PROSPECTUS Filed Pursuant to Rule 424(b)(1)
Registration Statement No. 333-39919
PANACO, Inc.
Offer to Exchange its
10 5/8% Series B Senior Notes due 2004
which have been registered under the
Securities Act for any and all of its
outstanding 10 5/8% Series A Senior Notes
due 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , DECEMBER
29, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
----------------------------
PANACO, Inc. a Delaware corporation (the "Company"), is hereby offering
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying Letter of Transmittal, as the same may be supplemented from
time to time (which together constitute the "Exchange Offer"), to issue an
aggregate of up to $100,000,000 aggregate principal amount of its 10 5/8% Series
B Senior Notes due 2004 (the "New Notes") in exchange for an identical face
amount of outstanding 10 5/8% Series A Senior Notes due 2004 (the "Old Notes,"
and together with the New Notes, the "Notes"). The terms of the New Notes are
identical in all material respects to the terms of the Old Notes except that the
registration and other rights relating to the exchange of the Old Notes for New
Notes and the restrictions on transfer set forth on the face of the Old Notes
will not apply to or appear on the New Notes. See "The Exchange Offer." The New
Notes are being offered hereunder in order to satisfy certain obligations of the
Company under a Registration Rights Agreement dated as of October 9, 1997. The
New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of, the Indenture (as herein defined)
governing the Old Notes. The Company will not receive any proceeds from the
Exchange Offer and will pay all expenses incident to the Exchange Offer.
Interest on the Notes will accrue from their date of original issuance (the
"Issue Date") and will be payable semi-annually in arrears on April 1 and
October 1 of each year, commencing on April 1, 1998, at the rate of 10 5/8% per
annum. The Notes will be redeemable, in whole or in part, at the option of the
Company on or after October 1, 2001, at the redemption prices set forth herein,
plus accrued interest, if any, thereon to the date of redemption. In addition,
at any time on or prior to October 1, 2000, the Company may, at its option,
redeem up to 35% of the aggregate principal amount of the Notes originally
issued with the net cash proceeds of one or more Equity Offerings (as defined),
at a redemption price equal to 110.625% of the aggregate principal amount of the
Notes to be redeemed plus accrued interest, if any, thereon to the date of
redemption; provided, however, that after giving effect to any such redemption,
at least 65% of the aggregate principal amount of the Notes originally issued
remains outstanding. Upon a Change of Control (as defined), each holder of the
Notes will have the right to require the Company to repurchase such holder's
Notes at a price equal to 101% of the principal amount thereof, plus accrued
interest, if any, thereon to the date of repurchase. In addition, the Company
will be obligated to offer to repurchase the Notes at 100% of the principal
amount thereof plus accrued interest to the date of repurchase in the event of
certain Asset Sales (as defined). See "Description of Notes."
The Notes are general unsecured obligations of the Company and rank pari
passu with any unsubordinated indebtedness of the Company and rank senior in
right of payment to all subordinated obligations of the Company. The Notes are
unconditionally guaranteed (the "Guarantees") on a senior basis by the Company's
restricted subsidiaries (the "Subsidiary Guarantors"). The Guarantees are
general unsecured obligations of the Subsidiary Guarantors and rank pari passu
with any unsubordinated indebtedness of the Subsidiary Guarantors and rank
senior in right of payment to all subordinated obligations of the Subsidiary
Guarantors. The Notes are effectively subordinated to all secured indebtedness
of the Company and the Subsidiary Guarantors to the extent of the value of the
assets securing such indebtedness. As of June 30, 1997, on a pro forma basis
after giving effect to the Offering and the application of the proceeds
therefrom, the Company has no secured indebtedness outstanding other than a
production payment valued at $1.7 million. See "Description of Notes - Ranking."
<PAGE>
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties unrelated to the Company, New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold, and otherwise
transferred by a holder thereof (other than a holder which is an Aaffiliate" of
the Company within the meaning of Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act"), without compliance with the registration and the
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders's business and such
holder has no arrangement with any person to participate in and is not engaged
in and is not planning to be engaged in the distribution of such New Notes.
However, the Company does not intend to request the Commission to consider and
the Commission has not considered, the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer as in such
other circumstances.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an Aunderwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "The Exchange Offer."
The Old Notes are designated for trading in the Private Offering, Resales
and Trading through Automated Linkages ("PORTAL") Market of the National
Association of Securities Dealers, Inc. To the extent Old Notes are tendered and
accepted in the Exchange Offer, the principal amount of outstanding Old Notes
will decrease with a resulting decrease in the liquidity in the market therefor.
Following the consummation of the Exchange Offer, holders of the Old Notes who
are eligible to participate in the Exchange Offer but who did not tender their
Old Notes will not be entitled to certain rights under the Registration Rights
Agreement (as defined) and such Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity in the market for the Old
Notes could be adversely affected. No assurance can be given as to the liquidity
of the trading market for either the Old Notes or the New Notes.
----------------------------
See "Risk Factors," beginning on page 17, for a discussion of certain
factors that should be considered in evaluating an investment in the Notes.
----------------------------
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.
----------------------------
The date of this Prospectus is November 17, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files periodic reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the office of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the regional offices of the Commission at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such information can be obtained by
mail from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Additionally,
the Commission maintains a web site that contains reports, proxy statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's web site is www.sec.gov. The
Company's common stock is traded on the NASDAQ National Market. The 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, N.W., Washington D.C. 20006.
Information about the Company, including certain reports filed with the
Commission, may also be found in the Company's website at www.panaco.com.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including for each a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereof by the Company's independent
certified public accountants and (ii) all reports that would be required to be
filed on Form 8-K if it were required to file such reports. In addition, for so
long as any of the Notes remain outstanding, the Company has agreed to make
available to any prospective purchaser of the Notes or beneficial owner of the
Notes, in connection with any sale thereof, the information required by Rule
144A(d)(4) under the Securities Act.
The Company, a corporation organized under the laws of Delaware, has its
principal executive offices located at the PANACO Building, 1050 West Blue Ridge
Boulevard, Kansas City, Missouri 64145-1216; its telephone number is (816)
942-6300.
UNTIL FEBRUARY 15, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS AFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information, financial statements, including the notes thereto, and
other data appearing elsewhere or incorporated by reference in this
Prospectus. Unless the context otherwise requires, all references herein to
"PANACO" or the "Company" include PANACO, Inc., a Delaware corporation, and
its consolidated subsidiaries including Goldking Companies, Inc. ("Goldking")
and Goldking's operating subsidiaries, and the Company's predecessor Pan
Petroleum MLP. Except as otherwise indicated, each reference herein to Aon a
pro forma basis" shall mean that the results for the stated period or other
information has been adjusted to reflect the consummation of the Goldking
Acquisition and/or the Amoco Acquisition (each as defined herein), as the case
may be. Certain capitalized terms relating to the oil and natural gas business
are defined in the Glossary. The Company maintains its corporate headquarters
at the PANACO Building, 1050 West Blue Ridge Boulevard, Kansas City, Missouri
64145-1216 and its telephone number is (816) 942-6300, FAX (816) 942-6305. The
Company's website may be found at www.panaco.com.
The Company
The Company is an independent exploration and production company with
operations focused primarily offshore in the Gulf of Mexico and onshore in the
Gulf Coast Region (collectively, the "GOM Region"). The Company has grown
through the acquisition of producing properties and the subsequent application
of advanced technology such as 3-D Seismic to exploit potential producing
zones which have been overlooked or bypassed by previous operators.
Since 1990, the Company has made five acquisitions of producing
properties for a total of $100.1 million, which properties had Proved Reserves
of approximately 116 Bcfe as of their respective acquisition dates. As of
September 1, 1997, the Company had Proved Reserves of 94.3 Bcfe with an SEC
PV-10 of $121.3 million. Approximately 58% of the Company's total Proved
Reserves are classified as Proved Developed Producing Reserves and
approximately 70% of the Company's total Proved Reserves are natural gas.
The Company owns interests in 20 federal blocks in the Gulf of Mexico
and nine state water blocks and operates approximately 47% of the wells
contained within these blocks. The Company's non-operated offshore properties
are managed primarily by large independents and major oil companies, including
Unocal, Phillips, Texaco, Coastal, Anadarko and LL&E. The Company's primary
property holdings include the East Breaks 160 Field, Umbrella Point Area, High
Island 309 Field, West Delta Fields, East Breaks 109 Field and Cheniere Perdue
Field. The Company owns interests in a total of 308 oil wells and 361 natural
gas wells. Of these, 508 are onshore wells which are primarily non-operated
and in the aggregate account for 12.4% of the Company's total SEC PV-10 value
as of September 1, 1997. The Company also owns interests in 22 offshore
production platforms and 69 miles of offshore oil and natural gas pipelines
with diameters of 10" or larger.
On July 31, 1997, the Company closed its acquisition of Goldking for
a purchase price of $27.5 million, consisting of cash, notes payable to
Goldking shareholders, PANACO Common Shares, plus the assumption of long term
debt of $14.3 million (the "Goldking Acquisition"). The Company acquired
approximately 37.7 Bcfe of Proved Reserves, 42% of which were classified as
Proved Developed Reserves and 63% of which were natural gas reserves, with an
SEC PV-10 at September 1, 1997 of $40.0 million. Goldking had interests in 234
wells and builds and operates pipelines through a subsidiary, Hill
Transportation Co., Inc.
<PAGE>
The Goldking Acquisition is complementary to the Company because of the
addition of technical staff, the geographic proximity and similarity of the
properties acquired and the existence of a large number of development and
exploration opportunities on its properties. The Goldking Acquisition adds
significant development opportunities which will extend the reserve life of the
Company's asset base and provide numerous exploration locations.
In October 1996, the Company acquired interests in six offshore
fields from Amoco Production Company ("Amoco") 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 $32.0 million in cash. The
interests acquired include (i) a 33a% working interest in the East Breaks 160
Field (two Blocks) and a 33a% interest in the High Island 302 Field, both
operated by Unocal Corporation; (ii) a 50% interest in the High Island 309
Field (two Blocks), a 12% interest in the High Island 330 Field (three Blocks)
both operated by Coastal Oil and Gas Corp.; (iii) a 12% interest in the High
Island 474 Field (four Blocks), operated by Phillips Petroleum Company; and
(iv) a 12.5% interest in the West Cameron 180 Field (one Block) operated by
Texaco (together, the "Amoco Properties").
On a pro forma basis, the Company had production for the six months
ended June 30, 1997 of 6.8 Bcfe, resulting in revenue and EBITDA of $17.9
million and $9.9 million, respectively. Average daily production for the six
months ended June 30, 1997 was 37,762 Mcfe.
Business Strategy
The Company's strategy is to systematically grow its reserves,
production, cash flow and earnings through a program focused on the GOM
Region, including (i) strategic acquisitions and mergers, (ii) exploitation
and development of acquired properties, (iii) marketing of existing
infrastructure and (iv) a selective exploration program. As a result of the
Goldking Acquisition, the Company has a substantial inventory of development
and exploration projects that provide significant additional reserve
potential. The key elements of the Company's objectives are outlined as
follows:
Strategic Acquisitions and Mergers
The Company has a defined acquisition strategy which focuses its
efforts on GOM Region properties that have a backlog of development and
exploitation projects, significant operating control, infrastructure value and
opportunities for cost reduction. 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 and have the potential for recompletion in more than one
reservoir. In pursuing this strategy, the Company identifies properties that
may be acquired, preferably through negotiated transactions or, where
appropriate, sealed bid transactions. 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.
<PAGE>
Over the past seven years, the Company has taken advantage of
opportunities to acquire interests in a number of producing properties which
fit its acquisition strategy. The historical success of the Company's
acquisition strategy is illustrated below:
<TABLE>
<CAPTION>
Cumulative Cumulative
Purchase Purchase Capital Cash SEC
Acquisition Seller Date Price Expenditures(a) Flow(b)PV- 10(c)
--------------- ----------- -------- ------- -------------- ----------------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
West Delta(d) CATO(e) May 1991 $ 19.6 $ 18.3 $ 48.6 $ 16.4
Zapata Properties Zapata Jul 1995 2.7(f) 0.7 11.6 10.6
Bayou Sorrel(g) Shell Western Dec 1995 9.9 3.4 1.3 N/A
Amoco Properties Amoco Oct 1996 40.4 5.7 7.7 50.4
Goldking Shareholders Jul 1997 27.5(h) -- -- 40.0
---------------
(a) Excludes exploration expenses for each acquisition subsequent to the date of acquisition.
(b) Defined as net revenues less direct operating expense.
(c) As of September 1, 1997.
(d) Excludes $4.0 million for repair of Tank Battery #3 in the West Delta Fields.
(e) Conoco, ARCO, Texaco and Oxy.
(f) Excludes a production payment and fee sharing agreement with the seller.
(g) The Company sold the Bayou Sorrel Field September 1, 1996 for $11.0 million.
(h) Excludes debt of Goldking of $14.3 million.
</TABLE>
While the Company tends to focus on acquisitions of properties from
large integrated oil companies, it evaluates a broad range of acquisition and
merger opportunities. The Company has assembled a staff, complemented by the
Goldking Acquisition, with significant technical experience in evaluating,
identifying and exploiting GOM Region properties. In addition, the Company is
regarded in the industry as a competent buyer with the proven ability to close
transactions in a timely manner. Based on these factors, the Company is
usually asked to bid on significant producing property sales in the GOM
Region.
Exploitation and Development of Acquired Properties
The Company has a substantial, diversified inventory of exploitation
projects including development drilling, workovers, sidetrack drilling,
recompletions and artificial lift enhancements. As of September 1, 1997, on a
pro forma basis, 28% of the Company's total Proved Reserves were classified as
Proved Undeveloped Reserves. The Company uses advanced technologies where
appropriate in its development activities to convert Proved Undeveloped
Reserves to Proved Developed Producing Reserves. These technologies include
horizontal drilling and through tubing completion techniques, new lower cost
coiled tubing workover procedures and reprocessed 2-D and 3-D Seismic
interpretation. All of the identified capital projects can be completed with
the Company's existing platform and pipeline infrastructure, thereby
substantially improving project economics.
<PAGE>
Marketing of Existing Infrastructure
Along with its purchase of producing properties, the Company has acquired
significant platform, pipeline and processing equipment infrastructure. The
Company has interests in 22 offshore platforms and 69 miles of offshore oil and
natural gas pipelines with diameters of 10" or larger. To enhance the value of
these assets, the Company has aggressively marketed this infrastructure to
operators and leasehold owners in adjacent fields. The Company currently has
pipeline and processing agreements relative to its West Delta Fields, East
Breaks 109 Field and the East Breaks 160 facilities. The annual revenue received
from these contracts for use of the Company's infrastructure currently totals
$2.5 million, which is accounted for as a reduction of lease operating expense.
The location of the East Breaks facilities is strategic to any deepwater
development in the area, and the replacement costs of the platforms, processing
facilities and pipelines exceed $100 million. As a result of the prohibitive
development costs, any operators with discoveries in the surrounding deepwater
area will have the incentive to use the Company's East Breaks facilities, thus
increasing the revenue potential of these platforms and pipelines and extending
their economic life significantly.
Selective Exploration Program
The Company participates in selective exploration projects for exposure
to additional reserve potential. The Company has farmed out the deep rights in
West Delta Blocks 52 through 56 to Ocean Energy, Inc. (formerly Flores &
Rucks, Inc.) in exchange for a new 3-D Seismic survey over these five Blocks
and the option to retain a 12.5% overriding royalty interest or a 50% working
interest in any proposed deep exploration wells. In addition, through the
Goldking Acquisition, the Company acquired an inventory of 15 diversified
exploratory drilling prospects with varying risk profiles. The Company plans
to devote a portion of its capital expenditure budget to drill exploratory
wells.
Company Strengths
The Company believes it has strengths, as outlined below, that provide
a solid base for continued growth and value creation.
Geographic Focus
The Company's reserve base is focused primarily in the GOM Region which
has historically been the most prolific basin in North America. The GOM Region
accounts for approximately 25% of the natural gas production in the United
States and continues to be the most active region in terms of capital
expenditures and new reserve additions. Because of upside potential, high
production rates, technological advances and acquisition opportunities, the
Company has focused its efforts in this region. The Company believes it has
the technical expertise and infrastructure in place to take advantage of the
inherent benefits of the GOM Region. In addition, as the integrated oil
companies move to deeper water, the Company believes it will continue to be
well positioned to use its expertise to acquire and exploit GOM Region
properties.
High Quality Reserve Base
Two of the Company's largest properties, the West Delta Fields and
Umbrella Point Field, are prolific fields with total cumulative production of
one Tcf of natural gas and 50 MMbbls of oil. These fields typify the Company's
focused GOM Region asset base with multiple pay horizons and significant
recompletion and workover potential. Both fields were developed without the
benefit of 3-D Seismic and the Company is currently in the process of
acquiring and applying 3-D Seismic technology to identify additional
potential. The majority of the Company's properties have multiple reservoirs
providing a diverse set of opportunities for production rate acceleration and
value enhancement. The number of potential reservoirs also reduces the risk
associated with determining remaining reserves and forecasting future
production from the properties.
<PAGE>
Substantial Inventory of Exploitation and Development Projects
The Company has identified over 17 development drilling locations and over
72 recompletion and workover opportunities. The Company believes that the
majority of these opportunities have a moderate risk profile and could add
incremental reserves and production. In addition to these identified
opportunities, the Company believes that with the use of 3-D Seismic technology,
additional potential may be exploited in the known reservoirs as well as deeper
undrilled horizons.
Application of Advanced Technologies
The Company has been successful historically due to its extensive use
of 3-D Seismic, horizontal drilling and coiled tubing technologies. As a
result of its acquisitions, the Company has an extensive seismic database with
a total of 2,424 linear miles of 2-D Seismic data and 186 square miles of 3-D
Seismic data. The Company was also among the first offshore operators to drill
and complete successful horizontal wells offshore. The Company has drilled a
total of four horizontal wells in the West Delta Field and has identified
several opportunities to apply this technology and expertise to the Goldking
Properties. The Company applies coiled tubing technology where applicable to
decrease workover costs and avoid using drilling rigs for recompletions. The
Company uses existing inactive wellbores whenever possible to sidetrack drill
to decrease costs and receive production tax benefits where applicable. Also,
the Company has performed the less costly through tubing recompletions in
several of its existing fields.
Significant Operating Control
The Company operates 55% of its properties as measured by SEC PV-10
value. This level of operating control benefits the Company in numerous ways
by enabling the Company to (i) control the timing and nature of capital
expenditures, (ii) identify and implement cost control programs, (iii) respond
quickly to operating problems and (iv) receive overhead reimbursements from
other working interest owners. In addition to significant operating control,
the geographic focus of the Company allows it to operate a large value asset
base with relatively few employees, thereby decreasing lease operating expense
on a unit of production basis. The Company believes that as the Goldking
Properties are integrated into the Company's operating structure the operating
costs, on a unit of production basis, will be further reduced.
Experienced Management
The Company's eleven officers have an average of over 20 years of oil
industry experience. The management team has diverse experience including
backgrounds in geology and engineering, environmental and regulatory
compliance, securities law and accounting and tax matters. In addition, the
technical staff have spent the majority of their careers focusing on the GOM
Region and are highly familiar with the basin and current operations.
Recent Financing Activities
Public Offering
On March 7, 1997, the Company received net proceeds of $22.0 million
from a public offering of its common stock (the "Public Offering"). The
proceeds were used to repay certain subordinated indebtedness and to develop
the Company's properties.
New Credit Facility
The Company entered into a New Credit Facility (which replaced the
existing Bank Facility), on October 9, 1997. While it is not contemplated that
the New Credit Facility will be utilized following the application of proceeds
from the Offering, it will be available on a stand-by basis for the future
needs of the Company. See ADescription of New Credit Facility."
<PAGE>
The Exchange Offer
The Exchange Offer applies to the $100,000,000 aggregate principal
amount at maturity of the Old Notes. The form and terms of the New Notes are
the same as the form and terms of the Old Notes except that the offer and sale
of the New Notes has been registered under the Securities Act and, therefore,
the New Notes will not bear legends restricting their transfer. The New Notes
will evidence the same debt as the Old Notes and will be entitled to the
benefits of the indenture pursuant to which the Old Notes were issued (the
"Indenture"). See "Description of New Notes."
The Exchange Offer $1,000 principal amount at maturity of New Notes in
exchange for each $1,000 principal amount at maturity of Old Notes. As
of the date hereof, Old Notes representing $100,000,000 aggregate
principal amount at maturity were outstanding. The terms of the New
Notes and the Old Notes are substantially identical.
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to
third parties unrelated to the Company, the Company believes that,
with the exceptions discussed herein, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any person receiving the New
Notes, whether or not that person is the holder (other than any such
holder or such other person that is an Aaffiliate" of the Company
within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that (i) the New Notes are acquired in
the ordinary course of business of that holder or such other person,
(ii) neither the holder nor such other person is engaging in or
intends to engage in a distribution of the New Notes, and (iii)
neither the holder nor such other person has an arrangement or
understanding with any person to participate in the distribution of
the New Notes. However, the Company has not sought, and does not
intend to seek, its own no-action letter, and there can be no
assurance that the Commission's staff would make a similar
determination with respect to the Exchange Offer. See "The Exchange
Offer." Each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where those Old Notes were acquired by the
broker-dealer as a result of its market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of those New Notes. See Plan of
Distribution.
<PAGE>
Registration Rights Agreement The Old Notes were sold by the Company
on October 9, 1997 in a private placement. In connection with the
sale, the Company entered into a Registration Rights Agreement (the
"Registration Rights Agreement") with BT Alex. Brown, First Union
Capital Markets Corp., A.G. Edwards & Sons, Inc. and Gaines, Berland
Inc., the initial purchaser of the Old Notes (the "Initial
Purchaser"), providing for the Exchange Offer. See The Exchange Offer
- Purpose and Effect.
Expiration Date The Exchange Offer will expire at 5:00 P.M., New York
City time, December 29, 1998, or such later date and time to which it
is extended.
Withdrawal Rights Tenders may be withdrawn at any time prior to the
Expiration Date. See The Exchange Offer - Withdrawal Rights.
