As filed with the Securities and Exchange Commission on December 19, 1996
Registration No.-----------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PANACO, Inc.
(Exact name of registrant as specified in its charter)
Delaware 1311 43-1593374
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1050 West Blue Ridge Boulevard
PANACO Building
Kansas City, Missouri 64145-1216
(816) 942-6300
(Address, including ZIP code, and telephone number,
including area code, of registrant's principal executive offices)
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Copies to:
Steven H. Goodman, Esq. Louis J. Bevilacqua, Esq.
Shughart Thomson & Kilroy, P.C. Cadwalader, Wickersham & Taft
Twelve Wyandotte Plaza 100 Maiden Lane
120 West 12th Street New York, New York 10038
Kansas City, Missouri 64105
As soon as practicable after Effectiveness of this Registration Statement
(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following: [ ] If this form is filed to register additional
securities for an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering: [ ] If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier registration statement for the
same offering: [ ] If delivery of this prospectus is expected to be made
pursuant to Rule 434, please check the following: [ ]
<TABLE>
Calculation of Registration Fee
<CAPTION>
- ---------------------------- ----------------- ------------------------- ------------------------- -------------------------
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to be Amount to be Offering Aggregate Amount of
Registered Registered (1) Price per Share (2) Offering Price Registration Fees
- ---------------------------- ----------------- ------------------------- ------------------------- -------------------------
- ---------------------------- ----------------- ------------------------- ------------------------- -------------------------
<S> <C>
Common Stock, par 9,663,801
value, $.01 per share. Shares $5.50 $53,150,905.00 $16,106.33
- ---------------------------- ----------------- ------------------------- ------------------------- -------------------------
</TABLE>
(1) Based upon the maximum number of shares that may be sold in the
transactions described herein.
(2) Estimated in accordance with Rule 457(g) & (c).
--------------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall be become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS-REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Location in Prospectus of
Information Required by Items of Form S-1
<TABLE>
<CAPTION>
Number and Caption Location in Prospectus
1. Forepart of the Registration Statement
<S> <C> <C> <C> <C> <C> <C>
and Outside Front Cover Page of
Prospectus........................................... Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................................. Inside Front Cover Page; Other Matters
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges................... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................................... Use of Proceeds
5. Determination of Offering Price.......................... Use of Proceeds
6. Dilution................................................. *
7. Selling Security Holders................................. Principal Shareholders; Selling Shareholders
8. Plan of Distribution..................................... Underwriting
9. Description of Securities to be Registered............... Front Cover Page; Description of
Capital Shares and Other Securities
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information With Respect to the Registrant............... Front Cover Page; Prospectus Summary;
The Company; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Management; Description of
Capital Shares and Other Securities; Index
to Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities......... Other Matters
</TABLE>
*Omitted because answer is not applicable or negative.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
Subject to Completion, Dated December 19, 1996.
<PAGE>
PROSPECTUS
(Subject to Completion)
[LOGO]
8,403,305 Common Shares
-------------------
Of the up to 8,403,305 Common Shares, par value $.01 per share (the "Common
Shares"), offered hereby (this "Offering"), 6,000,000 Common Shares are being
offered and sold by the Company and 2,403,305 are being sold directly by the
Selling Shareholders. See "Selling Shareholders." The Company will not receive
any proceeds from the sale of Common Shares by the Selling Shareholders.
The Common Shares are traded on the NASDAQ National Market under the symbol
"PANA". On December 18, 1996, the last reported sale price of the Common Shares
was $5.125 per share. See "Description of Capital Stock Market Prices".
The Common shares are being offered through the Underwriters on a best
efforts basis. The Offering will terminate on , unless extended by the Company
and the Underwriters.
An investment in the Common Shares offered hereby involves a high
degree of risk. See "Risk Factors" beginning on page 5 for
certain considerations relevant to an investment in the Common
Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
Proceeds to the
Price to Underwriting Proceeds to Selling
Public Discount (1) Company(2) Shareholders (3)
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
<S> <C>
Per Share ......... $ $ $ $
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
Total (4) ........... $ $ $ $
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting".
(2) Before deducting expenses payable by the Company, estimated to be $ .
(3) Before deducting expenses payable by the Selling Shareholders,
estimated to be $ .
(4) The Company has granted the Underwriters a 30-day option to purchase up
to an aggregate of 1,260,496 additional Common Shares solely to cover
over-allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting".
--------------------
The shares of Common Shares are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and reject orders in whole or in part. It is expected that
delivery of the shares of Common Shares offered hereby will be made in New York,
New York on or about , 1996.
Nolan Securities Corporation
The date of this Prospectus is , 1996
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless the context otherwise requires, references
in this Prospectus to the "Company" shall mean PANACO, Inc. and its
predecessors. Unless otherwise noted herein, the information contained in this
Prospectus assumes the Underwriters' over-allotment option will not be
exercised. An investment in the Common Shares offered hereby involves a high
degree of risk. Investors should carefully consider the information set forth
under the heading "Risk Factors". See "Glossary of Selected Oil and Gas Terms"
for the definitions of certain terms used in this Prospectus.
The Company
PANACO, INC. (the "Company") is a Delaware corporation, incorporated
October 4, 1991. When used herein the word "Company" includes its predecessor
Pan Petroleum MLP, which merged into the Company on September 1, 1992. The
Company is in the oil and gas business, acquiring, developing and operating
offshore oil and gas properties in the Gulf of Mexico. Including the recently
acquired Amoco Properties (as defined herein) and excluding the Bayou Sorrel
Field (as defined herein) which was recently sold, the Company owned oil and gas
properties containing, as of November 1, 1996, Proved Reserves of 2,920,000
Bbls of oil and 64,925,000 Mcf of gas. The SEC 10 Value of such Proved Reserves
as of September 1, 1996 was $128,092,000. See "Risk Factors - Estimates of
Reserves and Future Net Revenue." The Company operates 52 offshore wells and
owns interests in 71 offshore wells operated by others. It operates nine of the
twenty-five offshore blocks in which it owns an interest. In addition the
Company owns and operates some onshore properties which generate less than 3% of
its revenues. For a description of the properties owned and the activities
conducted by the Company, see "The Company" and "Property."
Common Shares are quoted on the NASDAQ-National Market under the symbol
"PANA".
The Company's Board of Directors consists of nine persons, three of which
are employees of the Company. See "Management - Officers and Directors."
The Company's headquarters are located at 1050 West Blue Ridge Boulevard,
PANACO Building, Kansas City, Missouri 64145-1216, and its telephone number at
such offices is (816)942-6300, FAX (816) 942-6305. The Houston office is located
at 1100 Louisiana, Suite 5110, Houston, Texas 77002-5220, and the telephone
number is (713) 652-5110, FAX (713) 651-0928.
Business Strategy
The Company's objective is to enhance shareholder value through sustained
growth in its reserve base, production levels and resulting cash flows from
operations. In pursuing this objective, the Company maintains a geographic focus
in the Gulf of Mexico and identifies properties that may be acquired preferably
through negotiated transactions or, if necessary, sealed bid transactions. The
properties the Company seeks to acquire generally are geologically complex, with
multiple reservoirs, have an established production history and are candidates
for exploitation. Geologically complex fields with multiple reservoirs are
fields in which there are multiple reservoirs at different depths and wells
which penetrate more than one reservoir, that have the potential for
recompletion in more than one reservoir. Once properties are acquired, the
Company focuses on reducing operating costs and implementing production
enhancements through the application of technologically advanced production and
recompletion techniques. Over the past five years, the Company has taken
advantage of opportunities to acquire interests in a number of producing
properties which fit these criteria.
<PAGE>
Recent Developments
Amoco Acquisition
On October 8, 1996, the Company closed on its acquisition of interests in
six offshore fields from Amoco Production Company for $40.4 million (the "Amoco
Acquisition"). In consideration for such interests, the Company issued Amoco
2,000,000 Common Shares and paid the sum of $32 million in cash. The interests
acquired include (1) a 33.3% working interest in the East Breaks 160 Field (2
Blocks) and a 33.3% interest in the High Island 302 Field, both operated by
Unocal Corporation; (2) an average 50% interest in the High Island 309 Field (2
Blocks), a 12% interest in the High Island 330 Field (3 Blocks) and a 12%
interest in the High Island 474 Field (4 Blocks), all operated by Phillips
Petroleum Company; and (3) a 12.5% interest in the West Cameron 180 Field (1
Block) operated by Texaco (collectively the "Amoco Properties"). Current
production, for the interests acquired, is 680 barrels of oil per day and 12
MMcf of natural gas per day. See "Amoco Acquisition."
Explosion and Fire
The Company experienced an explosion and fire on April 24, 1996 at its Tank
Battery #3 located in the Company's West Delta oil and gas fields (the "West
Delta Fields"), resulting in production from the West Delta Fields being shut-in
through October 7, 1996, when production was resumed. The loss of 67 days of
production in the second quarter and the entire third quarter was a principal
contributor to the loss of $.19 per share for the second and third quarters of
1996. Until final resolution of the total repair costs the insurance company is
advancing funds to assist the Company in paying for repairs. There is no
assurance that the Company's repair costs will be fully covered by such
insurance or that the Company's insurance carriers may not seek reimbursement
of some of their advances. The Company is considering filing suits against the
employers of the persons who caused the incidents. No assurance can be given
that the company will successfully recover any amounts sought in any such suits.
The repair expenditures on Tank Battery #3, with the delay in insurance
advances, also decreased working capital and increased long-term debt.
Sale of Bayou Sorrel
Effective September 1, 1996 the Company sold its interest in the Bayou
Sorrel oil and gas field ( the "Bayou Sorrel Field") to National Energy Group,
Inc. for $11 million. The Company received $9 million in cash and $2 million in
shares of National Energy Group, Inc. common stock. The Company also retained a
3% overriding royalty interest in the deep rights of the field below 11,000
feet.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Shares offered by the Company................................. 6,000,000 shares (a)
Common Shares offered by the Selling Shareholders.................... 2,403,305 shares
Common Shares offered hereby......................................... 8,403,305 shares (a)
Common Shares to be outstanding after this Offering..................20,350,255 shares (a)(b)
Use of Proceeds......................................................For repayment of existing long term debt,
development of existing oil and gas
properties and acquisition of additional oil
and gas properties.
</TABLE>
NASDAQ National Market Symbol........................................PANA
(a) Exclusive of the Underwriters' Over-Allotment Option of 1,260,496
shares.
(b) Excludes 289,365 Common Shares issuable upon the exercise of
outstanding warrants, 2,060,606 issuable upon the conversion of the Tranche A
Convertible Subordinated Notes, and up to 840,330 Common Shares which would be
issuable upon the exercise of warrants to be issued to the Underwriters should
all of the Common Shares offered hereby be sold, assuming no exercise of the
Underwriters' Over- Allotment Option.
<PAGE>
Summary Financial Data
The following table sets forth summaries of certain selected historical
financial and reserve information for the Company as of the dates and for the
periods indicated. Effective December 31, 1995, the Company changed its method
of accounting for oil and gas operations from the full cost method to the
successful efforts method. Prior periods have been restated to give effect to
this change. Future results may vary significantly from the amounts reflected in
the information set forth hereafter because of, among other reasons, normal
production declines, acquisitions, and changes in the price of oil and gas. See
"Risk Factors - Estimates of Reserves and Future Net Revenues" and "Risk Factors
- - Recent Changes in Oil and Gas Prices."
<TABLE>
<CAPTION>
As of and For the Nine Months As of and For the Year
Ended September 30, Ended December 31,
(unaudited)
1996(a) 1995 1995 1994 1993
--------------- -------------- ---------------- ------------------ -----------
Operations Data
<S> <C> <C> <C> <C> <C>
Oil & Gas Sales............... $ 13,257,000 13,660,000 18,447,000 17,338,000 12,605,000
Funds Provided By
Operations(b)........... 6,782,000 7,121,000 9,314,000 11,101,000 6,554,000
Exploration Expenses.......... 0 2,174,000 8,112,000 0 0
Provision for losses and
(gains) on disposition of
and write-down of asset....... 0 0 751,000 1,202,000 3,824,000
Depletion, depreciation &
amortization.......... 4,981,000 6,277,000 8,064,000 6,038,000 4,288,000
Net income (loss)............. (618,000) (2,492,000) (9,290,000) 1,115,000 (3,986,000)
Net Income (loss) per share (0.05) (.21) (.81) .11 (.53)
Balance Sheet Data
Oil and gas properties, net... $ 25,489,000 21,515,000 29,485,000 23,945,000 19,183,000
Total assets.................. 44,444,000 26,795,000 36,169,000 29,095,000 24,432,000
Long-term debt................ 25,137,000 8,865,000 22,390,000 12,500,000 12,465,000
Stockholders' equity.......... 10,498,000 15,335,000 9,174,000 14,882,000 8,744,000
Book value per share.......... $ .85 1.38 .80 1.46 1.07
Oil and Gas Data
Production:
Oil and condensates (Bbls)....... 203,000 122,000 170,000 137,000 180,000
Gas (Mcf)..................... 4,590,000 7,578,000 9,850,000 8,139,000 5,586,000
Estimated Proved
Reserves:
Oil and condensates (Bbls)(c).... 2,920,000 --- 900,000 943,000 745,000
Gas (Mcf)(c).................. 64,925,000 --- 46,711,000 41,582,000 43,696,000
SEC 10 Value(c)................ $ 128,092,000 --- 72,432,000 47,159,000 58,185,000
</TABLE>
(a) Results for the period ended September 30, 1996, were substantially
affected by the explosion and fire. See "Recent Explosion and Fire". Such
results include the results of operations through August 31 for the Bayou Sorrel
Field, which the Company sold effective September 1.
(b) Funds provided by operations is revenues less lease operating expenses
and production and ad valorem taxes.
(c) Reserve information was not prepared as of September 30, 1996 and 1995.
Information shown is from a reserve report prepared by the Company as of
November 1, 1996, which includes the recent effect of
<PAGE>
the Amoco Acquisition and excludes the Bayou Sorrel Field, which was recently
sold. No reserve reports were prepared as of November 1, 1996 by independent
petroleum engineers. The reserve information for the years ended December 31,
1995, 1994 and 1993 was derived by the Company from reports prepared by the
Company's independent petroleum engineers. See "Risk Factors - Estimates of
Reserves and Future Net Reserves."
RISK FACTORS
Prospective investors should carefully read this entire document and
should give particular attention to the following risk factors.
Large Shareholders
Richard A. Kayne controls four of the six lenders who invested through
Kayne, Anderson Investment Management, Inc. with respect to the 1993
Subordinated Notes (the "1993 Subordinated Notes"). These four lenders own
694,047 of the 816,526 shares acquired upon exercise of warrants held by the six
lenders. Mr. Kayne also controls five of the eight lenders on the 1996 Tranche A
Convertible Subordinated Notes (the "1996 Tranche A Convertible Subordinated
Notes"), which could acquire 1,466,667 of the 2,060,606 shares issuable upon
conversion of such Notes. See "The Company - Funding of Business Activities -
Borrowings and Obligations," for information with respect to these transactions.
Carl C. Icahn controls High River Limited Partnership which owns 1,095,000
shares. Because of the substantial holdings of these shareholders, they may be
able to influence the outcome of votes on various matters, including the
election of directors, extraordinary corporate transactions, and certain
business combinations. See "Principal Shareholders".
Anti-takeover Provisions
Documents governing the Company's affairs provide for or contain several
procedures, provisions, and plans designed to reduce the likelihood of a change
in the management or voting control of the Company without the consent of the
then incumbent Board of Directors, including a classified Board of Directors,
"fair price" provisions, the ability of the Board of Directors to issue classes
or series of preferred shares, restrictions on the ability of shareholders to
call meetings and propose business at meetings of the common shareholders,
restrictions on the ability of shareholders to approve actions or proposals by
written consent rather than at meetings and acceleration of vesting provisions
in stock award and option plans upon a change in control. These provisions may
have the effect of reducing interest in the Company as a potential acquisition
target or encouraging persons considering an acquisition or takeover of the
Company to negotiate with the Company's Board of Directors rather than pursue
non-negotiated acquisition or takeover attempts, although no assurance can be
given that they will have that effect.
In 1995, the Company adopted a Shareholder Right Plan which may have the
effect of discouraging non-negotiated takeover attempts.
In addition, the Company chose to be governed by Section 203 of the
Delaware General Corporation Law, which prohibits business combination between
the Company and any interested shareholder of the Company for a period of three
years following the date on which that shareholder became an owner of 15% or
more of the outstanding voting shares of the Company unless certain statutory
exceptions are satisfied. Section 203 may also have the effect of discouraging
non-negotiated takeover attempts.
For a discussion of documents and provisions with potential anti-takeover
effects, see "The Company Funding of Business Activities - Borrowings and
Obligation," "Management - Other Compensation Arrangements - Long-term Incentive
Plan," "Description of Capital Shares - Certain Anti-takeover Provisions," and
"Description of Capital Shares - Shareholder Rights Plan."
<PAGE>
Future Issuances of Shares
Of the 40,000,000 Common Shares, 14,350,255 are presently issued, leaving
25,649,745 shares which may be issued without further approval from the
shareholders. If the Company issues additional Common Shares or preferred
shares, the interest in the assets, liabilities, cash flows, and results of
operations of the Company represented by the Common Shares may be diluted.
Additional issuances may occur for many reasons, including pursuant to the
Company's Long-term Incentive Plan described in "Management - Other Compensation
Arrangements - Long-term Incentive Plan." As of the date hereof there are
outstanding warrants to acquire 289,365 Common Shares, exercisable at prices per
share ranging from $2.00 to $2.375. In connection with this Offering the
Underwriters will receive warrants to acquire up to 840,330 Common Shares at the
price at which Common Shares are sold hereunder, which warrants are exercisable
any time within two years of the date of this Prospectus. The exercise of such
warrants would likely occur primarily when the exercise prices are below the
then current market prices. After the expiration of 180 days following the
conclusion of this offering, the Tranche A Convertible Subordinated Notes are
convertible into 2,060,606 Common Shares, at $4.125 per share.
General Market Conditions
Revenues generated from the oil and gas operations of the Company are
highly dependent on the future prices of and demand for oil and gas. Various
factors beyond the control of the Company affect prices of oil, gas, and natural
gas liquids, including the worldwide supply of oil and gas, the ability of the
members of OPEC to agree to and maintain production controls, political
instability or armed conflict in oil-producing regions, the price of foreign
imports, the levels of consumer demand, the price and availability of
alternative fuels and changes in existing regulation. Prices for oil, gas, and
natural gas liquids have fluctuated greatly during the past few years, and
markets for oil, natural gas, and natural gas liquids continue to be volatile.
The currently unsettled energy markets make it particularly difficult to
estimate future prices of oil, natural gas, and natural gas liquids, and any
assumptions about future prices may prove incorrect. In addition, demand for
natural gas and fuel oil can fluctuate significantly with seasonal and annual
variations in weather patterns because those products are used in large part as
heating fuels. See "Risk Factors - Estimates of Reserves and Future Net
Revenues" and "The Company - Competition, Markets and Regulation".
Hedging of Production
The Company's lenders have generally required it to reduce its exposure to
the volatility of crude oil and natural gas prices by hedging a portion of its
production. In a typical hedge transaction, the Company will have the right to
receive from the counter party to the hedge, the excess of the fixed price
specified in the hedge over a floating price. If the floating price exceeds the
fixed price, the Company is required to pay the counter party this difference
multiplied by the quantity hedged, regardless of whether the Company has
sufficient production to cover the quantities specified in the hedge.
Significant reductions in production at times when the floating price exceeds
the fixed price could require the Company to make payments under the hedge
agreements even though such payments are not offset by sales of production.
However, the Company hedges up to, but not more than, 50% of its anticipated
production. Hedging will also prevent the Company from receiving the full
advantage of increases in crude oil or natural gas prices above the fixed amount
specified in the hedge.
Historical Operating Losses
The Company has sustained losses in two of the past three years, 1993 and
1995. No assurance may be given that the Company will be profitable in the
future. The Company sustained losses in 1993 and 1995 primarily as a result of
an accounting change in 1995 that required property write-downs in both years
and expensing of three unsuccessful exploratory wells in 1995. On April 24,
1996, the Company experienced an explosion and fire at its West Delta Tank
Battery #3 which has been the primary factor in a loss through September 30,
1996 of $.05 per share. As such, the Company can not assure a profit will result
for the year ended December 31, 1996. Due to the change in accounting method,
any future unsuccessful exploratory wells, as well as adverse events beyond
management's control, such as the fire, could also result in losses.
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
thereto included elsewhere herein.
Risks of Development, Exploration, and Other Activities
The Company engages in exploration activities on Undeveloped Acreage,
drills development wells, and reworks and recompletes wells on the properties it
owns as well as on properties it may acquire, and anticipates that it will
expend a significant portion of its net cash flow for those activities. See "The
Company - Acquisition, Development and Other Activities." Those activities
involve a significant degree of risk. For example, the drilling of exploratory
and development wells involves risks such as encountering unusual or unexpected
formations, pressures, and other conditions that could result in the Company
incurring substantial losses. In addition, all drilling is subject to the risk
of dry holes or a failure to produce oil or gas in commercial quantities. The
degree of risk will vary depending on the geological features of the area.
Other Operating Risks
The Company is also subject to all the operating hazards and risks
normally incident to drilling for or producing, processing and transporting oil
and gas, including blowouts, pollution, and fires, each of which could result in
damage to or destruction of oil and gas wells, producing formations, production,
pipeline, or processing plants, or persons or other property. Although the
Company maintains insurance coverage that is similar to that maintained by
comparable companies in the oil and gas industry, there can be no assurance that
the coverage will be adequate to insure fully against all risks.
Replacement of Reserves
In general, the volume of production from natural gas and oil properties
declines as reserves are depleted. Except to the extent the Company acquires
properties containing proved reserves or conducts successful development and
exploration activities, or both, the proved reserves of the Company will decline
as reserves are produced. The Company's future natural gas and oil production
is, therefore, highly dependent upon its level of success in finding or
acquiring additional reserves. The business of exploring for, developing or
acquiring reserves is capital intensive. To the extent cash flow from operations
is reduced and external sources of capital become limited or unavailable, the
Company's ability to make the necessary capital investments to maintain or
expand its asset base of natural gas and oil reserves could be impaired. In
addition, there can be no assurance that the Company's future development,
acquisition and exploration activities will result in additional proved reserves
or that the Company will be able to drill productive wells at acceptable costs.
Estimates of Reserves and Future Net Revenues
Numerous uncertainties exist in estimating quantities of Proved Reserves
and future net revenues. Oil and gas engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot be measured
exactly. The accuracy of any reserve estimate is a result of the quality of
available geologic and engineering data, geological interpretation, and
judgment. Actual results of drilling, testing, and production after the date of
an estimate may indicate the need to revise the estimate. In addition, the
prices used affect the calculation of quantities of reserves and future net
revenues. A higher price can generally result in a longer estimated economic
life for reserves and can increase estimated future net revenues because both
the estimated reserves are larger and the price per reserve unit (Bbl or Mcf) is
higher. Reserve reports as of November 1, 1996 were prepared by the Company.
Reserve information for the years ended December 31, 1995, 1994 and 1993 was
derived by the Company from reports prepared by the Company's independent
petroleum engineers.
SEC 10 Values presented in certain disclosures of reserves and the present
value of estimated future net revenues represent a reporting convention adopted
by the SEC that uses prices at the date of the reserve presentation and a 10%
discount rate. While SEC 10 Values provide a common basis for comparing oil and
<PAGE>
gas companies subject to the rules and regulations of the SEC, the use of prices
on the presentation date may not represent the prices ordinarily received or
that will be received for oil and gas because of seasonal price fluctuations or
other varying market conditions. SEC 10 Values are not necessarily indicative of
future results of operations. Accordingly, reserve estimates set forth herein
may be materially different from the quantities of oil and gas that are
ultimately recovered, and estimates of future net revenues may also be
materially different from the net revenues that are ultimately received.
Acquisitions
Although acquisitions of oil and gas properties with Proved Reserves
involve less risk than are inherent in exploratory or developmental drilling,
the criteria on which decisions to acquire properties are usually based (such as
the estimates of reserve quantities and the projections of future rates of
production, future development and production costs, and prices to be received
on sale) may prove to be incorrect, and consequently adversely affect the
profitability of an acquisition. The Company intends to continue acquiring oil
and gas properties. Although the Company performs a review of the properties to
be acquired that it believes is consistent with industry practices, such reviews
are inherently incomplete. Generally, it is not feasible to review in-depth
every individual property involved in each acquisition. Ordinarily, the Company
will focus its review efforts on the higher-valued properties and will sample
the remainder. However, even an in-depth review of all properties and records
may not necessarily reveal existing or potential problems nor will it permit a
buyer to become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections may not always be performed on every
facility, and environmental problems are not necessarily observable even when an
inspection is undertaken. Furthermore, the Company must rely on information,
including financial, operating and geological information, provided by the
seller of the properties without being able to verify fully all such information
and without the benefit of knowing the history of operations of all such
properties.
Environmental Risks
The discharge of oil, gas, or other pollutants into the air, soil, or
water may give rise to liability to the government or third parties and may
require the Company to incur costs to remedy the discharge. Oil or gas may be
discharged in many ways, including from a well or drilling equipment at a drill
site, leakage from pipelines or other gathering and transportation facilities,
leakage from storage tanks, and sudden discharges from damage or explosion at
processing plants or oil or gas wells. Hydrocarbons tend to degrade slowly in
soil and water, which makes remediation costly, and discharged hydrocarbons may
migrate through soil to water supplies or adjoining property, giving rise to
additional liabilities. A variety of federal and state laws and regulations
govern the environmental aspects of oil and gas production, transportation, and
processing and may, in addition to other law, impose liability in the event of
discharges (whether or not accidental), a failure to notify the proper
authorities of a discharge, and other noncompliance with those laws. The Company
has both an offshore Regional Spill Response Plan (RSRP) and onshore Spill
Prevention Control Countermeasure Plans (SPCC). Environmental laws may also
affect the costs of the Company's acquisitions of oil and gas properties.
The Company does not believe that its environmental risks are materially
different from those of comparable companies in the oil and gas industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future, result in a curtailment of production or processing or a material
increase in the costs of production, development, or exploration or otherwise
adversely affect the Company's operations and financial condition. Pollution and
similar environmental risks generally are not fully insurable.
Governmental Regulation
The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for and development and
production of oil and gas, as well as environmental and safety matters. Such
laws and regulations have generally become more stringent in recent years, often
imposing greater liability on a larger number of potentially responsible
parties. Because the requirements imposed by such laws
<PAGE>
and regulations are frequently changed, the Company is unable to predict the
ultimate cost of compliance with such requirements and their effect on the
Company. See "The Company - Competition, Markets, Seasonality and Regulation".
Dependence On Key Personnel
The success of the Company will depend almost entirely upon the ability
of a small group of key executives to manage the business of the Company. Should
one or more of these executives leave the Company or become unable to perform
his duties, no assurance can be given that the Company will be able to attract
competent new management. The key executives do not have employment contracts
and the Company does not have "key man" life insurance.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
6,000,000 Common Shares sold hereby (assuming an offering price of $5.125 per
share) are estimated to be approximately $28,598,000 ($37,137,437 if the
Over-Allotment Option is exercised in full) after deducting the anticipated
underwriting discount and estimated offering expenses. The Company intends to
use $5 million to repay the 1993 Subordinated Notes, which carry an interest
rate of 12% (due December 31, 1999), and are repayable at any time. These
borrowings were made to finance development activities. The Company intends to
also prepay $8.5 million of the Tranche B Bridge Loan Subordinated Notes of
October 8, 1996, which carry an interest rate of 12% until August 8, 1997 (14%
thereafter), are due October 8, 2003, and are prepayable at any time. These
funds were borrowed in connection with the Amoco Acquisition. The remaining net
proceeds of this offering will be used to develop the properties acquired in the
Amoco Acquisition, particularly High Island 474 Field, 309 Field, and 330 Field.
Any further remaining net proceeds will be used for general corporate purposes,
including further development of properties owned by the Company in the Gulf of
Mexico, and for further acquisitions of properties in the Gulf of Mexico deemed
appropriate by management. Although the Company actively reviews oil and gas
acquisition candidates, it has not identified any specific acquisitions at this
time, and no assurances can be made that the Company will be able to identify
and consummate acquisitions that it deems suitable. Pending such use, the net
proceeds will be used to pay down the Company's Bank Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources". See "The Company - Funding of Business
Activities - Borrowings and Obligations."
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at November 30, 1996, and as adjusted to reflect the issuance of the
Common Shares offered by the Company hereby at an assumed price of $5.125 per
share and the application of the net proceeds therefrom as described in "Use of
Proceeds". This table should be read in conjunction with the consolidated
financial statements of the Company, including the notes thereto, contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
November 30, 1996
Actual As Adjusted
<S> <C> <C>
Long-term debt (less current maturities) $ 49,000 $ 35,500
Stockholders' Equity:
Preferred shares, $.01 par value, 5,000,000
shares authorized; none issued or outstanding --- ---
Common Shares, $.01 par value, 40,000,000
shares authorized; 14,350,255 shares issued
and outstanding (20,350,255 as adjusted)(1)(2) 143 203
Additional paid-in capital 31,470 60,008
Retained Earnings (deficit) (10,214) ( 10,214)
--------- ------------
Total Stockholders' Equity 21,399 49,997
---------- ------------
Total capitalization $ 70,399 $ 85,497
=========== ==============
</TABLE>
(1) Excludes 289,365 Common Shares issuable upon the exercise of outstanding
warrants, 2,060,606 issuable upon the conversion of the Tranche A
Convertible Subordinated Notes, and up to 840,330 Common Shares which
would be issuable upon the exercise of warrants to be issued to the
Underwriters should all of the Common Shares offered hereby be sold
(assuming no exercise of the Underwriters' Over-Allotment Option).
(2) Exclusive of the Underwriters' Over-Allotment Option of 1,260,496 Shares.
<PAGE>
PRICE RANGE OF COMMON SHARES
The Common Shares are quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ")-National Market, under the
symbol "PANA". They commenced trading September 21, 1989. The following table
sets forth, for the periods indicated, the high and low closing bid for the
Common Shares. Information for fourth quarter 1996 is through December 18th.
1994
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
High 3 5/8 4 3/8 4 5/8 4 1/4
Low 2 9/16 2 15/16 3 1/2 3 5/8
1995
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
High 4 5/16 4 7/8 5 5/16 5
Low 3 5/8 4 4 1/8 4
1996
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
High 5 4 1/2 6 6 3/8
Low 3 7/16 3 11/16 3 3/8 4 9/16
On December 18, 1996, the last sale price of the Common Shares as reported
on the NASDAQ- NM was $5.125 per share. There are approximately 6,000
shareholders of the Common Shares.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Shares. The
Delaware General Corporation Law, to which the Company is subject, permits the
Company to pay dividends only out of its capital surplus (the excess of net
assets over the aggregate par value of all outstanding capital shares) or out of
net profits for the fiscal year in which the dividend is declared or the
preceding fiscal year. The Bank Facility and the Subordinated Notes require the
consent of the lenders to any dividends or distributions by the Company and to
any purchases by the Company of Common Shares. The Company retains its earnings
and cash flow to finance the expansion and development of its business and
currently does not intend to pay dividends on the Common Shares. Any future
payments of dividends will depend on, among other factors, the earnings, cash
flow, financial condition, and capital requirements of the Company.
PRO FORMA FINANCIAL INFORMATION
On October 8,1996, the Company completed the acquisition of interests
in thirteen offshore blocks comprising six fields in the Gulf of Mexico from
Amoco Production Company. Proved reserves at September 1, 1996 attributable to
the Amoco Properties were, net to the Company's interests, 1,953,000 barrels of
oil and condensate and 28.6 Bcf of natural gas, based upon internal reserve
reports prepared by the Company.
<PAGE>
The purchase price for the assets acquired in this transaction was $40.4
million, paid by the issuance of 2,000,000 Common Shares and by payment to Amoco
of $32 million in cash. Concurrently with this transaction the Company entered
into a new Bank Facility with First Union National Bank of North Carolina and
Banque Paribas under which its reducing revolver was increased to $40 million,
with an initial borrowing base of $35 million. In addition to that facility, the
Company borrowed $17 million pursuant to Tranche A Convertible and the Tranche B
Bridge Loan Subordinated Notes, provided by lenders investing through Kayne,
Anderson Investment Management, Inc.
On July 26, 1995, the Company completed the acquisition of all of the
offshore oil and gas properties in the Gulf of Mexico owned by Zapata
Exploration Company, the "Zapata Properties." Proved reserves at December 31,
1994 attributable to the oil and gas interests acquired, net to the Company's
interest, were 308,000 barrels of oil and 27.8 Bcf of natural gas, based upon a
rolling forward of reserve reports of Zapata's independent petroleum engineers
as of October 1, 1994. The purchase price for the Zapata properties and a
related receivable of $174,000 ($84,000 at December 31, 1995) was $2,748,000 in
cash and an obligation to pay a production payment to Zapata based on future
production. See "Properties - Zapata Properties."
On November 22, 1996, the Company completed its sale of the Bayou Sorrel
Field to National Energy Group, Inc. for a sales price of $11 million,
consisting of $9,000,000 in cash and $2 million in National Energy Group, Inc.
common stock.
Effective December 31, 1995, the Company changed its method of
accounting for oil and gas operations from the full cost method to the
successful efforts method. The information provided in the Pro Forma Financial
Statements reflects this change.
<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc.
Pro Forma Combined Balance Sheet
As of September 30, 1996
(Amounts in thousands except number of shares )
(Unaudited)
Amoco Bayou
PANACO, Inc. Properties Sorrel
As of Pro Forma PANACO, Inc. Pro Forma PANACO, Inc.
