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Notes with the Company's common stock, as long
as the Secured Note Purchaser not hold more than 9.99% of the number
of shares of the Company's common stock outstanding immediately
after giving effect to such payment. The value of such shares issued
as payment on the Senior Secured Notes is determined based on 90%
of the volume weighted average trading price during a specified
period of days beginning with the date of the payment notice and
ending before the payment date. Issuance costs related to the transaction
were $0.5 million and have been recorded as deferred financing costs
amortized to interest expense over the life of the Senior Secured
Notes.
As contemplated by the Secured Senior Notes
Purchase Agreement, the Company also entered into a registration
rights agreement with the Secured Note Purchaser (the "Registration
Rights Agreement"). In the event the Company chooses to issue shares
of its common stock as payment of interest on the principal of the
Senior Secured Notes, the Registration Rights Agreement provides
registration rights with respect to such shares. The Company is
generally required to file a resale shelf registration statement
to register the resale of such shares under the Securities Act of
1933 (the "Securities Act") if such shares are not freely tradable
under Rule 144(k) under the Securities Act. The Company is subject
to certain covenants under the terms of the Registration Rights
Agreement, including the requirement that the registration statement
be kept effective for resale of shares subject to certain "blackout
periods," when sales may not be made. In certain circumstances,
including those relating to (1) delisting of the Company's common
stock, (2) blackout periods in excess of a maximum length of time,
(3) certain failures to make timely periodic filings with the Securities
and Exchange Commission, or (4) certain delays or failures to deliver
stock certificates, the Company may be required to repurchase common
stock issued as payment on the Senior Secured Notes and, in certain
of these circumstances, to pay damages based on the market value
of its common stock. In certain situations, the Company is required
to indemnify the holders of registration rights under the Registration
Rights Agreement, including, without limitation, for liabilities
under the Securities Act.
The Senior Secured Notes Purchase Agreement
includes certain representations, warranties and covenants by the
parties thereto. The Company is subject to certain covenants under
the terms of the Senior Secured Notes Purchase Agreement, including,
without limitation, the maintenance of the following financial covenants:
(1) a maximum total recourse debt to EBITDA ratio of not more than
3.50 to 1.0, (2) a minimum EBITDA to interest expense ratio of 2.50
to 1.0, and (3) as of April 30, 2005, a minimum tangible net worth
of $12.5 million in excess of the Company's tangible net worth as
of September 30, 2004. Upon a change of control, any holders of
the Senior Secured Notes may require the Company to repurchase such
holders' Senior Secured Notes at a price equal to then outstanding
principal amount of such Senior Secured Notes, together with all
interest accrued on such Senior Secured Notes through the date of
repurchase. The Senior Secured Notes Purchase Agreement also places
restrictions on additional indebtedness, dividends to stockholders,
liens, investments, mergers, acquisitions, asset dispositions, asset
pledges and mortgages, repurchase or redemption for cash of the
Company's common stock, speculative commodity transactions and other
matters. The Senior Secured Notes Purchaser is an affiliate of the
Subordinated Notes Purchaser.
Estimated maturities of long-term debt are
$0.1 million in 2005, none in 2006, $18.0 million in 2007, and the
remainder in 2008.
At December 31, 2004, the Company was
in compliance with all of its debt covenants.
8. SEISMIC OBLIGATION PAYABLE
In 2002, the Company acquired (or obtained
the right to acquire) certain seismic data in its core areas in
the Texas and Louisiana Gulf Coast regions. Under the terms of the
acquisition agreements, the Company was required to make monthly
payments of $0.1 million through March 2004 and an additional payment
of $0.8 million in April 2004. All payments have been made.
9. CONVERTIBLE PARTICIPATING PREFERRED STOCK
In February 2002, the Company consummated the
sale of 60,000 shares of Convertible Participating Series B Preferred
Stock (the "Series B Preferred Stock") and warrants to purchase
252,632 shares of common stock for an aggregate purchase price of
$6.0 million. The Company sold 40,000 and 20,000 shares of Series
B Preferred Stock and 168,422 and 84,210 warrants to Mellon Ventures,
Inc. and Steven A. Webster, respectively. The Series B Preferred
Stock was convertible into common stock by the investors at a conversion
price of $5.70 per share, subject to adjustments, and was initially
convertible into 1,052,632 shares of common stock. Dividends on
the Series B Preferred Stock were payable in either cash at a rate
of 8% per annum or, at the Company's option, by payment in kind
of additional shares of the same series of preferred stock at a
rate of 10% per annum. At December 31, 2003 and through the conversion
dates specified below, the outstanding balance of the Series B Preferred
Stock has been increased by $1.2 million (11,987 shares) and $1.5
million (15,133 shares), respectively, for dividends paid in kind.
The Series B Preferred Stock was redeemable at varying prices in
whole or in part at the holders' option after three years or at
the Company's option at any time. The Series B Preferred Stock also
participated in any dividends declared on the common stock. Holders
of the Series B Preferred Stock would have received a liquidation
preference upon the liquidation of, or certain mergers or sales
of substantially all assets involving,
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