Conditions to the Exchange Offer The Exchange Offer is subject to
certain customary conditions, certain of which may be waived by the
Company. See The Exchange Offer - Conditions.
Procedures for Tendering Old Notes Each holder of Old Notes wishing to
accept the Exchange Offer must complete, sign and date the Letter of
Transmittal, or a copy thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise deliver the Letter
of Transmittal, or the copy, together with the Old Notes and any other
required documentation, to the Exchange Agent at the address set forth
herein. Persons holding Old Notes through the Depository Trust Company
(the "DTC") and wishing to accept the Exchange Offer must do so
pursuant to the DTC's Automated Tender Offer Program, by which each
tendering Participant (as defined) will agree to be bound by the
Letter of Transmittal. By executing or agreeing to be bound by the
Letter of Transmittal, each holder will represent to the Company that,
among other things, (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no
arrangement with any person to participate in the distribution of the
New Notes and (iii) it is not an Aaffiliate," as defined in Rule 405
of the Securities Act, of the Company, or if it is an affiliate, it
will comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable. If the holder is not a
broker-dealer, it will be required to represent that it is not engaged
in, and does not intend to engage in, the distribution of the New
Notes. If the holder is a broker-dealer that will receive New Notes
for its own account in exchange for Notes that were acquired as a
result of market-making activities or other trading activities, it
will be required to acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
<PAGE>
Pursuant to the Registration Rights Agreement, the Company is required
to file a registration statement for a continuous offering pursuant to
Rule 415 under the Securities Act in respect of the Old Notes if
existing Commission interpretations are changed such that the New
Notes received by holders in the Exchange Offer are not or would not
be, upon receipt, transferable by each such holder (other than an
affiliate of the Company) without restriction under the Securities
Act. See The Exchange Offer - Purpose and Effect.
Acceptance of Old Notes and Delivery of New Notes The Company will
accept for exchange any and all Old Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to the Exchange Offer
will be delivered promptly following the Expiration Date. See The
Exchange Offer - Terms of the Exchange Offer.
Exchange Agent UMB Bank, N.A. is serving as Exchange Agent in
connection with the Exchange Offer.
Federal Income Tax Considerations The exchange pursuant to the
Exchange Offer will not be a taxable event for federal income tax
purposes. See Certain United States Federal Income Tax Considerations.
Effect of Not Tendering Old Notes that are not tendered will,
following the completion of the Exchange Offer, continue to be subject
to the existing restrictions upon transfer thereof. The Company will
have no further obligation to provide for the registration under the
Securities Act of such Old Notes.
<PAGE>
Terms of the New Notes
Securities Offered $100,000,000 aggregate principal amount of 10 5/8%
Series B Senior Notes due 2004.
Issuer PANACO, Inc. (a Delaware corporation).
Maturity Date October 1, 2004.
Interest Payment Dates Interest on the Notes will accrue from the date
of original issuance (the "Issue Date") and will be payable
semi-annually in arrears on each April 1 and October 1, commencing
April 1, 1998.
Ranking The New Notes will be general unsecured obligations of the
Company and will rank pari passu with any unsubordinated indebtedness
of the Company and will rank senior in right of payment to all
subordinated obligations of the Company. The New Notes will be
effectively subordinated to all secured indebtedness of the Company
and of the Subsidiary Guarantors to the extent of the value of the
assets securing such indebtedness. As of June 30, 1997, on a pro forma
basis after giving effect to the Offering and the application of the
proceeds therefrom, the Company would have had no secured indebtedness
outstanding other than a production payment classified as debt and
currently valued at $1.7 million.
Guarantees The New Notes will be unconditionally guaranteed on a
senior basis by the Company's Subsidiary Guarantors. The Guarantees
will be general unsecured obligations of the Subsidiary Guarantors and
will rank pari passu with any unsubordinated indebtedness of the
Subsidiary Guarantors and will rank senior in right of payment to all
subordinated obligations of the Subsidiary Guarantors. The Guarantees
will be effectively subordinated to all secured indebtedness of the
Subsidiary Guarantors to the extent of the value of the assets
securing such indebtedness.
Optional Redemption The New Notes will be redeemable, in whole or in
part, at the option of the Company on or after October 1, 2001, at the
redemption prices set forth herein, plus accrued interest, if any,
thereon to the date of redemption. In addition, at any time on or
prior to October 1, 2000, the Company may, at its option, redeem up to
35% of the aggregate principal amount of the New Notes originally
issued with the net cash proceeds of one or more Equity Offerings, at
a redemption price equal to 110.625% of the aggregate principal amount
of the Notes to be redeemed plus accrued interest, if any, thereon to
the date of redemption; provided, however, that, after giving effect
to any such redemption, at least 65% of the aggregate principal amount
of the Notes originally issued remains outstanding.
Change of Control Upon a Change of Control, each holder of the Notes
will have the right to require the Company to repurchase such holder's
Notes at a price equal to 101% of the principal amount thereof plus
accrued interest, if any, thereon to the date of repurchase.
Certain Covenants The Indenture contains certain restrictive covenants
that limit the ability of the Company and its Restricted Subsidiaries
(as defined) to, among other things, incur additional indebtedness,
pay dividends or make certain other restricted payments, consummate
certain asset sales, enter into certain transactions with affiliates,
incur liens, impose restrictions on the ability of a Restricted
Subsidiary to pay dividends or make certain payments to the Company
and its Restricted Subsidiaries, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of the assets of the Company. In addition,
under certain circumstances, the Company will be required to offer to
purchase the Notes, in whole or in part, at a purchase price equal to
100% of the principal amount thereof plus accrued interest to the date
of repurchase, with the proceeds of certain Asset Sales.
Sinking Fund None.
For additional information regarding the Notes, see Description of
Notes.
Risk Factors
See Risk Factors for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical consolidated
financial data of the Company as of and for the three years ended December 31,
1996, for the six months ended June 30, 1996 and 1997 and as of June 30, 1997,
which have been derived from the Company's consolidated financial statements,
and unaudited summary pro forma data for the year ended December 31, 1996 and
as of and for the six months ended June 30, 1997. The historical financial
data of the Company for the six months ended June 30, 1996 and 1997 and as of
June 30, 1997 have been derived from the Company's unaudited interim
consolidated financial statements. The pro forma data give effect to the
consummation of the Goldking Acquisition. The pro forma balance sheet data
reflect such adjustments as if the Goldking Acquisition, the sale of the
Company's investment in common stock, and this Offering had occurred on June
30, 1997, and the pro forma income statement data and other data for the year
ended December 31, 1996 and the six months ended June 30, 1996 reflect such
adjustments as if the Goldking Acquisition, the Offering and the application
of the net proceeds therefrom, the Amoco Acquisition and the Bayou Sorrel
Field sale had taken place on January 1, 1996. The pro forma financial data do
not purport to represent what the Company's financial position or results of
operations would actually have been had these events in fact occurred on the
assumed dates and are not necessarily indicative of future operating results
or financial position. The information contained in this table should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the historical and pro forma financial
statements of the Company and Goldking, and the notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31 Six Months Ended June 30,
(unaudited)
Pro Pro
Actual Forma Actual Forma
______________________________ 1996(a) 1997
1994 1995 1996(a) 1996(a) 1997
(dollars in thousands, except ratios)
Consolidated Statement of
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and natural gas sales.... $ 17,338 $ 18,447 $ 20,063 $ 37,164 $ 10,808 $ 14,287 $ 17,882
Lease operating 5,231 8,055 8,477 11,674 4,184 5,122 6,084
expense (b) ...............
Production and ad valorem
taxes...................... 1,006 1,078 559 989 327 174 456
Depreciation, depletion and
amortization expense....... 6,038 8,064 9,022 18,783 3,812 6,184 7,878
General and administrative
expense.................... 587 690 772 2,174 382 389 1,404
Operating income (loss) (c).. 3,274 (8,303) 733 3,474 1,603 2,351 1,993
Interest expense (net)....... 1,623 987 2,514 8,587 902 1,265 4,293
Net income (loss)(d)......... $ 1,115 $ (9,290) $ (2,039) $ (5,113) $ 701 $ 1,146 $ (2,240)
''''''''' ''''''''' ''''''''' ''''''''' ''''''''' '''''''' '''''''''
Other Data:
EBITDA(e).................... $ 10,514 $ 8,624 $ 10,255 $ 22,327 $ 5,915 $ 8,602 $ 9,938
Capital expenditures(f)...... 12,128 22,841 43,050 81,035 3,440 8,160 43,883
Ratio of EBITDA to fixed
charges(g)................. 6.48x 8.74x 4.08x 2.60x 6.56x 6.80x 2.31x
Ratio of earnings to fixed
charges(h)................. 1.69x -- -- -- 1.78x 1.91x --
</TABLE>
June 30, 1997
-------------------------
(unaudited)
Actual Pro Forma
-------- -----------
Balance Sheet Data: (dollars in thousands)
Working capital.............................. $ 3,603 $ 42,664
Total assets................................. 74,841 169,634
Total debt................................... 28,000 101,700
Stockholders' equity......................... 40,808 55,221
ACNTA(i)..................................... -- 192,690
Ratio of ACNTA to total debt................. -- 1.89x
<PAGE>
(a) Results for 1996 were substantially affected by the explosion and fire at
West Delta Tank Battery #3. See "Business and Properties - 1996 Explosion
and Fire." Actual results for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1997 include the results of
operations through August 31, 1996 for the Bayou Sorrel Field, which was
sold effective September 1, 1996, and the results of operations of the
Amoco Properties, which were acquired October 8, 1996. Pro forma results
for 1996 and 1997 include the results of operations from the Amoco
Properties and Goldking Properties and exclude the results of operations
from the Bayou Sorrel Field.
(b) Lease operating expense is net of fees earned from third parties for the
use of the Company's platform, pipeline and processing equipment
infrastructure.
(c) Also includes exploration expenses and asset write-downs.
(d) Also includes gains and losses on investment in common stock.
(e) EBITDA is defined as net income (loss) before income taxes, plus the sum of
depletion and depreciation, write downs of assets, exploration expenses,
interest expense and the non-recurring charge pertaining to the 1996 West
Delta fire loss. EBITDA is not a measure of cash flow as determined by
generally accepted accounting principles. The Company has included
information concerning EBITDA because EBITDA is a measure used by certain
investors in determining the Company's historical ability to service its
indebtedness. EBITDA should not be considered as an alternative to, or more
meaningful than, net income or cash flows as determined in accordance with
generally accepted accounting principles or as an indicator of the
Company's operating performance or liquidity.
(f) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and natural gas properties and other fixed assets, without
taking into consideration sales of capital assets.
(g) For purposes of calculating the ratio of EBITDA to fixed charges, earnings
consist of income (loss) applicable to common shares plus provision for
income taxes, plus fixed charges. Fixed charges consist of interest expense
and amortization of deferred debt issuance costs.
(h) For purposes of calculating the ratio of earnings to fixed charges, fixed
charges consist of interest expense and amortization of deferred debt
issuance costs. The Company's earnings were inadequate to cover fixed
charges for the year ended December 31, 1995 and 1996 by $9,290,000 and
$2,039,000, respectively, pro forma for the year ended December 31, 1996 by
$5,113,000 and pro forma for the six months ended June 30, 1997 by
$2,240,000.
(i) Adjusted Consolidated Net Tangible Assets ("ACNTA"). Pro Forma ACNTA
includes: $121,318,000 of SEC PV-10, $42,664,000 of working capital,
$12,350,000 of book value for unproved properties, $14,366,000 of book
value for other properties and equipment and other tangible assets, before
income taxes, and $1,992,000 of restricted deposits for future plugging and
abandonment expenses. ACNTA is a measure not determined in accordance with
generally accepted accounting principles.
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA OPERATING, RESERVE AND WELL DATA
The following table sets forth certain summary information with respect to
the Company's operations for the periods indicated and summary information
with respect to the Company's estimated proved oil and natural gas
reserves. The pro forma operating data for the year ended December 31, 1996
and the six months ended June 30, 1997 give effect to the Goldking
Acquisition as if it had occurred on January 1, 1996, and the pro forma
reserve at December 31, 1996 give effect to the Goldking Acquisition as if
it had occurred on December 31, 1996. The information contained in this
table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and the notes thereto, the "Unaudited Pro
Forma Combined Financial Data" and the notes thereto and "Business and
Properties" included elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
Year Ended December 31, Pro Forma
_____________________________________ September 1, 1997
----------------
1994 1995 1996(a)
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Estimated Proved Reserves:
Oil (MBbl).......................... 943 1,900 2,239 4,640
Natural gas (MMcf).................. 41,582 46,711 41,446 66,468
Natural Gas Equivalents (MMcfe)..... 47,240 58,111 54,880 94,305
Percent Proved Developed
Reserves......................... 88% 88% 92% 72%
Percent natural gas reserves........ 88% 80% 76% 70%
Estimated future net cash flows
before tax (thousands)........... $ 56,696 $ 89,524 $ 149,053 $ 161,402
SEC PV-10 (thousands)............... $ 41,915 $ 62,921 $ 99,841 $ 121,318
Year Ended December 31, Six Months Ended June 30,
__________________________ Pro ___________________________
Forma
1996(a)
-------
Actual Actual Pro
__________________________ _________________ Forma
1997
1994 1995 1996(a) 1996(a) 1996(a) 1997
Average Net Daily Production:
Oil (Bbls)........................ 375 466 756 1,192 839 1,044 1,400
Natural gas (Mcf)................. 22,300 27,000 18,600 23,400 20,400 24,600 29,400
Average Sales Price:
Oil (per Bbl)..................... $ 15.35 $ 16.78 $ 19.42 $ 20.90 $ 17.92 $ 17.96 $ 18.85
Natural gas (per Mcf)............. 1.87 1.58 2.17 2.24 2.21 2.47 2.48
Reserve Life (years) (b): 5.3 5.4 6.5 n/a n/a n/a 6.8
Reserve Replacement Rate (c): 90% 200% 62% n/a n/a n/a 286%
Other Data:
Gross offshore wells ............. 40 83 123 161 83 142 161
Net offshore wells ............... 40 58 64 88 58 68 88
Miles of pipeline (d)............. 8 39 69 69 39 69 69
Offshore platforms................ 5 11 21 22 11 21 22
</TABLE>
(a) Amounts for 1996 were substantially affected by the explosion and fire at
West Delta Tank Battery #3. See "Business and Properties - 1996 Explosion
and Fire." Actual amounts for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1997 include the results of
operations through August 31 for the Bayou Sorrel Field, which was sold
effective September 1, 1996, and the results of operations of the Amoco
Properties, which were acquired October 8, 1996. Pro forma amounts for
1996 and 1997 include the results of operations from the Amoco Properties
and Goldking Properties and exclude the results of operations from the
Bayou Sorrel Field.
(b) The Company has historically had a reserve report prepared by its
independent petroleum engineers at each December 31, and not for any
interim periods. Goldking reserve information at December 31, 1996 is not
available. Reserve Life is calculated by dividing total Proved Reserves
by the Company's trailing twelve months production. Reserve Life for pro
forma six months ended June 30, 1997 is calculated by dividing pro forma
September 1, 1997 Proved Reserves by the Company's annualized pro forma
production for the six months ended June 30, 1997.
(c) Reserve Replacement Rate is calculated by dividing net reserve additions
by production during the preceding twelve months.
(d) 10" diameter pipe or larger.
<PAGE>
RISK FACTORS
Information contained or incorporated by reference in this Prospectus
may contain Aforward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as Amay," Aexpect," Aintend," Aanticipate,"
Aestimate" or Acontinue" or the negative thereof or other variations thereon or
comparable terminology. The following matters and certain other factors noted
throughout this Prospectus constitute cautionary statements identifying
important factors with respect to any such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
Prior to making an investment decision, prospective investors should
carefully consider, together with the other information contained in this
Prospectus, the following risk factors:
Finding and Acquiring Additional Reserves; Depletion
The Company's future success depends upon its ability to find or
acquire additional oil and natural gas reserves that are economically
recoverable. Except to the extent the Company conducts successful exploration or
development activities or acquires properties containing Proved Reserves, the
Proved Reserves of the Company will generally decline as they are produced. The
decline rate varies depending upon reservoir characteristics and other factors.
The Company's future oil and natural gas reserves and production, and,
therefore, cash flow and income, are highly dependent upon the Company's level
of success in exploiting its current reserves and acquiring or finding
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 oil and natural gas reserves could be impaired. There
can be no assurance that the Company's planned development projects and
acquisition activities will result in significant additional reserves or that
the Company will have success drilling productive wells at economic returns to
replace its current and future production.
Substantial Leverage; Ability to Service Debt
On a pro forma basis, the Company is significantly leveraged, with
outstanding long-term indebtedness of approximately $101.7 million and
stockholders' equity of $55.2 million as of June 30, 1997. The Company's level
of indebtedness has several important effects on its future operations,
including (i) a substantial portion of the Company's cash flow from operations
is dedicated to the payment of interest on its indebtedness and is not available
for other purposes, (ii) the covenants contained in the New Credit Facility and
the Indenture require the Company to meet certain financial tests and limit the
Company's ability to borrow additional funds or to acquire or dispose of assets,
and (iii) the Company's ability to obtain additional financing in the future may
be impaired. Additionally, the senior status of the Notes, the Company's high
debt to equity ratio, and the use of substantially all of the Company's assets
as collateral for the New Credit Facility will for the present time make it
difficult for the Company to obtain financing on an unsecured basis or to obtain
secured financing other than certain Apurchase money" indebtedness
collateralized by the acquired assets.
<PAGE>
The Company's ability to meet its financial covenants and to make
scheduled payments of principal and interest to repay its indebtedness,
including the Notes, is dependent upon its operating results and its ability to
obtain financing. However, there can be no assurance that the Company's business
will generate sufficient cash flow from operations or that future bank credit
will be available in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or make necessary capital expenditures. In
such event, the Company would be required to obtain such financing from the sale
of equity securities or other debt financing. There can be no assurance that any
such financing will be available on terms acceptable to the Company if at all.
Should sufficient capital not be available, the Company may not be able to
continue to implement its strategy.
The New Credit Facility limits the Company's borrowings to amounts
determined by the lenders, in their sole discretion, based upon a variety of
factors including the amount of indebtedness which can be adequately supported
by the value of oil and natural gas reserves and assets owned by the Company
(the "Borrowing Base"). The Company has approximately $40.0 million in borrowing
availability under the Borrowing Base of the New Credit Facility. If oil or
natural gas prices decline below their current levels, the availability of funds
under the New Credit Facility could be materially adversely affected.
The New Credit Facility requires the Company to satisfy certain
financial ratios in the future. The failure to satisfy these covenants or any of
the other covenants in the New Credit Facility would constitute an event of
default thereunder and, subject to certain grace periods, may permit the lenders
to accelerate the indebtedness then outstanding under the New Credit Facility
and demand immediate repayment thereof. See "Description of New Credit
Facility."
Effective Subordination of Notes
The Notes are general unsecured obligations of the Company and rank
pari passu in right of payment to all unsubordinated indebtedness of the Company
and rank senior in right of payment to all subordinated indebtedness of the
Company. The Notes are unconditionally guaranteed, jointly and severally, by
each of the Subsidiary Guarantors. The Guarantees are general unsecured
obligations of the Subsidiary Guarantors and rank pari passu in right of payment
to all unsubordinated indebtedness of the Subsidiary Guarantors and rank senior
in right of payment to all subordinated indebtedness of the Subsidiary
Guarantors. However, the Notes are effectively subordinated to secured
indebtedness of the Company and the Subsidiary Guarantors to the extent of the
value of the assets securing such indebtedness. In the event of a default on
such secured indebtedness, or a bankruptcy, liquidation or reorganization of the
Company and its subsidiaries, such assets will be available to satisfy
obligations with respect to the secured indebtedness before any payment
therefrom will be made on the Notes. The Company's subsidiaries are also
guarantors of the New Credit Facility. The Notes are not secured by any of the
assets of the Company or its subsidiaries. Any future indebtedness incurred
under the New Credit Facility will be secured by liens against substantially all
of the Company's and its subsidiaries' assets.
Volatility of Oil and Natural Gas Prices
The Company's revenues, profitability and the carrying value of its oil
and natural gas properties are substantially dependent upon prevailing prices
of, and demand for, oil and natural gas and the costs of acquiring, finding,
developing and producing reserves. The Company's ability to maintain or increase
its borrowing capacity, to repay the Notes and outstanding indebtedness under
any current or future credit facility, and to obtain additional capital on
attractive terms is also substantially dependent upon oil and natural gas
prices. Historically, the markets for oil and natural gas have been volatile and
are likely to continue to be volatile in the future. Prices for oil and natural
gas are subject to wide fluctuations in response to: (i) relatively minor
changes in the supply of, and demand for, oil and natural gas; (ii) market
uncertainty; and (iii) a variety of additional factors, all of which are beyond
the Company's control. These factors include domestic and foreign political
conditions, the price and availability of domestic and imported oil and natural
gas, the level of consumer and industrial demand, weather, domestic and foreign
government relations, the price and availability of alternative fuels and
overall economic conditions. The Company's production is weighted toward natural
gas, making earnings and cash flow more sensitive to natural gas price
fluctuations. Historically, the Company has attempted to mitigate these risks by
oil and natural gas hedging transactions. See "Business and Properties Marketing
of Production."
<PAGE>
Uncertainty of Estimates of Reserves and Future Net Cash Flows
This Prospectus contains estimates of the Company's oil and natural gas
reserves and the future net cash flows from those reserves, which have been
prepared or audited by certain independent petroleum consultants. There are
numerous uncertainties inherent in estimating quantities of Proved Reserves of
oil and natural gas and in projecting future rates of production and the timing
of development expenditures, including many factors beyond the Company's
control. The estimates in this Prospectus are based on various assumptions,
including, for example, constant oil and natural gas prices, operating expenses,
capital expenditures and the availability of funds, and, therefore, are
inherently imprecise indications of future net cash flows. Actual future
production, cash flows, taxes, operating expenses, development expenditures and
quantities of recoverable oil and natural gas reserves may vary substantially
from those assumed in the estimates. Any significant variance in these
assumptions could materially affect the estimated quantity and value of reserves
set forth in this Prospectus. Additionally, the Company's reserves may be
subject to downward or upward revision based upon actual production performance,
results of future development and exploration, prevailing oil and natural gas
prices and other factors, many of which are beyond the Company's control. See
"Business and Properties - Oil and Gas Information."