ASSETS 9/30/96 Adjustments Pro Forma Adjustments Pro Forma
(Note 1) (Note 2) Combined (Note 3) Combined
---------------------------------------------------------------------------
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $766 $766 $766
Accounts receivable 4,435 4,435 4,435
Accounts receivable - sale of 0 0
Bayou Sorrel Field 11,152 11,152 (11,152) 0
Prepaid expenses 359 359 359
National Energy Group Common Stock 0 0 2,000 2,000
--------------- --------------- ---------------
Total Current Assets 16,712 16,712 7,560
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties 98,015 40,400 138,415 138,415
Less: accumulated depreciation, depletion
and amortization (77,526) (77,526) (77,526)
--------------- --------------- ---------------
Net Oil and Gas Properties 20,489 60,889 60,889
PROPERTY, PLANT AND EQUIPMENT (net) 126 126 126
OTHER ASSETS
Restricted deposits 1,733 1,733 1,733
Other 384 384 384
--------------- --------------- ---------------
Total Other Assets 2,117 2,117 2,117
TOTAL ASSETS $39,444 $79,844 $70,692
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $8,809 $8,809 $8,809
Current portion of long-term debt 0 0 0
--------------- --------------- ---------------
Total Current Liabilities 8,809 8,809 8,809
LONG-TERM DEBT 20,137 32,000 52,137 (9,152) 42,985
STOCKHOLDERS' EQUITY
Preferred stock, ($.01 par value,
5,000,000 shares authorized;
no shares issued and outstanding) 0 0 0
Common stock, ($.01 par value,
40,000,000 shares authorized and
14,350,255 issued and outstanding) 123 20 143 143
Additional paid-in capital 23,090 8,380 31,470 31,470
Retained earnings (deficit) (12,715) 0 (12,715) (12,715)
--------------- --------------- ---------------
Total Stockholders' equity 10,498 18,898 18,898
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,444 $79,844 $70,692
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Pro Forma Combined Statement of Income (Operations)
For the Nine Months Ended September 30, 1996
(Amounts in thousands except per share data)
(Unaudited)
Amoco Bayou
Properties Sorrel
Pro Forma PANACO, Inc. Pro Forma PANACO, Inc.
Amoco Adjustments Pro Forma Adjustments Pro Forma
PANACO, Inc. Properties (Note 2) Combined (Note 3) Combined
--------------------------- ------------- ------------ ---------------------------
REVENUES
<S> <C> <C> <C> <C> <C> <C>
Oil and gas sales $13,257 $11,135 $0 $24,392 ($2,010) $22,382
COSTS AND EXPENSES
Lease operating 6,049 3,158 108 9,315 (733) 8,582
Depreciation, depletion and amortization 4,981 0 5,629 10,610 (888) 9,722
Exploration expenses 0 0 0 0 0 0
Provision for losses and (gains) on
disposition and write-down of assets (4) 0 0 (4) 0 (4)
General and administrative 573 0 0 573 0 573
Production and ad valorem taxes 429 0 0 429 (239) 190
West Delta fire loss 500 0 0 500 0 500
------------ ------------ ------------- ------------ ---------------------------
Total 12,528 3,158 5,737 21,423 (1,860) 19,563
------------ ------------ ------------- ------------ ---------------------------
NET OPERATING INCOME (LOSS) 729 7,977 (5,737) 2,969 (150) 2,819
------------ ------------ ------------- ------------ ---------------------------
OTHER INCOME (EXPENSE)
Interest expense (net) (1,347) 0 (1,389) (2,736) 588 (2,148)
------------ ------------ ------------- ------------ ---------------------------
NET INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (618) 7,977 (7,126) 233 438 671
INCOME TAXES (BENEFIT) 0 0 0 0 0 0
NET INCOME (LOSS) ($618) $7,977 $(7,126) $233 $438 $671
EARNINGS (LOSS) PER COMMON SHARE ($0.05) $0.01 $0.04
Weighted average shares outstanding 12,253 4,061 16,314 16,314
Cash flows from operations $14,648 $13,610
Cash flows from operations per share $0.90 $0.83
Cash flows $11,339 $10,889
Cash flows per share $0.70 $0.67
Note: "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
"Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
disposition and write-down of assets" and any extraordinary items.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc.
Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1995
(Amounts in thousands except per share data)
(Unaudited)
Pro Forma PANACO, Inc.
Zapata Amoco Adjustments Pro Forma
PANACO, Inc. Properties Properties (Note 2) Combined
REVENUES
<S> <C> <C> <C> <C> <C>
Oil and gas sales $18,447 $3,623 $12,528 $0 $34,598
COSTS AND EXPENSES
Lease operating 8,055 1,460 2,991 314 12,820
Depreciation, depletion and amortization 8,064 0 0 10,064 18,128
Exploration expenses 8,112 0 0 0 8,112
Provision for losses and (gains) on
disposition and write-down of assets 751 0 0 0 751
General and administrative 690 0 0 0 690
Production and ad valorem taxes 1,078 0 0 0 1,078
Total 26,750 1,460 2,991 10,378 41,579
NET OPERATING INCOME (LOSS) (8,303) 2,163 9,537 (10,378) (6,981)
OTHER INCOME (EXPENSE)
Interest expense (net) (987) 0 0 (1,921) (2,908)
NET INCOME (LOSS) BEFORE INCOME TAXES (9,290) 2,163 9,537 (12,299) (9,889)
INCOME TAXES (BENEFIT) 0 0 0 0 0
NET INCOME (LOSS) ($9,290) $2,163 $9,537 ($12,299) ($9,889)
EARNINGS (LOSS) PER COMMON SHARE ($0.81) ($0.64)
Weighted average shares outstanding 11,505 4,061 15,566
Cash flows from operations $20,700
Cash flows from operations per share $1.33
Cash flows $8,990
Cash flows per share $0.58
Note: "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
"Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
disposition and write-down of assets" and any extraordinary items.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1994
(Amounts in thousands except per share data)
(Unaudited)
Pro Forma PANACO, Inc.
Zapata Amoco Adjustments Pro Forma
PANACO, Inc. Properties Properties (Note 2) Combined
REVENUES
<S> <C> <C> <C> <C> <C>
Oil and gas sales $17,338 $7,540 $11,135 $0 $36,013
COSTS AND EXPENSES
Lease operating 5,231 3,317 3,158 444 12,150
Depreciation, depletion and amortization 6,038 0 0 8,710 14,748
Exploration expenses 0 0 0 0 0
Provision for losses and (gains) on
disposition and write-down of assets 1,202 0 0 0 1,202
General and administrative 587 0 0 0 587
Production and ad valorem taxes 1,006 0 0 0 1,006
Total 14,064 3,317 3,158 9,154 29,693
NET OPERATING INCOME (LOSS) 3,274 4,223 7,977 (9,154) 6,320
OTHER INCOME (EXPENSE)
Interest expense (net) (1,623) 0 0 (1,757) (3,380)
NET INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 1,651 4,223 7,977 (10,911) 2,940
INCOME TAXES (BENEFIT) 0 0 0 0 0
EXTRAORDINARY ITEM-LOSS ON EARLY
RETIREMENT OF DEBT (536) 0 0 0 (536)
NET INCOME (LOSS) $1,115 $4,223 $7,977 ($10,911) $2,404
EARNINGS (LOSS) PER COMMON SHARE $0.11 $0.17
Weighted average shares outstanding 10,039 4,061 14,100
Cash flows from operations $22,857
Cash flows from operations per share $1.62
Cash flows $18,890
Cash flows per share $1.34
Note: "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
"Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
disposition and write-down of assets" and any extraordinary items.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1993
(Amounts in thousands except per share data)
(Unaudited)
Pro Forma PANACO, Inc.
Zapata Amoco Adjustments Pro Forma
PANACO, Inc. Properties Properties (Note 2) Combined
REVENUES
<S> <C> <C> <C> <C> <C>
Oil and gas sales $12,605 $11,823 $12,079 $0 $36,507
COSTS AND EXPENSES
Lease operating 5,297 3,696 2,798 294 12,085
Depreciation, depletion and amortization 4,288 0 0 8,781 13,069
Exploration expenses 0 0 0 0 0
Provision for losses and (gains) on
disposition and write-down of assets 3,824 0 0 0 3,824
General and administrative 542 0 0 0 542
Production and ad valorem taxes 754 0 0 0 754
Total 14,705 3,696 2,798 9,075 30,274
NET OPERATING INCOME (LOSS) (2,100) 8,127 9,281 (9,075) 6,233
OTHER INCOME (EXPENSE)
Interest expense (net) (1,886) 0 0 (1,641) (3,527)
NET INCOME (LOSS) BEFORE INCOME TAXES (3,986) 8,127 9,281 (10,716) 2,706
INCOME TAXES (BENEFIT) 0 0 0 0 0
NET INCOME (LOSS) ($3,986) $8,127 $9,281 ($10,716) $2,706
EARNINGS (LOSS) PER COMMON SHARE ($0.53) $0.23
Weighted average shares outstanding: 7,584 4,061 11,645
Cash flows from operations $23,668
Cash flows from operations per share $2.03
Cash flows $19,599
Cash flows per share $1.68
Note: "Cash flows from operations" is "Revenues" less "Lease operating expenses" and "Production and ad valorem taxes".
"Cash flows" is "Net income" plus "Depreciation, depletion and amortization", "Provision for losses and (gains) on
disposition and write-down of assets" and any extraordinary items.
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
At September 30, 1996
1. Basis of Presentation
The Unaudited Pro Forma Balance Sheet presents the combined effects of
the acquisition of the Amoco Properties, which closed on October 8, 1996, and
the sale of Bayou Sorrel Field, closed on November 22, 1996, as if the
transactions had occurred on September 30, 1996. The Company's balance sheet at
September 30, 1996 is adjusted to reverse an earnest deposit made in August
1996, on the Amoco Acquisition of $5 million.
2. Amoco Properties Pro Forma Adjustments
The purchase price for the Amoco Properties was $32 million in cash and
2,000,000 Common Shares, valued at $4.20 per share, for a total of $40.4
million. The increases in Long-Term Debt and Stockholders' Equity represent the
additional borrowing for the cash portion of the purchase price and the issuance
of 2,000,000 Common Shares to Amoco.
3. Bayou Sorrel Pro Forma Adjustments
The Company sold the Bayou Sorrel Field on November 22, 1996 for $11
million, consisting of $9 million in cash and $2 million in National Energy
Group, Inc. common stock. National Energy Group, Inc. also reimbursed the
Company $152,000 for the amounts it had deposited in an escrow account for the
plugging and abandonment obligations of the Field.
The total cash proceeds from the sale of $9,152,000 are assumed to have
been all applied to the Company's Long-Term Debt balance at September 30, 1996.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (OPERATIONS)
For the nine months ended September 30, 1996
and the years ended December 31, 1995, 1994 and 1993.
1. Basis of Presentation
The Unaudited Pro Forma Statement of Income (Operations) for the nine
months ended September 30, 1996 presents the combined effects of the acquisition
of the Amoco Properties, which closed on October 8, 1996, the Zapata Properties,
closed on July 26, 1995 and the sale of the Bayou Sorrel Field, closed on
November 22, 1996, as if all of these transactions had been consummated on
January 1, 1996.
The Unaudited Pro Forma Statements of Income (Operations) for the years
ended December 31, 1995, 1994 and 1993 present the combined effects of the
acquisition of the Amoco Properties, which closed on October 8, 1996, and the
Zapata Properties, closed on July 26, 1995, as if the acquisitions had been
consummated on January 1 of each of these years.
Each period presented includes the issuance of 2,000,000 Common Shares to
Amoco Production Company in connection with the Amoco Acquisition. Each income
statement presented also includes the 2,060,606 shares issuable upon conversion
of the 1996 Tranche A Convertible Subordinated Notes, as if the conversion
occurred on January 1 of each period presented and the resulting decrease in
interest expense.
2. Amoco and Zapata Properties Pro Forma Adjustments
Additional lease operating expenses of $108,000 in 1996, $314,000 in
1995 and $444,000 in 1994 and $294,000 in 1993 represent the estimated
additional insurance costs of owning the Amoco Properties and the Zapata
Properties. These amounts are estimated using the Company's current insurance
rates for owning the
<PAGE>
properties acquired or similar properties.
Additional depletion and depreciation expense of $ 5,629,000 in 1996,
$10,064,000 in 1995, $8,710,000 in 1994 and $8,781,000 in 1993 represents the
estimated depletion and depreciation for assets acquired in the respective
acquisitions assuming the price and proved reserve amounts were identical to
those that existed at the time of the actual acquisitions.
Additional interest expense of $1,389,000 in 1996, $1,921,000 in 1995,
$1,757,000 in 1994 and $1,641,000 in 1993 represents the increased borrowings at
January 1 of each year. The purchase price assumed for each acquisition is the
same as at the actual date of acquisition. It is assumed that cash on hand at
the beginning of each year was used for the acquisitions, with the balance of
any cash required being funded with the Company's Bank Facility and the 1996
Subordinated Notes, using the rates in effect at the beginning of each such year
for the Bank Facility and 12% for the 1996 Subordinated Notes. The 1996
Subordinated Note interest is net of the $8,500,000 assumed to have been
converted at January 1 of each period.
3. Bayou Sorrel Pro Forma Adjustments
The adjustments with respect to the sale of the Bayou Sorrel Field
represent the revenues and expenses of the Field from January 1 to August 31.
Interest expense is reduced to reflect the elimination of the financing for the
acquisition, closed on December 28, 1995. The purchase price for the Field was
$10,455,000 which included a related receivable of $600,000 and a brokers fee of
$205,000.
<PAGE>
SELECTED FINANCIAL DATA
Selected financial data for the five years 1991 through 1995 is
presented below. Effective December 31, 1995, the Company changed its method of
accounting for oil and gas operations from the full cost method to the
successful efforts method. The information provided below reflects this change
for all periods. This data also reflects a retroactive restatement for all
periods presented to reflect the merging of the Company's predecessor, Pan
Petroleum MLP, into the Company effective September 1, 1992 and reflects the
acquisition of the West Delta offshore properties as of May 28, 1991, accounted
for utilizing the"purchase" method.
Summary of Operations: ( Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the nine months ended For the year ended
September 30, December 31,
(unaudited) (unaudited)
1996(a) 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and Gas revenue $ 13,257 13,660 18,447 17,338 12,605 13,335 8,149
Depreciation, depletion
& amortization 4,981 6,277 8,064 6,038 4,288 4,245 3,305
Lease operating expense 6,049 5,729 8,055 5,231 5,297 5,762 3,728
Production and ad valorem taxes 429 810 1,078 1,006 754 867 635
Exploration expenses - 2,174 8,112 - - - -
Provision for losses and (gains)
on disposition and write-downs
of assets (4) - 751 1,202 3,824 - (91)
West Delta fire loss 500 - - - - - -
Net operating income (loss) 729 (1,772) (8,303) 3,274 (2,100) 1,922 128
Interest (net) 1,347 720 987 1,623 1,886 2,323 1,597
Net income (loss) (618) (2,492) (9,290) 1,115 (3,986) (401) (1,469)
Net income (loss) per
Common Share $ (0.05) (0.21) (0.81) 0.11 (0.53) (0.05) (0.23)
Summary Balance Sheet Data:
Oil and Gas Properties (net) $ 25,489 21,515 29,485 23,945 19,183 26,448 29,018
Total assets 44,444 26,795 36,169 29,095 24,432 31,085 33,827
Long-term debt 25,137 8,865 22,390 12,500 12,465 15,380 18,945
Stockholders' equity 10,498 15,335 9,174 14,882 8,744 11,700 10,889
Dividends per Common Share $ 0.00 0.00 0.00 0.00 0.00 0.00 0.03
</TABLE>
(a) Results for the period ended September 30, 1996, were substantially affected
by the explosion and fire. See "Recent Explosion and Fire". Such results include
the results of operations through August 31 for the Bayou Sorrel Field, which
was sold by the Company effective September 1.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the nine months ended September 30, 1996 and 1995:
The oil and gas industry has experienced significant volatility in recent
years because of the oversupply of most fossil fuels relative to the demand for
such products and other uncertainties in the world energy markets. These
industry conditions should be considered when this analysis of the Company's
operations is read.
<PAGE>
Results of Operations
Effective December 31, 1995 the Company changed its method of accounting
for its oil and gas operations from the full cost to the successful efforts
method. Prior periods have been restated.
The Company experienced an explosion and fire on April 24, 1996 at Tank
Battery #3 in West Delta resulting in the fields being shut-in from April 24th,
until being returned to production on October 7, 1996. The loss of 67 days of
production in the second quarter and the entire third quarter and a loss
incurred in repairing the facility have been the principal contributors to the
loss of $.19 per share for the second and third quarters of 1996.
The decrease in production also brought about a decrease in operating
taxes of $178,000, as a portion of the production from West Delta is in
Louisiana State waters and is subject to State severance taxes. Although
production was shut-in for 67 days in the second quarter and the entire third
quarter, resulting in a decrease in West Delta lease operating expenses of
$805,000 from expected levels, a large part of the lease operating expenses in
West Delta are fixed expenses and continued throughout both quarters.
The Company has repaired Tank Battery #3 and has received advances from its
insurance company on the reimbursement of repair costs. Until final resolution
of the total repair costs the insurance company is advancing funds to assist the
Company in paying for repairs. There is no assurance that the Company's repair
costs will be fully covered by such insurance or that the Company's insurance
carriers may not seek reimbursement of some of their advances. The Company is
considering filing suits against the employers of the persons who caused the
incidents. No assurance can be given that the company will successfully recover
any amounts sought in any such suits. in such suits. The Company did not begin
receiving these insurance advances until the third quarter of 1996. The repair
expenditures, coupled with the decrease in net operating cash flows discussed
above resulted in higher borrowing levels and interest expense.
The resulting decrease in revenues, net of the corresponding production
taxes, slightly lower lease operating expense levels and higher interest expense
decreased current assets by approximately $1.9 million at the end of the third
quarter of 1996. The repair expenditures on Tank Battery #3, with the delay in
receiving insurance advances, also decreased cash and increased accounts payable
and long-term debt. These expenditures impacted working capital and limited the
Company's ability to pay down its long-term debt.
"Oil and natural gas sales" decreased only 3% for the first nine months of
1996 when compared to the same period in 1995 in spite of the explosion and fire
at West Delta.
Natural gas production decreased 39% to 4,590,000 Mcf for the first nine
months of 1996 from 7,578,000 Mcf for the same period in 1995. This decrease is
primarily due to two factors: no production from West Delta Properties for 67
days in the second quarter and the entire third quarter, due to the April 24,
1996 explosion and fire; and higher production in 1995 in West Delta from four
horizontal wells drilled in 1994 that had declined significantly by the end of
1995. These two factors were offset by the production from the Zapata Properties
and Bayou Sorrel Field not owned during the first and second quarters of 1995.
The Zapata Properties were acquired on July 26, 1995 and the Bayou Sorrel Field
was acquired on December 27, 1995.
Oil production was also reduced by the West Delta explosion and fire,
however, production for the first nine months of 1996 increased 66% to 203,000
barrels from 122,000 barrels in the same period in 1995, because oil production
from the Zapata Properties and Bayou Sorrel Field more than offset the decrease
from the West Delta explosion and fire.
On an Mcf equivalent basis, total oil and natural gas production decreased
30% for the first nine months in 1996 compared to the same period in 1995.
These reductions in production were more than offset by higher oil and
natural gas prices in 1996 when compared to 1995. Natural gas prices averaged
$2.65 per Mcf for the first nine months in 1996 compared to $1.54 for the same
period in 1995. Oil prices also increased to $18.33 per barrel for the first
nine months in 1996 from $16.30 in 1995. The Company entered into a natural gas
swap agreement beginning January 1, 1996 for the sale of 15,000 MMBTU of gas
each day in 1996 with contract prices ranging from $1.75 per MMBTU to $2.25 per
MMBTU. The hedge contract loss of $2.7 million averaged $.57 per Mcf, bringing
the net price received to $2.08 per Mcf for the first nine months of 1996.
<PAGE>
"Depletion, depreciation and amortization" decreased 21% for the first
nine months of 1996 primarily due to the decreased production from the West
Delta Properties as a result of the explosion and fire.
"Exploration expenses" in 1995 consist of two dry exploratory wells
drilled on South Timbalier Block 33 and Eugene Island Block 50 in the second
quarter. The Company has not drilled any exploratory wells in 1996.
"Lease operating expenses" increased due to the addition of the five
offshore Zapata Properties on July 26, 1995 and the Bayou Sorrel Field,
purchased from Shell Western E & P, Inc. on December 26, 1995. The increase as a
percentage of oil and natural gas sales from 42% for the first nine months of
1995 to 46% for the same period in 1996 is primarily due to the operating
expenses of the West Delta Properties which are fixed in nature and continued,
even with production from the fields being shut-in due to the explosion and
fire.
"Production and ad valorem taxes" decreased to 3.2% of oil and natural gas
sales in the first nine months of 1996 from 5.9% of oil and natural gas sales
for the same period in 1995. A part of the decrease is due to the lost
production from the West Delta Properties for 67 days in the second quarter and
the entire third quarter due to the explosion and fire. A large percentage of
this production is in Louisiana State waters which are subject to severance
taxes. The decrease is also due to the shift in the Company's production volumes
from properties subject to severance taxes to properties in federal offshore
waters (primarily the Zapata Properties) that are not subject to such taxes.
The "West Delta fire loss" is the Company's expense of repairing Tank
Battery #3, the central processing facility in the West Delta fields.
"Interest expense (net)" increased 87% for the first nine months of 1996
compared to the same period in 1995 due to higher borrowing levels in 1996
versus 1995. On December 27, 1995 the Company borrowed $10 million in connection
with the Bayou Sorrel Field acquisition. The Company began an aggressive debt
reduction program and through April 1996 it had reduced debt by $4 million. The
April 24th West Delta explosion and fire resulting in decreased discretionary
cash flows which restricted the Company's ability to lower its long-term debt
levels as quickly as anticipated, and correspondingly contributed to the
increase in interest expense.
The Company borrowed $5 million on the Bank Facility in late August
1996, for an earnest money deposit in connection with the acquisition of the
Amoco Properties, which closed on October 8, 1996.
Liquidity and Capital Resources
At September 30, 1996, 57% of the Company's total assets were
represented by oil and gas properties, net of accumulated depreciation,
depletion and amortization.
In 1991, in connection with a debt financing which has subsequently been
repaid, certain lenders received a net profits interest (NPI) in the West Delta
Properties, which is a continuing obligation with respect to these properties.
During the three months ended March 31, 1996, payments with respect to this NPI
averaged $53,000 per month. Due to the explosion and fire at Tank Battery #3, no
NPI payments were made in the three months ended June 30 or September 30, 1996.
Pursuant to existing agreements the Company is required to deposit funds in
escrow accounts to provide a reserve against satisfaction of its eventual
responsibility to plug and abandon wells and remove structures when certain
fields no longer produce oil and gas.Each month, until November 1997, $25,000 is
deposited in a bank escrow account, to satisfy such obligations with respect to
a portion of its West Delta Properties. The Company has entered into an escrow
agreement with Amoco Production Company under which the Company will deposit,
for the life of the fields, in a bank escrow account ten percent (10%) of the
net cash flow, as defined in the agreement, from the Amoco properties. These
funds and interest earned thereon will be available for the expenses of plugging
wells and removing structures when that time comes. The Company has established
the "PANACO East Breaks 110 Platform Trust" at Bank One, Texas, NA in favor of
the Minerals Management Service of the U.S. Department of the Interior. This
Trust requires an initial funding of $846,720 in December 1996, and remaining
deposits of $244,320 due at the end of each quarter in 1999 and $144,000 due at
the end of each quarter in 2000 for a total of $2,400,000. In addition, the
Company has $10,150,000 in surety bonds to secure its plugging and abandonment
obligations; including a $4,100,000 bond which was provided to the original
sellers of the West Delta Properties; a $2,400,000 bond provided to the Minerals
Management Service of the U.S Department of the Interior in connection with the
plugging and structure removal obligations for the Company's East Breaks Block
110 Platform; and a $3,000,000 Area Wide Bond, a $300,000 Pipeline Right-of-Way
Bond, a $300,000 Supplemental Bond and a $50,000 Operator's Bond provided the
Minerals Management Service.
Under a swap agreement the Company has hedged the price of natural gas by
selling the equivalent of 15,000 MMBtu per day for 1996 at fixed prices which
range from $2.25 for January to $1.75 for July. If the closing price (settlement
price) on NYMEX for natural gas futures is greater than the swap price for a
given month the Company must pay that difference to the bank which affected the
swap. If the settlement price is less than the swap price the bank must pay that
difference to the Company. By entering into the swap in December 1995 the
Company locked in the fixed prices on 15,000 MMBtu per day for each month in
1996. Because settlement prices have been above the fixed prices each month the
Company has been required to pay the difference to the bank which effected the
swap. Since the Company sells its natural gas on the spot market it realizes
prices which approximate the settlement prices on NYMEX, less differences for
transportation due to pipeline locations that are varying distances from Henry
Hub, Louisiana which is the delivery point used for natural gas futures on
NYMEX. Generally these differences are anticipatable and not significant.
However, to the extent that these differences become significant the Company may
realize more or less on its spot sales of gas than was anticipated and may be
impacted beneficially or detrimentally by erratic fluctuations in the natural
gas spot market or the futures market on NYMEX. Both such eventualities have
occurred so far this year. These erratic fluctuations which have characterized
the natural gas market in recent months have exposed the Company to market and
credit risks. In those months in which the spot price is below the settlement
price, the net amount realized by the Company on its total gas sales would be
proportionately reduced by the swap agreements. At present natural gas futures
on NYMEX for the remaining months of 1996 are all above the fixed prices under
the swap agreement and the Company anticipates that this will result in its
realizing less for its natural gas due to amounts required for payments to the
bank under the swap agreement. Management entered into the swap agreement to
assure the Company of not receiving less than the fixed prices established under
the agreement for at least 15,000 MMBtu's of natural gas per day in 1996. This
gave the Company assurance that it would be in a position to timely amortize its
long-term debt. Long-term debt had increased with acquisitions of the Zapata
Properties and Bayou Sorrel Field. Management has generally used hedge
transactions to protect its cash flows when long-term debt has been higher and
refrained from hedge transactions when long-term debt has been lower. For
accounting purposes, gains or losses on swap transactions are recognized in the
production month to which a swap contract relates. The fair market value of
these swap transactions at September 30, 1996 was ($600,000) due to the high
natural gas futures market prices on that date.
Capital Spending
Through the nine months ended September 30, 1996, the Company had spent
$11.8 million in capital expenditures, including (1) a $5 million earnest money
deposit of the Amoco Properties, which were subsequently acquired on October 8,
1996, (2) the repair and rebuilding of the West Delta Tank Battery #3 net of
insurance advances and (3) development of its oil and gas properties. The
majority of the development costs were incurred to drill two unsuccessful
development wells in the Bayou Sorrel Field and for the Company's share of
successfully recompleting two wells on Eugene Island Block 372, which is
operated by Unocal Corporation.
<PAGE>
During 1995, Shareholders' Equity increased $3,173,000, by virtue of the
exercise of options and warrants. During first quarter 1996 Shareholders' Equity
increased $1,837,000, as a result of the exercise of warrants.
For the years ended December 31, 1991 - December 31, 1995
Results of Operations
During the years ended December 31, 1991 through 1995, "Oil and Gas
Revenue" has varied due to several factors. The prices of oil and gas have
fluctuated widely during the years shown. Oil prices are influenced by world
political events as well as decisions made by OPEC regarding the production
quotas of its members. Prices are further influenced by world economic
conditions which affect industrial output and the need for oil.
In 1995, the Company sold 170,000 barrels of oil for an average of
$16.78 per barrel accounting for 15% of oil and gas revenue. In 1994 oil was 12%
of such revenue with 137,000 barrels at an average price of $15.35. In 1993 oil
was 19% of such revenue with 180,000 barrel at an average price of $16.69. In
1992 oil was 25% of such revenue with 174,000 barrels at an average price of
$19.41. In 1991 the Company sold 129,000 barrels of oil for an average price of
$19.68 per barrel; accounting for 29% of its oil and gas revenue.
A large part of the changes affecting most operating accounts in 1992
was due to West Delta being operated for twelve months compared with only seven
months in 1991.
The average natural gas price received by the Company has fluctuated
but generally followed the trend of national gas prices. By 1995, gas revenue
contributed 85% of revenue compared with 46% in 1990. While 1995 saw a
production increase of 21%, the drop in natural gas prices to $1.58 offset most
of the benefit. Part of the increase was due to the acquisition of the Zapata
Properties in July 1995. By drilling four horizontal wells and recompleting
eight existing wells, the Company increased production by 34% in 1994. With the
acquisition of the West Delta Properties in 1991, gas production increased in
1992, 1993 and 1994 to 5,811,000, 5,586,000 and 8,139,000 Mcf, which sold for an
average price of $1.81, $2.24 and $1.88 per Mcf, before the effects of various
natural gas hedge agreements. In 1991, the Company sold 3,714,000 Mcf for an
average price of $1.49.
From time to time, upon the insistence of its lenders the Company has
entered into natural gas hedging agreements which have the effect of raising or
lowering the price it receives for natural gas. In 1992 a contract loss of $1.1
million lowered the average price received per Mcf by $.19 to $1.73. In 1993 a
contract loss of $3 million lowered the average price received per Mcf by $.54
to $1.72.
The "depreciation, depletion and amortization" increase in 1995 was
primarily the result of the acquisition of the Zapata Properties for $2,748,000,
$1.5 million in capitalized costs on existing properties and the increase in
production bringing about an increase in the rate of depletion. The increase in
1994 is due to the 1994 drilling and rework program increasing capitalized cost
and the 34% increase in production. The expense for 1993 remained relatively
constant over 1992 with only a slight decrease due to lower production.
"Lease operating expense" increased significantly during 1995 by (1)
$1,008,000 related to the acquisition of the Zapata Properties in July which
added interests on six offshore platforms and 44 wells, (2) $1,105,000 of
additional operating expenses on the West Delta Properties to maintain
production from some of the more rapidly declining wells, and (3) $711,000 of
expensed items which might otherwise have been capitalized. Such expenses rose
from $.58 per Mcfe in 1994 (a year of very high production) to $.74 per Mcfe in
1995, after having been $.84, $.84, and $.79 per Mcfe in 1991, 1992, and 1993,
respectively.
"Production and ad valorem taxes" increased 33% in 1994 due to increased
production from four horizontal wells drilled in state waters on the West Delta
Properties in 1994.
The "West Delta fire loss" is the Company's expense of repairing Tank
Battery #3, the central processing facility in the West Dela fields.
The 1995 "exploration expense" consisted of dry hole exploratory costs of
$796,000 on Eugene Island Block 50, $1,378,000 on South Timbalier Block 33 and
$5,938,000 on West Delta Block 54. The Company currently plans no further
exploratory activity in these blocks.
<PAGE>
The "provision for write-downs of assets" in 1993, 1994 and 1995 were
for the Company's group of onshore properties, acquired in the early 1980's
which were becoming a less significant part of its operations.
"Net operating income (loss)" for 1995 would have been $560,000 were it
not for the $8,112,000 exploratory expenses and $751,000 property write-down.
The increased production in 1994, along with $2.6 million lower asset
write-downs brought about the large increase in 1994. The operating income for
1993 decreased due to lower production, and an asset write-down of $3.8 million.
Net operating income increased from 1991 to 1992 primarily due to the
realization of the benefit of a large number of expenses incurred in 1991 and
again the ownership of the West Delta Properties for a full twelve months.
The lower levels of long-term debt that prevailed throughout most of
1995 resulted in a decrease in "Interest (net)." Long-term debt increased during
1995 to fund the acquisitions of the Zapata Properties in July and more
importantly the acquisition of the Bayou Sorrel Field in late December. The
decreases of 19% in 1993 and 13% in 1994 were due to the significant decrease in
long term debt and the refinancing of such debt on July 1, 1994 at lower
interest rates. Interest expense increased significantly in 1992 because of the
debt incurred to acquire the West Delta Properties being in place a full twelve
months.
"Net income (loss) per common share" is based upon the weighted average
number of shares outstanding of 11,504,615 for 1995, 10,039,042 for 1994,
7,583,761 for 1993, 7,314,041 for 1992, and 6,399,338 for 1991.
Liquidity and Capital Resources
Cash flow from operations was used to reduce long term debt, drill
wells, recomplete wells and acquire properties.
On July 1, 1994 the Company entered into a Credit Agreement with the
First Union National Bank of North Carolina. The loan was a reducing revolver
designed to provide the Company up to $30 million depending upon the Company's
borrowing base. The principal amount of the loan was due July 1, 1998.
Capital Spending
In 1995 the Company spent $8,112,000 on exploratory drilling which did
not result in a discovery and $1,497,000 on developmental costs. During 1994
over $11,749,000 was spent on eight offshore recompletions and the drilling of
four horizontal wells. All four horizontal wells and all eight recompletions in
1994 were successful and offshore natural gas production increased
significantly.
During the last part of 1993 the Company increased Stockholders' Equity
$1,163,000, primarily by virtue of options and warrants being exercised. During
1994, the Company increased Stockholders' Equity $5,023,000, primarily as the
result of such exercises of options and warrants. Likewise most of the
$3,173,000 increase in 1995 was from the exercise of options and warrants. As
explained under "The Company - Funding of Business Activities," the Company
issued subordinated notes at year-end 1993. The Company utilized this
$5,000,000, along with equity proceeds and cash flow from operations described
above, to drill the wells and perform the recompletions in 1994 and 1995.
