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by certain production equipment in the amount of $0.1 million. The lease is payable
in 36 monthly payments of $2,179 including interest at 6.0% per annum. We have
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 2004
and 2005 amounted to $46,000 and $42,000, respectively, and accumulated depreciation
on the leased equipment at December 31, 2004 and 2005 amounted to $124,000 and
$166,000, respectively. Senior Subordinated Notes and
Related Securities We previously issued 9% Senior
Subordinated Notes due 2007 (the “Senior Subordinated Notes”). On July 21, 2005,
the Senior Subordinated Notes were repaid in full in connection with entering
into the Second Lien Credit Facility. See “Financing Arrangements - Second Lien
Credit Facility and Refinancing.” In December 1999,
we consummated the sale of $22.0 million principal amount of the Subordinated
Notes and $8.0 million of common stock and warrants. We 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 our 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 was amortized
over the life of the notes. Interest payments were due quarterly commencing on
March 31, 2000. As amended and described below, the Subordinated Notes allowed
us, by annual election and we have historically elected, to increase the amount
of the Subordinated Notes by 60% of the interest which would otherwise be payable
in cash through December 15, 2006. As of December 31, 2003 and 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. Concurrently with the sale
of the Subordinated Notes, we sold to the original purchasers shares of our common
stock. 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 fee
equal to 0.5% of the principal then outstanding, (4) an increase and extension
on the prepayment premium on the Subordinated Notes, (5) a modification of a covenant
regarding maximum quarterly leverage that our Total Debt will not exceed 3.5 times
EBITDA (as such terms are defined in the securities purchase agreement related
to the Subordinated Notes) for the last 12 months at any time and (6) additional
flexibility to obtain a separate project financing facility in the future. The
amendment fee was amortized over the remaining life of the Subordinated Notes
using the effective interest method. We were subject
to certain other covenants under the terms under 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 our capital
expenditures to an amount equal to our EBITDA for the immediately prior fiscal
year (unless approved by our Board of Directors) and (d) a limitation on our Total
Debt (as defined in the securities purchase agreement related to the Subordinated
Notes) to 3.5 times EBITDA for any twelve month period. Senior
Secured Subordinated Notes We previously issued
10% Senior Secured Subordinated Notes due 2008 (the “Senior Secured Notes”). On
July 21, 2005, the Senior Secured Notes were repaid in full in connection with
entering into the Second Lien Credit Facility. See “Financing Arrangements - Second
Lien Credit Facility and Refinancing.” On October 29, 2004, we 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, we could issue up to $28 million aggregate principal
amount of our 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 and May 31,
2005, the Senior Secured Notes Purchaser purchased $18.0 million and $4.0 million
aggregate principal amount of the Senior Secured Notes for a purchase price of
$16.2 million and $3.6 million, respectively. The debt discounts were amortized
to interest expense using the effective interest method over the life of the notes.
The Senior Secured Notes were secured by a second lien
on substantially all of our current proved producing reserves and nonreserve assets,
guaranteed by our subsidiary, and subordinated to our obligations under the Credit
Facility. The Senior Secured Notes bore 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 was due December 15, 2008,
and we had the option to prepay the Senior Secured Notes at any time. The Senior
Secured Notes included an option that allowed us to pay-in-kind 50% of | |