The SEC PV-10 of Proved Reserves referred to in this Prospectus should
not be construed as the current market value of the estimated Proved Reserves of
oil and natural gas attributable to the Company's properties. In accordance with
applicable requirements of the Commission, the estimated discounted future net
cash flows from Proved Reserves are generally based on prices and costs as of
the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. The calculation of the SEC PV-10 of the Company's
oil and natural gas reserves at September 1, 1997 is based on prices of $2.41
per Mcf of natural gas and $19.50 per Bbl of oil. These amounts compare to the
Company's pro forma actual average product prices of $2.48 per Mcf of natural
gas and $18.85 per Bbl of oil for the first six months of 1997 and $2.24 per Mcf
of natural gas and $20.90 per Bbl of oil for the year ended December 31, 1996.
Actual future net cash flows also will be affected by (i) the timing of both
production and related expenses; (ii) changes in consumption levels and (iii)
governmental regulations or taxation. In addition, the calculation of the
present value of the future net cash flows using a 10% discount as required by
the Commission is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with the
Company's reserves or the oil and natural gas industry in general. Furthermore,
the Company's reserves may be subject to downward or upward revision based upon
actual production, results of future development, supply and demand for oil and
natural gas, prevailing oil and natural gas prices and other factors. See
"Business and Properties - Oil and Gas Information."
Acquisition Risks
The Company has grown primarily through acquisitions and intends to
continue acquiring oil and natural gas properties. Although the Company performs
an extensive review of the properties proposed to be acquired, such reviews are
subject to uncertainties. Consistent with industry practice, it is not feasible
to review less significant properties involved in such acquisitions. However,
even a detailed review may not reveal existing or potential problems; nor will
it permit the Company to become sufficiently familiar with the properties to
assess fully their deficiencies and capabilities.
The Company has recently begun to focus its acquisition efforts on
larger packages of oil and natural gas properties, such as the properties
involved in the Amoco Acquisition. The acquisition of larger oil and natural gas
properties may involve substantially higher costs and may pose additional issues
regarding operations and management. There can be no assurance that oil and
natural gas properties acquired by the Company will be successfully integrated
into the Company's operations or will achieve desired profitability objectives.
See "Business and Properties - Acquisition, Development, and Other Activities."
<PAGE>
Exploration and Development Risks
The Company may increase its development and exploration activities.
Exploration drilling and, to a lesser extent, development drilling of oil and
natural gas reserves involve a high degree of risk that no commercial production
will be obtained and/or that production will be insufficient to recover drilling
and completion costs. The cost of drilling, completing and operating wells is
often uncertain. The Company's drilling operations may be curtailed, delayed or
canceled as a result of numerous factors, including title problems, weather
conditions, compliance with governmental requirements and shortages or delays in
the delivery of equipment. 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's incurring substantial
losses. Furthermore, completion of a well does not assure a profit on the
investment or a recovery of drilling, completion and operating costs.
Operating Hazards and Uninsured Risks
The Company's oil and natural gas business involves a variety of
operating risks, including, but not limited to, unexpected formations or
pressures, uncontrollable flows of oil, natural gas, brine or well fluids into
the environment (including groundwater contamination), blowouts, fires,
explosions, pollution and other risks, any of which could result in personal
injuries, loss of life, damage to properties and substantial losses. Although
the Company carries insurance at levels which it believes are reasonable, it is
not fully insured against all risks. The Company does not carry business
interruption insurance. Losses and liabilities arising from uninsured or
under-insured events could have a material adverse effect on the financial
condition and operations of the Company.
Marketing Risks
Substantially all of the Company's natural gas production is currently
sold to gas marketing firms or end users either on the spot market on a
month-to-month basis at prevailing spot market prices. For the year ended
December 31, 1996, one purchaser accounted for approximately 49% of the
Company's revenues. The Company does not believe that discontinuation of its
sales arrangement with such firm would be in any way disruptive to the Company's
natural gas marketing operations. See "Business and Properties - Competition,
Markets, Seasonality and Environmental and Other Regulation."
Hedging Risks
Historically, the Company has reduced 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
counterparty 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 all or a portion of 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. In
the past, the Company has hedged up to, but not more than, 50% of its
anticipated oil and natural gas production. Hedging also prevents the Company
from receiving the full advantage of increases in crude oil or natural gas
prices above the fixed amount specified in the hedge.
<PAGE>
Abandonment Costs
Due to the Company's number of offshore properties and production
facilities, government regulations and lease terms will require the Company to
incur substantial abandonment costs. As of September 1, 1997, total abandonment
costs for the Company's offshore properties estimated to be incurred through
2012 were approximately $12.3 million. Estimated abandonment costs have been
included in determining actual and pro-forma estimates of the Company's future
net revenues from Proved Reserves included herein, and the Company accounts for
such costs through its provision for depreciation, depletion and amortization.
Under the terms of various agreements, the Company is required to fund
restricted cash accounts as a reserve for abandonment costs on most of its
offshore properties. See Business and Properties - Plugging and Abandonment
Escrows.
Environmental and Other Regulations
The Company's operations are affected by extensive regulation pursuant
to various federal, state and local laws and regulations relating to the
exploration for and development, production, gathering and marketing of oil and
natural gas. Matters subject to regulation include discharge permits for
drilling operations, drilling and abandonment bonds or other financial
responsibility requirements, reports concerning operations, the spacing of
wells, unitization and pooling of properties, and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and natural gas wells below actual
production capacity in order to conserve supplies of oil and natural gas.
Operations of the Company are also subject to numerous environmental
laws, including but not limited to, those governing management of waste,
protection of water, air quality, the discharge of materials into the
environment, and preservation of natural resources. Non-compliance with
environmental laws and the discharge of oil, natural gas, or other materials
into the air, soil or water may give rise to liabilities to the government and
third parties, including civil and criminal penalties, and may require the
Company to incur costs to remedy the discharge. Oil and 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 oil and gas wells or explosion at
processing plants. Hydrocarbons tend to degrade slowly in soil and water, which
makes remediation costly, and discharged hydrocarbons may migrate through soil
and water supplies or adjoining property, giving rise to additional liabilities.
Laws and regulations protecting the environment have become more stringent in
recent years, and may in certain circumstances impose retroactive, strict, and
joint and several liability rendering entities liable for environmental damage
without regard to negligence or fault. From time to time, the Company has agreed
to indemnify sellers of producing properties from whom the Company has acquired
reserves against certain liabilities for environmental claims associated with
such properties. There can be no assurance that new laws or regulations, or
modifications of or new interpretations of existing laws and regulations, will
not increase substantially the cost of compliance or otherwise adversely affect
the Company's oil and natural gas operations and financial condition or that
material indemnity claims will not arise against the Company with respect to
properties acquired by the Company. While the Company does not anticipate
incurring material costs in connection with environmental compliance and
remediation, it cannot guarantee that material costs will not be incurred. See
Business and Properties - Competition, Markets, Seasonality and Environmental
and Other Regulation.
Competition
There are many companies and individuals engaged in the exploration for
and development of oil and natural gas properties. Competition is particularly
intense with respect to the acquisition of oil and natural gas producing
properties and securing experienced personnel. 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. See Business and
Properties - Competition, Markets, Seasonality and Environmental and Other
Regulation.
<PAGE>
Dependence Upon 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.
See Management.
Change of Control
Upon the occurrence of a Change of Control, the Company will be
required to offer to repurchase all or a portion of the outstanding Notes at
101% of the principal amount thereof, plus accrued and unpaid interest to the
date of repurchase. The source of funds for any such payment at maturity or
earlier repurchase will be the Company's available cash or cash generated from
operating or other sources, including, without limitation, borrowings or sales
of assets or equity securities of the Company. There can be no assurance that
sufficient funds will be available at the time of any such event to pay such
principal or to make any required repurchase. If an offer to repurchase is
required to be made and the Company does not have available funds sufficient to
pay for Notes tendered for repurchase, an event of default would occur under the
Indenture. The occurrence of an event of default could result in acceleration of
maturity of the Notes and all amounts due under the New Credit Facility. See
Description of Notes.
Lack of Public Market
The Old Notes were issued to, and the Company believes are currently
owned by, a relatively small number of beneficial owners. The Old Notes have not
been registered under the Securities Act and will continue to be subject to
restrictions on transferability to the extent that they are not exchanged for
New Notes. See "The Exchange Offer - Consequences of a Failure to Exchange
Outstanding Notes." Although the New Notes will generally be permitted to be
resold or otherwise transferred by the holders (who are not affiliates of the
Company or broker-dealers) without compliance with the registration and
prospectus delivery requirements under the Securities Act, they will constitute
a new issue of securities with no established trading market. The Company has
been advised by the Initial Purchasers that the Initial Purchasers presently
intend to make a market in the New Notes. However, the Initial Purchasers are
not obligated to do so and any market making activity with respect to the New
Notes may be discontinued at any time without notice. In addition, such market
making activity will be subject to the limits imposed by the Securities Act and
the Exchange Act and may be limited during the Exchange Offer. If the New Notes
are traded after their initial issuance, they may trade at a discount from their
initial offering price, depending upon prevailing interest rates, the market for
similar securities and other factors including general economic conditions and
the financial condition of the Company. While the Old Notes are designated for
trading in the PORTAL Market, there can be no assurance as to the development or
liquidity of any market for the New Notes. The liquidity of, and trading market
for, the Notes also may be adversely affected by general declines in the market
for similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
<PAGE>
Notwithstanding the registration of the New Notes in the Exchange
Offer, holders who are Aaffiliates" (as defined in Rule 405 under the Securities
Act) of the Company may publicly offer for sale or resell the New Notes only in
compliance with the provisions of Rule 144 under the Securities Act. Each
broker-dealer that receives New Notes for its own account in exchange for
Outstanding Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such New Notes. Subject to certain provisions
set forth in the Registration Agreement, the Company has agreed that, for a
period of up to 180 days after the Registration Statement is declared effective,
it will make this Prospectus available to any Participating Broker-Dealer for
use in connection with any such resale. However, under certain circumstances,
the Company has the right to require that Participating Broker-Dealers suspend
the resale of New Notes pursuant to this Prospectus. See The Exchange Offer -
Consequences of Failure to Exchange.
- --------------------------------------------------------------------------------
Fraudulent Conveyance
Various fraudulent conveyance laws enacted for the protection of
creditors may apply to the Subsidiary Guarantors' issuance of the Guarantees. To
the extent that a court were to find that (x) a Guarantee was incurred by a
Subsidiary Guarantor with intent to hinder, delay or defraud any present or
future creditor or the Subsidiary Guarantor contemplated insolvency with a
design to prefer one or more creditors to the exclusion in whole or in part of
others or (y) a Subsidiary Guarantor did not receive fair consideration or
reasonably equivalent value for issuing its Guarantee and such Subsidiary
Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the
issuance of such Guarantee, (iii) was engaged or about to engage in a business
or transaction for which the remaining assets of such Subsidiary Guarantor
constituted unreasonably small capital to carry on its business or (iv) intended
to incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, the court could avoid or subordinate such Guarantee in
favor of the Subsidiary Guarantor's creditors. Among other things, a legal
challenge of a Guarantee on fraudulent conveyance grounds may focus on the
benefits, if any, realized by the Subsidiary Guarantor as a result of the
issuance by the Company of the Notes. The Indenture contains a savings clause,
which generally will limit the obligations of each Subsidiary Guarantor under
its Guarantee to the maximum amount as will, after giving effect to all of the
liabilities of such Subsidiary Guarantor, result in such obligations not
constituting a fraudulent conveyance. To the extent a Guarantee of any
Subsidiary Guarantor was voided as a fraudulent conveyance or held unenforceable
for any other reason, holders of the Notes would cease to have any claim against
such Subsidiary Guarantor and would be creditors solely of the Company and any
Subsidiary Guarantor whose Guarantee was not voided or held unenforceable. In
such event, the claims of the holders of the Notes against the issuer of an
invalid Guarantee would be subject to the prior payment of all liabilities of
such Subsidiary Guarantor. There can be no assurance that, after providing for
all prior claims, there would be sufficient assets to satisfy the claims of the
holders of the Notes relating to any avoided portions of any of the Guarantees.
The measure of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any such proceeding. Generally,
however, a Subsidiary Guarantor may be considered insolvent if the sum of its
debts, including contingent liabilities, was greater than the fair marketable
value of all of its assets at a fair valuation or if the present fair marketable
value of its assets was less than the amount that would be required to pay its
probable liability on its existing debts, including contingent liabilities, as
they become absolute and mature.
Based upon financial and other information, the Company and the
Subsidiary Guarantors believe that the Guarantees were incurred for proper
purposes and in good faith and that the Company and each Subsidiary Guarantor is
solvent and will continue to be solvent after issuing its Guarantee, have
sufficient capital for carrying on its business and are able to pay its debts as
they mature. There can be no assurance, however, that a court passing on such
standards would agree with the Company.
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds to the Company from the Exchange Offer.
The net proceeds from the sale of Old Notes, after deducting expenses,
were $96.25 million. The Company used the net proceeds from the sale of Notes,
together with other working capital of the Company, primarily to (i) repay all
indebtedness outstanding under the Bank Facility, (ii) prepay the 1996 Tranche A
Convertible Subordinated Notes, (iii) pay the promissory notes given to the
former shareholders of Goldking (the "Shareholder Notes"), (iv) prepay the
Comerica Credit Facility of Goldking, (v) prepay the Heller Financial Term Notes
of Goldking, and (vi) provide additional working capital for general corporate
purposes including, but not limited to, future acquisitions and the further
development of the Company's properties. See ACapitalization," below.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1997 (i) on an actual basis, (ii) giving pro forma effect to the
Goldking Acquisition (including the incurrence of indebtedness under the Notes
issued to the former shareholders of Goldking, the Company's Bank Facility, and
Goldking's existing debt) and (iii) on a pro forma basis as adjusted for the
Offering and the application of the proceeds therefrom. This table should be
read in conjunction with the "Unaudited Pro Forma Combined Financial Data" and
the Consolidated Financial Statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Pro Forma
As Adjusted
Actual Pro for
________ Forma Offering
------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.......................................... $ 1,353 $ 3,062 $ 45,260
Total debt, including current maturities:
Bank Facility................................................... 19,500 27,000 --
1996 Tranche A Convertible Subordinated Notes................... 8,500 8,500 --
Goldking Shareholder Notes..................................... -- 6,000 --
Comerica Credit Facility....................................... -- 4,250 --
Heller Financial Term Notes ................................... -- 8,302 --
New Credit Facility............................................ -- -- --
Production Payment............................................. -- 1,700 1,700
10 5/8% Senior Notes due 2004...................................... -- -- 100,000
----------- --------------- -----------
Total debt 28,000 55,752 101,700
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
(20,382,087 and 23,621,017 shares issued and outstanding).... 204 236 236
Additional paid-in capital...................................... 53,593 67,974 67,974
Retained earnings (deficit)..................................... (12,989) (12,989)
---------- ------------- -----------
(12,989)
Total stockholders' equity............................... 40,808 55,221
--------- ------------ -----------
55,221
Total capitalization....................................... $ 68,808 $ 110,973 $ 156,921
'''''''' ''''''''''' '''''''''''
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data are derived
from the Consolidated Financial Statements of the Company set forth elsewhere in
this Prospectus and certain historical financial data with respect to various
assets and companies acquired by the Company. The Unaudited Pro Forma Balance
Sheet at June 30, 1997 has been prepared assuming the Goldking Acquisition, the
sale of the Company's investment in common stock, and the Offering and the
application of the net proceeds therefrom had occurred on June 30, 1997. The
Unaudited Pro Forma Statement of Income (Operations) for the six months ended
June 30, 1997 has been prepared assuming the Goldking Acquisition and the
Offering and the application of the net proceeds therefrom had been consummated
January 1, 1997. The Unaudited Pro Forma Combined Statement of Income
(Operations) for the year ended December 31, 1996 has been prepared assuming the
Goldking Acquisition, the Offering and the application of the net proceeds
therefrom, the Amoco Acquisition and the Bayou Sorrel Field sale had all been
consummated on January 1, 1996. The Amoco Acquisition occurred on October 8,
1996 and the Bayou Sorrel Field sale was effective September 1, 1996.
The unaudited pro forma combined financial data reflects the
preliminary allocation of the Goldking purchase price based on June 30, 1997
Goldking financial statement amounts. The final allocation of the purchase
price, including the amounts of the increases in consolidated assets and
liabilities on the closing date of July 31, 1997 may differ with a resulting
effect on depletion, depreciation and amortization expense. Management does not
expect these differences to be material.
The unaudited pro forma combined financial data should be read in
conjunction with the notes thereto and with the Consolidated Financial
Statements of the Company and the notes thereto. This data is not indicative of
the financial position or results of operations of the Company which would
actually have occurred if the transactions described above had occurred at the
dates presented or which may be obtained in the future. In addition, future
results may vary significantly from the results reflected in such statements due
to various factors.
<PAGE>
<TABLE>
<CAPTION>
PANACO, Inc.
Unaudited Condensed Pro Forma Combined Balance Sheet
At June 30, 1997
(Amounts in thousands except number of shares )
Goldking PANACO, Inc.
Acquisition and Offering
PANACO, Pro Forma Goldking Pro PANACO,
Inc. Forma Inc.
ASSETS At Adjustments Pro Forma Pro Forma
Adjustments
6/30/97 (a) Combined (h) Combined
CURRENT ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,353 1,709 (b)(i) $ 3,062 $ 42,198 $ 45,260
Accounts receivable 6,030 2,688 (b) 8,718 8,718
Investment in common stock 1,701 (1,701) (i) - -
Prepaid and other 552 847 (b) 1,399 1,399
Total Current Assets 9,636 13,179 55,377
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties 137,734 43,145 (c) 180,879 180,879
Less: accumulated depreciation, depletion
and amortization (87,374) - (87,374) (87,374)
Net Oil and Gas Properties 50,360 93,505 93,505
PROPERTY, PLANT AND EQUIPMENT (net) 12,474 1,892 (d) 14,366 14,366
OTHER ASSETS
Restricted deposits 1,992 1,992 1,992
Other 379 265 (e) 644 3,750 4,394
Total Other Assets 2,371 2,636 6,386
TOTAL ASSETS $ 74,841 $ 123,686 $ 169,634
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,033 $ 6,680 (f) 12,713 $ 12,713
Current portion of long-term debt - 1,181 (f) 1,181 (1,181) -
Total Current Liabilities 6,033 13,894 12,713
LONG-TERM DEBT 28,000 26,571 (g) 54,571 47,129 101,700
STOCKHOLDERS' EQUITY
Preferred shares, ($.01 par value, 5,000,000 shares
authorized and no shares issued or
outstanding) - - -
Common shares, ($.01 par value, 40,000,000 shares
authorized and 20,382,087 issued and outstanding
and 23,621,017 pro forma issued and
outstanding) 204 32 (a) 236 236
Additional paid-in capital 53,593 14,381 (a) 67,974 67,974
Retained earnings (deficit) (12,989) (12,989) (12,989)
Total Stockholders' equity 40,808 55,221 55,221
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,841 $ 123,686 $ 169,634
</TABLE>
<PAGE>
NOTES TO UNAUDITED CONDENSED PRO FORMA COMBINED BALANCE SHEET
At June 30, 1997
The Unaudited Condensed Pro Forma Combined Balance Sheet presents the
combined effects of the Goldking Acquisition, the application of the proceeds of
the Offering and the sale of the Company's investment in common stock as if
these transactions had been consummated on June 30, 1997. It reflects a
preliminary allocation of the purchase price for the Goldking Acquisition. The
final allocation of the purchase price may differ based on the actual assets and
liabilities acquired by the Company on July 31, 1997, however, management does
not expect these differences to be material.
Goldking Acquisition
(a) The Goldking Acquisition occurred on July 31, 1997. The purchase price
included $7,500,000 in cash, $6,000,000 in Shareholder Notes, 3,154,930
Common Shares valued at $4.45, and the assumption of debt described in
notes (f) and (g) below. The Company also paid a finder's fee in the
amount of 84,000 Common Shares.
(b) The Company acquired $8,000 in cash, $2,688,000 in accounts receivable
and $847,000 in other current assets, primarily restricted cash and
short-term funds.
(c) Based upon the nature of the assets acquired, the Company has allocated
$37,119,000 to proved oil and natural gas properties and $6,026,000 to
unproved oil and natural gas properties.
(d) The Company acquired furniture and fixtures with a net book value of
$892,000, which approximates market value. The Company also allocated
$1,000,000 of the net purchase to pipelines and equipment, based upon
the nature of the assets acquired.
(e) The Company acquired other long-term assets, including capitalized
software costs with a net book value of $265,000, which approximates
market value.
(f) The Company's consolidated current liabilities and current maturities
of long-term debt increased by $6,680,000 and $1,181,000, respectively.
(g) The Company's consolidated long-term debt increased with the Goldking
Acquisition, including Goldking's outstanding debt before the merger in
the amount of $13,071,000. The adjustment also includes $6,000,000 in
notes to the former shareholders of Goldking and borrowing of
$7,500,000 under the Company's Bank Facility to fund the cash portion
of the purchase price.
Offering of Notes
(h) Represents the adjustments necessary to record the application of the
proceeds, the incurrence of indebtedness from, and the costs associated
with, the Offering as described in the Use of Proceeds.
Offering Amount $100,000,000
Debt Issuance Costs (3,750,000)
---------------
Net Proceeds 96,250,000
Payoff debt (54,052,000)
--------------
Increase in cash $ 42,198,000
'''''''''''''
Sale of Investment
(i) To adjust for the sale of the investment as if it had occurred on June
30, 1997. The Company sold this investment in late July and early
August for a total of $1,717,000.
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1997
(Amounts in thousands except per share data)
Goldking
Goldking Acquisition PANACO, Inc. Offering PANACO,
Inc.
Acquisition Pro Forma Pro Forma Pro Forma Pro Forma
PANACO, (a) Adjustments Combined Adjustments Combined
Inc.