THE COMPANY
General
PANACO, Inc. (the "Company") is a Delaware corporation that was
organized in October 1991. Effective September 1, 1992, Pan Petroleum MLP, the
Company's predecessor, was merged into the Company. The Company is in the oil
and gas business, acquiring, drilling and operating offshore oil and gas
properties in the Gulf of Mexico.
<PAGE>
Between 1984 and 1988 a total of 114 limited partnerships were
consolidated into the Company's predecessor. With the acquisition of the West
Delta Properties in 1991, the Company shifted its emphasis offshore. Additional
offshore properties were acquired in 1994, 1995 and 1996. In recent years the
Company has been disposing of numerous onshore properties. The onshore
properties presently generate less than 3% of the Company's revenues. These
onshore property sales are part of management's plan to concentrate on
properties in the Gulf of Mexico, which the Company considers to be more
profitable.
Business Strategy
The Company's objective is to enhance shareholder value through sustained
growth in its reserve base, production levels and resulting cash flows from
operations. In pursuing this objective, the Company maintains a geographic focus
in the Gulf of Mexico and identifies properties that may be acquired preferably
through negotiated transactions or, if necessary, sealed bid transactions. The
properties the Company seeks to acquire generally are geologically complex, with
multiple reservoirs, have an established production history and are candidates
for exploitation. Geologically complex fields with multiple reservoirs are
fields in which there are multiple reservoirs at different depths and wells
which penetrate more than one reservoir, that have the potential for
recompletion in more than one reservoir. Once properties are acquired, the
Company focuses on reducing operating costs and implementing production
enhancements through the application of technologically advanced production and
recompletion techniques. Over the past five years, the Company has taken
advantage of opportunities to acquire interests in a number of producing
properties which fit these criteria.
Business Activities
The Company owns interests in 123 offshore wells, located offshore
Louisiana and Texas. It also owns interests in 314 onshore wells in Kansas,
Louisiana, Oklahoma and Texas, but these interests generate less than 3% of its
revenues. As of november 1, 1996, these properties, including the recently
acquired Amoco Properties and excluding the Bayou Sorrel Field which was
recently sold, contained estimated Proved Reserves of approximately 2,920,000
Bbls of oil and condensate and approximately 64,925,000 Mcf of gas and the SEC
10 Value of such Proved Reserves was approximately $128,092,000. Approximately
21% of such Proved Reserves are attributable to oil and 79% to natural gas,
based on six Mcf of gas being equivalent to one Bbl of oil. Information included
herein with respect to Proved Reserves and the SEC 10 Value thereof has been
prepared by the Company. See "Properties - Significant Proved Properties."
The Company expects to hold its producing properties until the
economically recoverable reserves attributable thereto are depleted, although
the Company may sell any of its properties if management believes that such sale
would be in the Company's best interest.
Recent Explosion and Fire
The Company experienced an explosion and fire on April 24, 1996 at its
Tank Battery #3 in West Delta, resulting in the production from the fields being
shut-in through October 7, 1996, when production resumed. The loss of 67 days of
production in the second quarter and the entire third quarter was a principal
contributor in the loss of $.19 per share for the second and third quarters of
1996. Although the production was shut-in, and consequently there was a decrease
in West Delta lease operating expenses of $805,000 from expected levels, a large
part of the lease operating expenses in West Delta are fixed expenses and
continued throughout both quarters.
The Company has repaired Tank Battery #3 and is receiving advances from its
insurance company. Until final resolution of the total repair costs the
insurance company is advancing funds to assist the Company in paying for
repairs. The Company began receiving these insurance advances in the third
quarter of 1996. There is no assurance that the Company's repair costs will be
fully covered by such insurance or that the Company's insurance carriers may
not seek reimbursement of some of their advances. The Company plans to file
suits against the employers of the persons who caused the incidents. No
assurance can be given that the Company will recover anything in such suits. The
repair expenditures, net of insurance advances, coupled with the decrease in net
operating cash flows discussed above resulted in higher borrowing levels and
interest expense for the second and third quarters. The resulting decrease in
revenues and higher interest expense decreased current assets by approximately
$1.9 million at the end of the third quarter of 1996.
<PAGE>
Well Operations
The Company operates 52 offshore wells and owns all of the working
interests in substantially all of those wells. The Company's 71 remaining
offshore wells are operated by third party operators, including Unocal
Corporation, Phillips Petroleum Company, Texaco, Anadarko Petroleum Corporation
and Louisiana Land and Exploration Company. Operations are conducted pursuant to
joint operating agreements that were in effect at the time the Company acquired
its interest in these properties. However, the Company considers these joint
operating agreements to be on terms customary within the industry. The operator
of an oil and gas property supervises production, maintains production records,
employs field personnel, and performs other functions required in the production
and administration of such property. The compensation paid to the operator for
such services customarily varies from property to property, depending on the
nature, depth, and location of the property being operated. Where properties are
operated by the Company, it generally owns all of the working interests or a
majority of the working interest in the property. Therefore, its revenue and
expense associated with portions of properties it operates for other working
interest holders is not material.
Acquisition, Development, and Other Activities
The Company utilizes its capital budget for (a) the acquisition of
interests in other producing properties, (b) recompletions of its existing
wells, and (c) the drilling of development and exploratory wells.
In recent years, major oil companies have been selling certain offshore
properties to independent oil companies because they feel these properties do
not have the remaining reserve potential needed by a major oil company. Several
independent oil companies have acquired these offshore properties and achieved
significant success in further exploitation of these properties. Even though a
property does not meet the criteria for further development by a major oil
company, that does not mean it is lacking further exploitation potential. The
majors are simply moving further offshore into deeper water and to other
countries where they can find and produce the super-fields that fit their
criteria. Present day technology permits drilling and completing wells in water
as deep as 10,000 feet.
On October 8, 1996, the Company closed on its acquisition of interests in
six offshore fields from Amoco Production Company for $40.4 million. In
consideration for such interests, the Company issued Amoco 2,000,000 Common
Shares and paid the sum of $32 million in cash. The interests acquired include
(1) a 33.3% working interest in the East Breaks 160 Field (2 Blocks) and a 33.3%
interest in the High Island 302 Field, both operated by Unocal Corporation; (2)
an average 50% interest in the High Island 309 Field (2 Blocks), a 12% interest
in the High Island 330 Field (3 Blocks) and a 12% interest in the High Island
474 Field (4 Blocks), all operated by Phillips Petroleum Company; and (3) a
12.5% interest in the West Cameron 180 Field (1 Block) operated by Texaco.
Current production for the interests acquired is 680 barrels of oil per day and
12 MMcf per day of natural gas. See "Properties - Amoco Acquisition."
Depending on the sales prices of oil and gas and its ability to finance
such activities, the Company may also drill exploratory wells on properties it
acquires. The Company does not currently have plans to drill exploratory wells
during 1997 but will evaluate potential prospects to determine the economic
benefit to the Company and may drill exploratory wells if the benefit to the
Company is reasonable when measured against the risks involved.
The number and type of wells drilled by the Company will vary from period
to period depending on the amount of the capital budget available for drilling,
the cost of each well, the Company's commitment to participate in the wells
drilled on properties operated by third parties, the size of the fractional
working interest acquired by the Company in each well and the estimated
recoverable reserves attributable to each well.
Acquisitions of properties may include acquisitions of working interests,
royalty interests, net profits interests, production payments, and other forms
of direct or indirect ownership interest or interests in oil and gas production.
The Company may also acquire general or limited partner interests in general or
limited partnerships and interests in joint ventures, corporations, or other
entities that own, manage, or are formed to acquire, explore for, or develop oil
and gas properties or conduct other activities associated with the ownership of
oil and gas production. The Company may also acquire or participate in the
expansion of natural gas processing plants and natural gas transportation or
gathering systems.
<PAGE>
The success of the Company's acquisitions will depend on (a) the Company's
ability to establish accurately the volumes of reserves and rates of future
production from producing properties being considered for acquisition and the
future net revenues attributable to reserves from such properties, taking into
account future operating costs, market prices for oil and gas, rates of
inflation, risks attendant to production of oil and gas, and a suitable return
on investment, and (b) the Company's ability to purchase properties and produce
and market oil and gas therefrom at prices and rates that over time will
generate cash flows resulting in an attractive return on the initial investment.
The Company's cash flow and return on investment will vary to the extent that
the Company's production from an acquired property is greater or less than that
estimated at the time of acquisition because of, for example, the results of
drilling or improved recovery programs, the demand for oil and gas, or changes
in the prices of oil and gas from the prices used to calculate the purchase
price for producing properties. The Company will evaluate any economically
feasible project that would enhance the value of its properties. Such a project
may involve both the acquisition of developed and undeveloped properties and the
drilling of infield wells.
The Company expects that its primary activities will continue to be
concentrated offshore in the Gulf of Mexico. The Company can, if it so chooses,
invest in any geographic area. Drilling on and production from offshore
properties often involves higher costs than does drilling on and production from
onshore properties, but the production achieved on successful wells is generally
much greater.
The Company may also seek to acquire oil and gas companies through stock
purchases, asset purchases, and purchases of interests in partnerships. The
Company intends to pay for such possible acquisitions with its own securities,
cash or any other property, or any combination of the foregoing. The consent of
the Company's lenders is required for any such purchases. See "Funding of
Business Activities - Borrowings and Obligations".
Capital Spending
Through the nine months ended September 30, 1996 the Company had made
$11.8 million in capital expenditures for (1) the earnest money deposit of $5
million for the Amoco Properties, which were subsequently acquired on October 8,
1996, (2) the repair and rebuilding of the West Delta Tank Battery #3 (net of
insurance advances) and (3) the development of its oil and gas properties. The
majority of the development costs were incurred to drill two unsuccessful
development wells in the Bayou Sorrel Field and for the Company's share of two
successful recompletions on Eugene Island Block 372, which is operated by Unocal
Corporation. The sources of funds for capital expenditures were cash flow from
operations, borrowings on the Company's Bank Facility and proceeds of the
issuances of Common Shares.
Use of 3-D Seismic Technology
The use of 3-D seismic and computer-aided exploration ("CAEX")
technology is an integral component of the Company's acquisition, exploitation,
drilling and business strategy. In general, 3-D seismic is the process of
obtaining seismic data along multiple lines and grids within a large geographic
area. 3-D seismic differs from 2-D seismic in that it provides information with
respect to multiple horizontal and vertical points within a geological formation
instead of information on a single vertical line or multiple vertical lines
within the formation. By expanding the amount of data obtained with respect to a
geological formation, the user is better able to correlate the data and obtain a
greater understanding and image of the formation. While it is impossible to
predict with certainty the specific configuration or composition of any
underground geological formation, 3-D seismic provides a mechanism by which
clearer and more accurate projected images of complex geological formations can
be obtained prior to drilling for hydrocarbons therein. In particular, 3-D
seismic delineates smaller reservoirs with greater precision than can be
obtained with 2-D seismic.
CAEX technology is the process of accumulating and analyzing the various
seismic, production and other data obtained relating to a potential prospect. In
general, the process of prospect evaluation through CAEX technology requires
inputting various 2-D and 3-D seismic data obtained with respect to a prospect,
correlating that data with historical well control and production data from
similar properties and analyzing the available data through computer programs
and modeling techniques in order to project the likely geological composition of
<PAGE>
a prospect and potential locations of hydrocarbons. This process relies on a
comparison of actual data with respect to the prospect and historical data with
respect to the density and sonic characteristics of different types of rock
formations, hydrocarbons and other subsurface minerals, resulting in a projected
three dimensional image of the subsurface. This modeling is performed through
the use of advanced interactive computer workstations and various combinations
of available computer programs that have been developed solely for this
application.
3-D seismic and CAEX technology have been in existence since the mid
1970's; however, it was not until the late 1980's, with the development of
improved data acquisition equipment and techniques capable of gathering
significant amounts of data through a large number of channels and the
availability of improved computer technology at reasonable costs, that the
method became economically available to firms such as the Company. Prior to
that, it was the exclusive province of large multinational oil companies.
The Company believes that its application of 3-D seismic and CAEX
technology in the exploration of oil and natural gas provides it with a number
of benefits in the exploration, delineation and development process that are not
generally available to those who only use 2-D seismic data and conventional
processing methods. In particular, the Company believes that, by obtaining
clearer and more accurate projected images of underground formations through
computer modeling, the Company is able to specifically identify potential
locations of hydrocarbon accumulations based on the characteristics of the
formations and analogies made with nearby fields and formations where
hydrocarbons have been found. This enhanced data can be used to assist the
Company in eliminating prospects and prospect locations that might otherwise
have been drilled had the Company relied solely on 2-D seismic data. This data
can be used to assist the Company in identifying the perceived most desirable
location for the well to maximize the likelihood of a successful exploratory or
development well and production from the reservoir.
The Company believes that the collective application of 3-D seismic and
CAEX technology enables a much more accurate definition of the risk profile of a
prospect than was previously available using traditional exploration techniques.
To the extent the Company is successful in increasing its success rate and
reducing its dry hole costs through the use of advanced technology the Company
believes it has a competitive advantage over companies that do not use such
technology.
The Company generated a prospect in the northern portion of West Delta
Block 58 using 3-D seismic, which it farmed out to Tana Oil & Gas Corporation in
1996. Tana drilled a successful well to 12,800 feet which encountered 85 feet of
net pay and could produce as much as 10,000 Mcf per day based upon a recent well
test. The Company retained a 5.833% overriding royalty interest in the farmout.
Three of the fields in the Amoco Acquisition have proprietary 3-D seismic, while
all of the Amoco Properties have group 3-D seismic. A group 3-D seismic shooting
was recently completed on the western portion of the Company's properties in
West Delta.
Marketing of Production
Production from the Company's properties is marketed in accordance with
industry practices, which include the sale of oil at the wellhead to third
parties and the sale of gas to third parties at prices based on factors normally
considered in the industry, such as the spot price for gas or the posted price
for oil, and the quality of the oil and gas.
The Company markets all of its offshore oil production to Amoco, Citgo,
Conoco, Texaco, Unocal and Vastar. Citgo, Conoco, Texaco, and Vastar each have
25% calls(exclusive rights to purchase) on the oil production from the West
Delta Fields at their average posted price for each month. Amoco has a call on
all of the oil production from the Amoco Properties at their posted prices. If
the Company has a bona fide offer from a crude oil purchaser at a higher price
than Amoco's posted price, then Amoco must match that price or release the call.
Oil from the Zapata Properties is currently being sold to Unocal and Amoco, but
can be sold to any crude oil purchaser of the Company's choice. Natural gas is
sold on the spot market. There are numerous potential purchasers for offshore
gas. Notwithstanding this, natural gas purchased by Tennoco Gas Marketing
Company accounted for 69% of the revenues in 1995. There are numerous gas
purchasers doing business in the areas involved as well as natural gas brokers
and clearing houses. Furthermore, the Company can contract to sell
<PAGE>
the gas directly to end users. The Company does not believe that it is dependent
upon any one customer or group of customers for the purchase of natural gas.
The Company's lenders have generally required it to reduce its exposure to
the volatility of crude oil and natural gas prices by hedging a portion of its
production. In a typical hedge transaction, the Company will have the right to
receive from the counter party to the hedge, the excess of the fixed price
specified in the hedge over a floating price. If the floating price exceeds the
fixed price, the Company is required to pay the counter party this difference
multiplied by the quantity hedged, regardless of whether the Company has
sufficient production to cover the quantities specified in the hedge.
Significant reductions in production at times when the floating price exceeds
the fixed price could require the Company to make payments under the hedge
agreements even though such payments are not offset by sales of production.
However, the Company hedges up to, but not more than, 50% of its anticipated
production. Hedging will also prevent the Company from receiving the full
advantage of increases in crude oil or natural gas prices above the fixed amount
specified in the hedge.
Plugging and Abandonment Escrows
Pursuant to existing agreements the Company is required to deposit funds in
escrow accounts to provide a reserve against satisfaction of its eventual
responsibility to plug and abandon wells and remove structures when certain
fields no longer produce oil and gas. Each month, until November 1997, $25,000
is deposited in a bank escrow account, to satisfy such obligations with respect
to a portion of its West Delta Properties. The Company has entered into an
escrow agreement with Amoco Production Company under which the Company will
deposit, for the life of the fields, in a bank escrow account ten percent (10%)
of the net cash flow, as defined in the agreement, from the Amoco properties.
These funds and interest earned thereon will be available for the expenses of
plugging wells and removing structures when that time comes. The Company has
established the "PANACO East Breaks 110 Platform Trust" at Bank One, Texas, NA
in favor of the Minerals Management Service of the U.S. Department of the
Interior. This Trust requires an initial funding of $846,720 in December 1996
and remaining deposits of $244,320 due at the end of each quarter in 1999 and
$144,000 due at the end of each quarter in 2000, for a total of $2,400,000. In
addition, the Company has $10,150,000 in surety bonds to secure its plugging and
abandonment obligations; including a $4,100,000 bond which was provided to the
original sellers of the West Delta Properties; a $2,400,000 bond provided to the
Minerals Management Service of the U.S. Department of the Interior in connection
with the plugging and structure removal obligations for the Company's East
Breaks Block 110 Platform; and a $3,000,000 Area Wide Bond, a $300,000 Pipeline
Right-of- Way Bond, a $300,000 Supplemental Bond and a $50,000 Operator's Bond
provided the Minerals Management Service.
Insurance
The Company maintains insurance coverage as is customary for companies of a
similar size engaged in operations similar to the Company's. The Company's
insurance coverage includes comprehensive general liability insurance in the
amount of $50 million per occurrence for personal injury and property damage and
cost of control and operators extra expense insurance of $3 million on onshore
wells, $20 million on wells in Louisiana State waters and $50 million per
occurrence in Federal offshore waters. The Company maintains $65 million in
property insurance on its offshore properties. There is no assurance that such
insurance will be adequate to cover all such costs or that such insurance will
continue to be available in the future or that such insurance will be available
at premium levels that justify its purchase. The occurrence of a significant
event not fully insured or indemnified against could have a material adverse
effect on the Company's financial condition and operations.
Funding of Business Activities
Cash Flow from Operations. Funding for the Company's activities is
provided primarily by cash flow from operations, however, the Company may use
its Bank Facility and other sources described below. Generally, cash flow from
properties declines over time as production declines. The cash flow generated by
the Company's activities, would decline in the absence of (a) the acquisition
and development of other oil and gas properties, (b) increases in the Company's
production of oil and gas resulting from the development of its properties, or
(c) increases in the prices that the Company receives for oil and gas
production.
Issuance of Additional Common Shares and Other Securities. The Company may
issue additional Common Shares or other securities for cash, to the extent that
market and other conditions permit, and use the proceeds to fund its activities.
Additional securities issued by the Company may be of a class preferred as
<PAGE>
to the Common Shares with respect to such matters as dividends and liquidation
rights and may also have other rights and preferences as determined by the Board
of Directors. The Certificate of Incorporation and By-laws of the Company
generally do not require the Company to obtain the consent of its shareholders
for the issuance and sale of Common Shares or other securities.
During 1995 Shareholders' Equity increased by $3,173,000, by virtue of the
exercise of options and warrants. Through September 30, 1996 Shareholders'
Equity increased by $1,837,000, as a result of the exercise of warrants.
Borrowings and Obligations. The Company is permitted to incur indebtedness
for any Company purpose. It is currently expected that Company indebtedness will
consist primarily of borrowings from commercial banks and credit corporations,
the sale of debt instruments, and possibly by advances from oil and gas
purchasers.
On October 8, 1996, the Company amended its bank facility with First Union
National Bank of North Carolina (60% participation), and Banque Paribas (40%
participation), herein "Bank Facility". The loan is a reducing revolver designed
to provide the Company up to $40 million depending on the Company's borrowing
base, as determined by the lenders. The Company's borrowing base at December 1,
1996 was $31 million, with an availability under the revolver of $3.5 million.
The principal amount of the loan is due July 1, 1999. However, at no time may
the Company have outstanding borrowings under the Bank Facility in excess of its
borrowing base. Should the borrowing base ever be determined to be less than the
outstanding principal owed, the Company must immediately pay that difference to
the lenders. Interest on the loan is computed at the bank's prime rate or at 1
to 1 3/4% (depending upon the percentage of the facility being used) over the
applicable London Interbank Offered Rate ("LIBOR") on Eurodollar loans.
Eurodollar loans can be for terms of one, two, three or six months and interest
on such loans is due at the expiration of the terms of such loans, but no less
frequently than every three months. Beginning April 1, 1997, the interest rate
will increase by an additional .5% at the beginning of each quarter to a maximum
of 3 3/4% over LIBOR as long as the Company has in excess of $13,500,000 in
Subordinated Notes outstanding, specifically the 1993 Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes. See "Use of Proceeds." Management
feels that this Bank Facility greatly enhances its ability to make necessary
capital expenditures to maintain and improve production from its properties and
makes available to the Company additional funds for future acquisitions. The
bank facility is collateralized by a first mortgage on the Company's offshore
properties. The loan agreement contains certain covenants including a
requirement to maintain a positive indebtedness to cash flow ratio, a positive
working capital ratio, a certain tangible net worth, as well as limitations on
future debt, guarantees, liens, dividends, mergers, material change in ownership
by management, and sale of assets.
In 1991, the Company borrowed $21,600,000 from New England Mutual Life
Insurance Company, NMB Post Bank, Groep, N.V. (now ING Bank), the Lincoln
National Life Insurance Company and En Cap 1989-1 Limited Partnership. The
balance owed on this facility was prepaid in 1994 with part of the proceeds of
the Company's Bank Facility. As part of the 1991 transaction these former
lenders received a net profits interest in part of the West Delta Properties.
From time to time the Company has borrowed funds from institutional lenders
who are represented by Kayne, Anderson Investment Management, Inc. In each case
these loans are due at a stated maturity, require payments of interest only at
12% per annum 45 days after the end of each calendar quarter and are secured by
a second mortgage on the Company's offshore oil and gas properties. The
respective loan documents contain certain covenants including a requirement to
maintain a net worth ratio, as well as limitations on future debt, guarantees,
liens, dividends, mergers, material change in ownership by management, and sale
of assets. The loans are as follows:
(a) 1993 Subordinated Notes. In 1993, $5,000,000 was borrowed, due
December 31, 1999, but prepayable at any time. The Company may deliver up to
$1,000,000 in PIK (payment in kind) notes in satisfaction of interest payment
obligations. The lenders were issued, and during 1996 exercised, warrants to
acquire 816,526 Common Shares at $2.25 per share.
(b) 1996 Tranche A Convertible Subordinated Notes. On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable any time after May
8, 1998. The Notes are convertible into 2,060,606 Common Shares on the basis of
$4.125 per share. The Company may deliver up to $2,000,000 in PIK notes in
satisfaction of interest payment obligations.
<PAGE>
(c) 1996 Tranche B Bridge Loan Subordinated Notes. On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable at any time. Should
this loan not be prepaid by August 8, 1997 the interest rate will increase from
12% to 14% per annum. The Company may deliver PIK notes in satisfaction of this
additional interest.
Management intends to pre-pay the 1993 Subordinated Notes and the 1996
Tranche B Bridge Loan Subordinated Notes with a portion of the proceeds of this
Offering.
Competition, Markets, Seasonality and Regulation
Competition. There are a large number of companies and individuals engaged
in the exploration for and development of oil and gas properties. Competition is
particularly intense with respect to the acquisition of oil and gas producing
properties. The Company encounters competition from various independent oil
companies in raising capital and in acquiring producing properties. Many of the
Company's competitors have financial resources and staffs considerably larger
than the Company.
Markets. The ability of the Company to produce and market oil and gas
profitably depends on numerous factors beyond the control of the Company. The
effect of these factors cannot be accurately predicted or anticipated. These
factors include the availability of other domestic and foreign production, the
marketing of competitive fuels, the proximity and capacity of pipelines,
fluctuations in supply and demand, the availability of a ready market, the
effect of federal and state regulation of production, refining, transportation,
and sales of oil and gas, political instability or armed conflict in
oil-producing regions, and general national and worldwide economic conditions.
In recent years, worldwide oil production capacity and gas production capacity
in the United States exceeded demand and resulted in a substantial decline in
the price of oil and natural gas in the United States.
Since early 1986, certain members of the Organization of Petroleum
Exporting Countries ("OPEC") have, at various times, dramatically increased
their production of oil, causing a significant decline in the price of oil in
the world market. The Company cannot predict future levels of production by the
OPEC nations, the prospects for war or peace in the Middle East, or the degree
to which oil and gas prices will be affected, and it is possible that prices for
any oil, natural gas liquids, or gas produced by the Company will be lower than
those currently available.
The demand for gas in the United States has fluctuated in recent years due
to economic factors, a deliverability surplus, conservation and other factors.
This lack of demand has resulted in increased competitive pressure on producers.
However, environmental legislation is requiring certain markets to shift
consumption from fuel oils to natural gas, thereby increasing demand for this
cleaner burning fuel.
In view of the many uncertainties affecting the supply and demand for oil,
gas, and refined petroleum products, the Company is unable to predict future oil
and gas prices. In order to minimize these uncertainties the Company, from time
to time, hedges prices on a portion of its production with futures contracts.
Seasonality. Historically the nature of the demand for natural gas caused
prices and demand to vary on a seasonal basis. Prices and production volumes
were generally higher during the first and fourth quarters of each calendar
year. For example, during 1991 the price the Company receives for its natural
gas fell from a high of $1.78 per Mcf in January to a low of $1.09 in July and
then climbed to a new high of $1.95 in December, averaging $1.49 for the year.
However, the substantial amount of gas storage becoming available in the U.S. is
altering this seasonality. During 1993, 1994 and 1995 the Company's gas prices
ranged from $2.78 to $1.64, $2.43 to $1.39 and $2.37 to $1.37, averaging $2.13,
$1.88 and $1.58, respectively, in each case, per Mcf. Gas prices averaged $2.08
per Mcf during the first nine months of 1996. The Company sells its natural gas
on the spot market based upon published index prices for each pipeline.
Historically the net price received by the Company for its gas has averaged
about $.10 per MMbtu below the NYMEX Henry Hub index price, due to
transportation differentials. Fields that are located further offshore, such as
the Amoco Properties, will generally sell their gas for as much as $.20 below
that index price. Recent pipeline index prices have been at historical highs.
During December 1996 the Company sold its gas for an average of $2.86.
Regulation. The Company's business is affected by governmental laws and
regulations, including price
<PAGE>
control, energy, environmental, conservation, tax and other laws and regulations
relating to the petroleum industry. For example, state and federal agencies have
issued rules and regulations that require permits for the drilling of wells,
regulate the spacing of wells, prevent the waste of natural gas and crude oil
reserves, and regulate environmental and safety matters including restrictions
on the types, quantities and concentration of various substances that can be
released into the environment in connection with drilling and production
activities, limits or prohibitions on drilling activities on certain lands lying
within wetlands and other protected areas, and remedial measures to prevent
pollution from current and former operations. Changes in any of these laws,
rules and regulations could have a material adverse effect on the Company's
business. In view of the many uncertainties with respect to current law and
regulations, including their applicability to the Company, the Company cannot
predict the overall effect of such laws and regulations on future operations.
The Company believes that its operations comply in all material respects
with all applicable laws and regulations and that the existence of such laws and
regulations have no more restrictive effect on the Company's method of
operations than on other similar companies in the industry. The following
discussion contains summaries of certain laws and regulations and is qualified
in its entirety by reference thereto.
Various aspects of the Company's oil and natural gas operations are
regulated by administrative agencies under statutory provisions of the states
where such operations are conducted and by certain agencies of the federal
government for operations of federal leases. The Federal Energy Regulatory
Commission (the FERC) regulates the transportation and sale for resale of
natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 (the
"NGA") and the Natural Gas Policy Act of 1978 (the "NGPA"). In the past, the
federal government has regulated the prices at which oil and gas could be sold.
Currently, sales by producers of natural gas, and all sales of crude oil,
condensate and natural gas liquids can be made at uncontrolled market prices,
but Congress could reenact price controls at any time. Deregulation of wellhead
sales in the natural gas industry began with the enactment of the NGPA in 1978.
In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act which removed
all NGA and NGPA price and nonprice controls affecting wellhead sales of natural
gas effective January 1, 1993.
Commencing in April 1992, the FERC issued Order NOS. 636, 636-A, and 636-B
("Order No. 636"), which require interstate pipelines to provide open-access
transportation on a basis that is equal for all gas shippers. Although Order No.
636 does not directly regulate the Company's activities, the FERC has stated
that it intends for Order No. 636 to foster increased competition within all
phases of the natural gas industry. It is unclear what impact, if any, increased
competition within the natural gas industry under Order No. 636 will have on the
Company's activities. Although Order No. 636, assuming it is upheld in its
entirety, could provide the Company with additional market access and more
fairly applied transportation service rates, Order No. 636 could also subject
the Company to more restrictive pipeline imbalance tolerances, delivering more
or less than anticipated deliveries, and greater penalties for violation of
those tolerances. The FERC has issued final orders in virtually all Order No.
636 pipeline restructuring proceedings. Appeals of Order No. 636 as well as
orders in the individual pipeline restructuring proceedings, are currently
pending and Company cannot predict the ultimate outcome of court review. This
review may result in the repeal, in whole or in part, of Order No. 636.
The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary market. While any resulting FERC action would affect
the Company only indirectly, the FERC's current rules and policies may have the
effect of enhancing competition in natural gas markets by, among other things,
encouraging non-producer natural gas marketers to engage in certain purchase and
sale transactions. The Company cannot predict what action the FERC will take on
these matters, nor can it accurately predict whether the FERC's actions will
achieve the goal of increasing competition in markets in which the Company's
natural gas is sold. However, the Company does not believe that it will be
affected by any action taken in a manner that is materially different than the
effect upon other natural gas producers with which it competes.
The FERC has issued a policy statement on how interstate natural gas
pipelines can recover the costs of new pipeline facilities. While this policy
statement affects the Company only indirectly, in its present form, the new
policy should enhance competition in natural gas markets and facilitate
construction of gas supply
<PAGE>
laterals. However, requests for rehearing of this policy statement are currently
pending. The Company cannot predict what action the FERC will take on these
requests.
Sales of crude oil, condensate and gas liquids by the Company are not
regulated and are made at market prices. The price the Company receives from the
sale of these products is affected by the cost of transporting the products to
market. Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transportation rates for oil pipelines,
which would generally index such rates to inflation, subject to certain
conditions and limitations. These regulations could increase the cost of
transporting crude oil, liquids and condensates by pipeline. These regulations
are subject to pending petitions for judicial review. The Company is not able to
predict with certainty what effect, if any, these regulations will have on it,
but other factors being equal, the regulations may tend to increase
transportation costs or reduce wellhead prices for such conditions.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before Congress, the FERC and the courts. The Company
cannot predict when or whether any such proposals may become effective. In the
past, the natural gas industry historically has been very heavily regulated.
There is no assurance that the current regulatory approach pursued by the FERC
will continue indefinitely into the future. Notwithstanding the foregoing, it is
not anticipated that compliance with existing federal, state and local laws,
rules and regulations will have a material or significantly adverse effect upon
the capital expenditures, earnings or competitive position of the Company.
Extensive federal, state and local laws and regulations govern oil and
natural gas operations regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment. Numerous
governmental departments issue rules and regulations to implement and enforce
such laws which are often difficult and costly to comply with and which carry
substantial penalties for failure to comply. Some laws, rules and regulations
relating to protection of the environment may, in certain circumstances, impose
"strict liability" for environmental contamination, rendering a person liable
for environmental damages and response costs without regard to negligence or
fault on the part of such person. For example, the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, also
known as the "Superfund" law, imposes strict liability on an owner and operator
of a facility or site where a release of hazardous substances into the
environment has occurred and on companies that disposed or arranged for the
disposal of the hazardous substances released at the facility or site. The
regulatory burden on the oil and natural gas industry increases its cost of
doing business and consequently affects its profitability. These laws, rules and
regulations affect the operations and costs of the Company. While compliance
with environmental requirements generally could have a material adverse effect
upon the capital expenditures, earnings or competitive position of the Company,
the Company believes that other independent energy companies in the oil and gas
industry likely would be similarly affected. The Company believes that it is in
substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements will not
have a material adverse impact on the Company.
Offshore operations of the Company are conducted on both federal and
state lease blocks of the Gulf of Mexico. In all offshore areas the more
stringent regulation of the federal system, as implemented by the Mineral
Management Service of the Department of the Interior, are to be applicable to
state leases as well as federal leases. The Oil Pollution Act of 1990 requires
operators of oil and gas leases on or near navigable waterways to provide $35
million in "financial responsibility", as defined in the Act. At present the
Company is satisfying the financial responsibility requirement with insurance
coverage.
Employees
The Company has thirteen full time employees, some of whom are officers.
The Company utilizes an additional thirty-two contract personnel in the
operation of the offshore properties, and uses numerous outside geologists,
production engineers, reservoir engineers, geophysicists and other professionals
on a consulting basis.
<PAGE>
Office Facilities
The Company's headquarters are located at 1050 West Blue Ridge Boulevard,
PANACO Building, Kansas City, Missouri 64145-1216, and its telephone number is
(816) 942-6300, FAX (816) 942-6305. The Houston, Texas office is located at 1100
Louisiana, Suite 5110, Houston, Texas 77002-5220, telephone (713) 652-5110, FAX
(713) 651-0928.
Legal Proceedings
The Company is presently a party to several legal proceedings, which it
considers to be routine and in the ordinary course of its business. Management
has no knowledge of any pending or threatened claims that could give rise to any
litigation which management believes would be material to the Company.
PROPERTIES
The Company's offshore properties are located offshore Louisiana and
Texas. The following table sets forth certain information with respect to the
Company's significant properties as of November 1, 1996. Such properties account
for 97% of the aggregate SEC 10 Value of its properties.
