants
under the terms of the Subordinated Notes securities purchase agreement,
including but not limited to, (a) maintenance of a specified tangible
net worth, (b) maintenance of a ratio of EBITDA (earnings before
interest, taxes, depreciation and amortization) to quarterly Debt
Service (as defined in the agreement) of not less than 1.00 to 1.00,
(c) a limitation of its capital expenditures to an amount equal
to the Company's EBITDA for the immediately prior fiscal year (unless
approved by the Company's Board of Directors) and (d) a limitation
on our Total Debt (as defined in the securities purchase agreement)
to 3.5 times EBITDA for any twelve month period.
Senior Subordinated Secured Notes
On October 29, 2004, the Company entered into
a Note Purchase Agreement (the "Senior Secured Notes Purchase Agreement")
with PCRL Investments L.P. (the "Senior Secured Notes Purchaser").
Pursuant to the Senior Secured Notes Purchase Agreement, the Company
may issue up to $28 million aggregate principal amount of 10% Senior
Subordinated Secured Notes due 2008 (the "Senior Secured Notes")
for a purchase price equal to 90% of the principal amount of the
Senior Secured Notes then issued. On October 29, 2004, the Senior
Secured Notes Purchaser purchased $18 million aggregate principal
amount of the Senior Secured Notes for a purchase price of $16.2
million. The debt discount is being amortized to interest expense
using the effective interest method over the life of the note. Subject
to the satisfaction of certain conditions, the Company has an option
to issue up to an additional $10 million aggregate principal amount
of the Senior Secured Notes to the Senior Secured Notes Purchaser
before October 29, 2006.
The Senior Secured Notes are secured by a second
lien on substantially all of the Company's current proved producing
reserves and non-reserve assets, guaranteed by the Company's subsidiary,
and subordinated to the Company's obligations under the Credit Facility.
The Senior Secured Notes bear interest at 10% per annum, payable
quarterly on the 5th day of March, June, September and December
of each year beginning March 5, 2005. The principal on the Senior
Secured Notes is due December 15, 2008, and the Company has the
option to prepay the Senior Secured Notes at any time. The Senior
Secured Notes include an option that allows the Company to pay-in-kind
50% of the interest due until June 5, 2007 by increasing the principal
due by a like amount. Subject to certain conditions, the Company
has the option to pay the interest on and principal of (at maturity
or upon prepayment) the Senior Secured
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