---------------------- ------------------------- ------------ ------------
REVENUES
<S> <C>
Oil and natural gas sales $ 14,287 $ 3,595 $ - $ 17,882 $ - $ 17,882
COSTS AND EXPENSES
Lease operating expense 5,122 962 - 6,084 - 6,084
Depreciation, depletion and amortization
expense 6,184 974 720 (b) 7,878 - 7,878
Exploration expense 67 - - 67 - 67
Provision for losses and (gains) on
disposition and write-down of assets
- - - - - -
General and administrative expense 389 1,015 - 1,404 - 1,404
Production and ad valorem taxes 174 282 - 456 - 456
---------- ---------- ----------- ----------- ------------ ------------
Total 11,936 3,233 720 15,889 - 15,889
---------- ---------- ----------- ----------- ------------ ------------
NET OPERATING INCOME (LOSS) 2,351 362 (720) 1,993 - 1,993
---------- ---------- ----------- ----------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (net) (1,265) (754) (490) (c) (2,509) (1,784) (e) (4,293)
Unrealized gain on investment in common stock 60 - - 60 - 60
---------- ---------- ----------- ----------- ------------ ------------
Total (1,205) (754) (490) (2,449) (1,784) (4,233)
NET INCOME (LOSS) BEFORE INCOME TAXES 1,146 (392) (1,210) (456) (1,784) (2,240)
INCOME TAXES (BENEFIT) - - - - - -
---------- ---------- ----------- ----------- ------------ ------------
NET INCOME (LOSS) 1,146 (392) (1,210) (456) (1,784) (2,240)
'''''''''' '''''''''' ''''''''''' ''''''''''' '''''''''''' ''''''''''''
EARNINGS (LOSS) PER WEIGHTED AVERAGE SHARE 0.07 (0.02) (.10)
'''''''''' ''''''''''' ''''''''''''
Weighted average shares outstanding 18,248 3,239 (d) 21,487 - 21,487
'''''''''' ''''''''''' ''''''''''''
EBITDA (f) 8,602 9,938
'''''''''' ''''''''''''
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENT OF INCOME (OPERATIONS)
For the six months ended June 30,1997
The Unaudited Pro Forma Combined Statement of Income (Operations) for
the six months ended June 30, 1997 presents the combined effect of the Goldking
Acquisition and the application of the proceeds and incurrence of indebtedness
for the Offering as if both of these transactions had been consummated on
January 1, 1997. It reflects a preliminary allocation of the purchase price for
the Goldking Acquisition. The final allocation of the purchase price may differ
based on the actual assets and liabilities acquired by the Company on July 31,
1997, however, management does not expect these differences to be material.
Goldking Acquisition
(a) These amounts represent the actual results of Goldking for the six months
ended June 30, 1997. Certain reclassifications have been made for
consistency.
(b) Goldking accounted for its oil and natural gas properties using the full
cost method of accounting. Pro forma entries are required to present the
information for Goldking as if it had accounted for its oil and natural gas
properties using the successful efforts method and using the new basis for
its oil and natural gas properties on July 31, 1997.
(c) To adjust interest expense for debt incurred in financing the Goldking
Acquisition, which included the $6,000,000 in notes and the borrowing of
the $7,500,000 cash portion of the purchase price under the Company's Bank
Facility.
(d) To adjust the weighted average shares outstanding for the issuance of
Common Shares in connection with the Goldking Acquisition.
Offering of Notes
(e) To adjust interest expense to reflect the repayment of debt at January 1,
1997 with the proceeds from the Offering and the amortization of loan
costs. The proceeds in excess of that used to repay indebtedness are
assumed to have been placed in short term investments yielding 6%.
(f) EBITDA is defined as net income (loss) before income taxes plus the sum of
depletion and depreciation, provisions for losses and gains on disposition
and write-down of assets, exploration expenses and interest expense. EBITDA
is not a measure of cash flow as determined by generally accepted
accounting principles. The Company has included information concerning
EBITDA because EBITDA is a measure used by certain investors in determining
the Company's historical ability to service its indebtedness. EBITDA should
not be considered as an alternative to, or more meaningful than, net income
or cash flows as determined in accordance with generally accepted
accounting principles or as an indicator of the Company's operating
performance or liquidity.
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Unaudited Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1996
(Amounts in thousands except per share data)
Goldking
Goldking Acquisition PANACO,Inc. 1996 PANACO, Inc Offering PANACO,
Inc.
Acquisition Pro Forma Pro Forma Transactions Pro Forma Pro Forma Pro Forma
PANACO, (a) Adjustments Combined (e) Combined Adjustments Combined
Inc.
------------------------------------------------------------------------------------------
REVENUES
<S> <C>
Oil and natural gas sales $ 20,063 $ 8,186 $ - $ 28,249 $ 8,915 $ 37,164 - $ 37,164
COSTS AND EXPENSES
Lease operating expense 8,477 1,282 - 9,759 1,915 11,674 - 11,674
Depreciation, depletion and
amortization
expense 9,022 2,243 1,432 (b) 12,697 6,086 18,783 - 18,783
Exploration expense - - - - - - - -
Provision for losses and (gains) on
disposition and write-down of
assets - (430) - (430) - (430) - (430)
General and administrative expense 772 1,402 - 2,174 - 2,174 - 2,174
Production and ad valorem taxes 559 669 - 1,228 (239) 989 - 989
West Delta fire loss 500 - - 500 - 500 - 500
--------- -------------------- ---------------------------------------------------------
Total 19,330 5,166 1,432 25,928 7,762 33,690 - 33,690
--------- -------------------- ---------------------------------------------------------
NET OPERATING INCOME (LOSS) 733 3,020 (1,432) 2,321 1,153 3,474 - 3,474
--------- -------------------- ---------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (net) (2,514) (1,414) (979) (c) (4,907) (1,042) (5,949) (2,638) (8,587)
Unrealized loss on investment in
common stock (258) - - (258) 258 - - -
--------- -------------------- ---------------------------------------------------------
Total (2,772) (1,414) (979) (5,165) (784) (5,949) (2,638) (8,587)
NET INCOME (LOSS) BEFORE INCOME TAXES (2,039) 1,606 (2,411) (2,844) 369 (2,475) (2,638) (5,113)
INCOME TAXES (BENEFIT) - - - - - - - -
--------- -------------------- ---------------------------------------------------------
NET INCOME (LOSS) (2,039) 1,606 (2,411) (2,844) 369 (2,475) (2,638) (5,113)
''''''''' '''''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''''''''''''''''''
EARNINGS (LOSS) PER WEIGHTED AVERAGE SHARE$ (0.16) (0.18) (0.14) (0.29)
''''''''' ''''''''''' ''''''''''' ''''''''''
Weighted average shares outstanding 12,742 3,239 (d) 15,981 1,540 17,521 17,521
''''''''' ''''''''''' ''''''''''' ''''''''''
EBITDA (g) $ 10,255 22,327
''''''''' ''''''''''
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
STATEMENT OF INCOME (OPERATIONS)
For the year ended December 31, 1996
The Unaudited Pro Forma Combined Statement of Income (Operations) for
the year ended December 31, 1996 presents the combined effects of the Goldking
Acquisition, the Amoco Acquisition on October 8, 1996, the sale of Bayou Sorrel
Field effective September 1, 1996 and the application of the proceeds and
incurrence of indebtedness for the Offering as if all had been consummated on
January 1, 1996. It reflects a preliminary allocation of the purchase price for
the Goldking Acquisition. The final allocation may differ based on the actual
assets and liabilities acquired on July 31, 1997, however, management does not
expect these differences to be material. The Amoco Acquisition and Bayou Sorrel
Field sale have been summarized as A1996 Transactions" in the pro forma data.
Goldking Acquisition
(a) These amounts represent the actual results of Goldking for the year ended
December 31, 1996. Certain reclassifications have been made for
consistency.
(b) Goldking accounted for its oil and natural gas properties using the full
cost method of accounting. Pro forma entries are required to present the
pro forma information for Goldking as if it had accounted for its oil and
natural gas properties using the successful efforts methods and using the
new basis for its oil and natural gas properties based upon the purchase on
July 31, 1997.
(c) To adjust interest expense for debt incurred in financing the Goldking
Acquisition, which included the $6,000,000 in notes and the borrowing of
the $7,500,000 cash portion of the purchase price under the Company's Bank
Facility.
(d) To adjust the weighted average shares outstanding for the issuance of
Common Shares in connection with the Goldking Acquisition.
1996 Transactions
(e) Represents the total adjustments necessary to present the Amoco Acquisition
on October 8, 1996 and the sale of Bayou Sorrel Field effective September
1, 1996 as if both had occurred on January 1, 1996. They include the
addition of revenues and expenses from a January 1 to October 7 for the
Amoco Acquisition and the reductions of such amounts for January 1 to
August 31 for the sale of Bayou Sorrel Field.
Offering of Notes
(f) To adjust interest expense to reflect the repayment of debt at January 1,
1997 with the proceeds from the Offering and the amortization of loan
costs. The proceeds in excess of that used to repay indebtedness are
assumed to have been placed in short term investments yielding 6%.
(g) EBITDA is defined as net income (loss) before income taxes plus the sum of
depletion and depreciation, provisions for losses and gains on disposition
and write-down of assets, exploration expenses, interest expense and the
non-recurring charge pertaining to the 1996 West Delta fire loss. EBITDA is
not a measure of cash flow as determined by generally accepted accounting
principles. The Company has included information concerning EBITDA because
EBITDA is a measure used by certain investors in determining the Company's
historical ability to service its indebtedness. EBITDA should not be
considered as an alternative to, or more meaningful than, net income or
cash flows as determined in accordance with generally accepted accounting
principles or as an indicator of the Company's operating performance or
liquidity.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data of the
Company are derived from, and qualified by reference to, the Company's
Consolidated Financial Statements and the notes thereto. The income statement
data for the six months ended June 30, 1997 are not necessarily indicative of
results for a full year. The historical selected financial data for the five
years ended December 31, 1996 were derived from the Company's audited
consolidated financial statements. The selected financial data for the six
months ended June 30, 1996 and 1997 have been derived from the Company's
unaudited interim consolidated financial statements and include, in the opinion
of the Company's management, all adjustments necessary to present fairly the
data for such periods. The information contained in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December Six Months
31, Ended June 30,
------------------------------------------
-----------------
1992 1993 1994 1997
_______ _______ _______ 1995 1996 1996 _______
------- ------ -------
Summary of Operating Data: (dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and natural gas sales $ 13,335 $ 12,605 $ 17,338 $ 18,447 $ 20,063 $ 10,808 $ 14,287
Depreciation, depletion & amortization
expense 4,245 4,288 6,038 8,064 9,022 3,812 6,184
Lease operating expense 5,762 5,297 5,231 8,055 8,477 4,184 5,122
Production and ad valorem taxes 867 754 1,006 1,078 559 327 174
Exploration expense -- -- -- 8,112 -- -- 67
General and administrative expense 539 542 587 690 772 382 389
Provision for losses (gains) on disposition
and write-downs of assets -- 3,824 1,202 751 -- -- --
West Delta fire loss
-- -- -- -- 500 500 --
---- ---- ---- ---- --- --- --
Net operating income (loss) 1,922 (2,100) 3,274 (8,303) 733 1,603 2,351
Interest expense (net) 2,323 1,886 1,623 987 2,514 902 1,265
Unrealized gain (loss) on investment in
common stock
-- -- -- -- (258) -- 60
---- ---- ---- ---- ----- ---- --
Net income (loss) $ (401) $ (3,986) $ 1,115 $ (9,290) $(2,039) $ 701 $ 1,146
''''''''' '''''''''' ''''''''' ''''''''' '' ''''''''' ''''''''''
Net income (loss) per Common Share $ (0.05) $ (0.53) $ 0.11 $ (0.81) $ (0.16) $ 0.06 $ 0.07
<PAGE>
Summary Balance Sheet Data:
Oil and gas properties and equipment (net) $ 26,448 $ 19,183 $ 23,945 $ 29,485 $ 60,747 $ 29,326 $ 62,834
Total assets 31,085 24,432 29,095 36,169 73,768 37,150 74,841
Long-term debt 15,380 12,465 12,500 22,390 49,500 18,390 28,000
Stockholders' equity 11,700 8,744 14,882 9,174 17,498 11,818 40,808
Dividends per Common Share -- -- -- -- -- -- --
Other Data:
EBITDA(a) $ 6,167 $ 6,012 $ 10,514 $ 8,624 $ $ 5,915 $ 8,602
10,255
Capital expenditures(b) 1,293 842 12,128 21,841 43,050 3,440 8,160
</TABLE>
(a) EBITDA is defined as net income (loss) before income taxes plus the sum of
depletion and depreciation, provisions for losses and gains on disposition
and write-down of assets, exploration expenses, interest expense and the
non-recurring charge pertaining to the 1996 West Delta fire loss. EBITDA is
not a measure of cash flow as determined by generally accepted accounting
principles. The Company has included information concerning EBITDA because
EBITDA is a measure used by certain investors in determining the Company's
historical ability to service its indebtedness. EBITDA should not be
considered as an alternative to, or more meaningful than, net income or
cash flows as determined in accordance with generally accepted accounting
principles or as an indicator of the Company's operating performance or
liquidity.
(b) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and natural gas properties and other fixed assets, without
taking into consideration sales of capital assets.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements, "Selected Consolidated Financial
Data" and respective notes thereto, included elsewhere herein. The information
below should not be construed to imply that the results discussed herein will
necessarily continue into the future or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of management of the
Company. Because of the size and scope of the Company's recent acquisitions, the
results of operations from period to period are not necessarily comparative.
General
The oil and natural gas industry has experienced significant volatility
in recent years because of the fluctuatory relationship of the supply 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.
The Company experienced an explosion and fire on April 24, 1996 at Tank
Battery #3 in the West Delta Fields resulting in these 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 resulted
in lost revenues estimated by management to be approximately $6,000,000. During
the second quarter the Company expensed $500,000 for its loss as a result of
this explosion. No further losses have been recognized or are anticipated. This
$500,000 amount included $225,000 in deductibles under the Company's insurance.
The Company has spent $8,500,000 on Tank Battery #3 inclusive of the
$500,000 expensed during second quarter and has received reimbursement from its
insurance company of $3,900,000, after satisfaction of the $225,000 in
deductibles. The excess of expenditures over insurance reimbursement has been
capitalized. No additional expenditures have been made or are anticipated. The
Company has filed suits against the employers of the persons who caused the
incidents for recovery of these costs and its lost profits. No assurance can be
given that the Company will successfully recover any amounts sought in any such
suits.
For the six months ended June 30, 1997 and 1996:
Liquidity and Capital Resources
On March 5, 1997, the Company completed an offering of 8,403,305 common
shares at $4.00 per share, $3.728 net of the underwriter's commission. The
offering consisted of 6,000,000 shares sold by the Company and 2,403,305 shares
sold by shareholders, primarily Amoco Production Company (2,000,000 shares) and
lenders advised by Kayne, Anderson Investment Management, Inc. (373,305 shares).
The Company's net proceeds of $22,000,000 from the offering were used to prepay
$13,500,000 of its 12% subordinated debt and the remaining was used to reduce
borrowings under the Company's Bank Facility.
<PAGE>
On October 8, 1996, the Company amended its Bank Facility with First Union
National Bank of North Carolina (the "Agent") (60%)and Banque Paribas (40%). The
loan is a reducing revolver designed to provide up to $40,000,000 depending on
the borrowing base, as determined by the lenders. At June 30, 1997 the Company
had $19,500,000 outstanding under the loan. The borrowing base on July 31, 1997
was $30,000,000. 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. Interest on the loan is computed at the Agent'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. Management feels that
this Bank Facility greatly facilitates 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.
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 natural gas
properties. The loans were as follows:
(a) 1993 Subordinated Notes. In 1993, $5,000,000 was borrowed, due
December 31, 1999, but prepayable at any time. These Notes were prepaid on March
6, 1997 with a portion of the proceeds from the common share offering.
(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 Notes are prepayable, in which event the Company must
deliver equivalent warrants to purchase Common Shares which expire December 31,
1998. The Company may deliver up to $2,000,000 in payment-in-kind notes in
satisfaction of interest payment obligations.
(c) 1996 Tranche B Bridge Loan Subordinated Notes. On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable any time. These
Notes were prepaid on March 6, 1997 with a portion of the proceeds of the common
share offering.
At June 30, 1997, 84% of the Company's total assets were represented by
oil and natural gas properties and pipelines and equipment, net of depreciation,
depletion and amortization.
In 1991, certain lenders received a net profits interest (NPI) in the
West Delta properties. During the six months ended June 30, 1997, payments with
respect to this NPI totaled $190,000.
Pursuant to existing agreements, the Company is required to deposit
funds in bank trust and 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 natural 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, for the Amoco Properties. The Company has established the "PANACO
East Breaks 110 Platform Trust" in favor of the Minerals Management Service of
the U.S. Department of the Interior. This trust required 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 $9,250,000 in surety bonds to
secure its plugging and abandonment operations.
<PAGE>
Through the six months ended June 30, 1997 the Company had spent $8,093,000
in capital expenditures, approximately $2 million of which was for the
completion of oil and natural gas pipelines in the West Delta Fields and the
remainder was primarily for development of its oil and natural gas properties.
On March 5, 1997 the Company completed an offering of 8,403,305 common shares at
$4.00 per share, $3.728 net of the underwriter's commission. The offering
consisted of 6,000,000 shares sold by the Company, from which it received
$22,000,000. The Company's proceeds were used to prepay $13,500,000 of its 12%
subordinated debt and the remaining was used to reduce borrowings under the
Company's Bank Facility. Through June 30, 1996 the Company had raised $1,837,000
in equity as a result of the exercise of warrants.
Results of Operations
Production. Natural gas production increased 21% to 4,421,000 Mcf in
1997 from 3,666,000 Mcf in 1996. Oil production increased 25% in 1997 to 188,000
Bbls, from 151,000 Bbls in 1996. Results for 1997 include production from the
former Amoco Properties, purchased in October 1996. Results for 1997 also
include increased production from the West Delta Fields, which were shut-in from
April 24, 1996 until October 1996. They do not include production from the Bayou
Sorrel Field which was sold September 1, 1996. Bayou Sorrel Field was primarily
an oil field and produced only a small amount of natural gas in 1996.
In March, 1997 the federal production from the West Delta Block 58 was
brought back on-line for the first time since April 1996 with the completion of
a dual six inch, eight mile pipeline to the West Delta central processing
facility, Tank Battery #3. This pipeline also allowed Tana Oil and Gas
Corporation and Samedan Corporation to resume production from their wells,
drilled on farm-outs from the Company, on which the Company receives overriding
royalty revenue and fees for processing the oil and natural gas.
Prices. Natural gas prices, net of the impacts of hedging transactions,
increased from $2.21 per Mcf in 1996 to $2.47 in 1997. The 1997 natural gas
hedge program had the effect of reducing natural gas prices by only ($.03) per
Mcf in 1997, compared to ($.52) per Mcf in 1996. The 1997 hedge program allows
the Company more participation in increases in market prices for natural gas,
while providing the price stability of no less than $1.80 per MMbtu in 1997 on
14,000 MMbtu per day in 1997. Oil prices remained relatively flat in 1997 at
$17.96 per Bbl, compared to $17.92 per Bbl in 1996.
The product prices received by the Company, net of the impact of hedge
transactions discussed below, averaged $2.47 per Mcf for natural gas and $17.96
per Bbl for oil for the six months ended June 30, 1997. Cash flow is currently
being used for capital expenditures, reduce liabilities and to pay general and
administrative overhead. Starting in 1997, the Company's natural gas hedge
transactions are based upon published gas pipeline index prices instead of the
NYMEX. This change has mitigated the risk of price differences due to
transportation. In 1997, 14,000 MMbtu per day has been hedged, at a swap price
of $1.80 per MMbtu for 1997 with varying levels of participation (93% in January
to 40% in September ) in settlement prices above the $1.80 per MMbtu swap price
level. The Company has hedged 10,000 MMbtu per day in 1998 and 7,000 MMbtu per
day in 1999, all at an average pipeline index swap price of $1.89 per MMbtu. In
1997 the Company has also hedged its oil prices by selling the equivalent of 720
Bbls of oil per day at $20.00, with a 40% participation in prices above the
$20.00 swap price level. Management has generally used hedge transactions to
protect its cash flows when the Company's levels of long-term debt have 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.
"Oil and natural gas sales" increased 32% for the first six months of
1997. Significant increases in both natural gas and oil production were the
primary factor in the increase in revenues. The former Amoco Properties,
acquired in October 1996 coupled with the resumption of production from the West
Delta fields have combined to outweigh the sale of the Bayou Sorrel Field in
September 1996. The Company's development program on the former Amoco Properties
has increased production from those fields steadily since the acquisition in
October.
<PAGE>
"Lease operating expense" increased $938,000, or 22% in 1997 with the
addition of interests in thirteen offshore blocks acquired in October 1996. As a
percent of revenues, lease operating expenses decreased to 36% in 1997 from 39%
in 1996.
"Depletion, depreciation and amortization expense" increased
$2,372,000, or 62% also in part due to the purchase of the former Amoco
Properties in October 1996. The amount per Mcf equivalent also increased from
$.86 in 1996 to $1.11 in 1997, due to several factors. Downward engineering
revisions by the Company's independent petroleum engineers, Ryder Scott Company,
in the West Delta and East Breaks 110 Fields at year-end 1996 were a significant
part of the increase. Also, $4,000,000 in capital expenditures made during 1996
(over and above insurance reimbursement) to rebuild Tank Battery #3, the central
processing facility for the West Delta Fields, increased the depletion cost per
Mcf.
"Production and ad valorem taxes" decreased 47% in 1997 to 1% of oil
and natural gas sales from 3% of oil and natural gas sales in 1996. The decrease
is due to the Company's shift to federal offshore waters where there are no
state severance taxes.
"Exploration expense" incurred in 1997 resulted from an option paid to
participate in an exploratory well in the High Island Area, offshore Texas which
was condemned before the well was drilled because of a dry hole drilled by
another company on an adjacent block. There will be no further exploration
expenses associated with this prospect.