Significant Proved Properties
<TABLE>
<CAPTION>
Proved Reserves
Oil Gas SEC 10
Property Area (Bbls) (Bcf) Value
<S> <C> <C> <C>
AMOCO PROPERTIES Offshore TX 1,820,000 28.1 $ 56,929,000
WEST DELTA PROPERTIES Offshore LA 566,000 25.2 $ 46,403,000
ZAPATA PROPERTIES Offshore TX & LA 208,000 9.6 $ 20,076,000
</TABLE>
Amoco Acquisition
On August 26, 1996 the Company entered into a Purchase and Sale
Agreement with Amoco Production Company to acquire Amoco's interest in 13
offshore blocks comprising six fields in the Gulf of Mexico ("Amoco
Properties"). The acquisition closed October 8, 1996. Current production, net to
the working interests acquired, is 680 barrels of oil per day and 12 MMcf of gas
per day of natural gas. The purchase price for the assets acquired in this
transaction was $40.4 million, paid by the issuance of 2,000,000 Common Shares,
at $4.20 per share, and by payment to Amoco of $32,000,000 in cash.
In addition to the interests acquired, the Company purchased a 33.3%
interest in a 12.67 mile 12" pipeline connecting East Breaks Block 160 platform
to the High Island Offshore System ("HIOS"), a natural gas pipeline system in
the Gulf of Mexico and a 33.3% interest in a 17.47 mile 10" pipeline connecting
the East Breaks Block 160 platform to the High Island Pipeline System ("HIPS"),
a crude oil pipeline system in the Gulf of Mexico. HIOS and HIPS are the primary
natural gas and crude oil pipeline systems in that part of the Gulf of Mexico.
The East Breaks Block 160 platform also serves a subsea well owned by
Mobil Oil Corporation in East Breaks Block 117. Under agreements with Mobil the
owners of the East Breaks Block 160 platform share in certain fees paid by
Mobil.
<PAGE>
The following table lists the field names, block numbers, working
interests, net revenue interests and number of wells of the properties.
Working Net Revenue Number of
Field/Block Interest Interest Active Wells
East Breaks 160 Field
EB 160 (OCS 2647) 0.3333 0.2778 13
EB 161 (OCS 2648) 0.3333 0.2778 10
High Island A-302 Field
HI A-302 (OCS 2732) 0.3333 0.2778 5
High Island A-309 Field
HI A-309 (OCS 2735) 0.4500 0.3750 9
HI A-310 (OCS 3378) 0.5500 0.4583 8
High Island A-330 Field
HI A-330 (OCS 2421) 0.1200 0.1000 25
HI A-349 (OCS 2743) 0.1200 0.1000 6
WC 613 (OCS 3286) 0.1200 0.1000 3
High Island A-474 Field
HI A-474 (OCS 2366) 0.1200 0.1000 18
HI A-489 (OCS 2372) 0.1200 0.1000 22
HI A-499 (OCS 3118) 0.1310 0.1092 6
HI A-475 (OCS 2367) 0.1200 0.1000 0
West Cameron 180 Field
WC 144 (OCS 1953) 0.1250 0.1042 7
Average net production from these fields during 1995 was 15.6 MMcf of gas
per day and 592 barrels of oil per day and cash flow net to the interests was
$9.5 million. These fields have potential for substantial reserve and production
increases. Net Probable Reserves of 10.8 Bcf and 213 MBO and net possible
reserves of 21.0 Bcf and 323 MBO have been identified by the Company in third
party engineering. Many of the fields have additional reserve potential that has
not yet been quantified.
East Breaks 160 Field
This field consists of two blocks, East Breaks 160 and 161. The water
depth ranges from 900' to 1,100'. The Company owns a 33.3% working interest with
a 27.8% net revenue interest. Unocal Corporation is the operator. The 1995 net
cash flow was $2.8 million. East Breaks 160 field produces from an anticlinal
ridge with 12 productive horizons. A proprietary 3-D survey was shot and
processed in 1990. Net proved reserves are estimated to be 15.2 Bcf and 1,641
MBO. The GA-2 and HB-2 reservoirs account for most of the reserves.
An additional 1.8 Bcf and 77 MBO of net Probable Reserves have been identified.
Additional income is derived from processing fees from the Mobil Oil Corporation
recent discovery in adjacent Block 117. This subsea well is tied back to the
East Breaks 160 platform. Management believes there are numerous reservoirs in
the field which have not been adequately evaluated with wells. Additional wells
on Blocks 160 and 161 as well as adjacent blocks are under consideration by
Unocal Corporation.
High Island A-302 Field
High Island Block A-302 is in approximately 200' of water. The Company
owns a 33.3% working interest with a 27.8% net revenue interest. Unocal
Corporation is the operator. Production is from four producing
<PAGE>
horizons on a faulted anticlinal structure. A speculative 3-D survey was shot in
1991 and processed in 1992. Net Proved Reserves are estimated to be .3 Bcf. One
well is producing, with one well scheduled to be recompleted in 1997 to exploit
net Probable Reserves of 5.1 Bcf. Management believes these probable reserves
should be recoverable from two sands in an area which seismic shows to be
undrained by the existing wells.
High Island A-309 Field
High Island A-309 field consists of two blocks, High Island A-309 and
A-310, in approximately 200' of water. The Company owns a 45% working interest
in Block A-309 and a 55% working interest in Block A-310. Phillips Petroleum
Company is the current operator. The 1995 net cash flow was $5.9 million.
Production is from three faulted anticlines with 18 productive horizons. A
proprietary 3-D seismic was shot in 1988 and processed in 1989. Net Proved
Reserves are estimated to be 7.3 Bcf. One additional well will be drilled to
recover the estimated 4.8 Bcf in four zones. An extensive field study was
completed in 1993. Numerous additional wells and recompletions are under
consideration for 1997.
High Island A-330 Field
The field consists of three blocks, High Island A-330, High Island A-349
and West Cameron 613. The field is located in 280' of water. The Company owns a
12% working interest with a 10% net revenue interest. Coastal Oil and Gas
Corporation is the current operator. Three wells have been recompleted in 1996.
This field produces from a faulted anticline with 24 productive horizons. The
Company has 2-D seismic over this field, but a 3-D seismic survey was recently
shot. Significant upside potential was delineated by the 3-D seismic. A well has
been proposed by the operator for 1997 and other wells and recompletions are
under consideration.
High Island A-474 Field
This field consists of three full blocks in the High Island Area, A-474,
A-489, A-499, and part of Block A- 475. The water depth is 250' to 285 and
Phillips Petroleum Company is the operator. The Company owns a 12% working
interest with a 10% net revenue interest in Blocks A-474 and A-489, a 13.1%
working interest with a 10.9% net revenue interest in Block A-499, and a 12%
working interest with a 9% net revenue interest in Block A-475. There are 23
productive horizons in this faulted anticline. A proprietary 3-D seismic was
shot in 1991 and processed in 1993. Net Proved Reserves are 3.6 Bcf and 174 MBO.
An additional 2.8 Bcf and 130 MBO of net probable reserves have been identified.
The most significant reserve base is the competitive G-15 Sand which has over 75
Bcf gross reserves remaining. Phillips is currently drilling a well and is
planning several recompletions and additional wells in 1997.
West Cameron 180 Field
This field consists of a single block, West Cameron 144, in 40' of water.
Texaco is the operator. The Company owns a 12.5% working interest with a 10.4%
net revenue interest. The producing feature is a north- plunging faulted
anticline that underlies West Cameron Blocks 173 and 180. There are three
productive horizons. Net Proved Reserves are estimated to be 353 MMCF, all of
which are producing in one well. Net probable incremental producing reserves
from this well add another 375 MMCF. Net Probable and Possible Undeveloped
Reserves of 16.4 Bcf are targeted by three proposed wells.
West Delta Properties
These properties consist of 13,565 acres in Blocks 52 through 56 and Block
58 in the West Delta Area, offshore Louisiana. The properties have 36 wells,
five of which were recently drilled. In 1994 the Company spent $6.9 million on
drilling four wells and the recompletion of eight wells on these properties. The
Company is the operator and generally owns 100% of the working interest, with an
87.5% net revenue interest with respect to these properties. Presently, the
wells produce from depths ranging from 1,200 feet to 12,500 feet. Because of the
existing surface structures and production equipment, additional wells can be
added on the properties with lower completion costs.
<PAGE>
The West Delta Properties were acquired from Conoco, Inc., Atlantic
Richfield Company (now Vastar Resources, Inc.), OXY USA, Inc. and Texaco
Exploration and Production, Inc. in May 1991. During 1995 the properties had net
production averaging approximately 20,643 Mcf of natural gas per day and 264
barrels of oil and condensate per day.
During 1994 the Company farmed out the deep rights (below 11,300 feet) to
an 1,875 acre parcel in Block 58 to Energy Development Corporation which drilled
a successful well to 16,500 feet. Production commenced in April, 1995. The
Company retained a 12 1/2% overriding royalty interest in that acreage that
converts to 15% overriding royalty interest at Payout. The well has produced as
much as 21,000 Mcf per day and 1,500 barrels of condensate per day. Energy
Development Corporation was subsequently acquired by Samedan Oil Corporation.
The Company generated a prospect in the northern portion of West Delta
Block 58 using 3-D seismic, which it farmed out to Tana Oil & Gas Corporation in
1996. Tana drilled a successful well to 12,800 feet which encountered 85 feet of
net pay and could produce as much as 10,000 Mcf per day based upon a recent well
test. The Company retained a 5.833% overriding royalty interest in the farmout.
Three of the fields in the Amoco Acquisition have proprietary 3-D seismic, while
all of the Amoco Properties have group 3-D seismic. A group 3-D seismic shooting
was recently completed on the western portion of the Company's properties in
West Delta.
The main production facility on the West Delta Properties is a four
platform complex designated as Tank Battery #3. There are four ancillary
platforms in the eastern portion of the properties connected to Tank Battery #3.
Three wells are on one of these platforms. In the western portion there is one
production platform designated as Platform "D" in Block 58, with three wells.
The remaining 30 wells are located on satellite structures connected to Tank
Battery #3 or one of its ancillary platforms. Eight wells produce oil and
natural gas. The remaining wells produce only natural gas.
The Company is replacing the pipeline connecting "D" Platform in Block 58
with Tank Battery #3 in Block 54 with two new 6" pipelines. For this reason
production from Block 58 is currently shut-in.
In connection with the acquisition of the West Delta offshore
properties the Company provides the sellers with a $4,100,000 plugging and
abandonment bond collateralized in part with a bank escrow account.
See "The Company - Plugging and Abandonment Escrows".
Zapata Properties
On July 12th, 1995, the Company entered into a Purchase and Sale
Agreement with Zapata Exploration Company ("Zapata") to acquire all of Zapata's
offshore oil and gas properties in the Gulf of Mexico. The properties consist of
East Breaks Blocks 109 and 110, East Cameron Block 359, Eugene Island Block 372,
South Timbalier Block 185 and West Cameron Block 538, totaling 31,134 gross
acres. The transaction was closed July 26, 1995. The Company took over as
operator of the East Breaks and West Cameron properties effective at closing.
The East Cameron property is operated by Anadarko Petroleum Corporation. The
Eugene Island property is operated by Unocal Corporation and the South Timbalier
property is operated by Louisiana Land & Exploration Company. Proved reserves at
December 31, 1995 attributable to the Company's net working interests, were
222,000 Bbls and 15.3 Bcf of natural gas. Management has identified probable and
possible reserves attributable to these properties. During 1995, subsequent to
July 26th, the properties produced 20,000 barrels of oil and 1.8 Bcf of natural
gas, net to the Company's interest.
In addition to the mineral interests acquired, the Company purchased a
100% interest in a 31 mile natural gas pipeline connecting the Company's East
Breaks 110 platform to the High Island Offshore System and a 22 mile oil
pipeline which connects the East Breaks 110 platform with the High Island
Pipeline System. HIOS and HIPS are the primary natural gas and crude oil systems
in that part of the Gulf of Mexico.
The Company's East Breaks 110 platform has significant excess capacity
for both crude oil and natural gas. Prior to the acquisition of the properties,
Zapata had entered into a Facilities Sharing Agreement with AGIP Petroleum
Company, Inc. ("AGIP") to operate and process for AGIP's subsea wells in Blocks
112 and 157. Under the Agreement AGIP will pay certain fees to the Company and
split the cost of operating the East Breaks 110 platform with the Company, based
upon each company's proportion of production. A portion, not to exceed $6
million, of the monies earned pursuant to this Agreement are being paid to
Zapata as part of the acquisition of the properties.
The purchase price for the assets acquired in the transaction was
$2,748,000 in cash and the obligation to pay a production payment to Zapata
based upon future production. The production payment is based upon production
from the East Breaks 109 Field after production of 12 Bcfe gross (10 Bcfe net)
measured from October 1, 1994. The Company will pay to Zapata $.4167 per Mcfe on
the next 27 Bcfe produced, if that much
<PAGE>
is produced. Payments to Zapata on this production payment are to be made by the
Company when it is paid for the oil or gas. The Company's oil and gas reserves
are calculated net of this production payment.
Bayou Sorrel Field
As of December 27, 1995 the Company acquired from Shell Western E &
P, Inc. all of its interest in the Bayou Sorrel Field in Iberville Parish,
Louisiana. The purchase price of the field and a related receivable of $600,000
was $10,455,000 in cash, including a $205,000 brokers' fee.
Effective September 1, 1996 the Company sold the Bayou Sorrel Field to
National Energy Group, Inc. for $11 million. The Company received $9 million in
cash and $2 million in shares of National Energy Group, Inc. common stock. The
Company retained a 3% overriding royalty interest in the deep rights of the
field below 11,000 feet. The transaction closed November 22nd.
Oil and Gas Information
The following tables set forth selected oil and gas information for the
Company. Future results may vary significantly from the amounts reflected in the
information set forth herein because of normal production declines and future
acquisitions. The transaction closed November 22nd.
Proved Reserves (a) (b)
The following table sets forth information as of November 1, 1996 as to the
estimated Proved Reserves attributable to the Company's properties.
Oil and liquids (Bbls):
Proved Developed Reserves ............................ 2,438,000
Proved Undeveloped Reserves .......................... 482,000
-----------
Total Proved Reserves ............................ 2,920,000
Natural gas (Mcf):
Proved Developed Reserves ............................ 52,192,000
Proved Undeveloped Reserves .......................... 12,733,000
-----------
Total Proved Reserves ............................ 64,925,000
(a) Calculated by the Company in accordance with the rules and regulations
of the SEC, based upon November 1, 1996 prices of $22.00 per barrel of oil and
$2.63 per MMBTU of gas, adjusted for basis differentials, BTU content of gas and
specific gravity of oil. The Company's independent reservoir engineers prepare a
reserve report as of the end of each calendar year.
(b) Includes the recently acquired Amoco Properties and excludes the
recently sold Bayou Sorrel Field.
Estimated Future Net Revenues
from Proved Reserves (a) (b)
The following table sets forth information as of November 1, 1996 as
to the estimated future net revenues (before deduction of income taxes) from the
production and sale of the Proved Reserves attributable to the Company's
properties.
Proved Total
Developed Proved
Reserves Reserves
Estimated Future net revenues (c):
1996(2 mos.)...................... $ 6,290,000 6,290,000
<PAGE>
1997 ............................. 35,573,000 36,847,000
1998 ............................. 25,008,000 31,607,000
1999 ............................. 16,910,000 22,331,000
Thereafter ....................... 53,627,000 79,623,000
------------ ------------
Total ............................ $ 137,408,000 $ 176,698,000
Present value (10%) of estimated future net
revenues (SEC 10 Value)........... $ 104,868,000 $ 128,092,000
(a) Calculated by the Company in accordance with the rules and regulations
of the SEC, based upon November 1, 1996 prices of $22.00 per barrel of oil and
$2.63 per MMBTU of offshore gas, adjusted for basis differentials, BTU content
of gas and specific gravity of oil. The Company's independent reservoir
engineers prepare a reserve report as of the end of each calendar year.
(b) Includes the recently acquired Amoco Properties and excludes the
recently sold Bayou Sorrel Field.
(c) Estimated future net revenues represent estimated future gross revenues
from the production and sale of Proved Reserves, net of estimated operating
costs, future development costs estimated to be required to achieve estimated
future production and estimated future costs of plugging offshore wells and
removing offshore structures.
Production, Price, and Cost Data
The following table sets forth certain production, price, and cost
data with respect to the Company's properties, for the three years ended
December 31, 1995, 1994 and 1993 and the nine months ended September 30, 1996
and 1995.
<TABLE>
<CAPTION>
For the nine months For the years
ended September 30, ended December 31,
1996(a) 1995 1995 1994 1993
----- ---- ------ ---- ----
Oil:
<S> <C> <C> <C> <C> <C>
Net Production (Bbls)(b) 203,000 122,000 170,000 137,000 180,000
Revenue........................$. 3,724,000 $ 1,989,000 $ 2,853,000 $ 2,103,000 $ 3,003,000
Average net Bbls per day 741 447 466 375 493
Average price per Bbl $ 18.34 $ 16.30 $ 16.78 $ 15.35 $ 16.69
Gas:
Net Production(Mcf)(b) 4,590,000 7,578,000 9,850,000 8,139,000 5,586,000
Revenue........................$ 9,533,000 $ 11,671,000 $ 15,594,000 $ 15,235,000 $ 9,602,000
Average net Mcf per day 16,800 27,800 27,000 22,300 15,300
Average price per Mcf $ 2.08 $ 1.54 $ 1.58 1.87 $ 1.72
Total Revenues..........................$ 13,257,000 $ 13,660,000 $ 18,447,000 $ 17,338,000 $ 12,605,000
Production Costs:
Production cost 6,049,000 5,729,000 8,055,000 5,231,000 5,297,000
Mcfe(c) 5,808,000 8,310,000 10,870,000 8,961,500 6,666,000
Production costs per Mcfe(c) 1.04 .69 .74 .58 .79
</TABLE>
- ------
(a) The information shown for 1996 was impacted by the explosion and fire
on April 24th at West Delta Tank Battery #3, which resulted in those
fields being off production until October 7, 1996, when production
resumed. For that reason management would not consider these production
costs to be indicative of the future. Also this information includes
Bayou Sorrel Field through August 31, the date of its sale, and does
not include any information with respect to the recently acquired Amoco
Properties.
(b) Production information is net of all royalty interests, overriding
royalty interest and the net profits interest in the West Delta
Properties owned by the Company's former lenders.
(c) Oil production is converted to Mcfe (Equivalent Mcf) at the rate of 6
Mcf per Bbl, representing the estimated relative energy content of
natural gas to oil.
<PAGE>
Productive Wells(a)
The following table sets forth the number of productive oil and gas
wells, as of the date hereof, attributable to the Company's properties.
Gross productive offshore wells (b): Company Operated
Oil . . . . . . . . . . . . . . . 33. . . . . . . . . . . 10
Gas . . . . . . . . . . . . . . . . 90. . . . . . . . . . . 42
-- --
Total . . . . . . . . . . . . . .123 . . . . . . . . . . . 52
Net productive offshore wells (c):
Oil . . . . . . . . . . . . . .. . . 1. . . . . . . . . . .. 10
Gas . . . . . . . . . . . . . . .. . .49 . . . . . . . . . . ..38
-- --
Total . . . . . . . . . . . . . . 64 . . . . . . . . . . ..48
- -----
(a) Productive wells consist of producing wells and wells capable of
production, including shut-in wells and water disposal and injection
wells. One or more completions in the same borehole are counted as one
well.
(b) A "gross well" is a well in which a working interest is owned. The
number of gross wells represents the sum of the wells in which a
working interest is owned.
(c) A "net well" is deemed to exist when the sum of the fractional working
interests in gross wells equals one. The number of net wells is the sum
of the fractional working interests in gross wells.
Leasehold Acreage
The following table sets forth the developed acreage as of the date
hereof attributable to the Company's properties, excluding onshore acreage which
is no longer significant.
Developed offshore acreage (a):
Gross acres (b).......................... 103,771
Net acres (c)............................ 43,645
(a) Developed acreage is acreage assignable to productive wells.
(b) A "gross acre" is an acre in which a working interest is owned. The
number of gross acres represents the sum of the acres in which a
working interest is owned.
(c) A "net acre" is deemed to exist when the sum of the fractional working
interests in gross acres equals one. The number of net acres is the sum
of the fractional working interests in gross acres.
<PAGE>
Drilling Activities
The following table sets forth the number of gross productive and dry
wells in which the Company had an interest, that were drilled and completed
during the three years ended December 31, 1995 and the nine months ended
September 30, 1996. Such information should not be considered indicative of
future performance, nor should it be assumed that there is necessarily any
correlation between the number of productive wells drilled and the oil and gas
reserves generated thereby or the costs to the Company of productive wells
compared to the costs to the Company of dry wells.
Developmental Wells Exploratory Wells
Completed Dry Completed Dry
Oil Gas Oil Gas Oil Gas Oil Gas
--- --- --- --- --- --- --- ---
1993 3 0 0 0 0 0 0 0
1994 5 4 0 0 0 1 0 0
1995 0 0 0 0 0 0 0 3
1996 (9 mos) 0 0 2 0 0 0 0 0
---- ---- ---- ---- ----- ---- ---- ----
Total 8 4 2 0 0 1 0 3
Title to Oil and Gas Properties
In the case of acquired properties title opinions are obtained. Prior
to the commencement of drilling operations a thorough drillsite title
examination is conducted and curative work performed with respect to significant
defects.
Undeveloped Acreage and Unproved Properties
The Company does not hold interest in a significant amount of
Undeveloped Acreage to which no Proved Reserves have been assigned. However, the
Company retained a 3% overriding royalty interest in depths below 11,000 feet
when it sold the Bayou Sorrel Field, and no reserves have been attributed to
these depths.
<PAGE>
MANAGEMENT
Officers and Directors
The Company has a classified Board of Directors. Directors are elected
to serve for three-year terms and until their successors are elected and
qualified. One-third of the directors stand for election each year as their
terms expire. The Board of Directors consists of three employees of the Company
and six independent directors.
Officers are elected by and serve at the discretion of the Board of
Directors.
Set forth below are the names, ages, and positions of the persons who
are executive officers and directors of the Company.
Director
Name Age Since Position
H. James Maxwell ..........52 1992 Chairman of the Board, President,
Chief Executive Officer, and Director(a)
Bob F. Mallory ............64 1992 Chief Operating Officer, Executive Vice
President and Director(a)
Larry M. Wright ...........52 1992 Executive Vice President and
Director(b)
Robert G. Wonish ..........43 --- Vice President
Edward A. Bush.............53 --- Vice President
William J. Doyle ..........45 --- Vice President
Todd R. Bart ..............32 --- Chief Financial Officer, Secretary and
Treasurer
A. Theodore Stautberg, Jr..50 1993 Director(c)-Compensation Committee
Donald W. Chesser .........57 1992 Director(a)
James B. Kreamer ..........56 1993 Director(c)
N. Lynne Sieverling .......59 1992 Director(b)-Audit and Compensation
Committees
Mark C. Barrett............46 1996 Director(b)-Audit and Compensation
Committees
Michael Springs............47 1996 Director(c)-Audit Committee
(a) These persons are designated as Class II directors, with their term of
office expiring at the annual meeting of shareholders in 1998.
(b) These persons are designated as Class I directors, with their term of
office expiring at the annual meeting of shareholders in 1997.
(c) These persons are designated as Class III directors, with their term of
office expiring at the annual meeting of shareholders in 1999.
Set forth below are descriptions of the principal occupations, during
at least the past five years, of the directors and executive officers of the
Company.
H. James Maxwell received a B.A. degree in Economics from the University of
Missouri-Kansas City
<PAGE>
and received his Law Degree from that same university in 1972. Mr. Maxwell
practiced securities law from 1972 to 1984, and was a frequent author and
speaker on oil and gas tax and securities law. He served as a General Partner of
Castle Royalty Limited Partnership from 1984 to 1988, Managing General Partner
of PAN Petroleum MLP from 1987 to 1992, both of which were predecessors of the
Company, and President, CEO and Chairman of the Company from 1992 to date. He is
a member of the Executive Committee and Personnel Committee.
Bob F. Mallory received his Ph.D. in Geology from the University of
Missouri in 1968 and a B.A. in Geology from the University of Wichita in 1961.
He began consulting in the oil industry in 1980. He served as a General Partner
of Castle Royalty Limited Partnership from 1984 to 1988, as a General Partner of
PAN Petroleum MLP from 1987 to 1992, both of which were predecessors of the
Company, and Executive Vice President and Chief Operating Officer of the Company
from 1992 to date. He is a member of the Executive Committee and Personnel
Committee.
Larry M. Wright received his B.S. Degree in Engineering from the
University of Oklahoma in 1966. From 1966 to 1976 he was with Union Oil Company
of California (UNOCAL). From 1976 to 1980, he was with Texas International
Petroleum Corporation, ultimately as division operations manager. From 1980 to
1981, he was with what is now Transamerica Natural Gas Company as Vice
President-Exploration and Production. From 1981-1982, he was Senior Vice
President of Operations for Texas International Petroleum Corporation, and, from
1983 to 1985, he was Executive Vice President of Funk Fuels Corp., a subsidiary
of Funk Exploration. From 1985 to 1993, Mr. Wright was an independent
consultant. From 1993 to date, he has served as Executive Vice President of the
Company. He is a member of the Executive Committee and Personnel Committee.
Robert G. Wonish received his B.S. in Mechanical Engineering in 1975
from the University of Missouri-Rolla. He was a production engineer with Amoco
from 1975 to 1977, Napeco, Inc. from 1977 to 1979; Division Operation Engineer
with Texas International from 1979 to 1980; Production Manager with Cliffs
Drilling Company from 1980 to 1984 and District Superintendent with Ladd
Petroleum Corporation from 1985 to 1991. He then worked as a consultant,
starting with the Company in 1992, and became an employee in 1993.
Edward A. Bush received his B.S. Degree in Geology from Baldwin Wallace
College in 1964 and his M.A. in Geology from Bowling Green State University in
1966. He served in various geological and exploration capacities with Exxon
(1968-75), Union Texas Petroleum (1975-79), Home Petroleum Corp. (1979-81),
Traverse Oil Co. (1981-83) and Sohio Petroleum Co. (1983-85). From 1985 to 1995
he served first as Exploration Manager, then Vice President of Exploration and
later Vice President of Operations for Columbia Gas Devp. Corp. From 1995 to
1996 he served as Vice President-Exploration and then the President of Howell
Petroleum Corp.
William J. Doyle received his Masters in Geology in 1975 from Texas A&M
University and his B.S. in Earth Sciences from the University of New Orleans in
1973. From 1975 to 1978 he was a geologist with Mobil Oil focusing on offshore
Gulf of Mexico projects. From 1978 to the present he has worked as an employee
and consultant for various oil and gas exploration companies operating in the
Gulf Coast. He joined the Company as a consulting geologist in 1992 and became a
Vice President in 1995.
Todd R. Bart received his B.B.A. in Accounting from Abilene Christian
University in 1987. He worked in the energy industry with Pennzoil Company from
1987 to 1990 and the public accounting firm of Arthur Andersen and Company from
1990 until 1992. From 1992 to 1995 he worked for Yellow Freight System, Inc., a
trucking company, in financial accounting and reporting. He joined the Company
as Controller in 1995 and was elected Chief Financial Officer, Treasurer and
Secretary in 1996. He received his C.P.A. designation in Texas in 1990 and in
Kansas in 1993, and is a member of the A.I.C.P.A.
A. Theodore Stautberg, Jr. has since 1981 been the President and a director
of Triumph Resources Corporation and its parent company, Triumph Oil and Gas
Corporation of New York. Triumph engages in the oil and gas business, assists
others in financing energy transactions, and serves as general partner of
Triumph
<PAGE>
Production L.P. Mr. Stautberg is also the president of Triumph Securities
Corporation and BT Energy Corporation. Prior to forming Triumph in 1981, Mr.
Stautberg was a Vice President of Butcher & Singer, Inc., an investment banking
firm, from 1977 to 1981. From 1972 to 1977, Mr. Stautberg was an attorney with
the Securities and Exchange Commission. Mr. Stautberg is a graduate of the
University of Texas and the University of Texas School of Law.
Donald W. Chesser received his B.B.A. in Accounting from Texas Tech
University in 1963 and has served with several CPA firms since that time,
including eight years with Elmer Fox and Company. From 1977 to 1981, he was with
IMCO Enterprises, Inc. Since 1982 he has been a shareholder and President of
Chesser & Company, P.A., a CPA firm. He is also President of Financial Advisors,
Inc., a registered investment advisor.
James B. Kreamer received his B.S. Degree in Business from the University
of Kansas in 1963 and has been active in investment banking since that time.
Since 1982 he has managed his personal investments.
N. Lynne Sieverling received his B.S. Degree in Accounting from the
University of Kansas in 1959 and has practiced as a CPA since graduation,
serving 17 years as a partner with the accounting firm of Coopers & Lybrand. Mr.
Sieverling has also been actively involved in the oil and gas industry since
1984 both as an investor and as an operator of oil and gas leases in Kansas,
Oklahoma and North Dakota.
Mark C. Barrett received his B.S. Degree in Business
Administration/Accounting in 1972 and is licensed to practice as a Certified
Public Accountant in both Kansas and Missouri. He was a partner in the firm
Drees Dunn Lubow and Company from 1974 until 1981. He founded Barrett &
Associates, a CPA firm, in 1981 and is the president and majority shareholder in
that firm. His CPA firm served as the Company's independent public accountants
from 1985 to 1995.
Michael Springs graduated from the Medical Field Service School, Brooke
Hospital, San Antonio, Texas in 1971 and the University of Missouri, Kansas
City, in 1969 with a degree in Business. He is the President and founder of
Ortho-Care, Inc. of Kansas City, Missouri and Ortho-Care Southeast of Charlotte,
North Carolina. Ortho-Care, Inc. is a manufacturer of orthopedic fracture
management and sports medicine products, and holds a number of patents in the
field. Mr. Springs is also controlling partner in Ortho-Implants, a distributor
of total joint replacement prosthesis.
None of the officers or directors serve pursuant to employment
agreements.
Board of Directors
The Board of Directors has the responsibility for establishing broad
corporate policies and for the overall performance of the Company, although it
is not involved in day-to-day operating details. Directors are kept informed of
the Company's business by various reports and documents, as well as by operating
and financial reports presented at Board and committee meetings by the Chairman
and other officers.
Meetings of the Board of Directors are held regularly each quarter and
there is also a meeting following the annual meeting of the shareholders.
Additional meetings, including meetings by telephone conference call, of the
Board may be called whenever needed. The Board of Directors of the Company held
six (6) meetings in 1995, two of which were meetings by telephone conference
call. Each director attended all meetings of the Board, except for the two
telephone conference calls, of which James B. Kreamer was not connected either
time and Allen H. Sweeney and Thomas E. Clark ( then directors) were not
connected on one conference call.
Committees of the Board
The committees established by the Board of Directors to assist it in
the discharge of its responsibilities are described below. The biographical
information on each director identifies the committee memberships currently
held.
<PAGE>
The Executive Committee has three members, all of whom are also
officers of the Company. The Committee meets on call whenever needed and has
authority to act on most matters during the intervals between Board meetings.
The Executive Committee also serves as the Personnel Committee.
The Audit Committee has three members, none of whom is an employee of
the Company. The Committee meets with management to consider the adequacy of the
internal controls of the Company and the objectivity of its financial reporting;
the Committee also meets with the independent accountants concerning these
matters. The Committee recommends to the Board the appointment of the
independent accountants, subject to ratification by the shareholders at the
annual meeting. The independent accountants periodically meet alone with the
Committee and have unrestricted access to the Committee. The Committee met once
in 1995.
The Compensation Committee has three members, none of whom is an
employee of the Company. It makes recommendations to the Board with respect to
the compensation of management of the Company and the Company's Long-Term
Incentive Plan. The Committee met twice in 1995.
Compensation of Directors
Directors receive travel expenses incurred in attending Board of
Directors or committee meetings. Officers of the Company who serve as directors
do not receive special compensation for serving on the Board of Directors or a
committee thereof. However, during 1995 Messrs. Stautberg, Chesser, Sweeney,
Kreamer and Sieverling, the then non-employee directors, were each issued 1,039
Common Shares as a $5,000 bonus. In 1995 Mr. Chesser was issued warrants to
acquire 25,000 Common Shares at $2.50 per share, which expired December 31,
1995, for services performed for the Company in 1991. During 1995 he exercised
those warrants. See "Certain Relationships and Related Transactions," herein.
Newly elected non-employee directors are granted a one-time restricted
stock award in Common Shares equal in value to $10,000 upon their being elected
to the Board. See "Long-Term Incentive Plan," herein.
Long-Term Incentive Plan
The Company's Long-Term Incentive Plan (the "Long-Term Incentive
Plan"), adopted in 1992, provides for the granting to certain officers and key
employees of the Company and its participating subsidiaries incentive awards in
the form of stock options, stock appreciation rights ("SARs"), Common Shares,
and cash awards. The Long-Term Incentive Plan is administered by a committee of
non-employee members of the Board of Directors with respect to awards to certain
executive officers of the Company but may be administered by the Board of
Directors with respect to any other awards (either, the "Plan Committee").
Except for certain automatic awards, the Plan Committee has discretion to select
the employees to be granted awards, to determine the type, size, and terms of
the awards, to determine when awards will be granted, and to prescribe the form
of the instruments evidencing awards.
Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of Common Shares at a price
fixed at the time the option is granted. Payment may be made with cash or other
Common Shares owned by the optionee or a combination of both. Options are
exercisable at the time and on the terms that the Plan Committee determines. The
payment of the option price can be made either in cash or by the person
exercising the option turning in to the Company shares presently owned by the
person, which would be valued at the then current market price. SARs are rights
to receive a payment, in cash or Common Shares or both, based on the value of a
Common Share. A stock award is an award of Common Shares or denominated in
Common Shares that may be subject to a restriction against transfer as well as a
repurchase option exercisable by the Company. During the period of the
restriction, the employee may be given the right to vote and receive dividends
on the shares covered by restricted stock awards. Cash awards are generally
based on the extent to which pre-established performance goals are achieved over
a pre-established period but may also include individual bonuses paid for
previous, exemplary performance. It is currently expected that the Plan
Committee will determine performance objectives and award levels before the
beginning of each plan year.
<PAGE>
The Long-term Incentive Plan provides for the issuance of a maximum
number of Common Shares equal to 20% of the total number of Common Shares
outstanding from time to time. Unexercised SARs, unexercised options, restricted
stock, and performance units under the Long-term Incentive Plan are subject to
adjustment in the event of a stock dividend, stock split, recapitalization or
combination of the Company, merger, or similar transaction and are not
transferable except by will and by the laws of descent and distribution. Except
when a participant's employment terminates as a result of death, disability, or
retirement under an approved retirement plan or following a change in control in
certain circumstances, an award generally may be exercised (or the restriction
thereon may lapse) only if the participant is an officer, employee, or director
of the Company or a subsidiary at the time of exercise or lapse or, in certain
circumstance, if the exercise or lapse occurs within 180 days after employment
is terminated.
The Long-term Incentive Plan allows for the satisfaction of a
participant's tax withholding with respect to an award by the withholding of
Common Shares issuable pursuant to the award or the delivery by the participant
of previously owned Common Shares, in either case valued at the fair market
value, subject to limitations the Plan Committee may adopt.
Awards granted pursuant to the Long-term Incentive Plan may provide
that, upon a change of control of the Company, (a) each holder of an option will
be granted a corresponding SAR, (b) all outstanding SARs and stock options
become immediately and fully vested and exercisable in full, and (c) the
restriction period on any restricted stock award shall be accelerated and the
restriction shall expire. Options and SARs will remain exercisable for their
original terms whether or not employment is terminated following a change in
control.
The Long-term Incentive Plan may be amended by the Board of Directors,
except that under current law no amendment that materially increases the number
of Common Shares subject to the Long-term Incentive Plan or that makes certain
other material changes may be made without shareholder approval. No grants or
awards may be made under the Long-term Incentive Plan after the tenth
anniversary of the Closing Date. No shareholder approval will be sought for
amendments to the Long-term Incentive Plan except as required by law (including
Rule 16b-3 under the Exchange Act) or the rules of any national securities
exchange on which the Common Shares are then listed.
There are no incentive awards pertaining to stock options, SARs or
Common Shares issued or outstanding under the Long-term Incentive Plan.
Under the Company's Long-Term Incentive Plan beginning in 1996, all
employees on December 31 of each year share a bonus equal to 5% of the Company's
pre-tax net income, computed in accordance with GAAP, exclusive of extraordinary
and non-recurring items. The bonuses will be paid to all full time (1,000 +
hours) employees at December 31. The bonus will be paid upon delivery of the
independent audit. The bonus shall be allocated to the full time employees based
upon their salary at December 31 of that year.
Each non-employee director of the Company who becomes a director will,
on the day after the first meeting of the Board of Directors at which that
director is in attendance, automatically be granted a restricted stock award of
the number of Common Shares that have a value of $10,000, which will be
calculated based on the average trading price of the Common Shares during the 60
days immediately preceding the date of grant. These restricted stock awards will
vest over two years, with one-third vesting six months following the date of
grant, another one-third vesting on the first anniversary of the date of grant,
and the last one-third vesting on the second anniversary of the date of grant so
long as the non-employee director remains a director of the Company through
those vesting dates.
Each non-employee director will be entitled to vote each share subject
to these restricted stock awards from the date of grant until the shares are
forfeited, if ever. The Long-term Incentive Plan requires each non-employee
director to make an election under Section 83(b) of the Code to include the
value of the restricted stock in his income in the year of grant and provides
for cash awards to the non-employee directors in amounts sufficient to pay the
federal income taxes due with respect to the award.
<PAGE>
The following table shows information with respect to restricted stock
awards owned by non-employee directors.
Name Date of Grant Shares Price
---------- ------------- ------ -----
Michael Springs September 4, 1996 2,447 $4.09
Mark C. Barrett September 4, 1996 2,447 4.09
-----
Total 4,894
Employee Stock Ownership Plan
In 1994, the shareholders approved the adoption of the PANACO, Inc.
Employee Stock Ownership Plan ("ESOP"). The primary purposes of the ESOP are to
enable participants to acquire ownership in the Company and to provide a source
of equity capital to the Company. The ESOP provides for the establishment of a
trust to hold ESOP assets which will primarily consist of Common Shares of the
Company. The ESOP will be administered by a committee of the Board of Directors.
Subject to the discretion of the Board of Directors, the Company may contribute
up to fifteen percent (15%) of the participant's (including employees and other
consultants to the Company) annual compensation to the ESOP. The ESOP does not
allow contributions by participants in the Plan.
Company contributions to the ESOP may be in the form of Common Shares
or cash. Cash contributions may be used, at the discretion of the Board of
Directors, to purchase Common Shares in the open market or from the Company at
prevailing prices.
The allocation of ESOP assets is determined by a formula based on
participant compensation. Participation in the ESOP requires completion of more
than one thousand (1,000) hours of service to the Company within twelve (12)
consecutive months.
The ESOP is intended to satisfy any applicable requirements of the
Internal Revenue Code of 1986 and the Employee Retirement and Income Security
Act of 1974. The Company has been advised that its contributions to the ESOP
will be deductible for Federal Income Tax purposes, and the participants will
not recognize income on their allocated share of ESOP assets until such assets
are distributed.
As of September 30, 1996, the ESOP owned of record 59,865 Common
Shares, allocable to the years prior to 1996, and will, subject to Board
approval, be issued 20,460 Common Shares for the first three quarters of 1996.
Such Common Shares are owned beneficially by the employees of the Company.
Summary Compensation Table
The following table sets forth the annual compensation paid to the
Company's Chief Executive Officer and each executive officer whose compensation
exceeds $100,000 during 1995.
<TABLE>
<CAPTION>
Long-Term Incentive Plan
Annual Compensation Awards Payouts
Securities
Other Restricted Underlying LTIP All
Name and Principal Salary Bonus Annual Stock Options Payouts Other
Position Year ($)(1) ($) Comp. ($) Award(s) ($) (#) ($) Comp.($)(2)
- ----------------------------- ------------------------------ ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
H. James Maxwell 1995 153,500 0 0 0 24,615 0 22,500
President and Chief 1994 120,000 0 0 0 22,857 0 18,000
Executive Officer 1993 80,000 0 0 0 115,000 0 0
Larry M. Wright 1995 147,300 0 0 0 0 0 22,100
Executive Vice 1994 134,000 0 0 0 0 0 20,000
President 1993 120,000 0 0 0 0 0 0
<PAGE>
Robert G. Wonish 1995 92,100 0 0 0 0 0 13,800
Vice President 1994 78,800 0 0 0 0 0 11,800
1993 77,000 0 0 0 0 0 0
</TABLE>
(1) The 1993 salary figures for Messrs. Wright and Wonish include payments
made to them as independent consultants before becoming employees of
the Company in that year.
(2) The other compensation figures for 1995 and 1994 represent
contributions to the accounts of the employees under the Company's
Employee Stock Ownership Plan. The Plan was adopted in 1994.
Aggregated Option( Warrants) Exercises in Last Fiscal Year
and Fiscal Year End Option Values
The following table provides information relating to the number and
value of Common Shares subject to options exercised during 1995 or held by the
named executive officers as of December 31, 1995.
<TABLE>
<CAPTION>
Number of
securities underlying Value of unexercised
Securities unexercised options in-the-money
acquired Value at fiscal year-end ($) options at year-end($)(2)
Name on Exercise (#) Realized ($)(1) Exercisable/unexercisable Exercisable/Unexercisable
- --------------------------------------- --------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
H. James Maxwell 250,972 410,129 -0- / -0- -0- / -0-
Larry M. Wright 0 0 250,000 / -0- 549,375 / -0-
Robert G. Wonish 0 0 -0 -/ -0- -0- / -0-
</TABLE>
(1) Value realized is calculated based upon the difference between the
options exercise price and the market price of the Common Shares on the
date of exercise multiplied by the number of shares to which the
exercise price relates.
(2) Value of unexercised in-the-money options is calculated based on the
difference between the option exercise price and the closing price of
the Common Shares at year-end, multiplied by the number of shares
underlying the options. The closing price on December 29, 1995 of the
Common Shares was $4.4375.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of
Securities total options
Underlying granted to Exercise or Market price
Options employees Base price at date Expiration Grant Date
Name Granted in fiscal year ($/Share) of grant($) Date Value($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
H. James Maxwell 24,615 (1) 33% 2.03125 4.0625 12/31/95 50,000
Larry M. Wright -0- -0- N/A N/A N/A N/A
Robert G. Wonish -0- -0- N/A N/A N/A N/A
</TABLE>
(1) Mr. Maxwell's options were exercised in 1995.
<PAGE>
TOTAL RETURN GRAPH
PERFORMANCE GRAPHS
The following Performance Graph compares the annual change of the
cumulative total shareholder return , assuming reinvestment of dividends, of an
assumed $100 investment on January 1, 1991 in (1) Common Shares, (2) the NASDAQ
Market Index and (3) a peer group of all crude petroleum and natural gas
exploration and production companies (SIC Code 1311) listed on NASDAQ. The
Company began trading on NASDAQ September 21, 1989.
FISCAL YEAR ENDING
COMPANY 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/29/95 11/29/96*
PANACO, Inc. 100.00 214.37 130.49 195.73 298.26 330.88 391.46
PEER GROUP 100.00 109.81 116.29 139.38 125.19 144.76 213.62
BROAD MARKET 100.00 128.38 129.64 155.5 163.26 211.77 257.90
* 1996 IS BASED ON 11 MONTHS, ENDING 11/29/96.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to record and
beneficial ownership of Common Shares by (a) each executive officer and director
of the Company, (b) all executive officers and directors of the Company as a
group, and (c) for each person who beneficially owns 5% or more of the Common
Shares as of November 15, 1996.
<TABLE>
<CAPTION>
Shares Owned
Name and Positions of Owners Of Record Beneficially
Number Percent Number Percent
H. James Maxwell; Chief Executive Officer,
<S> <C> <C> <C> <C> <C>
President, Chairman of the Board & Director .............. 313,386 2.18 322,971 (1) 2.01
Larry M. Wright; Executive Vice President &
Director ................................................. 395,000 2.75 654,999 (1)(2) 4.08
Bob F. Mallory; Chief Operating Officer,
Executive Vice President & Director ...................... 228,030 1.59 233,030 (1) 1.45
Robert G. Wonish; Vice President ......................... 12,000 .08 18,328 (1) .11
William J. Doyle; Vice President ......................... - .00 4,405 (1) .03
A. Theodore Stautberg, Jr.; Director ..................... 6,137 .04 6,137 .04
Donald W. Chesser; Director .............................. 1,039 .01 1,039 .00
Michael Springs; Director ................................ 3,096 .02 3,096 (3) .02
James B. Kreamer; Director ............................... 51,055 .36 51,055 .32
N. Lynne Sieverling; Director ............................ 8,137 .06 8,137 .05
Mark C. Barrett; Director................................. 2,447 .02 2,447 (3) .02
All directors and officers as a group (13 persons) ....... 1,020,327 7.11 1,305,644 (1) 8.13
Carl C. Icahn ........................................... 1,095,000 7.63 1,095,000 (4) 6.82
c/o Icahn Associates Corp.
114 West 47th Street, 19th Fl
New York, NY 10036
Richard A. Kayne ......................................... 694,047 4.84 2,160,714 (5)(6) 13.45
Kayne, Anderson Investment Management, Inc.
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Amoco Production Company.................................. 2,000,000 13.94 2,000,000 12.45
550 WestLake Park Blvd.
Houston, TX 77079
Attn.: John M. Kaffenes
</TABLE>
(1) Includes shares held in the Company's Employee Stock Ownership Plan for
each officer as follows: Mr. Maxwell - 9,585 shares, Mr. Wright - 9,999 shares,
Mr. Mallory - 5,000 shares, Mr. Wonish - 6,328 shares and Mr. Doyle - 4,405
shares, and for all directors and officers as a group - 35,307 shares.
(2) Includes 250,000 shares issuable pursuant to currently exercisable
warrants.
(3) These persons were each issued 2,447 shares upon election as a director
in 1996.
(4) Mr. Icahn is the sole shareholder of Riverdale Investors Corp, Inc.,
the general partner of High River Limited Partnership, the record holder of
these shares.
(5) Mr. Kayne has sole voting power with respect to investments of Kayne,
Anderson Investment Management, Inc., which is the general partner of KAIN
Non-Traditional, L.P., which is the general partner of: Offense Group Associates
Limited; Opportunity Associates, L.P.; ARBCO Associates, L.P.; and Kayne,
Anderson Non-Traditional Investments, L.P.; the record holders of 694,047 of
these shares were some of the lenders with respect to the 1993 Subordinated
Notes.
(6) Mr. Kayne has sole voting power with respect to investments of Kayne,
Anderson Investment & Management, Inc., which is the general partner of Offense
Group Associates, L.P.; Kayne, Anderson Non-Traditional Investments, L. P.;
ARBCO Associates, L. P.; Kayne, Anderson Offshore Limited and Opportunity
Associates, L. P.; the beneficial holders of 1,466,667 shares issuable upon
conversion of some of the 1996 Tranche A Convertible Subordinated Notes.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Theodore Stautberg, Jr., a director of the Company since 1993, is an
officer, director and beneficial shareholder of Triumph Securities Corporation,
which is participating in this Offering as a finder, and will receive
one-seventh of the 7% Underwriters discount.
During 1996 two new non-employee directors were each issued restricted
stock awards of 2,447 Common Shares upon election to the Board.
Mark C. Barrett became a director of the Company on September 4, 1996.
For the years 1985 through 1995 his CPA firm, Barrett and Associates, served as
the Company's independent accountants. During 1995 his CPA firm was paid $53,400
for accounting services, including the audit.
Those entities which invest through Kayne, Anderson Investment
Management, Inc., that were the lenders in connection with the 1993 Subordinated
Notes, own 816,526 Common Shares by virtue of their exercise of warrants issued
to them in 1993 and exercised in first quarter 1996. They are paid interest with
respect to the 1993 Subordinated Notes, which totaled $600,000 in 1995. In
addition, the Company is required to pay certain expenses, including legal fees,
of those lenders, of which there were none during 1995.
During 1995 Donald W. Chesser, a director who is not an employee of the
Company was issued warrants to acquire 25,000 Common Shares at $2.50 per share
for past services to the Company. The warrants, which would have expired
December 31, 1995, were all exercised during 1995.
During 1995 each of the five directors who are not employees of the
Company were issued a stock bonus of $5,000, paid by the issuance of 1,039
Common Shares.
Employees of the Company are eligible to receive stock awards, stock
options, stock appreciation rights, and performance units pursuant to the
Company's Long-Term Incentive Plan.
The Company has several procedures, provisions, and plans designed to
reduce the likelihood of a change in the management or voting control of the
Company without the consent of the incumbent Board of Directors. These
provisions may have the effect of strengthening the ability of officers and
directors of the Company to continue as officers and directors of the Company
despite changes in share ownership of the Company.
Under the terms of the Company's Long-Term Incentive Plan, three of the
officers and directors surrendered Common Shares in January 1995 in exercise of
outstanding options during 1995. The following table sets forth the number of
shares surrendered and market value thereof and the number of options exercised
and the aggregate exercise price thereof.
Shares Market Options Aggregate
Surrendered (a) Value ($) Exercised Price ($) (b)
--------------- --------- --------- -------------
H. James Maxwell 24,615 99,998 43,100 100,245
<PAGE>
Bob F. Mallory 24,615 99,998 42,400 100,018
Thomas E. Clark(c) 24,615 99,820 38,900 100,137
(a) Persons surrendering shares in payment of the exercise price of an
option were granted new options for a like number of shares at $2.03125
expiring December 31, 1995.
(b) Differences between the value of the share surrendered and the exercise
prices were paid in cash by the person exercising the option.
(c) Mr. Clark is a former officer and director.
Messrs. Maxwell and Mallory are the partners of 1050 Blue Ridge
Building Partnership, which owns a 5,200 square foot office building at 1050
West Blue Ridge Boulevard, Kansas City, Missouri, which they lease to the
Company on a triple net basis for $4,000 per month for a term of ten years,
expiring in 2003. The lease was approved by the Board of Directors, which
determined that the rate was as good or better than that which could be obtained
from a non-affiliated party.
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
The following table sets forth information as of November 15, 1996 as
adjusted to reflect the sale of the Common Shares offered hereby, with respect
to the Common Shares offered by the Selling Shareholders.
Shares Owned Shares Shares Beneficially
Name and Positions of Before Offering Offered Owned After
Beneficial Owners Directly Beneficially Hereby Offering
<S> <C> <C> <C> <C> <C> <C>
H. James Maxwell; Director, President 313,386 322,971(2) 2.01% 30,000 292,971 1.82%
and CEO of the Company................
Offense Group Associates Limited (1) 163,305 599,669(2) 3.73 70,000 529,669 3.30
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Opportunity Associates, L.P........... (1) 40,826 137,796(2) 0.86 40,826 96,970 0.60
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
ARBCO Associates, L.P................. (1) 285,785 722,149(2) 4.49 70,000 652,149 4.06
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Kayne, Anderson Non-Traditional
Investments, L.P................... (1) 204,131 604,495(2) 3.77 70,000 570,495 3.55
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Evanston Insurance Company............ (1) 81,653 81,653 0.51 81,653 0.00
P.O. Box 2009
Glen Allen, VA 23058-2009
Nobel Insurance Company............... (1) 40,826 40,826 0.25 40,826 0.00
3010 LBJ Freeway, Suite 320
Dallas, TX 75234
Amoco Production Company.............. 2,000,000 2,000,000 12.45 2,000,000 0.00
550 WestLake Park Blvd.
Houston, TX 77079
Total................. 3,129,912 4,509,559 28.07% 2,403,305 2,142,254 13.33%
</TABLE>
(1) These firms are the Company's lenders under the 1993 Subordinated Notes
described under "Funding of Business Activities - Borrowing and
Obligations." In 1993 these lenders were issued warrants to acquire a
total of 816,526 Common Shares at an exercise price of $2.25 anytime
prior to December 31, 1998, all of which were exercised during first
quarter 1996.
(2) Includes 436,364, 96,970, 436,364, and 436,364 Common Shares,
respectively, issuable upon conversion of the 1996 Tranche A
Convertible Subordinated Notes.
<PAGE>
DESCRIPTION OF CAPITAL SHARES AND OTHER SECURITIES
The authorized capital shares of the Company consists of 40,000,000
Common Shares, par value $.01 per share, and 5,000,000 preferred shares, par
value $.01 per share. The following description of the capital share of the
Company does not purport to be complete or to give full effect to the provisions
of statutory or common law and is subject in all respects to the applicable
provisions of the Company's Certificate of Incorporation and the information
herein is qualified in its entirety by this reference.
Common Shares
The Company is authorized by its Certificate of Incorporation, as
amended, to issue 40,000,000 Common Shares, of which 14,350,255 shares were
issued and outstanding as of the date hereof and are held by over 6,000
shareholders.
The holders of Common Shares are entitled to one vote for each share
held on all matters submitted to a vote of common holders. The Common Shares
have no cumulative voting rights, which means that the holders of a majority of
the Common Shares outstanding can elect all the directors if they choose to do
so. In that event, the holders of the remaining shares will not be able to elect
any directors.
Each Common Share is entitled to participate equally in dividends, as
and when declared by the Board of Directors, and in the distribution of assets
in the event of liquidation, subject in all cases to any prior rights of
outstanding preferred shares. The Common Shares have no preemptive or conversion
rights, redemption rights, or sinking fund provisions. The outstanding Common
Shares are duly authorized, validly issued, fully paid, and nonassessable.
Warrants
The Company has outstanding warrants to acquire 289,365 Common Shares
at prices ranging from $2.00 to $2.375. These warrants contain limited
provisions for adjustment of the number of shares in the event of a subdivision,
combination or reclassification of Common Shares. They do not have any rights to
demand registration or "piggy back" rights in the event of a registration of
Common Shares.
A group of the Company's lenders, pursuant to the 1993 Subordinated
Notes, acquired 816,526 Common Shares upon the exercise of warrants, which are
restricted securities within the meaning of the Securities Act of 1933 and can
only be sold pursuant to an exemption from registration or an offering which is
the subject of an effective registration statement. The holders of these shares
have demand registration rights and "piggy back" rights in the event the Company
registers an offering of its Common Shares. Six of those lenders are offering
Common Shares pursuant to this Prospectus. See "Selling Shareholders". See also
"The Company - Funding of Business Activities - Borrowing and Obligations."
The Company has agreed to grant to the Representative of the
Underwriters, or its designees, warrants to purchase Common Shares equal to 10%
of the aggregate number of Common Shares sold pursuant to this Prospectus. The
warrants will expire two years from the date of this Prospectus. The exercise
price per warrant will equal the Public Offering Price. See "Underwriting." The
warrants will be exercisable at any time and from time to time, in whole or in
part, during said two year term. The Company has also granted the
Representative, or his designee, "piggy back" registration rights with respect
to the Common Shares underlying the warrants.
Convertible Securities
A group of the Company's lenders, pursuant to the 1996 Tranche A
Convertible Subordinated Notes issued October 8, 1996, have the right to convert
$8,500,000 in notes into 2,060,606 Common Shares at $4.125 per share, which
Common Shares would be restricted securities within the meaning of the
Securities Act of 1933 and can only be sold pursuant to an exemption from
registration or an offering which is the subject of an effective registration
statement. The holders of these shares, after conversion, will have the right to
<PAGE>
demand registration of the shares or "piggy back" in the event the Company
registers an offering of its Common Shares.
Preferred Shares
Pursuant to the Company's Certificate of Incorporation, the Company is
authorized to issue 5,000,000 preferred shares, and the Company's Board of
Directors, by resolution, may establish one or more classes or series of
preferred shares having the number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights preferences, and
limitations that the Board of Directors fixes without any shareholder approval.
A number of preferred shares equal to one share for every one hundredth
of one Common Share outstanding has been reserved for issuance pursuant to the
Company's Shareholder Rights Plan, and designated as Series A Preferred Shares.
No shares of this Series A Preferred Shares have been issued or are outstanding.
Other than the designation as Series A, the Series A Preferred Shares have not
had designations, preferences and rights established by the Board of Directors.
See "Shareholder Rights Plan," below. The designations, preferences and rights
will be established if and when any of the Series A Preferred Shares are to be
issued.
Transfer Agent
The transfer agent, registrar and dividend disbursing agent for the
Common Shares is American Stock Transfer and Trust Company, 6201 15th Avenue,
Brooklyn, New York 11204.
Shareholder Rights Plan
On August 2, 1995, the Board of Directors declared a dividend
distribution of one Right for each outstanding Common Share of the Company to
the shareholders of record on August 3, 1995, (the "Record Date"). Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
one share of the Series A Preferred Shares (the "Preferred Shares"), or in some
circumstances, Common Shares, other securities, cash or other assets as
summarized below, at a price of $30.00 per share (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and American Stock
Transfer and Trust Company, as Rights Agent.
The Shareholder Rights Plan was designed to reduce the likelihood of
inadequate bids, partial bids, market accumulations and front-end loaded offers
to acquire the Company's Common Shares, which are not in the best interest of
all the Company's shareholders. The adoption of the Plan communicates the
Company's intention to resist such actions as are not in the best interest of
all shareholders and provides time for the Board of Directors to consider any
offer and seek alternative transactions to maximize shareholder value. The Plan
was adopted upon the advice of the Company's investment bankers in 1995.
Until the earlier to occur of (i) the date of a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") acquired, or obtained the right to acquire, beneficial ownership of 20%
or more of the outstanding Common Shares or (ii) ten days following the
commencement or announcement of an intention to make a tender offer or exchange
offer that would result in a Person or group beneficially owning 20% or more of
such outstanding Common Shares (the earlier of such dates being called the
"Distribution Date," the Rights will be evidenced, with respect to any of the
Company's Common Share certificates outstanding as of the Record Date, by such
Common Share certificate. The Rights Agreement provides that, until the
Distribution Date, the Rights will be transferred with and only with the Common
Shares. Until the Distribution Date (or earlier redemption or expiration of the
Rights), new Common Share certificates issued after the Record Date upon
transfer or new issuance of the Common Shares will contain a notation
incorporating the Rights Agreement by reference. Until the Distribution Date (or
earlier redemption or expiration of the Rights), the surrender for transfer of
any of the Company's Common Share certificates outstanding as of the Record,
will also constitute the transfer of the Rights associated with the Common
<PAGE>
Shares represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to holders of record of the Common Shares as of
the close of business on the Distribution Date and such separate Rights
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on August 4, 2005, unless earlier redeemed by the Company as
described below.
The Purchase Price payable, and the number of Preferred Shares (or
Common Shares, other securities, cash or other assets, as may be necessary)
issuable upon exercise of the Rights are subject to adjustment from time to time
to prevent dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of the Preferred Shares, (ii) upon the grant to
holders of the Preferred Shares of certain rights or warrants to subscribe for
Preferred Shares or convertible securities at less than the current market price
of the Preferred Shares or (iii) upon the distribution to holders of the
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends out of earnings or retained earnings or dividends
payable in the Preferred Shares) or of subscription rights or warrants (other
than those referred to above).
In the event that the Company were acquired in a merger or other
business combination transaction of 50% or more of its assets or earning power
were sold, proper provision shall be made so that each holder of a Right, other
than of Rights that are or were beneficially owned by an Acquiring Person (which
will thereafter be void) shall thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the Right, that number of
common shares of the acquiring company which at the time of such transaction
would have a market value of two times the exercise price of the Right. In the
event that an Acquiring Person becomes the beneficial owner of 20% or more of
the outstanding Common Shares, proper provision shall be made so that each
holder of a Right, other than of Rights that are or were beneficially owned by
the Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise that number of the Common Shares (or in certain
other circumstances, assets or other securities) having a market value of two
times the exercise price of the Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares will be issued (other than fractional
shares which are integral multiples of one one-hundredth of one Preferred Share)
and, in lieu thereof, an adjustment in cash will be made based on the market
price of the Preferred Shares on the last Trading Date prior to the date of
exercise.
At any time prior to 5:00 P.M. Kansas City, Missouri time on the tenth
calendar day after the first date after the public announcement that a person or
group of affiliated or associated persons has acquired beneficial ownership of
20% or more of the outstanding Common Shares of the Company (the "Share
Acquisition Date"), the Company may redeem the Rights in whole, but not in part,
at a price of $0.005 per Right (the "Redemption Price"). Following the Share
Acquisition Date, but prior to an event listed in Section 13(a) of the Rights
Agreement, the Company may redeem the Rights in connection with any event
specified in Section 13(a) in which all shareholders are treated alike and which
does not include the Acquiring Person or his Affiliates or Associates.
Thereafter, the Company's right of redemption may be reinstated if an Acquiring
Person reduces his beneficial ownership to 10% or less of the outstanding Common
Shares in a transaction or series of transactions not involving the Company.
Immediately upon the action of the Board of Directors of the Company electing to
redeem the Rights, the Company shall make announcement thereof, and upon such
election, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
The provisions of the Rights Agreement may be amended by the Board of
Directors in order to cure any ambiguity or correct any defect or inconsistency,
extend the Redemption Period and, prior to the
<PAGE>
Distribution Date, to make changes deemed to be in the best interests of the
holders of the Rights or, after the Distribution Date, to make such other
changes which do not adversely affect the interests of the holders of the Rights
(excluding the interests of any Acquiring Person and its affiliates and
associates).
Certain Anti-takeover Provisions
The provisions of the Company's Certificate of Incorporation and
By-laws summarized in the following paragraphs may be deemed to have an
anti-takeover effect and may delay, defer, or prevent a tender offer or takeover
attempt that a shareholder might consider to be in that shareholder's best
interests, including attempts that might result in a premium over the market
price for the shares held by shareholders. In addition, certain provisions of
Delaware law and the Company's Long-term Incentive Plan may be deemed to have a
similar effect.
Certificate of Incorporation and By-laws. The Board of Directors of the
Company is divided into three classes. The term of office of one class of
directors expires at each annual meeting of shareholders, when their successors
are elected and qualified. Directors are elected for three-year terms.
Shareholders may remove a director only for cause. In general, the Board of
Directors, not the Company's shareholders, has the right to appoint persons to
fill vacancies on the Board of Directors.
Pursuant to the Company's Certificate of Incorporation, the Company's
Board of Directors, by resolution, may establish one or more classes or series
of preferred shares having the number of shares, designation, relative voting
rights, dividend rates, liquidation and other rights, preferences, and
limitations that the Board of Directors fixes without any shareholder approval.
Any rights, preferences, privileges, and limitations that are established could
have the effect of impeding or discouraging the acquisition of control of the
Company.
The Company's Certificate of Incorporation contains a "fair price"
provision that requires the affirmative vote of the holders of at least 80% of
the voting shares of the Company and the affirmative vote of at least two-thirds
of the voting shares of the Company not owned, directly or indirectly, by the
Related Person (hereafter defined) to approve any merger, consolidation, sale or
lease of all or substantially all of the assets of the Company, or certain other
transactions involving any Related Person. For purposes of the fair price
provision, a "Related Person" is any person beneficially owning 10% or more of
the voting shares of the Company who is a party to the Transaction at issue, a
director who is also an officer of the Company and is a party to the Transaction
at issue, an affiliate of either such person, and certain transferees of those
persons. The voting requirement is not applicable to certain transactions,
including those that are approved by the Company's Continuing Directors (as
defined in the Certificate of Incorporation) or that meet certain "fair price"
criteria contained in the Certificate of Incorporation.
The Company's Certificate of Incorporation further provides that
shareholders may act only at annual or special meeting of shareholders and not
by written consent, that special meetings of shareholders may be called only by
the Board of Directors, and that only business proposed by the Board of
Directors may be considered at special meetings of shareholders.
The Company's Certificate of Incorporation also provides that the only
business (including election of directors) that may be considered at an annual
meeting of shareholders, in addition to business proposed (or persons nominated
to be directors) by the directors of the Company, is business proposed (or
persons nominated to be directors) by shareholders who comply with the notice
and disclosure requirements of the Certificate of Incorporation. In general, the
Certificate of Incorporation requires that a shareholder give the Company notice
of proposed business or nominations no later than 60 days before the annual
meeting of shareholders (meaning the date on which the meeting is first
scheduled and not postponements or adjournments thereof) or (if later) 10 days
after the first public notice of the annual meeting is sent to common
shareholders. In general, the notice must also contains certain information
about the shareholder proposing the business or nomination, his interest in the
business, and (with respect to nominations for director) information about the
nominee of the nature ordinarily required to be disclosed in public proxy
solicitations. The shareholder must also submit a notarized letter from each of
his nominees stating the nominee's
<PAGE>
acceptance of the nomination and indicating the nominee's intention to serve as
director if elected.
The Certificate of Incorporation also restricts the ability of
shareholders to interfere with the powers of the Board of Directors in certain
specified ways, including the constitution and composition of committees and the
election and removal of officers.
The Certificate of Incorporation provides that approval by the holders
of at least two-thirds of the outstanding voting shares is required to amend the
provisions of the Certificate of Incorporation discussed in the preceding
paragraphs and certain other provisions, except that approval by the holders of
at least 80% of the outstanding voting shares of the Company, together with
approval by the holders of at least two-thirds of the outstanding voting shares
not owned, directly or indirectly, by the Related Person, is required to amend
the fair price provisions and except that approval of the holders of at least
80% of the outstanding voting shares is required to amend the provisions
prohibiting shareholders from acting by written consent.
Delaware Anti-takeover Statute. The Company is a Delaware corporation
and is subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prevents an "interested shareholder" (defined generally as
a person owning 15% or more of the Company's outstanding voting shares) from
engaging in a "business combination" (as defined in Section 203) with the
Company for three years following the date that person became an interested
shareholder unless (a) before that person became an interested shareholder, the
Board of Directors of the Company approved the transaction in which the
interested shareholder became an interested shareholder or approved the business
combination, (b) upon consummation of the transaction that resulted in the
interested shareholder's becoming an interested shareholder, the interested
shareholder owns at least 85% of the voting shares of the Company outstanding at
the time the transaction commenced (excluding shares held by directors who are
also officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer), or (c) following
the transaction in which that person became an interested shareholder, the
business combination is approved by the Board of Directors of the Company and
authorized at a meeting of shareholders by the affirmative vote of the holders
of at least two-thirds of the outstanding voting shares of the Company not owned
by the interested shareholder.
Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested shareholder following the
announcement or notification of one of certain extraordinary transactions
involving the Company and a person who was not an interested shareholder during
the previous three years or who became an interested shareholder with the
approval of a majority of the Company's directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors before any person became an interested shareholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
Long-term Incentive Plan. Awards granted pursuant to the Company's
Long-term Incentive Plan may provide that, upon a change in control of the
Company, (a) each holder of an option will be granted a corresponding stock
appreciation right, (b) all outstanding stock appreciation rights and stock
options become immediately and fully vested and exercisable in full, and (c) the
restriction period on any restricted stock award shall be accelerated and the
restrictions shall expire.