"Interest expense (net)" increased 40% in 1997 primarily due to the
increased average borrowing levels in 1997 and partially due to an increased
weighted average interest rate incurred in 1997, partially offset by an increase
in interest capitalized. The average borrowing level increased to $34,000,000 in
1997 from $20,000,000 in 1996 as a result of the Amoco Acquisition in October
1996. On March 6, 1997 the proceeds from a common stock offering reduced
subordinated debt by $13,500,000 and temporarily reduced bank facility debt by
$8,500,000. The weighted average borrowing rate in 1997 increased from 8.6% in
1996 to 9.2% in 1997. The increase is due to an increased percentage of
borrowing under subordinated debt agreements, bearing interest at 12%, also a
result of the Amoco Acquisition in October 1996. In connection with this
acquisition, $17,000,000 was borrowed as subordinated debt, $8,500,000 of which
was prepaid in March 1997. In the 1996 period, only $5,000,000 of the
outstanding debt was borrowed under these subordinated facilities.
"Unrealized gain (loss) on investment in common stock" is the change in
the estimated market value of the Company's 477,612 shares of National Energy
Group, Inc. common stock since year-end 1996.
For the years ended December 31, 1996 and 1995:
Liquidity and Capital Resources
At December 31, 1996, 82% of the Company's total assets were
represented by oil and natural gas properties, pipelines and equipment, net of
accumulated depreciation, depletion and amortization.
<PAGE>
On October 8, 1996, the Company amended its bank facility with First
Union National Bank of North Carolina (the "Agent") (60% participation), and
Banque Paribas (40% participation), herein "Bank Facility". The loan is a
reducing revolver designed to provide the Company up to $40,000,000 depending on
the Company's borrowing base, as determined by the lenders. The Company's
borrowing base at December 31, 1996 was $31,000,000, with an availability under
the revolver of $2,500,000. 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. Interest on the loan is computed
at the Agent'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. 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. With the proceeds from the recently completed
Common Share offering, on March 6, 1997, the Company temporarily repaid
$8,500,000 on its Bank Facility, which funds were to ultimately be used for
general corporate purposes including, but not limited to, the development of its
properties and future acquisitions, such as the Goldking Acquisition.
From time to time the Company has borrowed funds from institutional
lenders who are advised 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 natural 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. These Notes were prepaid on March 6, 1997, with a portion of
the proceeds of the Company's recent Common Share offering. 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. 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.
(c) 1996 Tranche B Bridge Loan Subordinated Notes. On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003. These Notes were prepaid on March
6, 1997, with a portion of the proceeds of the Company's recent Common Share
offering.
In 1991, in connection with a debt financing which has subsequently
been repaid, certain former 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 remaining months of 1996.
<PAGE>
Pursuant to existing agreements, the Company is required to deposit funds
in bank trust and 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 natural 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. The Company has established the "PANACO East Breaks 110 Platform
Trust" in favor of the Minerals Management Service of the U.S. Department of the
Interior. This trust required 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 $9,250,000 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 supplemental 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 $300,000 Pipeline
Right-of-Way Bond.
Despite a 22% decrease in production and a net loss of $2,000,000 in
1996, strong product prices contributed significantly to cash flows provided by
operations of $8,000,000. While 1995 prices were lower, record production offset
this decrease, providing cash flows of $8,400,000 in 1995.
In 1996, the Company sold its Bayou Sorrel Field for $9,000,000 in cash
and 477,612 shares of National Energy Group, Inc. common stock. The Company made
$51,000,000 in capital expenditures (including issuing 2,000,000 Common Shares
to Amoco Production Company) in 1996, primarily for the Amoco Acquisition in
October and $4,000,000 to repair and rebuild Tank Battery #3 in the West Delta
Fields. The 1995 capital expenditures of $22,000,000 included the Zapata and
Bayou Sorrel Field acquisitions and $8,000,000 in exploratory drilling costs.
Along with increasing capital expenditures, the Company's borrowings
have also increased each year since 1994. Borrowings increased in 1996 to fund
capital expenditures, which included the repair and rebuilding of Tank Battery
#3 in West Delta. The explosion and fire, which necessitated the repair and
rebuilding, decreased discretionary cash flows, limiting the Company's ability
to repay long-term debt. The repayments in 1996 include $4,000,000 repaid
through April with cash provided by operations and $6,000,000 from the cash
proceeds from the sale of the Bayou Sorrel Field. The Company received cash and
increased stockholders' equity by $1,800,000 in 1996, $3,200,000 in 1995 and by
$5,000,000 in 1994 by virtue of the exercise of stock options and warrants.
Capital Spending
In 1996, the Company made $51,000,000 in total capital expenditures,
including (1) $40,400,000 on the purchase of oil and natural gas assets from
Amoco Production Company, which included $8,400,000 of the Company's common
stock, (2) $4,000,000 for repair and rebuilding of the West Delta Tank Battery
#3, net of insurance reimbursements, and (3) $4,700,000 for development of its
oil and natural 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.
Results of Operations
<PAGE>
Production. Natural gas production decreased 31% to 6,788,000 Mcf in
1996 from 9,850,000 Mcf in 1995. Natural gas production from West Delta
decreased from 7,825,000 Mcf in 1995 to 2,058,000 Mcf for the same period in
1996, primarily a result of the explosion and fire on April 24, 1996. A
secondary factor in the decrease in West Delta production was a decline in 1996
production from four horizontal wells drilled in 1994. These four wells produced
more natural gas in January to April, 1995 than they did for the same period in
1996 (in the period prior to the explosion and fire). Natural gas production,
primarily from the Zapata and the Amoco Properties, and the Bayou Sorrel Field
(primarily an oil field), somewhat offset the decrease in West Delta production.
The increase in Zapata production realized by the Company is due to the fact
that they were acquired on July 26, 1995. The production from these properties
included in the year ended December 31, 1995 is only from July 27 to December
31, while the production for the full year is included in 1996. The Zapata
acquisition was the primary factor in natural gas production increasing 21% to
9,850,000 Mcf in 1995 over 1994.
Oil production from the West Delta Fields also decreased for the year
ended December 31, 1996 when compared to the same period in 1995, from 132,000
Bbls to 57,000 Bbls. However, as with natural gas, acquisitions offset the
decrease from West Delta. The Bayou Sorrel Field, which produces primarily oil,
produced 93,000 Bbls in 1996 which, along with the Amoco Properties, had no oil
production realized by the Company in 1995, more than offsetting the decrease
from West Delta. Also, oil production from the Zapata Properties is included for
the full year in 1996, with only the period of July 27 to December 31 included
in the same period of 1995, due to the July 26 acquisition date, also offsetting
the decrease from West Delta. These factors resulted in a 62% increase in oil
production, from 170,000 Bbls in 1995 to 276,000 Bbls in 1996. Oil production in
1995 increased 24% over 1994, also primarily as a result of the Zapata
acquisition in July 1995.
On an Mcf equivalent basis, total oil and natural gas production decreased
22% in 1996 when compared to 1995, and increased 21% in 1995 over 1994.
Prices. Natural gas prices increased in 1996 to $2.75 per Mcf compared
to $1.58 in 1995. The Company entered into a natural gas swap agreement
beginning January 1, 1996 for the sale of 15,000 MMbtu of natural gas each day
in 1996, with contract prices ranging from $1.75 per MMbtu to $2.25 per MMbtu. A
swap loss for the year ended December 31, 1996 of $3,900,000, decreased the net
price received by the Company to $2.17 per Mcf for the year. Natural gas prices
dropped to $1.58 in 1995 from $1.88 in 1994, offsetting most of the benefit from
increased production in 1995.
Oil prices also increased, from $15.35 per Bbl in 1994 to $16.78 per Bbl in
1995 and to $19.42 per Bbl in 1996.
During 1996, the Company hedged the price of natural gas by selling the
equivalent of 15,000 MMbtu per day for 1996 at fixed prices which ranged from a
high of $2.25 in January to a low of $1.75 in July. When the closing price
(settlement price) on NYMEX for natural gas futures was greater than the swap
price for a given month, the Company paid that difference to the bank which
effected the swap. If the settlement price was less than the swap price the bank
paid 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. Since the Company sells its natural gas on the spot market, in 1996 it
realized prices which approximated 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. Starting in 1997 the Company's hedge transactions on
natural gas are based upon published gas pipeline index prices and not the
NYMEX. This change has eliminated the possibility of price differences due to
transportation. For 1997, 14,000 MMbtu's per day have been hedged, at a swap
price of $1.80 per MMbtu for 1997, with varying levels of participation (93% in
January of 1997 to 40% in September) in settlement prices above to $1.80 per
MMbtu swap price level. The Company has hedged 10,000 MMbtu per day in 1998 and
7,000 MMbtu per day in 1999, all at an average pipeline index swap price of
$1.89 per MMbtu. Management has generally used hedge transactions to protect its
cash flows when the Company's borrowings under long-term debt have 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.
<PAGE>
"Oil and natural gas sales" increased 8% for the year ended December
31, 1996 when compared to the year ended December 31, 1995, in spite of the
explosion and fire at West Delta. The fire and explosion substantially reduced
oil and natural gas production for 1996, as production from the West Delta
Fields was shut-in from the day of the explosion and fire (April 24, 1996) until
October 7, 1996. However, the decrease in production from West Delta was offset
by production from properties acquired. The Amoco Properties, acquired on
October 8, 1996, and the Bayou Sorrel Field, acquired on December 28, 1995 had
no production realized by the Company in 1995. The offshore properties of Zapata
Exploration Company were acquired on July 26, 1995 with the production from
these properties being included in the Company's results of operations from July
27 through December 31, 1995. Although production increased in 1995 over 1994,
primarily due to the acquisition of the Zapata Properties in July 1995, a drop
in natural gas prices offset most of the benefit of the increased production.
"Depletion, depreciation and amortization expense" increased 12% in
1996 despite the reduced production from the West Delta Fields (See the
discussion of production volumes in "Oil and Gas Revenue"). While the production
from properties acquired accounted for a part of the 12% increase, depletion,
depreciation and amortization per Mcf equivalent also increased, from $0.74 in
1995 to $1.07 in 1996, due to year-end 1996 engineering revisions from Ryder
Scott on the West Delta and East Breaks 109 Fields, and production from the
Amoco Properties in the fourth quarter of 1996, which had higher depletion rates
per Mcf equivalent than previously owned properties. The 34% increase in 1995
was also a result of the Zapata acquisition for $2,700,000 and an increase in
production, bringing about an increased rate of depletion.
"Lease operating expense" increased $422,000 in 1996 primarily due to
the Amoco, Zapata and Bayou Sorrel Field acquisitions. With the Zapata
Properties, the Company acquired interests in five offshore producing
properties. Since the acquisition of the Zapata Properties closed on July 26,
1995, only the lease operating expenses from July 27, to December 31, 1995 are
included in the 1995 results of operations, while the 1996 period includes these
expenses for the full year. 1996 also includes eight months of lease operating
expenses for the Bayou Sorrel Field (sold September 1) and almost three months
(October 8 - December 31) of the Amoco Properties, with none of these expenses
included in 1995. West Delta lease operating expenses did decrease in 1996
($805,000 from expected levels) with the fields being shut-in from April 25
through October 7, however, a part of these lease operating expenses are fixed
in nature and continued. These expenses increased significantly in 1995 over
1994 by (1) $1,008,000 related to the acquisition of the Zapata Properties in
July which added interests in six offshore platforms and 44 wells, (2)
$1,105,000 of additional operating expenses on the West Delta Properties
required to maintain production from some of the more rapidly declining wells,
and (3) $711,000 of expensed items which might have otherwise have been
capitalized.
"Production and ad valorem taxes" decreased to 2.8% of oil and natural
gas sales in 1996 from 5.8% of oil and natural gas sales in 1995.The decrease is
primarily due to the shift in the Company's production volumes from properties
subject to severance taxes to properties in federal offshore waters (the Amoco
and Zapata Properties) that are not subject to such taxes. A part of the
decrease ($178,000 from expected levels) is also 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.
"Exploration expense" in 1995 consisted of dry hole exploratory costs
of $796,000 on Eugene Island Block 50, $1,378,000 on South Timbalier Block 33,
(both drilled during the second quarter of 1995), and $5,938,000 on West Delta
Block 54 (drilled during the fourth quarter of 1995).
<PAGE>
"Provision for losses (gains) on disposition and write-downs of assets" in
1995 was related to the group of onshore properties, acquired in the early
1980's which were becoming a less significant part of its operations.
"West Delta fire loss" is the expense of the explosion and fire at Tank
Battery # 3, the central processing facility for the West Delta Fields. Included
in this expense are the insurance deductibles and the cost of non-reimbursed
expenditures which were not capitalized.
"Unrealized gain (loss) on investment in common stock" in 1996 was a
result of a decrease in the market value at December 31, 1996 of 477,612 shares
of National Energy Group, Inc. common stock received in connection with the sale
of the Bayou Sorrel Field.
"Net operating income (loss)" increased significantly in 1996 as a
result of the $8,100,000 exploration expenses and the $751,000 onshore property
write-down incurred in 1995. Of the $8,100,000 in exploration expenses in 1995,
$5,900,000 was incurred in the fourth quarter in the drilling of a dry
exploratory well in West Delta Block 54. The $5,900,000 exploration expense,
along with the $751,000 property write down, also incurred in the fourth
quarter, were the primary contributors to the net operating loss of $8,300,000
in 1995.
"Interest expense (net)" increased $1,500,000, or 155% in 1996 when
compared to 1995. Average Long-Term Debt levels increased from $11,000,000 in
1995 to $28,000,000 for 1996, resulting in the primary cause of the increase in
interest expense. On December 27, 1995 the Company borrowed $10,000,000 in
connection with the Bayou Sorrel Field acquisition. Through April, 1996, the
Company had begun to aggressively reduce Long-Term Debt, and it had reduced it
by $4,000,000. The April 24th explosion and fire at West Delta reduced the
Company's discretionary cash flows and restricted the Company's ability to
continue to lower its Long-Term Debt. On October 8, 1996, the Company completed
its acquisition of oil and natural gas assets from Amoco Production Company. The
cash portion of the $40,400,000 purchase price ($32,000,000) was funded by
Long-Term Debt. The Company borrowed $17,000,000 from lenders advised by Kayne,
Anderson Investment Management, Inc., bearing interest at 12%. The remaining
$15,000,000 in cash paid to Amoco was funded under the Company's bank facility,
bearing interest at approximately 7.25%. These were the primary factors in the
Company's average borrowing levels being higher in 1996 versus 1995. The
weighted average interest rate incurred in 1996 was 8.9%, relatively flat with
the 8.6% in 1995. The decrease in interest expense in 1995 from 1994 was a
result of the lower average Long-Term Debt levels that prevailed throughout most
of the year.
Sale of Bayou Sorrel Field
<PAGE>
Effective September 1, 1996, the Company sold its Bayou Sorrel Field to
National Energy Group, Inc. for $9,000,000 in cash and 477,612 shares of
National Energy Group, Inc. common stock. The Company also retained an
overriding royalty interest in the deep rights of the field for depths below
11,000'. The field was acquired by the Company from Shell Western E.P., Inc. for
$10,500,000 on December 28,1995, which included a broker's fee and a related
receivable. During the eight months the Company owned the field two wells were
drilled which did not result in production in commercial quantities. The Company
received an offer to purchase the field. After having made the Amoco
Acquisition, Management believed that the Company's resources could be better
utilized elsewhere. The effective date of the sale was September 1, 1996, the
date at which National Energy Group, Inc. assumed all benefits and liabilities
of owning the property. The Company did not record a gain or loss on the sale.
For the year ended December 31, 1996, the Bayou Sorrel Field accounted for
$2,000,000, or 10% of the Company's total oil and natural gas revenue. The Field
had also accounted for $733,000, or 9% of lease operating expenses, $888,000, or
10% of depreciation, and amortization and $239,000 or 43% of production and ad
valorem taxes. The net results of the field contributed $150,000 to operating
income, or 20%. The purchase price was paid in cash, borrowed on the Company's
Bank Facility. The estimated interest expense incurred in 1996 by owning the
field totaled $588,000. The operating income of the field and interest expense
incurred resulted in a decrease in net income of $438,000.
For the years ended December 31, 1994 - December 31, 1992
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 $30,000,000 depending upon the Company's
borrowing base. The principal amount of the loan was due July 1, 1998.
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. At year-end 1993, the
Company issued the 1993 Subordinated Notes. 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.
Capital Spending
During 1994, the Company spent over $11,749,000 on eight offshore
recompletions and the drilling of four horizontal wells. The 1994 capital
expenditures were primarily for developmental work in the West Delta Fields. All
four horizontal wells and all eight recompletions in 1994 were successful and
offshore natural gas production increased significantly.
Results of Operations
Production. The West Delta Fields were purchased in 1991. For 1992 and
1993, production for the Company remained relatively flat. Mcf equivalent
production was 6,855,000 in 1992 and 6,666,000 in 1993. In 1994, the Company
drilled four successful horizontal wells in the West Delta Fields, substantially
increasing production to 8,961,000 Mcf equivalent in that year.
In 1994, the Company sold 137,000 Bbls of oil for an average of $15.35 per
Bbl accounting for 12% of oil and natural gas revenue.
Prices. The average natural gas price received by the Company has
fluctuated but generally followed the trend of national gas prices. Gas revenue
increased as a percentage of the Company's revenue from 75% in 1992 to 88% in
1994. While production reached a record high in 1994, natural gas prices dropped
to a low for the three-year period of $1.88 per Mcf from $2.24 in 1993 and $1.92
in 1992.
In 1993, oil was 24% of such revenue with 180,000 Bbls at an average price
of $16.68. In 1992, oil was 25% of such revenue with 174,000 Bbls at an average
price of $19.41.
From time to time, 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 $1,100,000 lowered the average
price received per Mcf by $.19 to $1.73. In 1993, a contract loss of $3,000,000
lowered the average price received per Mcf by $.52 to $1.72.
<PAGE>
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.
"Oil and natural gas sales" during the years ended December 31, 1992
through 1994 has varied due to several factors. The prices of oil and natural
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.
"Depreciation, depletion and amortization expense" increased in 1994
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" remained relatively flat throughout the three
year period overall. On a Mcf equivalent basis, was lower in 1994 at $.58 per
1994 due to the increased production in that year from $.84 per Mcf equivalent
in 1992 and $.79 per Mcf in 1993.
"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.
"Provision for losses (gains) on disposition and write-downs of assets"
in 1993 and 1994 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)" increase in 1994 was due to the increased
production in that year, along with $2,600,000 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 $3,800,000.
"Interest expense (net)" decreases of 19% in 1993 and 13% in 1994 were
due to the significant decrease in Long-Term Debt from 1992 levels and the
refinancing of such debt on July 1, 1994 at lower interest rates. The average
debt outstanding in 1994 was $14,000,000 with a weighted average interest rate
of 11.5% versus average debt outstanding of $14,000,000 and a weighted average
interest rate of 14% in 1993. Interest expense in 1992 had increased
significantly because of the debt incurred to acquire the West Delta Properties,
purchased in 1991. The average debt outstanding in 1992 was $17,000,000 with a
weighted average interest rate of 14%.
"Net income (loss) per common share" is based upon the weighted average
number of shares outstanding of 10,039,042 for 1994, 7,583,761 for 1993 and
7,314,041 for 1992.
<PAGE>
BUSINESS AND PROPERTIES
The Company
PANACO, Inc. is in the business of acquiring, drilling and operating
offshore oil and natural gas properties in the Gulf of Mexico and onshore in the
Gulf Coast Region (collectively, the "GOM Region"). 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. Between
1984 and 1988, this predecessor acquired a total of 114 limited partnerships
engaged in the onshore oil and natural gas business. 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. The Company
has experienced substantial growth as a result of the acquisition of offshore
properties from Amoco (the "Amoco Acquisition") and Gulf Coast properties, both
onshore and in Texas and Louisiana State waters, acquired as part of the
Goldking Companies, Inc. (the "Goldking Acquisition").
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) 209-0698.
Business Strategy
The Company's strategy is to systematically grow its reserves,
production, cash flow and earnings through a program focused on the GOM Region,
including (i) strategic acquisitions and mergers, (ii) exploitation and
development of acquired properties, (iii) marketing of existing infrastructure
and (iv) a selective exploration program. As a result of the Goldking
Acquisition, the Company has a substantial inventory of development and
exploration projects that provide significant additional reserve potential. The
key elements of the Company's objectives are outlined as follows:
Strategic Acquisitions and Mergers
The Company has a defined acquisition strategy which focuses its
efforts on GOM Region properties that have a backlog of development and
exploitation projects, significant operating control, infrastructure value and
opportunities for cost reduction. 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
and have the potential for recompletion in more than one reservoir. In pursuing
this strategy, the Company identifies properties that may be acquired,
preferably through negotiated transactions or, where appropriate, sealed bid
transactions. 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.
<PAGE>
Over the past seven years, the Company has taken advantage of opportunities
to acquire interests in a number of producing properties which fit its
acquisition strategy. The historical success of the Company's acquisition
strategy is illustrated below:
<TABLE>
<CAPTION>
Cumulative Cumulative
Purchase Purchase Capital Cash SEC
Acquisition Seller Date Price Expenditures(a) Flow(b) PV- 10(c)
- --------------- ----------- -------- ------- -------------- ---------- -------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
West Delta(d) CATO(e) May 1991 $ 19.6 $ 18.3 $ 48.6 $ 16.4
Zapata Properties Zapata Jul 1995 2.7(f) 0.7 11.6 10.6
Bayou Sorrel(g) Shell Western Dec 1995 9.9 3.4 1.3 N/A
Amoco Properties Amoco Oct 1996 40.4 5.7 7.7 50.4
Goldking Shareholders Jul 1997 27.5(h) -- -- 40.0
- ---------------
(a) Excludes exploration expenses for each acquisition subsequent to the date of acquisition.
(b) Defined as net revenues less direct operating expense.
(c) As of September 1, 1997.
(d) Excludes $4.0 million for repair of Tank Battery #3 in the West Delta Fields.
(e) Conoco, ARCO, Texaco and Oxy.