Debt. Certain provisions in the Bank Facility and Subordinated Notes
may also impede a change in control, in that they provide that the loans become
due if there is a change in the management of the Company or a merger with
another company.
UNDERWRITING
The Company and the Selling Shareholders have entered into an
underwriting agreement dated the date of this Prospectus (the "Underwriting
Agreement"). Subject to the terms and conditions of the Underwriting Agreement,
the Company and the Selling Shareholders have appointed the Underwriters named
below, for whom Nolan Securities Corporation is acting as Representative (the
"Representative"), exclusive
<PAGE>
agents to offer and sell 8,403,305 Common Shares on behalf of the Company and
the Selling Shareholders, on a "best efforts, all-or-none" basis. Such
appointment will be exclusive and not subject to termination by the Company or
the Selling Shareholders for a period of three months following the date of this
Prospectus. The Underwriters have not made a firm commitment to purchase any
Common Shares. The number of Common Shares that each Underwriter has agreed to
use its "best efforts" to sell, is set forth below opposite each Underwriter's
name:
Underwriter Number of Shares
Nolan Securities Corporation 8,403,305
Total 8,403,305
The Underwriting Agreement provides that the obligation of the
Underwriters are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions. The Underwriters are obligated to use
their "best efforts" to sell all of the Common Shares offered hereby (other than
those covered by the over-allotment option described below).
The Company has been advised by the Representative that the
Underwriters propose to offer the Common Shares directly to the public at the
initial public offering price per share set forth on the cover page of this
Prospectus (the "Public Offering Price"). Upon the closing of the sale of any of
the Common Shares, the Company will receive the net proceeds therefrom after
deducting a discount equal to seven percent (7%) of the Public Offering Price
for each Common Share sold, including any Over-Allotment Option shares. The
Underwriters have agreed to pay Triumph Securities Corporation ("Triumph") as a
finder, an amount equal to one-seventh of such 7%. A. Theodore Stautberg Jr., a
director of the Company, is also an officer, director and beneficial shareholder
of Triumph.
The Company has granted to the Underwriters an option, exercisable by
the Representative within 45 days after the date of this Prospectus, to require
the Company to offer and sell to an additional 1,260,496 Common Shares at the
Public Offering Price per share, herein "Over-Allotment Option." To the extent
that such option is exercised, each of the Underwriters has agreed to use its
best efforts to sell on behalf of the Company approximately the same percentage
of such additional shares as the number set forth above next to such
Underwriter's name in the preceding table bears to the total number of Common
Shares offered by this Prospectus. This Option may only be exercised for the
purpose of covering any over-allotments in the sale of the shares offered
hereby.
The Company has agreed to grant to the Representative, or its
designees, warrants (the "Warrants") to purchase Common Shares equal to 10% of
the aggregate number of Common Shares sold pursuant to this Prospectus. The
Warrants will expire two years from the date of this Prospectus. The exercise
price per Warrant will equal the Public Offering Price. The Warrants will be
exercisable at any time and from time to time, in whole or in part, during said
two year term. The Company has also granted the Representative or his designee
"piggy back" registration rights with respect to the Common Shares underlying
the Warrants.
The Company has agreed to pay all expenses of the Offering, including
the fees and expenses of counsel to the Underwriters and the expenses of
qualifying the Common Shares for sale under the laws of such states as the
Representative may designate, including expenses of counsel retained for such
purpose.
In the Underwriting Agreement, the Company, the Selling Shareholders
and the Underwriters have agreed to indemnify each other against liabilities
arising out of or based upon any untrue statement or alleged untrue statement of
any material fact or omission or alleged omission of a material fact required to
be stated or necessary to make the statements made not misleading (in the case
of the Underwriters only to the extent such statement or omission was made in
reliance upon or in conformity with written information furnished by the
Underwriters for use herein). If such indemnifications are unavailable or
insufficient, the Company, the Selling Shareholders and the Underwriters have
agreed to damage contribution arrangements between them
<PAGE>
based upon relative benefits received from this Offering and relative fault
resulting in such damage.
The Underwriters do not intend to confirm sales of the Common Shares
offered hereby to discretionary accounts.
The Company, its directors and officers and the Selling Shareholders
have agreed not to offer, sell, contract to sell or otherwise dispose of any
Common Shares, for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representative, other than the Common
Shares offered hereby.
The Public Offering Price has been determined by negotiations among the
Underwriters, the Company and the Selling Shareholders. Among the factors
considered in such negotiations were certain financial and operating information
for recent periods, the future prospects of the Company, and its industry in
general, the general condition of the securities markets at the time of the
Offering, and the market prices of securities and certain financial and
operating information of companies engaged in activities similar to those of the
Company. There can, however, be no assurance that the prices at which the Common
Shares will sell in the public market after the Offering will not be lower than
the price at which they are sold hereunder.
Pursuant to the Underwriting Agreement, the Public Offering will take
place only if certain material conditions are satisfied by the Company. Such
material conditions include that, except for matters disclosed in this
Prospectus (i) between the date of the last audited financial statements
included in the Prospectus and the Closing Date, the Company shall not have
sustained any loss on account of fire, explosion, flood, accident, calamity or
any other cause, which materially adversely affects its business or properties,
whether or not such loss is covered by insurance; (ii) there shall be no pending
or threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company that is not
adequately disclosed and there is no required contract or other document that is
not adequately disclosed; (iii) the Company (1) shall be in compliance with
applicable environmental laws, (2) has received all permits, licenses or other
approvals required of the Company under applicable environmental laws, and (3)
shall be in compliance with all such permits, licenses or approvals; (iv) the
material agreements, relating to the Company rights of ownership, lease or
operation of oil and gas properties, the acquisition of interests in oil and gas
properties, or exploration for, development of or production of oil and gas
reserves thereon are valid, binding and enforceable agreements; (v) the
statements in the Prospectus regarding the legal matters, documents or
proceedings, shall fairly represent and summarize the information called for
with respect to such legal matters, documents and proceedings; (vi) since the
date of the most recent financial statements included in the Prospectus, there
shall have been no material adverse change in the condition (financial or
other), earnings, business or properties of the Company; (vii) the lock up
agreement between the Representative and certain shareholders, officers and
directors of the Company for sales and certain dispositions of Common Shares
shall have been delivered on a timely basis; and (viii) since the date of the
Registration Statement, no material adverse change in the general affairs,
business prospects, properties, management, condition (financial or otherwise)
or results of operations of the Company shall have occurred.
The foregoing does not purport to be a complete statement of the terms
and conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Company, the Representative and the Securities and Exchange
Commission.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date hereof the Company had outstanding 14,350,255 Common
Shares, warrants exercisable for 289,365 Common Shares, and the 1996 Tranche A
Convertible Subordinated Notes which are convertible into 2,060,606 Common
Shares. An additional 1,260,496 Common Shares may be sold if the Underwriters
exercise the Over-Allotment Option. The Underwriters have also been granted
warrants to acquire 840,330 Common Shares if all shares offered hereby are sold,
assuming they do not exercise the Over-Allotment Option. Following the
consummation of the Offering, and assuming the Underwriters receive warrants to
acquire 840,330 Common Shares , the Company will then have 16,459,444 Common
Shares available for issuance at such times and upon such terms as may be
approved by the Company's Board of
<PAGE>
Directors. No prediction can be made as to the effect, if any, that future sales
or the availability of shares for sale will have on the market price of the
Common Shares prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Shares of the Company in the public market could adversely
affect the prevailing market price of the Common Shares and could impair the
Company's ability to raise capital through sales of its equity securities.
After giving effect to the Offering, 3,436,358 Common Shares (including
shares issuable upon exercise of outstanding warrants and the 1996 Tranche A
Convertible Subordinated Notes) will be held by executive officers, directors
and affiliates of the Company and may be sold pursuant to an effective
registration statement covering such shares or pursuant to Rule 144 of the
Securities Act, subject to the contractual restrictions described below.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least two years, is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding Common Shares or (ii) an amount equal
to the average weekly reported volume of trading in such shares during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner of sale limitations, notice requirements and the availability of
current public information about the Company. Restricted shares properly sold in
reliance on Rule 144, are thereafter freely tradeable without restrictions or
registration under the Securities Act, unless thereafter held by an affiliate of
the Company. In addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144, other than the two-year holding
period requirement, in order to sell Common Shares which are not restricted
shares (such as Common Shares acquired by affiliates of the Company in this
Offering). As defined in Rule 144, an "affiliate" of an issuer is a person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, such issuer. If three years have
elapsed since the later of the date of any acquisition of restricted shares from
the Company or from any affiliate of the Company, and the acquiror or subsequent
holder thereof is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale, such person would be entitled to sell
such shares in the public market pursuant to Rule 144(k) without regard to
volume limitations, manner of sale restrictions, or public information or notice
requirements.
The lenders under the 1993 Subordinated Notes have the right to request
registration of 816,526 restricted shares which they received upon the exercise
of warrants issued to them at the time of the borrowing under the 1993
Subordinated Notes; 373,305 of which are being sold pursuant to this Offering.
The lenders under the 1996 Tranche A Convertible Subordinated Notes have the
right to receive 2,060,606 shares upon conversion of the Notes, which may take
place anytime after 180 days from the date of this Prospectus. They have the
right to request registration with respect to those shares. There can be no
assurance that the holders of such rights will not exercise these registration
rights in a manner and at a time which may adversely impact the market price of
the Common Shares or business plans of the Company or may adversely affect the
Company's efforts to seek additional capital.
OTHER MATTERS
Available Information
The Company is subject to the informational requirements of the
Exchange Act, as amended, and, in accordance therewith, files reports and other
information with the SEC. Reports, proxy and information statements and other
information filed by the Company with the SEC pursuant to the informational
requirements of the Exchange Act may be inspected at the public reference
facilities maintained by the SEC at 450 Fifth Street, NW, Judiciary Plaza,
Washington, D.C. 20549-1004, and at the following Regional Offices of the SEC:
Chicago Regional Office, 500 West Madison Street, Suite 1400 , Chicago, Illinois
60661-2511, and New York Regional Office, 7 World Trade Center, New York, New
York 10048. Copies of such material may also be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, NW Washington, D.C. 20549-1004
at prescribed rates. The Common Shares are traded on the NASDAQ National Market.
The
<PAGE>
Company's registration statements, reports, proxy and information statements,
and other information may also be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, NW, Washington, D.C. 20006. Copies of
such material may also be obtained from the SEC EDGAR archives on the Internet
at the following SEC address: HTTP://WWW.SEC.GOV/CGI-BIN/SRCH-EDGAR.
The Company will furnish to the holders of the Common Shares the
Company's annual reports containing audited financial statements and interim
reports containing unaudited financial statements.
This Prospectus constitutes a part of a Registration Statement on Form
S-1 filed by the Company with the SEC under the Securities Act. This Prospectus
omits certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement for further information
with respect to the Company and the securities offered hereby. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the SEC are not
necessarily complete and in each instance reference is made to the copy of such
document so filed.
Each such statement is qualified in its entirety by such reference.
SEC Position on Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling the
registrant pursuant to any provisions described in this Prospectus, the
registrant has been informed that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
LEGAL MATTERS
The validity of the Common Shares offered hereby, including those shares
offered by the Selling Shareholders, and certain other legal matters will be
passed upon for the Company by Shughart Thomson & Kilroy, Kansas City, Missouri,
counsel to the Company. Certain legal matters in connection with the Offering
are being passed upon for the Underwriters by Cadwalader, Wickersham & Taft, New
York, New York.
EXPERTS
The financial statements of the Company as of December 31, 1995 and
1994 and for each of the years in the three year period ended December 31, 1995
and the audit of Schedules of Revenues, Direct Operating Expenses and Production
Taxes of the Zapata Properties and the Bayou Sorrel Field for each of the two
years in the period ended December 31, 1994 included herein have been examined
by Barrett and Associates, independent certified public accountants, to the
extent and for the periods indicated in their reports with respect thereto, and
are included herein in reliance upon those reports and upon the authority of
that firm as experts in accounting and auditing. On September 4, 1996 Mark C.
Barrett became a director of the Company.
The Schedule of Revenues and Direct Operating Expenses of the Amoco
Properties for each of the three years in the period ended December 31, 1995
included herein have been examined by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of such firm as experts in giving such
reports.
The firm of Arthur Andersen LLP has been engaged to do the annual
audits of the Company commencing with the year ending December 31, 1996. They
have not audited any period of the Company during 1996.
The information with respect to the independent reserve reports as of
December 31, 1995, 1994 and 1993 was prepared by the petroleum engineering firms
of Ryder Scott Company (offshore and Bayou Sorrel Field) and McCune Engineering,
P.E. (onshore other than Bayou Sorrel Field), and are referenced herein in
reliance upon such firms as experts with respect to such information. Dwayne
McCune, the sole proprietor
<PAGE>
of McCune Engineering, P.E., was an employee of the Company from September 1992
to July 1995. Other reserve information referenced herein was based upon reports
prepared by the Company, which is solely responsible for its content.
GLOSSARY OF SELECTED OIL AND GAS TERMS
The following are abbreviations and definitions of certain terms commonly
used in the oil and gas industry and this Prospectus.
"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
"Bank Facility" means the Company's reducing revolving bank facility with
First Union National Bank of North Carolina and Banque Paribas.
"Bbl" means a barrel of oil and condensate or natural gas liquids, being 42
U.S. gallons.
"Bcf" means billion cubic feet of natural gas.
"Bcfe" means billion cubic feet of natural gas equivalents.
"Block" means one offshore unit of lease acreage, generally 5,000 acres.
"Btu" or "British Thermal Unit" means the quantity of heat required to
raise the temperature of one pound of water by one degree Fahrenheit.
"Condensate" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.
"Developed acreage" means oil and gas acreage spaced for or assignable to
productive wells.
"Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
"Dry hole" means a well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as an oil or gas well.
"Equivalent Bbls" means a measure of gas volumes representing the estimated
relative energy content of natural gas to oil, being 6 Mcf of natural gas per
Bbl of oil.
"Estimated future net revenues" means revenues from production of oil and
gas, net of all production -related taxes, lease operating expenses and capital
costs.
"Exploratory well" means a well drilled to find and produce oil or gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil and gas in another reservoir, or to extend a known reservoir.
"Gross," when used with respect to acres or wells, refers to the total
acres or wells in which the Company has a working interest.
"Group 3-D seismic" means seismic procured by a group of parties or shot on
a speculative basis by a seismic company.
<PAGE>
"MBbls" means thousands of barrels of oil.
"MBOE" means one thousand barrels of oil equivalent.
"Mbtu" means one thousand Btus.
"Mcf" means thousand cubic feet of natural gas.
"Mcfe" means thousand cubic feet of natural gas equivalents.
"MMBbls" means millions of barrels of oil.
"MMBOE" means one million barrels of oil equivalent
"MMBtu" means one million British Thermal Units.
"MMcf" means million cubic feet of natural gas.
"MMcfe" means million cubic feet of natural gas equivalents.
"Natural gas equivalents" means a volume, expressed in Mcf's of natural
gas, that includes not only natural gas but also liquids converted to an
equivalent quantity of natural gas on an energy equivalent basis. Equivalent gas
reserves are based on a conversion factor of 6 Mcf of gas per barrel of liquids.
"Net," when used with respect to acres or wells, refers to gross acres or
wells multiplied, in each case, by the percentage working interest owned by the
Company.
"Net pay" means the thickness of a productive reservoir capable of
containing hydrocarbons.
"Net production" means production that is owned by the Company less
royalties and production due others.
"NGLs" means the natural gas liquids such as ethane, propane, iso-butane,
normal butane and natural gasoline that have been extracted from natural gas.
"Oil" means crude oil or condensate.
"Operator" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.
"Overriding royalty interest" or "ORRI" means an interest in an oil and gas
property entitling the owner to a share of oil and gas production free of costs
of exploration and production.
"Payout" means that point in time when a party has recovered monies out of
the production from a well equal to the cost of drilling and completing the well
and the cost of operating the well through that date.
"Possible reserves" means reserves that are less certain than probable
reserves and can be estimated with a low degree of certainty, insufficient to
indicate whether they are more likely to be recovered than not.
"Present value of future net revenues" or "Present value of proved
reserves" means the present value of estimated future revenues to be generated
from the production of proved reserves calculated in accordance with Securities
and Exchange Commission guidelines, net of estimated production and future
development costs, using prices and costs as of the date of estimation without
future escalation, except as otherwise provided by contract, without giving
effect to non-property related expenses such as general and administrative
<PAGE>
expenses, debt service, future income tax expense and depreciation, depletion
and amortization, and discounted using an annual discount rate of 10%.
"Probable reserves" means reserves that are less certain than proved
reserves and can be estimated with a degree of certainty sufficient to indicate
they are more likely to be recovered than not.
"Production costs" means costs necessary for the production of a well or
field and sale of oil and gas, including production and ad valorem taxes.
"Productive well" means a well that is producing oil or gas or that is
capable of production.
"Proprietary 3-D seismic" means seismic privately procured and owned by the
procurer.
"Proved developed nonproducing reserves" means those reserves that exist
behind the casing if existing wells or at minor depths below the present bottom
of such wells and that are expected to be produced through these wells in the
predictable future, when the cost of making such oil and gas available for
production should be relatively small compared to the cost of a new well.
"Proved developed producing reserves" means those reserves that are
expected to be produced from existing completion intervals now open for
production in existing wells.
"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.
"Proved reserves" means the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions (i.e., prices and costs as of
the date the estimate is made). Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on escalation
based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any; and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
ii. Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
iii. Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified
separately as "indicated additional reserve"; (B) crude oil, natural gas
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics or
economic factors; (C) crude oil, natural gas and natural gas liquids that
may occur in undrilled prospects; and (D) crude oil, natural gas and
natural gas liquids that may be recovered from oil shales, coal, gilsonite
and other such sources.
"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells
<PAGE>
on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion. Reserves on undrilled acreage is
limited to those drilling units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for other undrilled units
can be claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances are estimates of proved undeveloped reserves attributable to any
acreage for which an application of fluid injection or other improved recovery
technique is contemplated, unless such techniques have been proved effective by
actual tests in the area and in the same reservoir.
"Recompletion" means the completion for production of an existing wellbore
in another formation from that in which the well has previously been completed.
"Reserves" means proved reserves.
"Royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the lease acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by the owner of the leasehold
in connection with a transfer to a subsequent owner.
"SEC 10 Value" means the present value of estimated future net revenues,
before taxes, of the specified reserves or property, determined in all material
respects in accordance with the rules and regulations of the SEC (generally
using prices and costs in effect at a fixed date and a 10% discount rate).
"Shut-in" means to close down a producing well or field temporarily for
repair, cleaning out, building up reservoir pressure, lack of a market or
similar conditions.
"Undeveloped acreage" means the oil and gas acreage on which wells have not
been drilled or to which no Proved Reserves other than Proved Undeveloped
Reserves have been attributed by independent petroleum engineers.
"Unproved properties" means the oil and gas acreage to which no Proved
Reserves have been attributed by independent petroleum engineers.
"Unproved reserves" means those reserves based on geologic and/or
engineering data similar to that used in estimates of proved reserves; but
technical, contractual, economic, or regulatory uncertainties preclude such
reserves being classified as proved. They may be estimated assuming future
economic conditions different from those prevailing at the time of the estimate.
Unproved reserves may be divided into two subclassifications: "probable" and
"possible."
"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain only
87.5% of the production.
.
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
INDEX TO FINANCIAL STATEMENTS
Page
PRO FORMA COMBINED FINANCIAL INFORMATION
<S> <C> <C> <C>
Balance Sheet, September 30, 1996 13
Statements of Income (Operations) for the nine months
ended September 30, 1996 14
Statements of Income (Operations) for the years ended
December 31, 1995, 1994 and 1993 15
Notes to Pro Forma Financial Statements 18
PANACO, INC. - AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Balance Sheets, December 31, 1995 and 1994 F-3
Statements of Income (Operations) for the Years Ended
December 31, 1995, 1994 and 1993 F-5
Statements of Changes in Stockholders' Equity and Retained Earnings (Deficit)
for the Years Ended December 31, 1995, 1994 and 1993 F-6
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 F-7
Notes to Financial Statements for the Years Ended
December 31, 1995, 1994 and 1993 F-8
ZAPATA PROPERTIES AND BAYOU SORREL FIELD
Independent Auditors' Report F-21
Schedules of Revenues, Selected Direct Operating Expenses and Production Taxes
for the Years Ended December 31, 1994 and 1993 F-22
Notes to the Schedules of Revenues, Selected Directed Expenses and Production
Taxes for the Years Ended December 31, 1994 and 1993 F-23
PANACO, INC. - UNAUDITED FINANCIAL STATEMENTS
Balance sheets, September 30, 1996 and December 31, 1995 F-28 Statements of F-27
Income operating for the nine months and three months ended
September 30, 1996 F-29
Statement of Changes in Stockholders' Equity for the nine months ended
September 30, 1996 F-30
Statements of Cash Flows for the nine months ended September 30, 1996 F-31
Notes to Financial Statements for the nine months ended September 30, 1996 F-32
AMOCO PROPERTIES
Independent Auditors' Report F-34
Statement of Revenues and Direct Operating Expenses F-35
Notes to the Statement F-37
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors
PANACO, Inc.
We have audited the accompanying balance sheets of PANACO, Inc. (a Delaware
corporation) as of December 31, 1995 and 1994, and the related statements of
income (operations), changes in Stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the Financial Statements, the Company has given
retroactive effect to the change in accounting for its oil and gas operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PANACO, Inc. as of December 31,
1995 and 1994, and the results of its operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
BARRETT & ASSOCIATES
Overland Park, Kansas
February 26, 1996, except for Note 1, which the date is June 7, 1996.
F-2
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
BALANCE SHEETS
ASSETS
December 31,
1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 1,198,000 $ 1,583,000
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable
Trade 3,294,000 2,230,000
Other 1,092,000 1,000
Prepaid expenses 465,000 272,000
--------------- --------------
Total current assets 6,049,000 4,086,000
-------------- --------------
OIL AND GAS PROPERTIES, AS DETERMINED
BY THE SUCCESSFUL EFFORTS METHOD
OF ACCOUNTING
Oil and gas properties 103,105,000 89,010,000
Less accumulated depreciation, depletion, amortization,
and valuation allowances (73,620,000) (65,065,000)
----------- -----------
Net oil and gas properties 29,485,000 23,945,000
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT
Equipment 196,000 158,000
Less accumulated depreciation (92,000) (68,000)
-------------- -------------
Net property, plant, and equipment 104,000 90,000
-------------- -------------
OTHER ASSETS:
Loan costs, net 471,000 714,000
Certificates of deposit - escrow 26,000 47,000
Other 5,000 6,000
Accounts receivable - other 8,000 186,000
Note receivable 21,000 21,000
--------------- --------------
Total other assets 531,000 974,000
--------------- --------------
TOTAL ASSETS $ 36,169,000 $29,095,000
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
1995 1994
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 4,444,000 $ 1,528,000
Interest payable 161,000 185,000
Current portion of long-term debt -0- -0-
------------- ------------
Total current liabilities 4,605,000 1,713,000
------------- -------------
LONG-TERM DEBT 22,390,000 12,500,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Share, $.01 par value,
1,000,000 shares authorized; no
shares issued and outstanding -0- -0-
Common Share, $.01 par value,
20,000,000 shares authorized;
11,504,615 and 10,220,138 shares
issued and outstanding, respectively 115,000 102,000
Additional paid in capital 21,155,000 17,586,000
Retained earnings (deficit) (12,096,000) (2,806,000)
------------ ------------
Total Stockholders' Equity 9,174,000 14,882,000
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,169,000 $ 29,095,000
============ ============
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-4
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
STATEMENTS OF INCOME (OPERATIONS)
Year Ended December 31,
1995 1994 1993
REVENUES
<S> <C> <C> <C>
Oil and gas sales $18,447,000 $17,338,000 $ 12,605,000
COSTS AND EXPENSES
Lease operating 8,055,000 5,231,000 5,297,000
Depreciation, depletion and amortization 8,064,000 6,038,000 4,288,000
General and administrative 690,000 587,000 542,000
Production and ad valorem taxes 1,078,000 1,006,000 754,000
Exploration expenses 8,112,000 -0- -0-
Provision for losses and (gains) on disposition
and write-down of assets 751,000 1,202,000 3,824,000
-------------- ------------- -------------
Total 26,750,000 14,064,000 14,705,000
------------ ------------ ------------
NET OPERATING INCOME (LOSS) (8,303,000) 3,274,000 (2,100,000)
------------ ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 5,000 46,000 27,000
Interest expense (992,000) (1,669,000) (1,913,000)
------------- ------------ ------------
Total (987,000) (1,623,000) (1,886,000)
-------------- ------------ ------------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (9,290,000) 1,651,000 (3,986,000)
INCOME TAXES (BENEFIT) -0- -0- -0-
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (9,290,000) 1,651,000 (3,986,000)
EXTRAORDINARY ITEM - LOSS ON EARLY
RETIREMENT OF DEBT -0- (536,000) -0-
------------- ------------- -------------
NET INCOME (LOSS) $ (9,290,000) $ 1,115,000 $ (3,986,000)
============ ============= =============
EARNINGS (LOSS) PER COMMON SHARE
Primary:
Earnings (loss) before extraordinary item $ (.81) $ .16 $ (.53)
Extraordinary loss -0- (.05) -0-
------------------- ----------------- --------------------
Net earnings (loss) $ (.81) $ .11 $ (.53)
================= ================== =================
Assuming full dilution:
Earnings (loss) before extraordinary item $ (.81) $ .16 $ (.53)
Extraordinary loss -0- (.05) -0-
------------------- ---------------- -------------------
Net earnings (loss) $ (.81) $ .11 $ (.53)
================= ================== =================
Weighted average shares outstanding:
Primary $ 11,504,615 $ 9,952,870 $ 7,583,761
============ ============ =============
Assuming full dilution $ 11,504,615 $10,039,042 $ 7,583,761
============ =========== =============
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-5
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Common Additional Retained
Share Paid-In Earnings
Shares Par Value Capital (Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992 $ 7,534,496 $ 75,000 $ 11,298,000 $ 65,000
Net loss -0- -0- -0- (3,986,000)
Exercises of stock options and warrants 620,759 7,000 1,285,000 -0-
----------- ------------ ------------------------------
Balances, December 31, 1993 8,155,255 $ 82,000 $12,583,000 $(3,921,000)
Net income -0- -0- -0- 1,115,000
Exercises of stock options and warrants and
shares issued under Employee Stock
Ownership Plan 2,064,883 20,000 5,003,000 -0-
---------- ----------- ------------------------------
Balances, December 31, 1994 $ 10,220,138 $102,000 $17,586,000 $(2,806,000)
Net Loss -0- -0- -0- (9,290,000)
Exercise of stock options and warrants 1,181,602 12,000 3,137,000 -0-
Issuance of new shares 102,875 1,000 432,000 -0-
----------- ------------ -----------------------------
Balances, December 31, 1995 $ 11,504,615 $ 115,000 $21,155,000 $(12,096,000)
============ ========= =========== ============
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-6
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) before extraordinary item $(9,290,000) $1,651,000 $ (3,986,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion, and amortization 8,065,000 6,038,000 4,288,000
Amortization of loan discount -0- 340,000 512,000
Exploration expenses 8,112,000 -0- -0-
Provision for losses and (gains) on disposition
and write-down of assets 751,000 1,202,000 3,824,000
Changes in operating assets and liabilities:
Accounts receivable (2,155,000) (1,202,000) 1,261,000
Prepaid expenses (193,000) (113,000) (20,000)
Other assets 200,000 (388,000) (11,000)
Accounts payable 2,916,000 (79,000) (896,000)
Interest payable (24,000) 26,000 (40,000)
Extraordinary loss -0- (536,000) -0-
-------------- ------------ ------------------
Net cash provided by operating activities 8,382,000 6,939,000 4,932,000
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of oil and gas properties 11,000 300,000 41,000
Capital expenditures and acquisitions (21,803,000) (12,101,000) (790,000)
Purchase of other property and equipment (38,000) (37,000) (52,000)
Sale of other property and equipment -0- 10,000 -0-
Purchase of certificate of deposit -0- -0- (26,000)
-------------- -------------- ---------------
Net cash used by investing activities (21,830,000) (11,828,000) (827,000)
-------------- ------------ --------------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds 16,890,000 5,564,000 -0-
Repayment of long-term debt (7,000,000) (7,326,000) (3,535,000)
Issuance of common shares - exercise of
warrants and options 3,173,000 5,023,000 1,163,000
------------- ------------- -------------
Net cash provided (used) by financing activities 13,063,000 3,261,000 (2,372,000)
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH (385,000) (1,628,000) 1,733,000
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,583,000 3,211,000 1,478,000
------------- ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,198,000 $ 1,583,000 $ 3,211,000
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-7
<PAGE>
PANACO, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of PANACO, Inc. (the Company) is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
who are responsible for the integrity and objectivity of the financial
statements. These accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of the
financial statements.
Revenue Recognition
The Company recognizes its ownership interest in oil and gas sales as revenue.
It records revenues on an accrual basis, estimating volumes and prices for any
months for which actual information is not available. If actual production sold
differs from its allocable share of production in a given period, such
differences would be recognized as deferred or accounts receivable.
Hedging Transactions
The Company engages in natural gas futures contracts within the normal course of
its business. The Company uses futures and floor contracts to reduce the effects
of fluctuations in natural gas prices. Changes in the market value of these
contracts are deferred and subsequent gains and losses are recognized monthly in
the same period as the hedged item based on the difference between the First
Nearby Contract for Natural Gas - NYMEX and the contract price. The Company
entered into a hedge agreement beginning in January, 1996, for the delivery of
15,000 MMBTU of gas for each day in 1996 with contract prices ranging from
$1.7511/MMBTU to $2.253/MMBTU. Prior to this agreement, the Company had entered
into a floor contract that expired December, 1994, and a hedge contract which
expired September, 1993.
Income Taxes
In 1993, the Company adopted Statement of Financial Accounting Standards (FAS)
No. 109 - "Accounting for Income Taxes", which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Generally, FAS 109 allows for at least the
partial recognition of deferred tax assets in the current period for the future
benefit of net operating loss carry forwards.
Income (Loss) per share
The computation of earnings or loss per share in each year is based on the
weighted average number of common shares outstanding. When dilutive, stock
options and warrants are included as share equivalents using the treasury share
method. Stock options and warrants were not included in the calculation for 1993
and 1995, as the effects were not dilutive. Shares to be contributed to the ESOP
plan are treated as common share equivalents.
Property, Plant & Equipment
Other property and equipment is recorded at cost. Depreciation is provided using
the straight-line method based on estimated useful lives which range from 5 to 7
years.
Oil and Gas Producing Activities and Depreciation, Depletion and Amortization
Effective December 31, 1995, PANACO changed its method of accounting for
oil and gas operations from the
F-8
<PAGE>
full cost method to the successful efforts method. Management concluded that the
successful efforts method will more appropriately reflect PANACO's oil and gas
operations and will enable investors and others to better compare PANACO to
similar oil and gas companies, the majority of which follow the successful
efforts method. All prior period financial statements have been restated to
reflect the change.
Under the successful efforts method, lease acquisition costs are capitalized.
Exploratory drilling costs are also capitalized pending determination of proved
reserves. If proved reserves are not discovered, the exploratory costs are
expensed. All development costs are capitalized. Provision for depreciation and
depletion is determined on a field-by-field basis using the unit-of-production
method. The carrying amounts of proven and unproven properties are reviewed
periodically on a property-by-property basis, based on future net cash flows
determined by an independent engineering firm, and an impairment reserve is
provided as conditions warrant. The provision for write down of assets was
$751,000 for 1995, $1,202,000 for 1994, and $3,824,000 for 1993.
The change in the Company's accounting method increased 1995 net income by
$2,054,000 or $0.18 per share from previously reported results under the full
cost method. The change decreased 1994 and 1993 net income by $1,298,000, or
$0.13 per share and $3,800,000, or $0.51 per share, respectively, from
previously reported results under the full cost method. As of December 31, 1995,
retained earnings was decreased by $2,797,000 as a result of the accounting
change and additional paid in capital was reduced by $1,264,000.
Amortization of Note Discount
The note discount was being amortized utilizing the interest method, which
applies a constant rate of interest to the book value of the note. Additional
interest expense of $0, $234,000, and $512,000, was recorded in 1995, 1994 and
1993, respectively, from the amortization of the discount. Effective July 1,
1994 the debt related to the note discount was extinguished, and the balance of
the note discount totaling $106,000 was recorded as an extraordinary item.
Statement of Cash Flows
For purposes of reporting cash flows, the Company considers all cash investments
with maturities of three months or less to be cash equivalents.
Use of Estimates
Management relies on the use of estimates for oil and gas reserve information
and the valuation allowance for deferred income taxes in preparing financial
statements in accordance with generally accepted accounting principles.
Estimates related to oil and gas reserve information and the standardized
measure are based on estimates provided by third parties. Changes in prices
could significantly affect these estimates from year to year.
Reclassification
Certain financial statement items have been reclassified to conform to the
current year's presentation.
Note 2 - LOAN COSTS
Loan costs in the amount of $602,000 and $255,000 are being amortized over the
lives of the loans, three years and six years, respectively. Additional loan
costs of $402,000 were incurred during 1994.
Note 3 - MAJOR CUSTOMERS
One purchaser accounted for 69% and 83% of revenues in 1995 and 1994,
respectively, and two purchasers accounted for 65% and 17% of revenues in 1993.
Note 4 - CERTIFICATE OF DEPOSITS - ESCROW
The Company has CD's to satisfy plugging obligations with certain government
entities.