(f) Excludes a production payment and fee sharing agreement with the seller.
(g) The Company sold the Bayou Sorrel Field September 1, 1996 for $11.0 million.
(h) Excludes debt of Goldking of $14.3 million.
</TABLE>
While the Company tends to focus on acquisitions of properties from
large integrated oil companies, it evaluates a broad range of acquisition and
merger opportunities. The Company has assembled a staff, complemented by the
Goldking Acquisition, with significant technical experience in evaluating,
identifying and exploiting GOM Region properties. In addition, the Company is
regarded in the industry as a competent buyer with the proven ability to close
transactions in a timely manner. Based on these factors, the Company is usually
asked to bid on significant producing property sales in the GOM Region.
Exploitation and Development of Acquired Properties
The Company has a substantial, diversified inventory of exploitation
projects including development drilling, workovers, sidetrack drilling,
recompletions and artificial lift enhancements. As of September 1, 1997, on a
pro forma basis, 28% of the Company's total Proved Reserves were classified as
Proved Undeveloped Reserves. The Company uses advanced technologies where
appropriate in its development activities to convert Proved Undeveloped Reserves
to Proved Developed Producing Reserves. These technologies include horizontal
drilling and through tubing completion techniques, new lower cost coiled tubing
workover procedures and reprocessed 2-D and 3-D Seismic interpretation. All of
the identified capital projects can be completed with the Company's existing
platform and pipeline infrastructure, thereby substantially improving project
economics.
Marketing of Existing Infrastructure
<PAGE>
Along with its purchase of producing properties, the Company has acquired
significant platform, pipeline and processing equipment infrastructure. The
Company has interests in 22 offshore platforms and 69 miles of offshore oil and
natural gas pipelines with diameters of 10" or larger. To enhance the value of
these assets, the Company has aggressively marketed this infrastructure to
operators and leasehold owners in adjacent fields. The Company currently has
pipeline and processing agreements relative to its West Delta Fields, East
Breaks 109 Field and the East Breaks 160 facilities. The annual revenue received
from these contracts for use of the Company's infrastructure currently totals
$2.5 million, which is accounted for as a reduction of lease operating expense.
The location of the East Breaks facilities is strategic to any deepwater
development in the area, and the replacement costs of the platforms, processing
facilities and pipelines exceed $100 million. As a result of the prohibitive
development costs, any operators with discoveries in the surrounding deepwater
area will have the incentive to use the Company's East Breaks facilities, thus
increasing the revenue potential of these platforms and pipelines and extending
their economic life significantly.
Selective Exploration Program
The Company participates in selective exploration projects for exposure
to additional reserve potential. The Company has farmed out the deep rights in
West Delta Blocks 52 through 56 to Ocean Energy, Inc. (formerly Flores & Rucks,
Inc.) in exchange for a new 3-D Seismic survey over these five Blocks and the
option to retain a 12.5% overriding royalty interest or a 50% working interest
in any proposed deep exploration wells. In addition, through the Goldking
Acquisition, the Company acquired an inventory of 15 diversified exploratory
drilling prospects with varying risk profiles. The Company plans to devote a
portion of its capital expenditure budget to drill exploratory wells.
Company Strengths
The Company believes it has strengths, as outlined below, that provide a
solid base for continued growth and value creation.
Geographic Focus
The Company's reserve base is focused primarily in the GOM Region which
has historically been the most prolific basin in North America. The GOM Region
accounts for approximately 25% of the natural gas production in the United
States and continues to be the most active region in terms of capital
expenditures and new reserve additions. Because of upside potential, high
production rates, technological advances and acquisition opportunities, the
Company has focused its efforts in this region. The Company believes it has the
technical expertise and infrastructure in place to take advantage of the
inherent benefits of the GOM Region. In addition, as the integrated oil
companies move to deeper water, the Company believes it will continue to be well
positioned to use its expertise to acquire and exploit GOM Region properties.
High Quality Reserve Base
Two of the Company's largest properties, the West Delta Fields and
Umbrella Point Field, are prolific fields with total cumulative production of
one Tcf of natural gas and 50 MMbbls of oil. These fields typify the Company's
focused GOM Region asset base with multiple pay horizons and significant
recompletion and workover potential. Both fields were developed without the
benefit of 3-D Seismic and the Company is currently in the process of acquiring
and applying 3-D Seismic technology to identify additional potential. The
majority of the Company's properties have multiple reservoirs providing a
diverse set of opportunities for production rate acceleration and value
enhancement. The number of potential reservoirs also reduces the risk associated
with determining remaining reserves and forecasting future production from the
properties.
Substantial Inventory of Exploitation and Development Projects
The Company has identified over 17 development drilling locations and
over 72 recompletion and workover opportunities. The Company believes that the
majority of these opportunities have a moderate risk profile and could add
incremental reserves and production. In addition to these identified
opportunities, the Company believes that with the use of 3-D Seismic technology,
additional potential may be exploited in the known reservoirs as well as deeper
undrilled horizons.
<PAGE>
Application of Advanced Technologies
The Company has been successful historically due to its extensive use of
3-D Seismic, horizontal drilling and coiled tubing technologies. As a result of
its acquisitions, the Company has an extensive seismic database with a total of
2,424 linear miles of 2-D Seismic data and 186 square miles of 3-D Seismic data.
The Company was also among the first offshore operators to drill and complete
successful horizontal wells offshore. The Company has drilled a total of four
horizontal wells in the West Delta Field and has identified several
opportunities to apply this technology and expertise to the Goldking Properties.
The Company applies coiled tubing technology where applicable to decrease
workover costs and avoid using drilling rigs for recompletions. The Company uses
existing inactive wellbores whenever possible to sidetrack drill to decrease
costs and receive production tax benefits where applicable. Also, the Company
has performed the less costly through tubing recompletions in several of its
existing fields.
Significant Operating Control
The Company operates 55% of its properties as measured by SEC PV-10
value. This level of operating control benefits the Company in numerous ways by
enabling the Company to (i) control the timing and nature of capital
expenditures, (ii) identify and implement cost control programs, (iii) respond
quickly to operating problems and (iv) receive overhead reimbursements from
other working interest owners. In addition to significant operating control, the
geographic focus of the Company allows it to operate a large value asset base
with relatively few employees, thereby decreasing lease operating expense on a
unit of production basis. The Company believes that as the Goldking Properties
are integrated into the Company's operating structure the operating costs, on a
unit of production basis, will be further reduced.
Experienced Management
The Company's eleven officers have an average of over 20 years of oil
industry experience. The management team has diverse experience including
backgrounds in geology and engineering, environmental and regulatory compliance,
securities law and accounting and tax matters. In addition, the technical staff
have spent the majority of their careers focusing on the GOM Region and are
highly familiar with the basin and current operations.
Goldking Acquisition
Effective July 31, 1997, the Company acquired Goldking, a
privately-owned, Houston-based oil and natural gas company. Through this
acquisition, the Company obtained estimated additional Proved Reserves of 37.7
Bcfe from 234 wells located primarily in Texas and Louisiana, both onshore and
in State waters. Goldking also has a sizeable portfolio of exploration prospects
developed using 3-D Seismic data, an extensive development program and a staff
of seventeen people experienced in Gulf Coast oil and natural gas operations. As
part of the transaction, the Company also acquired three pipelines totaling 19
miles in length. The acquisition provides the Company with attractive
development opportunities in the currently active Lower Frio/Vicksburg play in
Trinity Bay, Chambers County, Texas.
The Company acquired Goldking by merging its corporate parent, The Union
Companies, Inc. ("Union") into Goldking Acquisition Corp., a newly-formed,
wholly-owned subsidiary of the Company. The individual shareholders of Union
received merger consideration consisting of $7.5 million in cash, $6.0 million
in notes and 3,154,930 Company Common Shares, valued for purposes of the
transaction at $14.0 million. Goldking's debt at the time of the merger was
approximately $14.3 million. Goldking is a holding company which owns directly
or indirectly all of the capital stock of its operating subsidiaries Goldking
Oil & Gas Corp., Goldking Trinity Bay Corp., Goldking Production Company, Hill
Transportation Co., Inc. and Umbrella Point Gathering, L.L.C. (together with
Goldking and Goldking Acquisition Corp., the "Subsidiary Guarantors").
<PAGE>
Properties
The Company's primary producing properties are located along the Gulf Coast
in Texas and Louisiana and offshore in the federal and state waters of the Gulf
of Mexico. In addition to these primary properties, the Company owns interests
in 508 onshore wells, which in the aggregate account for 12.4% of the Company's
total SEC PV-10 value. The following table sets forth certain information with
respect to the Company's significant properties as of September 1, 1997. These
properties represent 85% of the aggregate SEC PV-10 value of the Company.
<TABLE>
<CAPTION>
Field Working Total Proved % of
_____________ Interest Wells Operator Reserves SEC PV-10 Total SEC
_______ ______ __________ ___________ Value (000s) PV-10
MBbls Bcf ____________ ________
------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
East Breaks 160 33.3% 15 Unocal 1,136 9.7 $ 25,457 21%
Umbrella Point 100% 18 PANACO 1,788 16.1 24,493 20%
High Island 309 50% 17 Coastal 271 12.8 23,532 19%
West Delta 100% 36 PANACO 328 10.5 16,391 14%
East Breaks 109 100% 10 PANACO 7 4.9 8,870 7%
Cheniere Perdue 17-51% 8 PANACO 237 1.5 4,317 4%
--- - ------ ----- ------- ------- --
Total 104 3,767 55.5 $ 103,060 85%
</TABLE>
East Breaks 160 Field
The Company acquired a 33.3% interest in this field as part of the Amoco
Acquisition in October 1996. The field consists of two federal offshore blocks,
East Breaks 160 and 161, with a production platform set in 925' of water placing
this production facility on the edge of deep water. The field is operated by
Unocal and production is from 12 separate reservoirs. Unocal acquired
proprietary 3-D Seismic over the field in 1990 and has identified the
undeveloped locations. The Proved Developed Producing Reserve value is
proportionately dispersed among eleven producing wells decreasing the risk to
some degree. The undeveloped locations included are based on seismic
interpretation of attic reserves. A rig is currently being mobilized to the
field and a recompletion should commence in the fourth quarter of 1997. The
facility also receives processing fees from Mobil Oil Corp. related to a subsea
well drilled in Block 117. Because of the strategic location of the platform on
the edge of deepwater, the facility has potential for additional processing and
handling fees as more nearby discoveries are made and tied into the platform. In
addition to the property interests acquired, the Company purchased a 33.3%
interest in a 12.67 mile 12" natural gas pipeline connecting the 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"
oil pipeline connecting the platform to the High Island Pipeline System
("HIPS"), a crude oil pipeline system in the Gulf of Mexico. Currently such
firms as Exxon, Reading and Bates and Santa Fe Energy are actively exploring in
the East Breaks Area and the Company believes that, due to the ongoing deepwater
exploration in the Area, the Company's platform and pipelines will become long
term strategic revenue generating assets after the field reserves are depleted.
Umbrella Point Field
Since its discovery in 1957 by Sun Oil, the Umbrella Point Field has
produced over 17 MMbbls of oil and 100 Bcf of natural gas from 35 wells. The
Company owns 100% of the working interest in Texas State Leases 73,74,87 and 88
in Trinity Bay, Chambers County, Texas, that encompass the field. Field
production is gathered on a small platform complex in approximately 10' of water
and transported via a Company owned 5 mile oil pipeline to the Company's onshore
production facility at Cedar Point. Gas production is transported through a
Vintage Petroleum owned gathering system.
<PAGE>
The Umbrella Point Field consists of multiple stacked reservoirs.
Production is from 13 main reservoirs from 7,700' to 9,000'. Prior to Goldking's
control of the field, it was developed and produced by two different operators
each controlling two state leases which created a competitive drainage
situation. This situation resulted in several reservoirs that were abandoned
prematurely as the former operator tried to accelerate production in uphole
reservoirs. Consequently, significant development work remains to sufficiently
drain the abandoned reservoirs. Proved Developed Producing Reserves make up 21%
of the reserve value and are based on significant production history. The Proved
Developed Non-Producing Reserves make up another 10% of the field value and are
primarily related to reactivation of shut-in wells and increasing the total
fluid rates in the larger producing reservoirs. The Proved Developed Reserves
behind pipe reserves comprise 6% of the field value and are attributed to
classic recompletion scenarios. The remaining 63% of the field value is
attributable to three Proved Undeveloped locations which were identified using a
recently acquired 3-D Seismic survey. Due to the complex nature of the field,
the Company believes that continued analysis of the 3-D Seismic, with
correlation to well production and well log data, will reveal numerous drilling,
workover and recompletion opportunities.
High Island 309 Field
The Company purchased its interest in the High Island Block A-309 Field
from Amoco in October of 1996 and has a 50% working interest. The field consists
of the High Island blocks A-309 and A-310 in approximately 200' of water.
Production is from three faulted anticlines with 18 productive reservoirs.
Coastal Oil and Gas Corp. operates this property and has conducted an evaluation
of reprocessed proprietary 3-D Seismic surveys resulting in significant drilling
activity in 1997. The Company has announced the following 1997 results: four new
wells have been drilled, three of which have been successful; four existing
wells have been sidetracked into new formations, all successfully; and three
existing wells have been the subject of workovers, all of which have been
successful. The field is currently producing 56 MMcf per day of natural gas and
1,100 Bbl per day of condensate compared to 15 MMcf per day and 6 Bbl per day of
condensate at the beginning of 1997. The Company believes that continued review
of the 3-D Seismic will result in additional drilling through 1998.
West Delta Fields
These properties consist of 13,565 acres in Blocks 52 through 56 and Block
58 in the West Delta Area, offshore Louisiana. 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.
The Company has an 87.5% net revenue interest in the field, subject to a
5% net profits interest on the shallower reservoirs in favor of the Company's
former lenders and a 4.166% overriding royalty interest on the deeper reservoirs
in favor of Conoco and OXY. The Company is the operator and generally owns 100%
of the working interest in these wells. Presently, the properties have 36 wells,
five of which were recently drilled, which produce from depths ranging from
1,200' to 12,500'. Because of the existing surface structures and production
equipment, additional wells can be added on the properties with lower completion
costs.
<PAGE>
The main production facility on the West Delta properties is a four
platform complex designated as Tank Battery #3. There are three ancillary
platforms and one three well production platform in the eastern portion of the
properties connected to Tank Battery #3. 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, with the remaining wells producing only natural gas. In 1997 the
Company replaced the pipeline connecting "D" Platform in Block 58 with Tank
Battery #3 in Block 54 with two new 6" pipelines, and installed a new 4"
pipeline connected "C" Platform with "D" Platform.
The field is characterized by multiple reservoirs with significant
workover and recompletion potential. Proved producing reserves are based on an
established consistent production history. The behind pipe reserves are
generally uphole recompletions with reserves based on volumetric estimates.
Currently there are no Proved Undeveloped Reserves assigned to the field. The
Company has been historically successful increasing rates and reserves through
the use of horizontal wells and coiled tubing operations. In 1994 the company
drilled 4 horizontal wells in the field increasing production 34% and
accelerating reserves. The Company is also using coiled tubing technology with
increasing frequency to avoid costly rig workovers.
The Company has farmed out the deep rights in West Delta Blocks 53
through 56 to Ocean Energy, Inc. (formerly Flores & Rucks, Inc.) which has
committed to fund a new 3-D Seismic survey. The Company retains all presently
producing reservoirs and shallow horizons. The Company will have the option of
retaining a 12 1/2% overriding royalty interest or participating up to 50% as a
working interest owner in any wells drilled by Ocean Energy. Due to the
complexity of the geology and the long history of production, the Company
believes that the evaluation of the 3-D Seismic over the produced reservoirs
will create significant additional development and exploitation opportunities.
In addition the Company believes that evaluation of the deeper potential by
Ocean Energy will create exploration opportunities with the Company having the
option to limit capital exposure.
During 1994 the Company farmed out the deep rights (below 11,300') to an
1,875 acre parcel in Block 58 and sold "C" Platform to Energy Development
Corporation which drilled a successful well to 16,500'. Production commenced in
April, 1995. The Company has a 15% overriding royalty interest in that acreage.
The well is currently producing 10,000 Mcf per day and 700 Bbls 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' which encountered 85' of net pay
and is producing 14,750 Mcf per day. The Company retained a 5.833% overriding
royalty interest in the farmout which is convertible to a 25% working interest
at payout, expected in the fourth quarter of 1997.
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".
East Breaks 109 Field
The Company acquired a 100% interest in the East Breaks 109 Field from
Zapata in July of 1995. The field consists of East Breaks Blocks 109 and 110.
The Company operates this field which produces from six wellbores. There are no
proved behind pipe or undeveloped reserves associated with the field. Over 93%
of the field value is in the A-2 well completed in the TW-3 sand. This well is
the last remaining producer in a large reservoir that has produced over 50 BCF.
Due to the significance of the well, the Company has spent significant time
evaluating the reserves using several methodologies. The A-2 well is currently
making approximately 4,500 Mcf per day with no reported water production.
<PAGE>
In addition to the mineral interests acquired, the Company purchased
the 100% interest in a 31 mile 10" natural gas pipeline connecting the East
Breaks 110 platform to the High Island Offshore System and a 22 mile 4" oil
pipeline which connects the East Breaks 110 platform with the High Island
Pipeline System. The HIOS and HIPS systems are the primary oil and natural gas
pipelines in this region 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 Company acquiring the property,
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 pays certain fees to the Company and split
the cost of operating the East Breaks 110 platform with the Company, based on
each company's proportion of the 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 Zapata properties included a production
payment to Zapata based upon future 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 of gross
production, if that much is produced. The Company's oil and natural gas reserves
are calculated net of this production payment.
Cheniere Perdue Fields
The Company acquired the Cheniere Perdue Fields as part of the Goldking
Acquisition. The Company operates the property, which geologically consists of a
low relief anticline with stacked reservoirs from 8,000' to 10,000'. The field
has a very active water drive. There is not any significant concentration of
value in the producing wells and the reserves are spread over nine active
completions. Behind pipe reserves were assigned to ten sands primarily based on
volumetric calculations considering analogous performance. Proved Undeveloped
Reserves have been identified in the field representing attic gas accumulations.
Due to the complexity of the field, the Company is currently conducting a field
study to determine the most efficient development scenario. The Company believes
that significant development activity will result from the field study findings.
Other Properties
High Island A-302 Field. High Island Block A-302 acquired from Amoco in
1996 is in approximately 200' of water. The Company owns a 33.3% working
interest and Unocal Corporation is the operator. Production is from four
producing horizons on a faulted anticlinal structure. A speculative 3-D survey
was shot in 1991 and processed in 1992. Management believes additional reserves
should be recoverable from two sands which seismic data shows to be undrained by
the existing wells.
High Island A-330 Field. The field consists of three blocks, High
Island A-330, High Island A-349 and West Cameron 613, located in 280' of water.
The Company owns a 12% working interest which it acquired from Amoco in 1996.
Coastal Oil and Gas Corporation is the operator. Three wells were recompleted in
1996. This field produces from a faulted anticline with 24 productive horizons.
Significant upside potential was delineated by a recently shot 3-D Seismic
survey. A well in West Cameron Block 613 has been proposed by the operator for
1998 to offset a field operated by Shell Offshore in Block A-350.
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. In 1996
the Company acquired from Amoco a 12% working interest in Blocks A-474 and
A-489, a 13.1% working interest in Block A-499, and a 12% working interest in
Block A-475. There are 23 productive horizons in this faulted anticline. A
proprietary 3-D Seismic survey was shot in 1991 and processed in 1993.
<PAGE>
West Cameron 180 Field. This field consists of a single block, West Cameron
144, in 40' of water. Texaco is the operator. The Company acquired its 12.5%
working interest from Amoco in 1996. The producing feature is a north-plunging
faulted anticline that underlies West Cameron Blocks 173 and 180. There are
three productive horizons.
East Cameron Block 359. The Company acquired its 30.7% working interest in
this field from Zapata in 1995. Anadarko Petroleum Corp. is the operator. The
property has eight wells and is in 330' of water.
Eugene Island Block 372. This field was acquired in 1995 from Zapata.
Unocal Corp. is the operator and the Company owns a 25% working interest. The
property has seven wells and is in 414' of water.
South Timbalier 185. The Company acquired this field in 1995 from
Zapata. The Company owns a 7.7% working interest and Louisiana Land &
Exploration Co. is the operator. The property has eleven wells and is in 180' of
water. One of the partners, Hall-Houston Oil Co., has proposed a 14,500'
exploratory well on the block, to be spudded in 1997.
West Cameron Block 538. This field is operated by the Company and it owns a
35.3% working interest. The property was acquired from Zapata in 1995. It has
six wells and is located in 194' of water.
Oil and Gas Information
The following tables set forth selected oil and natural gas information
for the Company, and certain forward looking information about its properties.
Future results may vary significantly from the amounts reflected in the
information set forth herein because of normal production declines and future
acquisitions. See ARisk Factors - Uncertainty of Estimates of Reserves and
Future Net Cash Flows" and "Finding and Acquiring Additional Reserves;
Depletion." The following information on Proved Reserves, future net cash flows
from Proved Reserves and the SEC PV-10 value of such estimated future net cash
flows for the Company's properties as of September 1, 1997 were prepared or
audited by Ryder Scott Co., independent petroleum engineers, and is provided
upon the authority of such firm as an expert with respect to such matters. See
"Experts."
Proved Reserves (a) (b)
The following table sets forth information as of September 1, 1997 as
to the estimated Proved Reserves attributable to the Company's properties.
Oil and liquids (Bbl):
Proved Developed Reserves ...........3,227,185
Proved Undeveloped Reserves..........1,412,323
Total Proved Reserves...........4,639,508
Natural gas (Mcf):
Proved Developed Reserves ..........48,440,663
Proved Undeveloped Reserves.........18,027,300
Total Proved Reserves..........66,467,963
- -------------
(a) Calculated by the Company in accordance with the rules and regulations of
the SEC, based upon September 1, 1997 prices of $19.50 per Bbl of oil and
$2.41 per Mcf of natural gas, adjusted for basis differentials, Btu
content of natural gas and specific gravity of oil. The Company's
independent reservoir engineers prepare a reserve report as of the end of
each calendar year.