F-9
<PAGE>
Note 5- LONG-TERM DEBT
1995 1994
------------- -----------
Note payable (a) $ 5,000,000 $ 5,000,000
Note payable (b) 17,390,000 7,500,000
------------- -------------
22,390,000 12,500,000
Less current portion - -
------------- ------------
Long-term debt $ 22,390,000 $ 12,500,000
============ ============
(a) Note payable dated December 31, 1993 due to a group of six lenders in
the amount of $5,000,000 bearing interest at 12%. The lenders at their
discretion can loan an additional $5,000,000 to the Company. Payments for
interest only are required quarterly. The Company may deliver up to $1,000,000
in PIK (payment in kind) notes, bearing interest at 12%, in satisfaction of all
or part of any interest payment. The loan agreement limited the use of the first
$5,000,000 to capital expenditures and the next $5,000,000 (assuming the lenders
approve additional borrowings) to acquisitions. The loan agreement contains
certain financial covenants including future indebtedness and payment of
dividends. The note matures on December 31, 1999 and is collateralized by a
second mortgage on a substantial portion of offshore oil and gas properties,
production proceeds and receivables. The lenders were issued 816,526 warrants,
at an exercise price of $2.25, expiring December 31, 1998 in connection with the
financing (see Note 8).
(b) Reducing Revolving Line of Credit dated July 1, 1994 with a maximum
debt incurred equal to the lesser of thirty million dollars or the Borrowing
Base ($21,000,000 at December 31, 1995). The Borrowing Base reduces on a monthly
basis at a rate of $500,000 and is reviewed on a semi-annual basis as of June 30
and December 31. The note is due July 1, 1998 and bears interest at either prime
or Libor plus 1.0% to 1.75% depending on the percentage of the borrowing base
used (8% and 7.625% at December 31, 1995, respectively). At December 31, 1995,
the Company had $3,025,000 borrowed at 7.625%, $10,500,000 borrowed at 7.5625%,
and $3,865,000 borrowed at 7.6875%. Interest is due on the last day of the month
for prime notes and is due on the last day of the interest period or every three
months on Libor notes. A commitment fee of .375% to .5% of the average unused
portion of the Borrowing Base is due on a quarterly basis. The revolving line of
credit is collateralized by a substantial portion of the oil and gas properties,
receivables, inventory and general intangibles. The loan agreement contains
certain covenants including maintaining a positive indebtedness to cash flow
ratio, a positive working capital ratio, a certain tangible net worth,
limitations on future debt, guarantees, liens, dividends, mergers, material
change in ownership by management, and sale of assets. In addition, the Lender
has issued the Company a letter of credit for $3,000,000 to collateralize a
plugging bond which reduces the available Borrowing Base.
Maturities of long-term debt are as follows:
December 31, 1997 $17,390,000
December 31, 1999 $ 5,000,000
------------
$22,390,000
Note 6 - STOCKHOLDERS' EQUITY
During 1995, 1,181,602 shares were issued related to the exercise of warrants
and options, 97,680 shares were issued related to property acquisition costs and
5,195 shares were issued for board of directors fees.
During 1994, 2,034,033 shares were issued related to the exercise of warrants
and options, and 30,850 shares were issued related to the Company's ESOP.
During 1993, 12,294 shares were awarded to three new directors, 1,200 shares
were issued in exchange for oil and gas properties, 36,363 shares were issued
for payment of a finders fee on new financing (see Note 5) and 575,000 shares
were issued related to the exercise of warrants and options.
F-10
<PAGE>
During 1993, 4,098 shares were relinquished to the Company under the terms of
the Long-Term Incentive Plan by a director upon his resignation. These shares
were reissued in the above transactions during 1993.
Shares outstanding are as follows:
Year Ending December 31,
Common Preferred
Shares Shares
1993 8,155,255 -
1994 10,220,138 -
1995 11,504,615 -
Note 7- WARRANTS
Warrants outstanding at December 31, 1995 to acquire common shares are as
follows:
Number of Price per
Shares Share Expiration Date
-------- ---------- ------------------
160,000 $2.375 June 1, 1996
90,000 $2.000 June 1, 1996
39,365 $2.000 December 31, 1997
---------
289,365
During 1995, warrants with exercise prices ranging from $2.00 to $4.00 per share
were exercised for a total of 495,735 shares.
Note 8 - LENDER WARRANTS
In connection with the note payable dated December 31, 1993 (See Note 4)
warrants were issued to a group of six lenders. These warrants differ from those
described in Note 5; they have stronger antidilution provisions, effective
January 1, 1996 the holders can demand registering the warrant shares either
issuable upon exercise or held by the holder, and the holder may also, if the
Company files a Registration Statement, have an opportunity to include the
warrant shares in such Registration Statement. Warrants to acquire Common Shares
were as follows:
Number of Price per
Shares Share Expiration Date
816,526 $2.25 December 31, 1998
Early in 1996, the warrants were exercised.
Note 9 - STOCK OPTIONS AND LONG-TERM INCENTIVE PLAN
On August 26, 1992, the shareholders approved a long-term incentive plan
allowing the Company to grant incentive and nonstatutory stock options,
performance units, restricted stock awards and stock appreciation rights to key
employees, directors, and certain consultants and advisors of the Company up to
a maximum of 20% of the total number of shares outstanding.
At December 31, 1995, there were no stock options outstanding.
During 1995, options with exercise prices ranging from $2.00 to $3.975 per share
were exercised for a total of 759,712 shares.
Under the terms of the Long-Term Incentive Plan, three directors surrendered
73,845 shares to exercise 124,400 options. New options were issued equal to the
number of shares surrendered at a price of $2.0313
F-11
<PAGE>
per share.
Note 10 - RELATED PARTY TRANSACTIONS
During 1995, 25,000 warrants at a price of $2.50 per share were issued to and
exercised by a director.
During 1994, 650,000 warrants at a price of $2.75 per share were issued to the
Board of Directors. All warrants were exercised during 1994.
The Company entered into a triple net lease agreement with a partnership owned
by two directors for the lease of an office building. The lease, which expires
November, 2003, has monthly rental payments of $4,000. During 1995 and 1994,
$48,000 per year in rent was paid under the lease agreement. During 1993, no
rent was due under the lease agreement. A deposit of $4,000 was due and included
in accounts payable at December 31, 1993.
Stock options (see Note 7) originally issued to three directors to acquire
250,000 shares each, were exercisable through December 31, 1995 at $2.00 per
share. During 1995, 1994 and 1993, 150,000, 275,000 and 300,000 options were
exercised at $2.00 per share. In 1994 and 1993, an additional 275,000 and
300,000 options respectively were issued at prices ranging from $2.32 per share
to $3.9375 per share, and all options were exercised in 1995.
Under the terms of the Long-Term Incentive Plan, three directors were issued
73,845 options at $2.0313 per share and 68,567 options at $2.1875 per share in
1995 and 1994, respectively. These options were exercised in 1995.
Warrants were issued to a director in 1991 to acquire 250,000 shares. Of these,
160,000 shares were exercised in 1993 at $2.00 per share and 90,000 warrants are
exercisable through June 1, 1996 at $2.00 per share. In addition, 160,000
warrants at $2.375 issued December 10, 1993, are exercisable through June 1,
1996.
Consulting fees of $80,000 were paid in 1993 to an entity of which a director is
a 100% owner. At December 31, 1993, no such fees were payable to this entity.
In 1993, three new directors were awarded 4,098 shares each (valued at a total
of $30,000) pursuant to the Company's Long-term Incentive Plan. These shares
become vested over a thirty month period.
During 1993, a director relinquished 4,098 shares upon his resignation.
Note 11 - LEASES
The following is a schedule of future rental payments required under an office
building lease described in Note 10 as of December 31, 1995.
Year ending December 31,
1996 $ 48,000
1997 48,000
1998 48,000
1999 48,000
2000 48,000
2001-2003 140,000
$ 380,000
Rental expense incurred on a former office lease for the year ended December 31,
1993, was $26,180.
F-12
<PAGE>
Note 12 - INCOME TAXES
At December 31, 1995, the Company had net operating loss carry forwards for
federal income tax purposes of $15,765,000 which are available to offset future
federal taxable income through 2010.
Significant components of the Company's deferred tax liabilities and assets as
of December 31 are as follows:
1995 1994
------------ ----------
Deferred tax assets
Fixed asset basis differences $1,408,000 $ 557,000
Net operating loss carry forwards 6,306,000 3,504,000
--------- ------------
Total deferred tax assets 7,714,000 4,061,000
--------- ------------
Valuation allowance for deferred
tax assets (7,714,000) (4,061,000)
---------- ----------
Total deferred tax assets $ - $ -
=========== ===========
A valuation allowance is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized.
The valuation allowance for deferred tax assets as of December 31, 1993 was
$3,704,000. The net change in the total valuation allowance for the years ended
December 31, 1995 and 1994 was an increase of $3,653,000 and $357,000,
respectively.
Note 13 - COMMITMENT AND CONTINGENCIES
A $3,000,000 letter of credit, collateralizing a plugging bond, expires on
December 14, 1996. The contract amount of the letter of credit approximates its
fair value.
The Company has had a suit filed against it related to a gas gathering system in
Oklahoma seeking $700,000. The Company has filed a counter claim against the
plaintiff alleging fraud, asking that the contract, which is the subject of the
suit, be declared void. Management feels the suit is without merit and will be
disposed of for less than the amount claimed, although this amount cannot be
reasonably estimated.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of bank account balances in excess of federally
insured limits and trade receivables. The Company's receivables consist of oil
and gas sales to third parties primarily from offshore production in the Gulf of
Mexico and onshore oil production in the central part of the United States. This
concentration may impact the Company's overall credit risk, either positively or
negatively, in that these entities may be similarly affected by changes in
economic or other conditions. Receivables are generally not collateralized.
Historical credit losses incurred by the Company on receivables have not been
significant.
Note 14 - EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
In August, 1994, the Company established an Employee Stock Ownership Plan (ESOP)
and Trust that covers substantially all employees. The Board of Directors can
approve contributions, up to a maximum of 15% of eligible employees' gross
wages. The Company incurred $132,000 and $123,000 in costs for the years ended
December 31, 1995 and 1994, respectively.
F-13
<PAGE>
Note 15-IMPAIRMENT OF LONG-LIVED ASSETS
In 1995 the Company adopted the Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of", which requires that long-lived assets and identifiable
intangibles be reviewed for impairment when the assets carrying amount may not
be recoverable based on the fair market value of the asset. SFAS 121 requires
assets to be reviewed for impairment at the lowest level for which there are
independent, indentifiable cash flows. The adoption of SFAS 121 had no effect on
1995 financial statements and the Company expects no future impact, as the
Company periodically evaluates its oil and gas properties for impairment under
the successful efforts method of accounting on a field by field basis as
prescribed by FAS No. 121.
Note 16-FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted the requirements of Statement
of Financial Accounting Standards No. 107, "Disclosure about Fair Value of
Fianacial Instruments" requires desclosure of an estimate of the fair value of
certain financial instruments. The carrying amount and fair values of the
Company's financial insturments at December 31, 1995, are as follows:
Assets (Liabilities)
Carrying Amount Fair Value
Cash and cash equivalents $ 1,198,000 $ 1,198,000
Receivables 4,415,000 4,415,000
Payables (4,605,000) (4,605,000)
Long-term variable rate debt (17,390,000) (17,390,000)
Long-term fixed rate debt (5,000,000) (3,675,150)
Off balance sheet financial instruments
Letter of credit 0 0
Hedge contracts 0 (2,000,000)
Cash and cash equivalents, receivables, payables, and long-term variable rate
debt
The carrying amount reported on the consolidated balance sheet approximates its
fair value because of the short maturities of these instruments.
Long-term, fixed rate debt
The Company estimates the fair value of its long-term, fixed rate debt generally
using descounted cash flow analysis based on the Corporation's current borrowing
rates for debt with similar maturities.
Letter of credit
A $3,000,000 letter of credit collateralizes a plugging bond. Fair value
estimated on the basis of fees paid to obtain the obligation is not material at
December 31, 1995.
Hedge contract
The fair value of the Company's futures contracts are estimated based on current
settlement values.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of bank account balances in excess of federally
insured limits and trade receivables. The Company's receivables consist of oil
and gas sales to third parties primarily from offshore production in the Gulf of
Mexico and onshore oil production in the central part of the United States. This
concentration may impact the Company's overall credit risk, either positively or
negatively, in that these entities may be similarly affected by changes in
economic or other conditions. Receivables are generally not collateralized.
Historical credit losses incurred by the Company on receivables have not been
significant.
Note 17 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The following table reflects the costs incurred in oil and gas property
activities for each of the three years ended December 31:
F-14
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- --------------
<S> <C> <C> <C>
Property acquisition costs, proved $12,603,000 $ 352,000 $ -
Property acquisition costs, unproved $ - $ - $ -
Exploration costs $ 8,112,000 $ - $ -
Development costs $ 1,497,000 $ 11,749,000 $ 801,000
</TABLE>
Quantities of Oil and Gas Reserves
The estimates of proved developed and proved undeveloped reserve quantities at
December 31, 1995 are based upon reports of petroleum engineers and do not
purport to reflect realizable values or fair market values of PANACO's reserves.
It should be emphasized that reserve estimates are inherently imprecise and
accordingly, these estimates are expected to change as future information
becomes available. These are estimates only and should not be construed as exact
amounts. All reserves are located in the United States.
Proved reserves are estimated reserves of natural gas and crude oil and
condensate that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are those expected
to be recovered through existing wells, equipment, and operating methods.
Proved developed and undeveloped reserves Oil Gas
Estimated reserves as of December 31, 1992 1,121,000 46,595,000
Production (180,000) (5,586,000)
Sale of minerals in-place (12,000) (155,000)
Revisions of previous estimates (184,000) 2,842,000
---------- ----------
Estimated reserves as of December 31, 1993 745,000 43,696,000
Production (137,000) (8,139,000)
Extensions and discoveries 183,000 16,930,000
Sale of minerals in-place (24,000) (45,000)
Revisions of previous estimates 176,000 (10,860,000)
----------- -----------
Estimated reserves as of December 31, 1994 943,000 41,582,000
Production (170,000) (9,850,000)
Sale of minerals in-place (1,000) (22,000)
Purchase of minerals in-place 1,140,000 20,094,000
Revisions of previous estimates (12,000) (5,093,000)
---------- ------------
Estimated reserves as of December 31, 1995 1 ,900,000 46,711,000
=========== ===========
Proved developed reserves:
Oil Gas
(BBLS) (MCF)
-------------- -----------
December 31, 1992 1,053,000 36,208,000
============== ==========
December 31, 1993 745,000 24,665,000
============== ==========
December 31, 1994 907,000 36,282,000
============== ==========
December 31, 1995 1,794,000 40,323,000
============== ==========
F-15
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows are computed by applying year-end prices of oil and gas
(with consideration of price changes only to the extent provided by contractual
arrangements) to the year-end estimated future production of proved oil and gas
reserves. Estimates of future development and production costs are based on
year-end costs and assume continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 per cent
per year to reflect the estimated timing of the future cash flows. The
standardized measure of discounted cash flows is the future net cash flows less
the computed discount.
The accompanying table reflects the standardized measure of discounted
future cash flows relating to proved oil and gas reserves as of the three years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- --------------
<S> <C> <C> <C>
Future cash inflows $140,247,000 $88,893,000 $113,419,000
Future development and production costs 50,723,000 32,197,000 38,375,000
-------------- ------------ --------------
Future net cash flows 89,524,000 56,696,000 75,044,000
Future income taxes 11,755,000 6,304,000 13,937,000
-------------- ------------- --------------
Future net cash flows after income taxes 77,769,000 50,392,000 61,107,000
10% annual discount (14,848,000) (8,477,000) (13,728,000)
-------------- ------------ --------------
Standardized measure after income taxes $ 62,921,000 $41,915,000 $ 47,379,000
============= =========== =============
</TABLE>
Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The accompanying table reflects the principal changes in the standardized
measure of discounted future net cash flows attributable to proved oil and gas
reserves for each of the three years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------------- -------------- --------------
<S> <C> <C> <C>
Beginning balance $ 41,915,000 $47,379,000 $ 48,163,000
Sales of oil and gas, net of production costs (9,314,000) (11,047,000) (9,426,000)
Net change in income taxes (4,267,000) 5,562,000 (2,130,000)
Changes in price and production costs 11,498,000 (10,781,000) 2,199,000
Purchase of minerals in-place 34,415,000 - -
Revision of previous estimates, extensions,
discoveries, & sales of minerals in place-net (11,326,000) 10,802,000 8,573,000
-------------- ----------- -------------
Ending balance $ 62,921,000 $41,915,000 $ 47,379,000
================ =============== ================
Price per MCF $ 2.24 $ 1.75 $ 2.40
================ =============== ================
Price per BBL $ 17.75 $ 16.00 $ 12.75
================ =============== ================
</TABLE>
Note 18 - ACQUISITIONS
On July 12, 1995, the Company entered into a Purchase and Sale Agreement with
Zapata Exploration Company ("Zapata") to acquire all of Zapata's offshore oil
and gas properties in the Gulf of Mexico. The properties consist of East Breaks
Blocks 109 and 110, East Cameron Block 359, Eugene Island Block 372, South
Timbalier Block 185 and West Cameron Block 538, totaling 31,134 gross acres. The
transaction closed July 26, 1995.
The purchase price for the assets acquired in this transaction was $2,748,000 in
cash and the obligation to pay a production payment to Zapata based upon future
production. The production payment is based upon production from the East Breaks
109 Field after production of 12 Bcfe gross (10 Bcfe net) measured from October
1, 1994. The Company will pay to Zapata $.4167 per Mcfe on the next 27 Bcfe
produced. Payments to Zapata on this production payment are to be made by the
Company when it is paid for the oil or gas. Oil and gas reserves attributable to
this production payment are not included in the reserves for the properties set
forth herein.
F-16
<PAGE>
As of November 30, 1995, the Company entered into a Purchase and Sale Agreement
with Shell Western E&P Inc. ("Shell") to acquire all of Shell's interest in the
Bayou Sorrel Field in Iberville Parish, Louisiana. The transaction closed
December 27, 1995, and PANACO took over as operator from Shell. Proved reserves
attributable to the field at December 31, 1995, were 898,000 barrels and 3.1 Bcf
of natural gas. In addition to the proved reserves management has identified
significant probable and possible reserves attributable to this field. The
purchase price of the field was $10,455,000 which included a $204,000 brokers'
fee and a related receivable of $600,000.
Both of the acquisitions made in 1995 were accounted for using the purchase
method. The results of the Zapata properties acquisition are included in the
Company's statement of income (operations) from July 27 to December 31, 1995.
The results of the Bayou Sorrel acquisition are included in the Company's
statement of income (operations) from December 28 to December 31, 1995.
The unaudited pro forma statements of income (operations) for the year ended
December 31, 1995 assumes the Zapata and Bayou Sorrel acquisitions had been
consummated January 1, 1995. The unaudited pro forma statement of income
(operations) includes certain adjustments to give effect to the acquisitions of
the oil and gas properties.
The pro forma statements do not purport to be indicative of the results of the
Company had these acquisitions occurred on the date assumed, nor is the pro
forma statement necessarily indicative of the future results of the Company. The
pro forma statement should be read together with the Financial Statements of the
Company, including the notes thereto and included elsewhere in this Statement.
F-17
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Unaudited Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1995
Zapata Bayou PANACO, Inc.
PANACO, Inc. Properties Sorrel Field Pro Forma Pro Forma
(As Restated) 1/1-7/26/95 1/1-12/26/95 Adjustments Combined
REVENUES
<S> <C> <C> <C> <C>
Oil and gas sales $ 18,447,000 $ 3,623,000 $ 3,326,000$ -- $ 25,396,000
COSTS AND EXPENSES
Lease operating 8,055,000 1,460,000 867,000 280,000 (a) 10,662,000
Depreciation, depletion and
amortization 8,064,000 -- -- 1,812,000 (b) 9,876,000
Exploration expenses 8,112,000 -- -- -- 8,112,000
Provision for losses and
(gains) on disposition
& write-down of assets 751,000 -- -- -- 751,000
General and administrative 690,000 -- -- -- 987,000
Production and ad valorem
taxes 1,078,000 -- 297,000 -- 1,078,000
------------------------------------------------------------------------------
Total 26,750,000 1,460,000 1,164,000 2,092,000 31,466,000
NET OPERATING INCOME
(LOSS) (8,303,000) 2,163,000 2,162,000 (2,092,000) (6,070,000)
------------ ------------ ------------ ------------ --------------
OTHER INCOME (EXPENSE)
Interest income 5,000 -- -- -- 5,000
Interest expense (992,000) -- -- (651,000) (c) (1,643,000)
------------------------------------------------------------ --------------
Total (987,000) -- -- (651,000) (1,638,000)
---------------------------------------------------------------- --------------
NET INCOME (LOSS) BEFORE
INCOME TAXES (9,290,000) 2,163,000 2,162,000 (2,743,000) (7,708,000)
INCOME TAXES (BENEFIT) -- -- -- -- --
-------------------------------------------------------------------------------
NET INCOME (LOSS) $(9,290,000) $2,163,000 $2,162,000 $(2,743,000) $(7,708,000)
============ ========== ========== ============ ============
EARNINGS (LOSS) PER COMMON SHARE
Primary
Net earnings (loss) $ (0.81) $ (0.67)
================ =================
Assuming full dilution
Net earnings (loss) $ (0.81) $ (0.67)
================ =================
Weighted average shares outstanding:
Primary 11,504,615 11,504,615
================ ================
Assuming full dilution 11,504,615 11,504,615
================ ================
</TABLE>
The accompanying notes to pro forma financial statements are an
integral part of this statement.
F-18
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Unaudited Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1994
Zapata Bayou PANACO, Inc.
PANACO, Inc. Properties Sorrel Field Pro Forma Pro Forma
(As Restated) 1/1-12/31/94 1/1-12/31/94 Adjustments Combined
REVENUES
<S> <C> <C> <C> <C>
Oil and gas sales $ 17,338,000 $ 7,540,000 $ 2,888,000 -- $ 27,766,000
COSTS AND EXPENSES
Lease operating 5,231,000 3,317,000 1,942,000 480,000 (a) 10,970,000
Depreciation, depletion and
amortization 6,038,000 -- -- 1,447,000 (b) 7,485,000
Exploration expenses -- -- -- -- --
Provision for losses and (gains)
on disposition and write-down
of assets 1,202,000 -- -- -- 1,202,000
General and administrative 587,000 -- 310,000 -- 897,000
Production and ad valorem taxes 1,006,000 -- -- -- 1,006,000
--------------------------------------------------------------------------
Total 14,064,000 3,317,000 2,252,000 1,927,000 21,560,000
------------- -------------- ------------- ------------- ------------
NET OPERATING INCOME (LOSS) 3,274,000 4,223,000 636,000 (1,927,000) 6,206,000
-------------- ------------- -------------- -------------- -----------
OTHER INCOME (EXPENSE)
Interest income 46,000 -- -- -- 46,000
Interest expense (1,669,000) -- -- (788,000)(c) (2,457,000)
--------------------------------------------------------------- -----------
Total (1,623,000) -- -- (788,000) (2,411,000)
--------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY ITEM 1,651,000 4,223,000 636,000 (2,715,000) 3,795,000
INCOME TAXES (BENEFIT) -- -- -- -- --
--------------------------------------------------------------------------
EXTRAORDINARY ITEM-LOSS
ON EARLY RETIREMENT OF
DEBT $ (536,000) $ -- $ -- $ -- $ (536,000)
--------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,115,000 $ 4,223,000 $ 636,000 $(2,715,000) $ 3,259,000
------------ ----------- ------------ ------------ ------------
EARNINGS (LOSS) PER COMMON SHARE
Primary
Net (loss) before extraordinary item$ 0.16 $ 0.37
Extraordinary loss (0.05) (0.05)
------------------ -----------------
Net earnings (loss) $ 0.11 $ 0.33
================= ================
Assuming full dilution
Earnings loss before
extraordinary item $ 0.16 $ 0.38
Extraordinary loss (0.05) (0.05)
----------------- -----------------
Net earnings (loss) $ 0.11 $ 0.33
================= =================
Weighted average shares outstanding:
Primary 9,952,870 9,952,870
================ =================
Assuming full dilution 10,039,042 10,039,042
================ =================
</TABLE>
The accompanying notes to pro forma financial statements are an
integral part of this statement.
F-19
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (OPERATIONS)
1. Basis of Presentation
The Unaudited Pro Forma Statement of Income (Operations) of PANACO, Inc.
presents the combined effects of the acquisition of the Zapata properties and
Bayou Sorrel Field as if the acquisitions had been consummated January 1st of
each year.
2. Pro Forma Entries
(a) To record the estimated additional insurance expense.
(b) To record the additional depletion and depreciation expense for the
increased property costs and production volumes (see Note 4 below).
(c) To record the additional interest expense for increased term of
borrowing (see Note 5 below).
3. Taxes
No additional operating taxes are included for the Zapata properties as the
production from these properties is from federal offshore waters and is not
subject to severance taxes.
4. Depletion, depreciation & amortization
Additional depletion and depreciation expense is included to reflect the
additional property costs and production volumes assuming the transaction was
consummated January 1. The original purchase prices are used for the cost of the
properties. The actual purchase prices of the properties were reduced by the net
income of the properties from the effective dates of the purchases until the
closing dates.
5. Interest
Additional interest expense is included as if the transactions had taken place
January 1. It is assumed that the Zapata acquisition price was paid in cash and
the Bayou Sorrel acquisition price was paid for using the Company's Primary
Credit Facility. Interest is computed on the additional borrowings at the
estimated rates in effect at January 1.
F-20
<PAGE>
Independent Auditors' Report
To the Board of Directors
PANACO, Inc.
We have audited the accompanying schedules of Revenues, Direct Operating
Expenses and Production Taxes of the Zapata properties (which were acquired by
PANACO, Inc., on July 26, 1995) and the Bayou Sorrel Field (which was acquired
by PANACO on December 27, 1995) for each of the two years in the period ended
December 31, 1994. These schedules are the responsibility of PANACO, Inc.'s
management. Our responsibility is to express an opinion on the schedules based
on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Schedules of Revenues, Direct Operating Expenses and
Production Taxes are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
schedule presentation. We believe that our audit provides a reasonable basis for
our opinion.
The accompanying Schedules of Revenues, Selected Direct Operating Expenses and
Production Taxes were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
current report on Form 10-K) and is not intended to be a complete presentation
of the Zapata properties and Bayou Sorrel Field's revenues and expenses.
In our opinion, the Schedules of Revenues, Direct Operating Expenses and
Production Taxes referred to above present fairly, in all material respects, the
revenues, selected direct operating expenses and production taxes of the Zapata
properties and the Bayou Sorrel Field for each of the two years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
BARRETT & ASSOCIATES
Overland Park, Kansas
December 15, 1995
F-21
<PAGE>
<TABLE>
<CAPTION>
ZAPATA PROPERTIES AND BAYOU SORREL FIELD
SCHEDULES OF REVENUES, SELECTED DIRECT OPERATING EXPENSES
AND PRODUCTION TAXES
Zapata Bayou Sorrel
Properties Field Total
Year Ended December 31, 1994
<S> <C> <C> <C>
Oil and gas revenues $ 7,540,000 $ 2,888,000 $ 10,428,000
============ ============ =============
Selected direct operating expenses $ 3,317,000 $ 1,942,000 $ 5,259,000
============ ============ ==============
Production taxes 0 $ 310,000 $ 310,000
============ ============= ===============
Year Ended December 31, 1993
Oil and gas revenues $ 11,823,000 $ 2,908,000 $ 14,731,000
============ ============ ============
Selected direct operating expenses $ 3,696,000 $ 1,806,000 $ 5,502,000
============= ============ =============
Production taxes $ 0 $ 352,000 $ 352,000
============= ============= ==============
</TABLE>
See accompanying notes to this schedule.
F-22
<PAGE>
ZAPATA PROPERTIES AND BAYOU SORREL FIELD
NOTES TO THE SCHEDULES OF REVENUES,
SELECTED DIRECT OPERATING EXPENSES AND PRODUCTION TAXES
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies related to the Schedules of
Revenues, Selected Direct Operating Expenses and Production Taxes of the Zapata
properties and the Bayou Sorrel Field is presented to assist in understanding
the schedules. The schedules and notes are representations of the Company's
management, which is responsible for the integrity and objectivity of the
schedules. These accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of the
statement.
Acquisitions
The Zapata properties were acquired on July 26, 1995, from Zapata Exploration
Co. The Bayou Sorrel Field was acquired on December 27, 1995, from Shell-Western
E&P, Inc.
Revenue Recognition
Revenues are recorded on the accrual basis, with volumes and prices being
estimated for properties during periods when actual production information is
not available.
Selected Direct Operating Expenses
Selected direct operating expenses include necessary and ordinary expenses
to maintain production. Insurance expense is not included since sufficient
information is not available from the Seller. Management estimates insurance
costs to be $280,000 per annum.
Depreciation, depletion and amortization
Depreciation, depletion and amortization is not presented as sufficient
information is not available from the Seller.
Operating Taxes
No additional tax expense is included for the Zapata properties, as the
production from federal offshore waters is not subject to state severance taxes.
General, Administrative, and Overhead Expenses
General, administrative, and overhead expenses are not presented as sufficient
information is not available from the Seller.
Note 2 - 1995 REVENUES, SELECTED DIRECT OPERATING EXPENSES AND PRODUCTION TAXES
----------------------------------------------------------------------
(UNAUDITED)
The following is a schedule of revenues, selected direct operating expenses and
production taxes for the periods in 1995 that the Company did not own the Zapata
properties and the Bayou Sorrel Field. The schedule is not intended to be a
complete presentation of the Zapata properties and Bayou Sorrel Field's revenues
and expenses.
F-23
<PAGE>
<TABLE>
<CAPTION>
Oil and Gas Selected Direct Production
Revenues Operating Expenses Taxes
Zapata Properties
<S> <C> <C> <C> <C> <C> <C>
January 1, 1995 to July 25, 1995 $ 3,623,000 $ 1,460,000 $ 0
Bayou Sorrel
January 1, 1995 to December 26, 1995 3,326,000 867,000 297,000
------------ ------------- ------------
TOTAL $ 6,949,000 $ 2,327,000 $ 297,000
=========== =========== ===========
</TABLE>
Note 3 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
--------------------------------------------------------------------
(UNAUDITED)
Quantities of Oil and Gas Reserves
The estimates of proved developed and proved undeveloped reserve quantities of
the Zapata properties and the Bayou Sorrel Field at December 31, 1994 are based
upon management's computation from the report of PANACO's independent petroleum
engineers as of December 31, 1995, and do not purport to reflect realizable
values or fair market values of the properties' reserves. It should be
emphasized that reserve estimates are inherently imprecise and accordingly,
these estimates are expected to change as future information becomes available.
These are estimates only and should not be construed as exact amounts. All
reserves are located in the United States. Reserve quantities for the Zapata
properties and the Bayou Sorrel Field were not available at December 31, 1992,
1993, and 1994, and the balances at those dates were derived from production
activity during 1993 and 1994.
Proved reserves are estimated reserves of natural gas and crude oil that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment, and operating methods.
<TABLE>
<CAPTION>
Proved developed and OIL (BBLS) GAS (MCF)
undeveloped reserves Bayou Bayou
Zapata Sorrel Total Zapata Sorrel Total
Estimated reserves as of
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1992 391,000 1,323,000 1,714,000 27,647,000 4,039,000 31,686,000
Production (54,000) (143,000) (197,000) (4,924,000) (228,000) (5,152,000)
-------- --------- ---------- ----------- ---------- -----------
Estimated reserves as of
December 31, 1993 337,000 1,180,000 1,517,000 22,723,000 3,811,000 26,534,000
Production (67,000) (127,000) (194,000) (3,419,000) (368,000) (3,787,000)
-------- --------- --------- ----------- ---------- -----------
Estimated reserves as of
December 31, 1994 270,000 1,053,000 1,323,000 19,304,000 3,443,000 22,747,000
======= ========= ========= =========== ========= ==========
Proved, developed reserves:
December 31, 1993 337,000 1,180,000 1,517,000 22,723,000 3,811,000 26,534,000
======= ========= ========= ========== ========= ==========
December 31, 1994 270,000 1,053,000 1,323,000 19,304,000 3,443,000 22,747,000
======= ========= ========= ========== ========= ==========
</TABLE>
F-24
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows are computed by applying year-end prices of oil and gas
(with consideration of price changes only to the extent provided by contractual
arrangements) to the year-end estimated future production of proved oil and gas
reserves. Estimates of future development and production costs are based on
year-end costs and assume continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 percent
per year to reflect the estimated timing of the future cash flows. The
standardized measure of discounted cash flows is the future net cash flows less
the computed discount.