(b) Includes the Goldking Acquisition.
<PAGE>
Estimated Future Net Revenues
from Proved Reserves (a) (b)
The following table sets forth information as of September 1, 1997 as
to the estimated future net revenues (before deduction of income taxes) from the
production and sale of the Proved Reserves attributable to the Company's
properties.
Proved Total
Developed Proved
Reserves Reserves
------------ ------------
Estimated Future net revenues (c):
1997 (4 mos.)......................$ 14,910,180 $ 13,601,397
1998 .............................. 37,565,360 38,216,563
1999 .............................. 24,450,994 33,647,374
2000 .............................. 14,365,477 20,576,977
Thereafter......................... 26,418,050 55,359,744
--------------- --------------
Total..............................$ 117,710,061 $ 161,402,055
Present value (10%) of estimated future net
revenues (SEC PV-10)...............$ 95,863,443 $ 121,318,462
''''''''''''''' ''''''''''''''''
- ---------------
(a) Calculated by the Company in accordance with the rules and regulations
of the SEC, based upon September 1, 1997 prices of $19.50 per Bbl of
oil and $2.41 per Mcf of offshore natural gas, adjusted for basis
differentials, Btu content of natural 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 Goldking Acquisition.
(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, 1996, 1995 and 1994 and the six months ended June 30, 1997 and 1996, and
pro-forma for the Goldking Acquisition for the year ended December 31, 1996 and
the six months ended June 30, 1997.
<TABLE>
<CAPTION>
Year Ended December Six Months Ended June 30,
31, __________________________
---------------------------------------
Pro Pro
Actual Forma Actual Forma
_____________________________ 1996(a) _________________ 1997
-------- -------
1994 1996(a) 1997
________ 1995 ________ 1996(a) _______
-------- --------
Oil and Condensate:
<S> <C> <C> <C> <C> <C> <C> <C>
Net Production (MBbls)(b) 137 170 276 435 151 188 252
Revenue (000s) $ 2,103 $ 2,853 $ 5,356 $ 9,099 $ 2,710 $ 3,382 $ 4,744
Average net Bbl per day 375 466 756 1,192 839 1,044 1,400
Average price per Bbl $ 15.35 $ 16.78 $ 19.42 $ 20.90 $ 17.93 $ 17.96 $ 18.85
Natural Gas:
Net Production (MMcf)(b) 8,139 9,850 6,788 8,544 3,666 4,421 5,287
Revenue (000s) $ 15,235 $ 15,594 $ 14,707 $ 19,149 $ 8,098 $ 10,905 $ 13,104
Average net Mcf per day 22,300 27,000 18,600 23,400 20,400 24,600 29,400
Average price per Mcf $ 1.87 $ 1.58 $ 2.17 $ 2.24 $ 2.21 $ 2.47 $ 2.48
Total Revenues (000s) $ 17,338 $ 18,477 $ 20,063 $ 28,249 $ 10,808 $ 14,287 $ 17,848
Production Costs:
Production cost (000s) $ 5,231 $ 8,055 $ 8,477 $ 9,759 $ 4,184 $ 5,122 $ 6,084
MMcfe(c) 8,962 10,870 8,444 11,156 4,573 5,550 6,797
Production costs per Mcfe(c) $ .58 $ .74 $ 1.00 $ .87 $ .91 $ .92 $ .90
</TABLE>
<PAGE>
(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 this data to be indicative of
the future. Also this information includes Bayou Sorrel Field through
September 1, the date of its sale, and includes information with respect
to the Amoco Properties from October 8 through December 31, 1996.
(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 at the rate of 6 Mcf per Bbl,
representing the estimated relative energy content of natural gas to oil.
Productive Wells (a)
The following table sets forth the number of productive oil and natural
gas wells, as of the date hereof, attributable to the Company's properties.
Productive Wells Company Operated
------------------------------
Gross productive offshore wells (b):
Oil ......................... 53 25
Natural Gas .................. 108 45
--- --
Total .................... 161 70
Net productive offshore wells (c):
Oil ......................... 32 25
Natural Gas .................. 56 41
-- --
Total .................... 88 66
Gross productive onshore wells (b):
Oil ......................... 255 66
Natural Gas .................. 253 15
--- --
Total .................... 508 81
Net productive onshore wells (c):
Oil ......................... 77 59
Natural Gas .................. 21 8
-- ---
Total .................... 98 67
(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 Agross 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 Anet 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.
<PAGE>
Leasehold Acreage
The following table sets forth the developed acreage as of the date
hereof attributable to the Company's properties.
Developed onshore acreage (a):
Gross acres (b).................. 90,651
Net acres (c).................... 9,749
Undeveloped onshore acreage (a):
Gross acres (b).................. 10,180
Net acres (c).................... 1,685
Developed offshore acreage (a):
Gross acres (b).................. 199,189
Net acres (c).................... 56,124
Undeveloped offshore acreage (a)(d):
Gross acres (b).................. 2,560
Net acres (c).................... 2,560
(a) Developed acreage is acreage assignable to productive wells.
(b) A Agross 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 Anet 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.
(d) In addition to these acres, the Company's undeveloped offshore potential
exists at greater depths beneath existing producing reservoirs.
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, 1996 and the ten months ended November 1, 1997.
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 natural 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 -- -- -- -- -- -- --
1994 5 4 -- -- -- 1 -- --
1995 -- -- -- -- -- -- -- 3
1996 -- -- 2 -- -- -- -- --
1997 (10 mos) 4 7 -- -- -- -- -- --
-- -- --- --- --- --- --- ---
Total 12 11 2 -- -- 1 -- 3
<PAGE>
Title to Oil and Gas Properties
In the case of acquired properties title opinions are obtained for the
more significant properties. Prior to the commencement of drilling operations a
thorough drill site title examination is conducted and curative work performed
with respect to significant defects.
Unproved Properties
The Company retained a 3% overriding royalty interest in depths that
are below 11,000' when it sold the Bayou Sorrel Field to National Energy Group,
Inc. Two successful wells have been drilled to these depths, but no reserves
have as yet been attributed to these wells.
Well Operations
The Company operates 71 offshore wells and owns all of the working
interests in substantially all of those wells. The Company's 90 remaining
offshore wells are operated by third party operators, including Unocal
Corporation, Coastal Oil & Gas Corp., Phillips Petroleum Company, Texaco,
Anadarko Petroleum Corporation and Louisiana Land and Exploration Company. The
Company operates 82 onshore wells in which it owns a majority or all of the
working interest. In addition, it owns working interests in 426 wells operated
by others. Where properties are operated by others, operations are conducted
pursuant to joint operating agreements that were in effect at the time the
Company acquired its interest in these properties. The Company considers these
joint operating agreements to be on terms customary within the industry. The
operator of an oil and natural 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.
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 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 properties and achieved significant success in
further exploitation. 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 in excess of 10,000'.
In October 1996, the Company acquired 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
$32.0 million in cash. The interests acquired include (1) a 33a% working
interest in the East Breaks 160 Field (two Blocks) and a 33a% interest in the
High Island 302 Field, both operated by Unocal Corporation; (2) a 50% interest
in the High Island 309 Field (two Blocks), a 12% interest in the High Island 330
Field (three Blocks) both operated by Coastal Oil and Gas Corp., (3) a 12%
interest in the High Island 474 Field (four Blocks), operated by Phillips
Petroleum Company; and (4) a 12.5% interest in the West Cameron 180 Field (one
Block) operated by Texaco.
<PAGE>
Future 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
natural 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 natural gas properties or conduct other
activities associated with the ownership of oil and natural gas production. The
Company may also acquire or participate in the expansion of natural gas
processing plants and natural gas transportation or gathering systems.
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 natural gas,
rates of inflation, risks attendant to production of oil and natural gas, and a
suitable return on investment, and (b) the Company's ability to purchase
properties and produce and market oil and natural 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 natural gas, or changes in the prices of oil and natural 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 and onshore in the Gulf Coast
region. The Company can, if it so chooses, invest in any geographic area. 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. 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.
1996 Explosion and Fire
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 resulted in lost
revenues of approximately $6.0 million. The fire was the principal contributor
to the losses of $0.16 per share in 1996. During the second quarter the Company
expensed $500,000 for its loss as a result of this explosion. No further losses
have been recognized or are anticipated. This $500,000 amount included $225,000
in deductibles under the Company's insurance.
The Company has repaired Tank Battery #3 at a cost of $8.5 million
inclusive of the $500,000 expensed during second quarter and has received
reimbursement from its insurance company of $3.9 million, after satisfaction of
the $225,000 in deductibles. The excess of repair expenditures over insurance
reimbursement will be capitalized. No additional repair expenditures have been
made or are anticipated. The Company has filed suits against the employers of
the persons who caused the incidents for recovery of these costs and its lost
profits. No assurance can be given that the Company will successfully recover
any amounts sought in any such suits.
<PAGE>
The repair expenditures, net of insurance payments, 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.
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.
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 owns its own processing equipment, but it also utilizes the services of
outside firms to process and interpret seismic data.
A new 3-D Seismic survey will be shot in the fourth quarter of 1997 by
Ocean Energy, Inc. (formerly Flores & Rucks, Inc.) on the Company's West Delta
Fields. 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 Corp. in 1996.
Tana drilled a successful well to 12,800' which encountered 85' of net pay and
is producing 14,750 Mcf per day. The Company retained a 5.833% overriding
royalty interest which converts to a 25% working interest after Payout
(anticipated in the fourth quarter of 1997). Three of the fields in the Amoco
Acquisition have proprietary 3-D Seismic, while all of the Amoco Properties have
group 3-D Seismic. The Company has experienced excellent success in High Island
309 Field, acquired from Amoco, in the drilling of six sidetracks of existing
wells and new wells, based upon an extensive reevaluation of the field using 3-D
Seismic.
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 natural gas to third parties at prices based on factors
normally considered in the industry, such as the spot price for natural gas or
the posted price for oil, and the quality of the oil and natural gas.
<PAGE>
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
natural gas. Notwithstanding this, natural gas purchased by Tenneco Gas
Marketing Company (now El Paso Gas Marketing Co.) accounted for 49% of the
revenues in 1996. There are numerous natural gas purchasers doing business in
the areas involved as well as natural gas brokers and clearing houses.
Furthermore, the Company can contract to sell the natural 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 hedges the prices of its oil and natural gas production
through the use of oil and natural gas futures and swap contracts within the
normal course of its business. The Company uses futures and swap contracts to
reduce the effects of fluctuations in oil and natural gas prices. Changes in the
market value of these contracts are deferred and subsequent gains and losses are
recognized monthly as adjustments to revenues in the same production period as
the hedged item, based on the difference between the index price and the
contract price. The Company entered into a hedge agreement beginning in January,
1996, for the delivery of 15,000 MMbtu of natural gas for each day in 1996 with
contract prices ranging from $1.7511 per MMbtu to $2.253 per MMbtu.
Starting in 1997 the Company's hedge transactions on natural gas are
based upon published natural gas pipeline index prices and not the NYMEX. This
change has eliminated price differences due to transportation. For 1997, 14,000
MMbtu's per day has been hedged, at a swap price of $1.80 per MMbtu for 1997,
with varying levels of participation (93% in January to 40% in September) in
settlement prices above $1.80 per MMbtu. The Company has hedged 10,000 MMbtu per
day in 1998 and 7,000 MMbtu per day in 1999, all at a pipeline index swap price
of $1.89 per MMbtu.
Starting in 1997, the Company also hedged 720 Bbls of oil for each day in
1997 at a swap price of $20.00 per Bbl, with a 60% participation in settlement
prices above the swap price.
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 natural 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. As of
December 31, 1996 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 was initially funded
by deposit 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 $9,250,000 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 supplemental 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 $300,000 Pipeline Right-of-Way Bond.
<PAGE>
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, which limits are proportionately reduced
when the Company owns less than 100% of the respective property. 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
Through 1996 and the eight months ended August 31, 1997, the Company
made over $90,000,000 in capital expenditures for (1) the purchase of the Amoco
Properties, (2) the repair and rebuilding of the West Delta Tank Battery #3 (net
of insurance payments), (3) the development of its oil and natural gas
properties, and (4) the Goldking Acquisition. The majority of the development
costs were incurred to drill exploratory and developmental wells on the Amoco
Properties, primarily the High Island 474 Field and the High Island 309 Field.
The sources of funds for capital expenditures were cash flow from operations,
borrowings on the Company's existing Bank Facility and proceeds of the issuances
of Common Shares. The cash flow generated by the Company's activities would
decline in the absence of the acquisition and development of other oil and
natural gas properties or increases in the Company's production of oil and
natural gas resulting from the development of its properties.
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. During 1996 shareholders' equity increased by
$1,837,000, as a result of the exercise of warrants, and $8,400,000 as a result
of 2,000,000 shares being issued to Amoco Production Company as part of the
Amoco Acquisition. During the first eight months of 1997, shareholders' equity
increased by $22,014,000 as a result of the issuance of 6,000,000 of Common
Shares in the public offering, $180,000 as a result of exercise of warrants and
$14,400,000 as a result of the issuance of 3,154,930 Common Shares to the
beneficial owners of Goldking and 84,000 Common Shares as a finders fee, both in
connection with the Goldking Acquisition.
Competition, Markets, Seasonality and Environmental and Other Regulation
Competition. There are a large number of companies and individuals
engaged in the exploration for and development of oil and natural gas
properties. Competition is particularly intense with respect to the acquisition
of oil and natural gas producing properties and securing experienced personnel.
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.
<PAGE>
Markets. The ability of the Company to produce and market oil and natural
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 natural 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 natural 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 natural gas prices will be affected, and it is possible that
prices for any oil, natural gas liquids, or natural gas produced by the Company
will be lower than those currently available.
The demand for natural 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, natural gas, and refined petroleum products, the Company is unable to
predict future oil and natural 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 natural gas storage becoming
available in the U.S. is altering this seasonality. During 1993, 1994 and 1995
the Company's natural 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 $2.17 per Mcf during 1996 and have averaged $2.47
per Mcf during the first six months of 1997. 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 natural 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 natural gas for as much as $.20
below that index price. Early 1997 pipeline index prices were at historical
highs, but moderated during the late winter and spring. During October 1997 the
Company sold its natural gas for an average of $2.90 per Mcf.
Environmental and Other Regulation. The Company's business is affected
by governmental laws and regulations, including price 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.
<PAGE>
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 natural 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.
Sales of crude oil, condensate and natural 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
natural 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.
<PAGE>
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 change frequently, are often difficult and costly to comply with
and which carry substantial civil and/or criminal penalties for failure to
comply. Some laws, rules and regulations to which the Company is subject
relating to protection of the environment may, in certain circumstances, impose
Astrict 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, joint and several 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.
Similarly, the Oil Pollution Act of 1990 ("OPA") imposes strict liability for
remediation and natural resource damages in the event of an oil spill. In
addition to other requirements, the OPA requires operators of oil and natural
gas leases on or near navigable waterways to provide $35 million in Afinancial
responsibility", as defined in the Act. At present the Company is satisfying the
financial responsibility requirement with insurance coverage. 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. Furthermore, the Company cannot
guarantee that such laws as they apply to oil and natural gas operations will
not change in the future in such a manner as to impose substantial costs on 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 natural 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, will ultimately be
applicable to state as well as federal leases, which could impose additional
compliance costs on the Company. While there can be no guarantee, the Company
does not expect these costs to be material. See "Risk Factors - Environmental
and Other Regulations."
Employees
The Company has 30 full time employees, 11 of whom are officers. The
Company utilizes an additional 44 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.
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) 209-0698. Goldking currently has separate offices at
1221 McKinney, Houston, Texas 77002, telephone (713) 759-2400, FAX (713)
759-2417. The Company anticipates moving all Goldking Houston personnel into its
1100 Louisiana offices prior to year end 1998.
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.
<PAGE>
MANAGEMENT
Officers and Directors
The Company has a classified Board of Directors, consisting of four Class I
directors, three Class II directors, and four Class III directors. The directors
are elected to serve for three-year terms and until their successors are elected
and qualified. The directors stand for election each year as their terms expire
by class. The Board of Directors consists of five 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, and the committees of the
Board on which they serve.
<TABLE>
<CAPTION>
Director
Name Age Since Title
----- --- ----- ----
<S> <C> <C>
H. James Maxwell........... 52 1992 Chairman of the Board, Chief Executive
Officer, and Director(a)
Larry M. Wright............ 53 1992 President, Chief Operating Officer and
Director(b)
Leonard C. Tallerine, Jr... 47 1997 Executive Vice President-Business Development
and Director(c)
Mark C. Licata............. 46 1997 Sr. Vice President-General Counsel, and Director(a)
Todd R. Bart............... 33 1997 Chief Financial Officer, Secretary and Treasurer
Robert G. Wonish........... 43 --- Sr. Vice President-Operations
Edward A. Bush, Jr......... 53 --- Sr. Vice President-Geology/Geophysics
William J. Doyle........... 45 --- Vice President-Exploitation
Bruce A. DeBartolo......... 50 --- Vice President-Exploration
Jim R. Wible............... 48 --- Vice President-Drilling/Production
Barbara A. Whitton......... 35 --- Vice President-Marketing/Planning
Laurie A. McNamara......... 44 --- Vice President-Land
A. Theodore Stautberg, Jr.. 50 1993 Director(c)-Compensation Committee
Donald W. Chesser.......... 57 1992 Director(a)-Audit Committee
James B. Kreamer........... 57 1993 Director(c)-Compensation Committe
Mark C. Barrett............ 46 1996 Director(b)-Audit and Compensation Committees
Michael Springs............ 47 1996 Director(c)
Harold First............... 61 1997 Director(b)-Audit and Compensation Committee
</TABLE>
<PAGE>
(a) These persons are designated as Class III directors, with their term of
office expiring at the annual meeting of shareholders in 1998.
(b) These persons are designated as Class II directors, with their term of
office expiring at the annual meeting of shareholders in 1997.
(c) These persons are designated as Class I 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 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 natural 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, President of the Company from 1992 to 1997 and
Chief Executive Officer and Chairman of the Board of the Company from 1992 to
date.
Larry M. Wright received his B.S. Degree in Chemical 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
to the Company and its predecessors. From 1993 to 1997, he served as Executive
Vice President of the Company and since October 1997, has served as President
and Chief Operating Officer.
Leonard C. Tallerine, Jr., graduated from Rice University's Advanced
Management Institute and holds undergraduate and graduate degrees in accounting
from the University of Houston. Mr. Tallerine practiced as a CPA with Price
Waterhouse and KPMG from 1972 through 1980, specializing in oil and natural gas
tax issues. From 1981 through 1986, he served as co-managing and general partner
of Paso Grande Investment, Ltd., an oil and natural gas real estate holding
company and served as Chairman of the Texas Guarantee National Bank from 1983 to
1986. In 1987, he founded the Union Companies and in 1991 became Chairman and
Chief Executive Officer of Goldking. In July 1997 Mr. Tallerine was appointed an
Executive Vice President and a Director, pursuant to contractual arrangements
with the Company following the Company's acquisition of Goldking. See
AProperties - Goldking Acquisition."
Mark C. Licata received a Bachelor of Business Administration and
Accounting (1972) and a law degree (1976) from the University of Texas. He was
employed in the private practice of law from 1976 through 1985 and then served
as President and Chief Operating Officer of Vista Host, Inc. and later as
President and Chief Operating Officer of the publicly held McFaddin Ventures,
Inc. In 1988, Mr. Licata returned to the practice of law in Houston with Looper,
Reed, Mark & McGraw, where he remained until he joined Goldking as President in
1996. In July 1997 Mr. Licata was appointed Senior Vice President-General
Counsel and a Director, pursuant to contractual arrangements with the Company
following the Company's acquisition of Goldking. See "Properties - Goldking
Acquisition."
<PAGE>
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. In Nobember 1997, he was appointed Director to fill the
vacancy left by the retirement of Bob F. Mallory. 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.
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, serving as Senior Vice
President - Operations.
Edward A. Bush, Jr., 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 Dev. Corp.
From 1995 to 1996 he served as Vice President-Exploration and President of
Howell Petroleum Corp. He presently serves with the Company as Senior Vice
President-Geology/Geophysics.
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 natural 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.
Bruce A. DeBartolo received his B.S. and M.S. degrees in geology from
Tulane University in 1968 and 1970. He has over 25 years of experience in major
and independent oil companies, including Getty Oil (1969-1973), Tesoro
(1974-1979) and Peltex Oil and Gas (1981-1985). Following eight years with
independents DeBartolo Oil & Gas and DeBartolo Associates, he joined Goldking in
1993, where he serves as Senior Vice President-Exploration. Mr. DeBartolo is a
certified petroleum geologist and is an active member of the Houston Geologic
Society and the American Association of Petroleum Geologists.
Jim R. Wible received his B.A. degree from the University of Colorado in
1970 and has post-graduate training in petroleum engineering. He began his
career in 1974 with Dresser Industries and has served in various drilling,
production and engineering positions with Dresser Industries, Conoco and others,
as well as serving as an engineer with drilling contractor Delta Drilling
Company, a large oil field service organization. Since 1995, Mr. Wible has
served as Vice President-Engineering of Goldking. Prior positions include
wellsite engineer for Schlumberger Integrated Project Management (1995) and
Operations Manager for Aran Energy Corp. (1992-1995). Mr. Wible is a member of
the Society of Petroleum Engineers and the American Association of Drilling
Engineers.
Barbara A. Whitton joined Goldking in 1993 as the Manager of Revenue
Accounting and was appointed Vice President-Marketing/Planning in 1997. Prior to
Goldking, Ms. Whitton had experience in accounting, finance and marketing with
Hall-Houston Oil Company (1991-1993), UMC Petroleum Corporation (1987-1989),
Energy Assets International (1984-1987) and Sohio Petroleum (1982-1984).
Laurie A. McNamara received her B.S. in geology and biology in 1975 from
Hope College, Michigan and an M.S. from Louisiana State University in 1977. She
joined Goldking in 1997 as Land Manager. Her experience includes nine years as
an independent landman in Lafayette, Louisiana. In Houston, she has served as a
landman for Texas Crude Energy, Inc. (1993-1996) as an independent landman on
projects for Cody Energy and Burlington Resources. She is a member of the
American Association of Petroleum Landmen and is a Certified Professional
Landman.