The accompanying table reflects the standardized measure of discounted future
cash flows relating to the proved oil and gas reserves of the Zapata properties
as of the two years ended December 31:
<TABLE>
<CAPTION>
1994 1993
--------------------------------------------------------------------------------------
Bayou Bayou
Zapata Sorrel Total Zapata Sorrel Total
<S> <C> <C> <C> <C> <C> <C>
Future cash inflows $ 45,181,000 $27,233,000 $72,414,000 $52,721,000 $30,121,000 $ 82,842,000
Future development
and production costs 15,341,000 9,021,000 24,362,000 18,658,000 11,273,000 29,931,000
------------- ------------- ------------ ------------- ------------ -------------
Future net cash flows 29,840,000 18,212,000 48,052,000 34,063,000 18,848,000 52,911,000
10% annual discount
to reflect timing of
cash flows 1,821,000 5,532,000 7,353,000 1,821,000 5,532,000 7,353,000
-------------- ------------- ------------- -------------- ------------- --------------
Standardized measure
before income taxes $ 28,019,000 $12,680,000 $40,699,000 $ 32,242,000 $13,316,000 $ 45,558,000
============ ============ =========== ============ =========== ============
</TABLE>
Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The accompanying table reflects the principal changes in the standardized
measure of discounted future net cash flows attributable to proved oil and gas
reserves of the Zapata properties for each of the two years ended December 31:
<TABLE>
<CAPTION>
1994 1993
---------------------------------------------------------------------------------------
Bayou Bayou
Zapata Sorrel Total Zapata Sorrel Total
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 32,242,000 $13,316,000 $45,558,000 $40,369,000 $14,066,000 $ 54,435,000
Sales of oil and gas,
net of production
costs 4,223,000 636,000 4,859,000 8,127,000 750,000 8,877,000
-------------- -------------- ------------- -------------- -------------- ---------------
Ending balance $ 28,019,000 $12,680,000 $40,699,000 $32,242,000 $ 13,316,000 $ 45,558,000
============ =========== =========== ============ =========== =============
</TABLE>
F-25
<PAGE>
PANACO, Inc.
September 30, 1996
Financial Statements
(Unaudited)
F-26
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Condensed Balance Sheets (Successful Efforts Method)
(Unaudited)
ASSETS As of As of
September 30, 1996 December 31, 1995
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $766,000 $1,198,000
Accounts receivable 4,435,000 4,386,000
Accounts receivable - sale of Bayou Sorrel 11,152,000 0
Prepaid expenses 359,000 465,000
------------- -------------
Total Current Assets 16,712,000 6,049,000
------------- -------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING:
Oil and gas properties 103,015,000 103,105,000
Less: accumulated depreciation,
depletion and amortization (77,526,000) (73,620,000)
------------- ------------
Net Oil and Gas Properties 25,489,000 29,485,000
------------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Equipment 248,000 196,000
Less: accumulated depreciation (122,000) (92,000)
------------- ------------
Net Property, Plant and Equipment 126,000 104,000
------------- ------------
OTHER ASSETS:
Restricted deposits 1,733,000 0.00
Loan costs, net 323,000 471,000
Certificate of deposit 27,000 26,000
Note receivable 21,000 21,000
Other 13,000 13,000
------------- ------------
Total Other Assets 2,117,000 531,000
------------- ------------
TOTAL ASSETS $44,444,000 $36,169,000
============= ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement
F-27
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Condensed Balance Sheets (Successful Efforts Method)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY As of As of
September 30, 1996 December 31, 1995
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $8,569,000 $4,444,000
Interest payable 240,000 161,000
Current portion of long-term debt 0 0
------------ -----------
Total Current Liabilities 8,809,000 4,605,000
------------ -----------
LONG-TERM DEBT 25,137,000 22,390,000
------------ -----------
STOCKHOLDERS' EQUITY:
Preferred stock, ($.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding) 0 0
Common stock, ($.01 par value,
40,000,000 shares authorized and
12,350,255 and 11,504,615 shares
issued and outstanding, respectively) 123,000 115,000
Additional paid-in capital 23,090,000 21,155,000
Retained earnings (deficit) (12,715,000) (12,096,000)
------------ -----------
Total Stockholders' Equity 10,498,000 9,174,000
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,444,000 $36,169,000
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement
F-28
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Statements of Income (Successful Efforts Method)
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
1996 1995
REVENUES
<S> <C> <C>
Oil and natural gas sales $13,257,000 $13,660,000
COSTS AND EXPENSES
General & administrative 573,000 442,000
Depletion, depreciation & amortization 4,981,000 6,277,000
Exploration expenses - 2,174,000
Provision for losses and (gains) on
disposition and write-downs of assets (4,000) -
Lease operating 6,049,000 5,729,000
Production and ad valoreum taxes 429,000 810,000
West Delta fire loss 500,000 -
----------- ------------
Total 12,528,000 15,432,000
----------- ------------
NET OPERATING INCOME (LOSS) 729,000 (1,772,000)
----------- ------------
OTHER INCOME (EXPENSE)
Interest expense (net) (1,347,000) (720,000)
----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES (618,000) (2,492,000)
INCOME TAXES - -
----------- ------------
NET INCOME (LOSS) ($618,000) ($2,492,000)
=========== ============
Net income (loss) per share ($0.05) ($0.21)
=========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement
F-29
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Statement of Changes in Stockholders' Equity and Retained Earnings (Deficit)
For the nine months ended September 30, 1996
(Unaudited)
Amount ($)
Number of Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 11,504,615 $115,000 $21,155,000 ($12,096,000)
Net income 0 0 0 (618,000)
Common shares issued - warrants
exercised and ESOP contribution 840,746 8,000 1,935,000 0
----------- --------- ------------ --------------
Balance, September 30, 1996 12,345,361 $123,000 $23,090,000 ($12,714,000)
=========== ========= ============ ==============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement
F-30
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Statement of Cash Flows
Nine Months Ended September 30,
(Unaudited)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ($618,000) ($2,492,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depletion, depreciation and amortization 4,824,000 6,052,000
Exploration expenses 0 2,174,000
Amortization of loan costs 157,000 225,000
Changes in operating assets and liabilities:
Certificates of Deposits - escrow (1,000) 21,000
Accounts receivable (49,000) (110,000)
Prepaid expenses 106,000 (405,000)
Other assets 0 44,000
Accounts payable 4,231,000 916,000
Interest payable 79,000 (34,000)
------------ -----------
Net cash provided by operating activities 8,729,000 6,391,000
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Accounts receivable - sale of Bayou Sorrel (11,152,000) 0
Sale of oil and gas properties 11,158,000 9,000
Capital expenditures and acquisitions (11,804,000) (5,396,000)
Purchase of other property and equipment (52,000) (33,000)
Increase in restricted deposits (1,886,000) 0
------------ -----------
Net cash used by investing activities (13,736,000) (5,420,000)
============ ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt proceeds 7,500,000 3,365,000
Repayment of long-term debt (4,753,000) (7,000,000)
Issuance of common stock-exercise of warrants 1,837,000 2,554,000
Additional loan costs (9,000) 0
------------ -----------
Net cash provided (used) by financing activities 4,575,000 (1,081,000)
------------ -----------
NET INCREASE (DECREASE) IN CASH (432,000) (110,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,198,000 1,583,000
------------ -----------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, $766,000 $1,473,000
============ ===========
Supplemental disclosures of cash flow information:
Cash paid for nine months ended September 30:
Interest $1,180,000 $757,000
Disclosure of accounting policies:
1. For purposes of the statement of cash flows, the Company considers all highly liquid debt
instruments purchased with a maturity of six months or less to be cash equivalents.
2. 24,220 Common Shares were issued related to the Company's ESOP in a non-cash
transaction.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement
F-31
<PAGE>
PANACO, INC.
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30, 1996 and 1995
Note 1. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position as of September 30, 1996 and December 31, 1995 and the results of
operations and changes in Stockholders' Equity and cash flows for the periods
ended September 30, 1996 and 1995. Most adjustments made to the financial
statements are of a normal, recurring nature. Other adjustments, if any, are
discussed in later notes.
Note 2. Effective December 31, 1995, the Company changed its method of
accounting for oil and gas operations from the full cost to the successful
efforts method. Management concluded that the successful efforts method will
better enable investors and others to compare the Company to similar oil and gas
companies, the majority of which follow the successful efforts method.
Under the successful efforts method, lease acquisition costs are
capitalized. Exploratory drilling costs are also capitalized pending
determination of proved reserves. If proved reserves are not discovered, the
exploratory costs are expensed. All development costs are capitalized. Provision
for depreciation and depletion is determined on a field-by-field basis using the
unit-of-production method. The carrying amounts of proved and unproved
properties are reviewed periodically on a property-by-property basis, based on
future net cash flows determined by an independent engineering firm, with an
impairment reserve provided if conditions warrant.
The Company recognizes its ownership interest in oil and gas sales as
revenue and records revenues on an accrual basis.
Capital costs of oil and gas properties include the estimated costs
to develop proved reserves and the costs of plugging offshore wells and removing
structures. The capital costs are amortized on the units of production method,
using the ratio of current production to the calculated future production from
the remaining proved oil and gas reserves.
Reserve determinations are subject to revision due to inherent
imprecisions in estimating reserves and are revised as additional information
becomes available.
Note 3. The results of operations for the nine months ended September 30, 1996
are not indicative of the results to be expected for the full year. On April 24,
1996 the Company experienced an explosion and fire at Tank Battery #3 in West
Delta. The fields were shut-in through October 7th while repairs were being
made. No revenues for the 67 remaining days in the second quarter and the full
third quarter of 1996 were recorded, while at the same time, a large part of
lease operating expenses associated with West Delta are fixed costs, and have
stayed at relatively the same level as before the fire. Production taxes
decreased as a result of the lost production from West Delta , a large part of
which is in Louisiana State waters and is subject to severance taxes. Interest
expense is also up as a result of the fire due to reduced cash flows, coupled
with increased spending to repair Tank Battery #3. The Company did not begin to
receive insurance advances for repairing the platform until the third quarter of
1996. The Company began producing oil and natural gas from the West Delta fields
on October 7th, 1996.
Note 4. The net income per share for the nine months ended September 30, 1996
and 1995 has been calculated based on 12,253,382 and 11,649,091 weighted average
shares outstanding, respectively and 12,345,361 and 11,661,540 weighted average
shares for the three months ended September 30, 1996 and 1995, respectively.
F-32
<PAGE>
Note 5. The reserves presented in the following table were prepared solely by
the Company and are estimates only and should not be construed as being exact
amounts. All reserves presented are proved reserves that are defined as
estimated quantities which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Sale of minerals-in-place
reflects the sale of the Bayou Sorrel Field, effective September 1, 1996.
Reserves attributable to the Amoco Acquisition, closed on October 8th, are not
included.
Proved developed and undeveloped reserves Oil Gas
(Bbls) (Mcf)
December 31, 1995 reported reserves 1,900,000 46,711,000
Purchase of minerals-in-place -0- -0-
Extensions & Discoveries -0- -0-
Production (203,000) (4,590,000)
Sale of minerals-in-place (805,000) (3,102,000)
Revisions of previous estimates -0- -0-
------------ -----------
Estimated reserves at September 30, 1996 892,000 39,019,000
============ ===========
No major discovery or other favorable or adverse event has caused a significant
change in the estimated proved reserves since September 30, 1996. The Company
does not have proved reserves applicable to long-term supply agreements with
governments or authorities. All proved reserves are located in the United
States.
Note 6. The Company's Common Shares are quoted on the National Market of NASDAQ.
The last trade on September 30 was at $5.375 per share.
Note 7. The Company is party to various escrow agreements which provide for
monthly deposits into escrow accounts to satisfy future plugging and abandonment
obligations. The terms of the agreements vary as to deposit amounts, based upon
fixed monthly amounts or percentages of the properties' net income. With respect
to plugging and abandonment operations, funds are partially or completely
released upon the presentation by the Company to the escrow agent of evidence
that the operation was or is being conducted in compliance with applicable laws
and regulations. These escrow amounts are included on the financial statements
as Restricted Deposits. See "The Company-Plugging and Abandonment Escrows"
Note 8. On April 24, 1996, the Company experienced an explosion and fire on Tank
Battery #3 in West Delta. The fire was caused by a service company performing
work on the facility. The extraordinary loss, recorded in the second quarter of
1996, is management's estimate of the Company's shortfall on insurance advances
of repairing the facilities, which includes a $225,000 deductible. The Company
will seek to recover these costs, along with lost profits, from the company
whose workers caused the fire.
Note 9. On November 22, 1996, effective September 1, 1996, the Company sold its
Bayou Sorrel Field to National Energy Group, Inc. for $11,000,000, $9,000,000 in
cash and $2,000,000 in National Energy Group, Inc. common shares. National
Energy Group, Inc. will also reimburse the Company for deposits it has made into
an escrow agreement for the plugging and abandonment obligation. Through
September 30, this amount was $152,000. The Company will also retain a 3%
overriding royalty interest in the deep rights of the field.
Note 10. At December 31, 1995, the Company had net operating loss carry forwards
for federal income tax purposes of $15,765,000 which are available to offset
future federal taxable income through the year 2010.
F-33
<PAGE>
Report of Independent Public Accountants
To the Board of Directors
PANACO, Inc.
We have audited the accompanying Statement of Revenues and Direct Operating
Expenses of the Amoco Properties (to be acquired by PANACO, Inc.) for each of
the three years in the period ended December 31, 1995. This statement and the
notes thereto are the responsibility of PANACO, Inc.'s management. Our
responsibility is to express an opinion on the statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Statement of Revenues and Direct Operating Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the Statement of Revenues and Direct Operating Expenses referred
to above presents fairly, in all material respects, the revenues and direct
operating expenses of the Amoco Properties for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Kansas City, Missouri
September 6, 1996
F-34
<PAGE>
AMOCO PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
Year Ended December 31 Six Months Ended June 30
---------------------- ------------------------
(Unaudited)
1995 1994 1993 1996 1995
---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C>
Gas $ 8,769,000 $ 7,346,000 $ 8,459,000 $ 5,684,000 $ 4,379,000
Oil & Condensate 3,759,000 3,789,000 3,620,000 2,221,000 1,979,000
------------ ------------ ------------ ----------- -----------
Total Revenues $12,528,000 $11,135,000 $12,079,000 $ 7,905,000 $ 6,358,000
=========== =========== =========== =========== ===========
Direct Operating Expenses $ 2,991,000 $ 3,158,000 $ 2,798,000 $ 1,756,000 $ 1,275,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to this statement.
F-35
<PAGE>
AMOCO PROPERTIES
NOTES TO THE STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements require the use of estimates, and when applicable,
specific information regarding significant estimates embodied in the financial
statements have been disclosed. The Statement of Revenues and Direct Operating
Expenses was prepared for purposes of complying with the rules and regulations
of the Securities and Exchange Commission and is not intended to be a complete
presentation of the financial position or results of operations of the Amoco
Properties.
Acquisition
The Amoco Properties are to be acquired by the Company on October 8, 1996 from
Amoco Production Company (seller) pursuant to the purchase and sale agreement
dated August 26, 1996. The properties to be acquired are Amoco Production
Company's existing interests in the following offshore blocks: East Breaks 160,
East Breaks 161, High Island (HI) 302, HI 309, HI 310, HI 330, HI 349, HI 474,
HI 489, HI 499, a portion of the HI 475 Block, West Cameron (WC) 613, and WC
144.
Revenue Recognition
Revenues are recorded on an accrual basis, with volumes and prices being
estimated for properties during periods when actual production information is
not available. Revenues are recognized based on volumes of production taken and
sold by Amoco which is not materially different from the entitlement method for
the three year period ending December 31, 1995. For each of the periods
presented, Amoco sold substantially all of their production to a related party
at market based prices.
Direct Operating Expenses
Direct operating expenses include necessary and ordinary expenses to maintain
production. Insurance expense is not included since sufficient information is
not available from the Seller. Depreciation, depletion and amortization is not
included. No severance tax expense is included for the Amoco Properties, since
the production from federal offshore waters are not subject to state severance
taxes.
General, Administrative, and Overhead Expenses
General, administrative, and overhead expenses are not presented as sufficient
information is not available from the Seller.
Note 2 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
--------------------------------------------------------------------
(UNAUDITED)
Quantities of Oil and Gas Reserves
The estimates of proved developed and proved undeveloped reserve quantities of
the Amoco Properties at December 31, 1995 are based upon PANACO's computation at
September 1, 1996 from a report of independent petroleum engineers, retained by
Amoco, and do not purport to reflect realizable values or fair market values of
the properties' reserves. It should be emphasized that reserve estimates are
inherently imprecise and accordingly, these estimates are expected to change as
future information becomes available. These are estimates only and should not be
construed as exact amounts. All reserves are located in the United States.
Reserve quantities for the Amoco Properties were not available at December 31,
1992, 1993, 1994, and 1995, and the balances at those dates were derived from
production activity during 1993, 1994, 1995 and 1996.
Proved reserves are estimated reserves of natural gas and crude oil that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment, and operating methods.
F-36
<PAGE>
<TABLE>
<CAPTION>
Proved developed and OIL (BBLS) GAS (MCF)
undeveloped reserves
Estimated reserves as of
<S> <C> <C> <C> <C>
December 31, 1992 2,772,000 45,227,000
Production (216,000) (3,874,000)
--------- -----------
Estimated reserves as of
December 31, 1993 2,556,000 41,353,000
Production (236,000) (4,057,000)
--------- -----------
Estimated reserves as of
December 31, 1994 2,320,000 37,296,000
Production (216,000) (5,704,000)
------------ ------------
Estimated reserves as of
December 31,1995 2,104,000 31,592,000
=========== ===========
Proved developed reserves:
OIL (BBLS) GAS (MCF)
December 31, 1993 2,185,000 35,202,000
========== ==========
December 31, 1994 1,949,000 31,145,000
========== ===========
December 31, 1995 1,733,000 25,441,000
========== ==========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows are computed by applying September, 1996 prices of oil and
gas (with consideration of price changes only to the extent provided by
contractual arrangements) to the estimated future production of proved oil and
gas reserves. Estimates of future development and production costs are based on
September, 1996 costs and assume continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10
percent per year to reflect the estimated timing of the future cash flows. The
standardized measure of discounted cash flows is the future net cash flows less
the discount at September 1, 1996.
F-37
<PAGE>
The accompanying table reflects the standardized measure of discounted future
cash flows relating to the proved oil and gas reserves of the Amoco properties
as of the three years ended December 31:
1995 1994 1993
---- ---- ----
Future cash inflows $ 108,399,000 $120,927,000 $132,062,000
Future development
and production costs 31,112,000 34,103,000 37,261,000
------------ ------------ --------------
Future net cash flows 77,287,000 86,824,000 94,801,000
10% annual discount
to reflect timing of
cash flows 23,045,000 23,045,000 23,045,000
------------- -------------- --------------
Standardized measure
before income taxes $ 54,242,000 $ 63,779,000 $ 71,756,000
============= ============= =============
Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The accompanying table reflects the changes in the standardized measure of
discounted future net cash flows from the sales of oil and gas, net of
production costs attributable to proved oil and gas reserves of the Amoco
properties for each of the three years ended December 31:
1995 1994 1993
---- ---- ----
Beginning balance $ 63,779,000 $ 71,756,000 $ 81,037,000
Sales of oil and gas,
net of production
costs 9,537,000 7,977,000 9,281,000
--------------- -------------- --------------
Ending balance $ 54,242,000 $ 63,779,000 $ 71,756,000
=============== ============ ============
F-38
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus, and
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Underwriter. Neither the delivery
of this Prospectus nor any sale hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities to any person in any jurisdiction
in which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such an offer or solicitation.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary............................. 3 8,403,305
Risk Factors................................... 6 Common Shares
Use of Proceeds................................ 10
Capitalization................................. 10
Price Range of Common Shares................... 11
Dividend Policy................................ 11
Pro Forma Financial Information................ 12
Selected Financial Data........................ 20
Management's Discussion and Analysis........... 20
The Company.................................... 25
Properties..................................... 35
Management..................................... 43 [LOGO]
Principal Shareholders......................... 51
Certain Relationships and Related Transactions 52
Selling Shareholders........................... 53
Description of Capital Shares and Other
Securities................................ 53
Underwriting................................... 58
Shares Eligible for Future Sale................ 60
Other Matters.................................. 61
Legal Matters.................................. 62
Experts........................................ 62 PROSPECTUS
Glossary of Selected Oil and Gas Terms......... 63 , 1996
Index to Financial Statements.................. F-1
` Nolan Securities
Corporation
</TABLE>
Until ,all dealers effecting transactions in the Common Shares, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriter and with respect to their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the Offering are as set forth
in the following table. All amounts except the SEC registration fee and the NASD
filing fee are estimates.
SEC Registration Fee $ 16,106.00
NASD Filing Fee and legal clearance fee 5,815.00
Blue Sky Legal Fees and Filing and Qualification Fees 11,000.00
Printing and Engraving Expenses 30,000.00
Legal Fees and Expenses
Accounting Fees and Expenses 25,000.00
Transfer Agent's Fees 2,000.00
Miscellaneous Expenses (including travel and promotion expenses) 10,000.00
-----------
TOTAL $
Item 14. Indemnification of Directors and Officers.
Article Twelve of the Certificate of Incorporation of PANACO, INC. (the
"Company") provides that the Company must indemnify its officers and directors
to the extent allowed by the Delaware General Corporation Law. Pursuant to
Section 145 of the Delaware General Corporation Law, the Company generally has
the power to indemnify its present and former directors and officers against
expenses and liabilities incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
those positions so long as they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
Company, and with respect to any criminal action, they had no reasonable cause
to believe their conduct was unlawful. With respect to suits by or in the right
of the Company, however, indemnification is generally limited to attorney's fees
and other expenses and is not available if the person is adjudged to be liable
to the Company unless the court determines that indemnification is appropriate.
The statute expressly provides that the power to indemnify authorized thereby is
not exclusive of any rights granted under any by-law, agreement, vote of
shareholders or disinterest directors, or otherwise. The Company also has the
power to purchase and maintain insurance for its directors and officers.
Additionally, Article Twelve of the Certificate of Incorporation provides that,
in the event that an officer or director files suit against the Company seeking
indemnification of liabilities or expenses incurred, the burden will be on the
Company to prove that the indemnification would not be permitted under the
Delaware General Corporation Law.
The preceding discussion of the Company's Certificate of Incorporation
and Section 145 of the Delaware General Corporation Law is not intended to be
exhaustive and is qualified in its entirety by the Certificate of Incorporation
and Section 145 of the Delaware General Corporation Law.
Item 15. Recent Sales of Unregistered Securities.
During the three years preceding the filing of this Registration
Statement, the Company sold the following securities in transactions that were
not registered under the Securities Act of 1933, as amended, in reliance upon
the exemption provided by Section 4(2) thereof and the rules and regulations
promulgated thereunder.
II-1
<PAGE>
1. Effective December 31, 1993, the Company concluded a private
placement in which it issued promissory notes in an aggregate amount of
$5,000,000, the 1993 Subordinated Notes, and warrants to purchase an
aggregate of 816,526 Common Shares to six investors for an aggregate
consideration of $5,000,000. Each investor executed a loan agreement
confirming that it was an accredited investor (as defined in Rule 501
under the Securities Act) and containing other representations and
agreements customary for private placement transactions.
2. Effective October 8, 1996, the Company concluded a private placement
in which it issued promissory notes in an aggregate amount of
$17,000,00, the 1996 Tranche A Convertible Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes, and warrants to purchase
an aggregate of 2,060,606 Common Shares to seven investors for an
aggregate consideration of $17,000,000. Each investor executed a loan
agreement confirming that it was an accredited investor (as defined in
Rule 501 under the Securities Act) and containing other representations
and agreements customary for private placement transactions.
3. On October 8, 1996, the Company issued 2,000,000 Common Shares to
Amoco Production Company as part of the purchase price for certain oil
and gas properties, in a private placement. The purchase and sale
agreement confirmed that Amoco is an accredited investor and contained
the representations and agreements customary in private placement
transactions.
4. In the past three years various persons and entities have acquired
Common Shares upon the exercise of options and warrants. In 1993 seven
investors acquired 575,000 Common Shares. In 1994 eighteen investors
acquired 1,719,900 Common Shares. In 1995 twelve investors acquired
1,255,447 Common Shares. In each instance the person or entity was an
officer or former officer, director or former director, lenders or
investment bankers. In each instance the documentation contained
appropriate representations and agreements to establish the
availability of the exemption.
5. In the first quarter 1996 the six investors, described in paragraph
(1) above, exercised their warrants to acquire the 816,526 Common
Shares, which were issued in reliance upon the exemption and the facts
relied upon above.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit
Number Description
1.0*** Underwriting Agreement
1.1*** Selling Stockholders' Custody Agreement
1.2*** Selling Stockholders' Power of Attorney
3.1* Certificate of Incorporation of the Company.
3.2* Amendment to Certificate of Incorporation of the Company dated
November 19, 1991.
3.3* By-laws of the Company.
3.4 Amendment to Certificate of Incorporation of the Company dated
September 24, 1996 filed as an exhibit to the Amended Current Report on Form
8-K/A, filed with the Commission on November 18, 1996, and incorporated herein
by this reference.
II-2
<PAGE>
4.1* Article Fifth of the Certificate of Incorporation of the Company in
Exhibit 3.1.
4.2* Form of Certificate of Common Shares par value $.01 per share, of the
Company.
4.3 Rights Agreement, dated as of August 3, 1995, between PANACO, Inc., and
American Stock Transfer and Trust Company, which includes as Exhibit A the Form
of Certificate of Designation of Series A Preferred Stock, Exhibit B the Form of
Rights Certificate and Exhibit C the Summary of Rights to Purchase Preferred
Stock was filed as Exhibit 1 to the Registration Statement on Form 8-A, filed
with the Commission on August 21, 1995, and incorporated herein by this
reference.
5 Form of Opinion of Shughart Thomson & Kilroy, P.C. regarding the legality
of the securities being registered.
10.1* PANACO, Inc. Long-term Incentive Plan.
10.7* Senior Second Mortgage Term Loan Agreement as of December 31, 1993,
between PANACO, Inc., and seven lenders represented by Kayne Anderson Investment
Management, Inc.
10.9 Purchase and Sale Agreement, dated July 12, 1995, between Zapata
Exploration Company, Zapata Offshore Gathering Co., Inc., and PANACO, Inc.,
filed as an exhibit to the Current Report on Form 8-K filed with the Commission
on August 1, 1995, and incorporated herein by this reference.
10.11 Assignment/East Breaks 110, effective October 1, 1994, from Zapata
Exploration Company to PANACO, Inc. The Assignment/East Breaks 109 document is
identical, filed as an exhibit to the Current Report on Form 8-K filed with the
Commission on August 1, 1995, and incorporated herein by this reference.
10.12 Purchase and Sale Agreement dated November 30, 1995, between Shell
Western E&P, Inc. and PANACO, Inc., filed as an exhibit to the Current Report on
Form 8-K filed, with the Commission on January 31, 1996, and incorporated herein
by this reference.
10.13** PANACO, Inc. Employee Stock Ownership Plan & Trust.
10.14 Purchase and Sale Agreement, dated August 26, 1996, between Amoco
Production Company and PANACO, Inc., filed as an exhibit to the Current Report
on Form 8-K, filed with the Commission on October 28, 1996, and incorporated
herein by this reference.
10.15 Amended and Restated Credit Agreement, dated October 7, 1996, among
First Union National Bank of North Carolina, as agent, and the lenders signatory
thereto, and PANACO, Inc., filed as an exhibit to the Amended Current Report on
Form 8-K/A, filed with the Commission on November 18, 1996, and incorporated
herein by this reference.
10.16 Senior Subordinated Mortgage Master Loan Agreement dated October 8,
1996 between PANACO, Inc. and Offense Group Associates, L.P., Kayne, Anderson
Non-Traditional Investments, L.P., ARBCO Associates, L.P., Opportunity
Associates, L.P., Kayne, Anderson Offshore Limited, Foremost Insurance Company,
TOPA Insurance Company and EOS Partners, L.P. and Offense, as agent for the
Lenders, filed as an exhibit to the Amended Current Report on Form 8-K/A, filed
with the Commission on November 18, 1996, and incorporated herein by this
reference.
23.1 Consent of Barrett and Associates.
23.2 Consent of Ryder Scott Company.
II-3
<PAGE>
23.3 Consent of McCune Engineering, P.E.
23.4 Consent of Shughart Thomson & Kilroy, P.C. (included in Exhibit 5 to
this Registration Statement.)
23.5 Consent of Arthur Andersen LLP.
24 Power of Attorney (included on signature page).
27 Financial Data Schedule.
*Filed with the Registration Statement on Form S-4, Commission File No.
33-44486, initially filed December 13, 1991, and incorporated herein by
this reference.
** Filed with the Registration Statement on Form S-1, Commission file No.
33-81058, initially filed July 1, 1994, and incorporated herein by this
reference.
All others filed herewith or incorporated herein by reference to prior
filings with the Commission.
***To be filed by amendment.
(b) Financial Statement Schedules
None.
All other statements and schedules for which provision is made in the
applicable regulation of the Securities and Exchange Commission have been
omitted because they are not required under related instruction or are
inapplicable, or the information is shown in the financial statements and
related notes.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, State of Missouri on December 18, 1996.
PANACO, INC.
By: /s/ H. James Maxwell
H. James Maxwell, President & CEO
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
We, the undersigned directors and officers of PANACO, Inc., a Delaware
corporation, hereby constitute and appoint H. James Maxwell and Todd R. Bart,
and each of them, the true and lawful agents and attorneys-in-fact of the
undersigned with full power and authority in said agents and the
attorneys-in-fact, and in any one or more of them, to sign for the undersigned
and in their respective names as directors and officers of the Corporation the
Registration Statement of the Corporation on forms S-1 to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Act
of 1933, as amended, and sign any amendment or amendments to such Registration
Statement, in the matter of the proposed public offering by the Corporation and
certain shareholders of the Corporation, hereby ratifying and confirming all
acts taken by such agents and attorneys-in-fact or any one of them, as herein
authorized.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ H. James Maxwell Chairman of the Board, Chief Executive Officer, Dec. 18,1996
H. James Maxwell, President, and Director (principal executive officer)
/s/ Bob F. Mallory Chief Operating Officer, Executive Vice President, Dec. 18, 1996
Bob F. Mallory and Director
/s/ Todd R. Bart Chief Financial Officer, Secretary, and Dec. 18, 1996
Todd R. Bart Treasurer
/s/ Larry M. Wright Executive Vice President and Director Dec. 18, 1996
Larry M. Wright
/s/ N. Lynn Sieverling Director Dec. 18, 1996
N. Lynn Sieverling
/s/ A. Theodore Stautberg, Jr.Director Dec. 18, 1996
A. Theodore Stautberg, Jr.
</TABLE>
II-5
<PAGE>
__________ 1996
PANACO, INC.
8,403,305 SHARES OF
COMMON STOCK, PAR VALUE $.01 PER SHARE,
REGISTRATION STATEMENT ON FORM S-1
Dear Ladies and Gentlemen:
We have acted as counsel to PANACO, Inc., a Delaware corporation (the
"Company"), in connection with the Company's Registration Statement on Form S-1,
to be filed with the Securities and Exchange Commission under the Securities Act
of 1933 (the "Act"), for the registration under the Act of the offering by the
Company and certain persons (the "Selling Shareholders") of up to 9,663,801
common shares (including the Over-Allotment Option), $.01 par value per share,
of the Company (the "Common Shares").
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records,
and other instruments as we have deemed necessary for the purposes of this
opinion, including the following: (a) the Certificate of Incorporation of the
Company, as amended and applicable certificates of public officials, (b) the
By-laws of the Company, as amended, and (c) resolutions adopted by the Board of
Directors of the Company.
Based on the foregoing, we are of the opinion that the authorized capital
stock of the Company conforms as to legal matters to the description thereof
contained in the Prospectus; the outstanding Common Shares including those owned
by the selling Shareholders have been duly and validly authorized and issued and
are fully paid and nonassessable; the shares to be issued and sold by the
Company pursuant to this offering have been duly and validly authorized, and,
when issued, delivered and paid for, will be fully paid and nonassessable and
the issuance of such shares will not be subject to any preemptive or similar
right.
We know that we are referred to under the heading "Legal Matters" in
the Prospectus forming a part of the Registration Statement and we hereby
consent to such use of our name in such Prospectus and to the use of this
opinion for filing as Exhibit 5 to the Registration Statement.
Very truly yours,
SHUGHART THOMSON & KILROY, P.C.
Exhibit 5
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, Barrett & Associates consents to the
use of our reports and to all references to our firm included in or made a part
of this Registration Statement on Form S-1 filed with the Securities and
Exchange Commission by PANACO, Inc. under the Securities Act of 1933, as
amended, including any references to our firm as experts.
BARRETT & ASSOCIATES
Overland Park, Kansas
December 18, 1996
Exhibit 23.1
<PAGE>
CONSENT OF RYDER SCOTT COMPANY
As independent petroleum consultants, Ryder Scott Company Petroleum
Engineers consents to the references to our firm included in or made a part of
this Registration Statement on Form S-1 filed with the Securities and Exchange
Commission by PANACO, Inc. under the Securities Act of 1993, as amended,
including any references to our firm as experts.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
December 18, 1996
Exhibit 23.2
<PAGE>
CONSENT OF MCCUNE ENGINEERING
As independent petroleum consultants, McCune Engineering, Petroleum
Engineers consents to the references to our firm included in or made a part of
this Registration Statement on Form S-1 filed with the Securities and Exchange
Commission by PANACO, Inc. under the Securities Act of 1933, as amended,
including any references to our firm as experts.
MCCUNE ENGINEERING
PETROLEUM ENGINEERS
Kansas City, Missouri
December 18, 1996
Exhibit 23.3
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and all references to our Firm) included in or made a part of this
Registration Statement on Form S-1.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
December 18, 1996
Exhibit 23.5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 766,000
<SECURITIES> 0
<RECEIVABLES> 15,587,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,712,000
<PP&E> 103,015,000
<DEPRECIATION> (77,526,000)
<TOTAL-ASSETS> 44,444,000
<CURRENT-LIABILITIES> 8,809,000
<BONDS> 0
0
0
<COMMON> 123,000
<OTHER-SE> 23,090,000
<TOTAL-LIABILITY-AND-EQUITY> 44,444,000
<SALES> 13,257,000
<TOTAL-REVENUES> 13,257,000
<CGS> 0
<TOTAL-COSTS> 12,528,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,347,000)
<INCOME-PRETAX> (618,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (618,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (618,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