<PAGE>
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 natural gas business,
assists others in financing energy transactions, and serves as general partner
of Triumph 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 certified public accounting 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 certified public accounting 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.
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 certified public accounting firm, in 1981 and is the president and
majority shareholder in that firm. His 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.
Harold First has been self-employed as a financial consultant since 1993.
From 1990 to 1993 he was Chief Financial Officer of Icahn Holding Corp. and also
served as Senior Vice President of Trans World Airlines, Inc. from 1992 to 1993.
Mr. First is currently a director of Marvel Entertainment Group, Inc., Toy Biz,
Inc., Cadus Pharmaceutical Corp. and Tele-Save Holdings, Inc. He was nominated
for election to the Board of Directors pursuant to an agreement with shareholder
Carl C. Icahn.
None of the officers or directors serve pursuant to employment agreements.
The Board of Directors
The Board of Directors has the responsibility for establishing broad
corporate policies and for the overall performance and governance 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.
<PAGE>
Meetings of the Board of Directors are regularly held each quarter and
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 seven meetings in 1996, four
of which were meetings by telephone conference call. Each director attended all
in person meetings of the Board, except Donald W. Chesser who failed to attend
two meetings. With respect to the telephone conference calls, Donald W. Chesser
was not connected two times and James B. Kreamer was not connected on one
conference call.
Compensation of Directors
In order to align the interests of the Company's shareholders and its
directors, directors do not receive cash compensation. Non-employee directors
are compensated for their services with shares of the Company's common stock,
receiving $1,000 in Common Shares for attending Board of Directors meetings,
$500 in Common Shares for attending committee meetings and $200 in Common Shares
for participating in telephone meetings. Officers of the Company who serve as
directors do not receive additional compensation for serving on the Board of
Directors or a committee thereof. Directors are reimbursed for travel expenses
incurred in attending Board of Directors or committee meetings.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation provides that no director or
officer of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of his or her fiduciary duty as a
director or officer, except for liability (i) for any breach of the director or
officer's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director or
officer derived an improper personal benefit. The effect of these provisions is
to eliminate the rights of the Company and its stockholder (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director or officer for breach of fiduciary duty, except in
the situations described above.
The Company entered into indemnification agreements with its directors and
executive officers as of July 15, 1997, which the Company believes will assist
the Company in attracting and retaining qualified individuals to serve the
Company. Under the terms of the Indemnification Agreements, the Company has
agreed to hold harmless and indemnify such individuals to the fullest extent
permitted by law and to advance expenses, if the director or executive officer
becomes a party to or witness or other participant in any threatened, pending or
completed action, suit or proceeding by reason of any occurrence related to the
fact that the person is or was a director or executive officer of the Company or
a subsidiary of the Company or another entity at the Company's request, unless a
reviewing party (either majority of disinterested directors, independent legal
counsel, or by the stockholders) determines that the person would not be
entitled to indemnification under the Agreement or applicable law.
Depending upon the character of the proceeding, the Company may indemnify
against expenses, including attorneys' fees, judgments, amounts paid in
settlement, ERISA excise taxes or penalties, finds and other expenses actually
and reasonably incurred by the indemnified person in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, investigative or appellate to which director is, was
or at any time becomes a party by reason of his or her service as a director or
executive officer.
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth certain information
concerning the annual compensation paid to the Company's Chief Executive Officer
and each executive officer whose compensation exceeded $100,000 during 1996.
<TABLE>
<CAPTION>
Long-Term Incentive Plan
-----------------------------
Annual Compensation Awards Payouts
--------------------------------- --------------------- -------
Securities
Other Restricted Underlying LTIP All
Salary Bonus Annual Stock Options Payouts Other(a)
Position Year ($) ($) Comp.($) Award(s)($)
(#) ($) Comp.($)
- ------------------ ---- ------- ------ -------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
H. James Maxwell 1996 166,900 0 0 0 0 0 22,500
President and Chief 1995 153,500 0 0 0 24,615 0 22,500
Executive Officer 1994 120,000 0 0 0 22,857 0 18,000
Larry M. Wright 1996 160,300 0 0 0 0 0 22,500
Executive Vice 1995 147,300 0 0 0 0 0 22,100
President 1994 134,000 0 0 0 0 0 20,000
Robert G. Wonish 1996 100,200 0 0 0 0 0 15,000
Vice President 1995 92,100 0 0 0 0 0 13,800
1994 78,800 0 0 0 0 0 11,800
</TABLE>
(a) The Aother compensation" represents contributions to the accounts of the
employees under the Company's Employee Stock Ownership Plan.
Options and Warrants. No options or warrants were granted in 1996, and no
executive officers exercised any options during 1996. As of December 31, 1996,
Larry M. Wright was the only executive officer holding options or warrants, with
currently exercisable warrants to purchase 250,000 Shares. The in-the-money
value of Mr. Wright's unexercised warrants at year end was $658,750. No awards
were outstanding under the Long-Term Incentive Plan at December 31, 1996.
Aggregate Option and Warrant Exercises. The following table provides information
relating to the number and value of Common Shares subject to options exercised
during 1996 or held by the named executive officers as of December 31, 1996.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of
securities underlying Value of unexercised
Securities unexercised options in-the-money
acquired Value at fiscal year-end($) options at year-end($)(b)
Name on Exercise (#) Realized ($)(a) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------- ------------------ ------------------- --------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
H. James Maxwell 0 0 -0- / -0- -0- / -0-
Larry M. Wright 0 0 250,000 / -0- 658,750 / -0-
Robert G. Wonish 0 0 -0- / -0- -0- / -0-
</TABLE>
<PAGE>
(a) 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.
(b) 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 31, 1996 of the
Common Shares was $4,875.
On June 18, 1997 the following compensatory stock options were granted
to officers which are immediately exercisable for a period of three years from
the date of grant, with an exercise price of $4.45 per share: Mr. Maxwell -
600,000; Mr. Wright - 400,000; Mr. Bob F. Mallory - 50,000 (then Director); Mr.
Wonish - 40,000; Mr.
Bush - 20,000; Mr. Doyle - 10,000 and Mr. Bart - 30,000.
Objectives and Approach. The overall goals of the Company's executive
compensation program are: (i) to encourage and provide an incentive to its
executive officers to achieve the Company's strategic business and financial
goals, both short-term and long-term, and thereby enhance shareholder value,
(ii) to attract and retain well-qualified executive officers and (iii) to reward
individuals for outstanding job performance in a fair and equitable manner when
measured not only with respect to the Company's internal performance goals but
also the Company's performance in comparison to its peers. The components of the
Company's executive compensation are salary, incentive bonuses and awards under
its Long Term Incentive Plan and Employee Stock Ownership Plan, each of which
assists in achieving the program's goals.
Long Term Incentive Plan. The Company's Long-Term Incentive Plan provides for
the granting, to certain officers and key employees of the Company and its
participating subsidiaries, of incentive awards in the form of stock options,
stock appreciation rights ("SARs"), stock, and cash awards. The Long-Term
Incentive Plan is administered by a committee of independent members of the
Board of Directors (the "Plan Committee") 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. 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, Common Shares presently owned
by him, 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
the Common Shares. A stock award is an award of Common Shares or denominated in
Common Shares. 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.
The Plan Committee determines performance objectives and award levels before the
beginning of each plan year.
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.
<PAGE>
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.
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 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.
Under the Company's Long-Term Incentive Plan all full time employees
share a bonus equal to 5% of the Company's pre-tax net income, 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. Former Goldking
employees will receive proportionate participation for 1997, based upon their
five months employment with the Company.
Employee Stock Ownership Plan. In 1994, the Company adopted the PANACO, Inc.
Employee Stock Ownership Plan ("ESOP"). Pursuant to the terms of the ESOP, the
Company may contribute up to fifteen percent (15%) of the participant's annual
compensation to the ESOP. ESOP assets are allocated in accordance with a formula
based on participant compensation. In order to participate in the ESOP, a
participant must complete at least one thousand hours of service to the Company
within twelve consecutive months. Former Goldking employees will receive
proportionate participation for 1997, based upon their five months employment
with the Company. A participant's interest in the ESOP becomes one hundred
percent vested after three years of service to the Company. Benefits are
distributed from the ESOP at such time as a participant retires, dies or
terminates service with the Company in accordance with the terms and conditions
of the ESOP. Benefits may be distributed in cash or in shares of the Company's
common stock. No participant contributions are allowed to be made to the ESOP.
<PAGE>
PRINCIPAL STOCKHOLDERS
AND SHARE OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock by (a) each officer and director of the
Company, (b) all officers and directors of the Company as a group, and (c) for
each person who beneficially owns 5% or more of the Common Stock as of November
1, 1997. Except as set forth in footnote (c) below, each shareholder has sole
voting and sole investment power over all shares.
<TABLE>
<CAPTION>
Name Shares Owned Beneficially (a)
Number Percent
--------- ------
Directors and Executive Officers
H. James Maxwell; Chief Executive Officer, Chairman
<S> <C> <C>
of the Board and Director.......................................... 897,586 3.79%
Larry M. Wright; President, Chief Operating Officer and Director..... 1,059,614 4.47
Leonard C. Tallerine, Jr.; Executive Vice President and Director..... 1,548,784 6.53
Mark C. Licata; Sr. Vice President-General Counsel and Director...... 1,606,146 6.77
Robert G. Wonish; Sr. Vice President-Operations...................... 66,410 .28
Edward A. Bush, Jr.; Sr. Vice President-Geology/Geophysics........... 20,000 .08
William J. Doyle; Vice President-Exploitation........................ 16,288 .07
Todd R. Bart; Chief Financial Officer, Secretary, Treasurer
and Director......................................................... 33,997 .14
A. Theodore Stautberg, Jr.; Director................................. 6,881 .03
Donald W. Chesser; Director.......................................... 1,669 .01
James B. Kreamer; Director........................................... 51,685 .22
Michael Springs; Director............................................ 3,726 .02
Mark C. Barrett; Director............................................ 3,258 .01
Harold First; Director............................................... 2,315 .01
------------ ---------
All Directors and Officers as a group (18 persons)................... 5,332,240 22.49%
Shares Owned Beneficially
---------------------------------
---------------- ----------------
Number Percent
-------- ------
Beneficial Owners of 5% or more (excluding persons named above)
Carl C. Icahn (b)................................................ 3,030,000 12.78%
% Icahn Associates Corp.
767 Fifth Avenue, 47th Floor
New York, NY 10153
Richard A. Kayne (c)............................................. 1,466,667 6.19
% Kayne Anderson Investment Management, Inc.
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Croft-Leominster, Inc............................................ 1,617,100 6.82
207 East Redwood Street, Suite 802
Baltimore, Maryland 21202
</TABLE>
<PAGE>
(a) Includes 1,100,000 currently exercisable options to purchase shares, at
$4.45 per share, held by the following: Mr. Maxwell-600,000; Mr. Wright-400,000;
Mr. Wonish-40,000; Mr. Bush-20,000; Mr. Doyle-10,000 and Mr. Bart-30,000. These
options are exercisable any time before June 19, 2000. However, the holder may
not dispose of the shares acquired upon exercise for a period of three years and
must remain an employee of PANACO during that three year period. Otherwise, the
shares may be reacquired by PANACO at the person's cost, thereby denying them
the benefit of the option. In addition, warrants for 160,000 shares, exercisable
at $2.38 any time prior to December 31, 1997, are held by Mr. Wright.
(b) Mr. Icahn is the sole member of Riverdale Investors LLC, the general
partner of High River Limited Partnership, the record holder of these shares.
(c) The shares are beneficially owned by four investment limited
partnerships and are issuable upon the exercise of warrants which expire on
December 31, 1998. KAIM Non-Traditional, L.P. is the sole or managing general
partner of three of the limited partnerships and a co-general partner of the
fourth. Richard A. Kayne is the controlling shareholder of the corporate owner
of Kayne, Anderson Investment Management, Inc., the sole general partner of KAIM
Non-Traditional, L.P. Mr. Kayne is also the managing general partner of one of
the limited partnerships and a limited partner of each of the limited
partnerships. KAIM Non-Traditional, L.P. is an investment manager of the
offshore corporation. Mr. Kayne is a director of one of the insurance companies.
All shares have shared voting and investment power.
KAIM Non-Traditional, L.P. disclaims beneficial ownership of the shares
except for those shares attributable to it by virtue of its general partner
interests in the limited partnerships. Mr. Kayne disclaims beneficial ownership
of the shares except those shares held by him or attributable to him by virtue
of his limited and general partner interests in the limited partnerships and by
virtue of his indirect interest in the interest of KAIM Non-Traditional, L.P. in
the limited partnerships.
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Theodore Stautberg, Jr., is an officer, director and beneficial
shareholder of Triumph Securities Corporation ("Triumph Securities"), which
provided certain services in connection with the 1996 offering of Common Shares.
In connection with the services so provided, Triumph Securities received
$268,906, representing .8% of the 6.8% underwriters discount.
Mark C. Barrett's CPA firm, Barrett and Associates, served as the
Company's independent accountants for the years 1985 through 1996. During 1996
his CPA firm was paid $53,400 for accounting services related to the audit of
the fiscal year 1995. Mr. Barrett's firm has provided advice on tax matters in
1997.
H. James Maxwell and Bob F. 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 it leases to the Company
on a triple net basis for $4,000 per month for a term of ten years, expiring in
2003. Mr. Malloy recently retired from his positions as Executive Vice
President and Director of the Company. 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.
Larry M. Wright exercised warrants to purchase 90,000 Common Shares on
July 31, 1997, at an exercise price of $2.00 per share, for an aggregate of
$180,000. The warrants were originally granted to Mr. Wright in 1991.
Michael Springs and Mark C. Barrett, were each issued restricted stock
awards of 2,447 Common Shares upon their election to the Board of Directors in
1996. Harold First was likewise issued 2,315 Common Shares upon his election to
the Board of Directors in October, 1997.
In connection with the Goldking Acquisition, Mark C. Licata and Leonard C.
Tallerine, Jr. were paid a total of $27,539,000, including 1,606,146 and
1,548,784 restricted Common Shares respectively, issued at the closing on July
31, 1997. Messrs. Licata and Tallerine have certain rights to require the
Company to register such Common Shares for resale. Messrs. Licata and Tallerine
were the sole beneficial owners of Goldking. See "Business and Properties -
Goldking Acquisition." After the Offering, $6,000,000 in promissory notes
received by Messrs. Licata and Tallerine as a portion of the acquisition
consideration were paid by the Company.
On October 8, 1996 the Company borrowed $17,000,000 from lenders
advised by Kayne, Anderson Investment Management, Inc. ("Kayne Anderson"), a
beneficial owner of greater than 5% of the Common Shares. Of this amount,
$8,500,000 was repaid on March 6, 1997 from the proceeds of the Company's recent
public offering of common stock. The Company paid certain expenses, including
legal fees, of those lenders in 1996 and 1997. During the first quarter of 1996,
lenders advised by Kayne Anderson exercised warrants issued to them in
connection with the Subordinated Notes issued to them in 1993, receiving 816,526
Common Shares. After the Offering, $8,500,000 in 1996 Tranche A Convertible
Subordinated Notes due October 8, 2003, convertible into 2,060,606 common shares
on the basis of $4.125 per share, were prepaid by the Company. Warrants to
purchase 2,060,606 common shares at a price of $4.125 per share, which may be
exercised until December 31,1998, were issued as part of the terms of the
prepayment.
H. James Maxwell and former officer and Director Bob F. Mallory are
personal guarantors of the Company's obligation to plug the wells and remove the
platforms on the West Delta Properties acquired from Conoco, Arco (now Vastar),
Texaco and Oxy in 1991.
<PAGE>
THE EXCHANGE OFFER
Purpose and Effect
The Old Notes were sold by the Company on October 9, 1997 in a private
placement. In connection with that placement, the Company entered into the
Registration Rights Agreement which requires that the Company file a
registration statement under the Securities Act with respect to the New Notes on
or prior to 45 days after the date of issuance of the Old Notes (the "Issue
Date") and, upon the effectiveness of that registration statement, offer to the
holders of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, which will be issued without a restrictive legend
and may be reoffered and resold by the holder without registration under the
Securities Act. The Registration Rights Agreement further provides that the
Company must use its reasonable best efforts to cause the registration statement
with respect to the Exchange Offer to be declared effective within 150 days
following the Issue Date. A copy of the Registration Rights Agreement has been
filed as an exhibit to the registration statement of which this Prospectus is a
part.
In order to participate in the Exchange Offer, a holder must represent
to the Company, among other things, that (i) any New Notes to be received by it
will be acquired in the ordinary course of its business, (ii) it has no
arrangement with any person to participate in the distribution of the New Notes
and (iii) it is not an Aaffiliate," as defined in Rule 405 of the Securities
Act, of the Company, or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer should acknowledge that it acquired the
Old Notes for its own account as the result of market making activities or other
trading activities. Any holder who is unable to make the appropriate
representations to the Company will not be permitted to tender the Old Notes in
the Exchange Offer and will be required to comply with the registration and
prospectus delivery requirements of the Securities Act (or an appropriate
exemption therefrom) in connection with any sale or transfer of the Old Notes.
If the holder is not a broker-dealer, it will be required to represent
that it is not engaged in, and does not intend to engage in, the distribution of
the New Notes. If the holder is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
The Old Notes are designated for trading in the PORTAL market. To the
extent Old Notes are tendered and accepted in the Exchange Offer, the principal
amount of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, holders of Old Notes who were eligible to participate in the Exchange
Offer but who did not tender their Old Notes will not be entitled to certain
rights under the Registration Rights Agreement and such Old Notes will continue
to be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for the Old Notes could be adversely affected. No assurance can be
given as to the liquidity of the trading market for either the Old Notes or the
New Notes.
<PAGE>
Based on an interpretation by the Commission's staff set forth in
no-action letters issued to third parties unrelated to the Company, the Company
believes that, with the exceptions discussed herein, New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any person receiving the New Notes, whether
or not that person is the holder (other than any such holder or such other
person that is an Aaffiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that (i) the New
Notes are acquired in the ordinary course of business of that holder or such
other person, (ii) neither the holder nor such other person is engaging in or
intends to engage in a distribution of the New Notes, and (iii) neither the
holder nor such other person has an arrangement or understanding with any person
to participate in the distribution of the New Notes. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where those
Old Notes were acquired by the broker-dealer as a result of its market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of those New Notes. See "Plan of
Distribution."
Consequences of Failure to Exchange
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the offer or sale of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act and
applicable state securities laws, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not intend to register the Old Notes under the Securities
Act and, after consummation of the Exchange Offer, will not be obligated to do
so. Based on an interpretation by the staff of the Commission set forth in a
series of no-action letters issued to third parties, the Company believes that,
except as set forth in the next sentence, New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold or
otherwise transferred by holders thereof (other than any such holder that is an
Aaffiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such Old Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement with any
person to participate in the distribution of such New Notes. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OUTSTANDING NOTES AS TO WHETHER TO TENDER OR
REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OUTSTANDING NOTES PURSUANT TO
THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OUTSTANDING NOTES MUST MAKE THEIR OWN DECISION
WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE
AMOUNT OF OUTSTANDING NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE
LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR
OWN FINANCIAL POSITION AND REQUIREMENTS.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount at
maturity of New Notes in exchange for each $ 1,000 principal amount at maturity
of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some
or all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may
be tendered only in integral multiples of $1,000 in principal amount.
<PAGE>
The form and terms of the New Notes are substantially the same as the form
and terms of the Old Notes except that the New Notes have been registered under
the Securities Act and will not bear legends restricting their transfer. The New
Notes will evidence the same debt as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the indenture pursuant to which the Old
Notes were, and the New Notes will be, issued.
As of the date of this Prospectus, $100,000,000, in aggregate principal
amount at maturity of the Old Notes were outstanding. The Company has fixed the
close of business on November 17, 1997 as the record date for the Exchange Offer
for purposes of determining the persons to whom this Prospectus, together with
the Letter of Transmittal, will initially be sent. Holders of Old Notes do not
have any appraisal or dissenters' rights under the General Corporation Law of
the State of Delaware or the Indenture in connection with the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with
the applicable requirements of the Exchange Act and the rules and regulations of
the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company. If any tendered Old
Notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"The Exchange Offer - Solicitation of Tenders; Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
December 29, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Company will notify the Exchange Agent of any extension by
oral or written notice prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. The Company
reserves the right, in its sole discretion, (i) to delay accepting any Old
Notes, to extend the Exchange Offer or, if any of the conditions set forth under
"The Exchange Offer - Conditions" shall not have been satisfied, to terminate
the Exchange Offer, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner.
Procedures for Tendering
<PAGE>
Only a holder of Old Notes may tender the Old Notes in the Exchange Offer.
Except as set forth under "The Exchange Offer - Book Entry Transfer," to tender
in the Exchange Offer a holder must complete, sign and date the Letter of
Transmittal, or a copy thereof, have the signatures thereon guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver the Letter
of Transmittal or copy to the Exchange Agent prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation
of a book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if
that procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "DTC" or the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below. To be tendered
effectively, the Old Notes, Letter of Transmittal and other required documents
must be received by the Exchange Agent at the address set forth under "The
Exchange Offer - Exchange Agent" prior to the Expiration Date.
The tender by a holder that is not withdrawn before the Expiration Date
will constitute an agreement between that holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE AND
PROPER INSURANCE SHOULD BE OBTAINED. NO LETTER OF TRANSMITTAL OR OLD NOTES
SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE
TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the Letter of Transmittal and delivering the owner's
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box tided "Special Registration Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. If signatures on a Letter of Transmittal or
a notice of withdrawal, as the case may be, are required to be guaranteed, the
guarantee must be by any eligible guarantor institution that is a member of or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or an Aeligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, the Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as that registered holder's name appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations, or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal unless waived by the Company.
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding after the
Expiration Date or, as set forth under "The Exchange Offer - Conditions," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will represent to the Company that, among
other things, (i) the New Notes acquired pursuant to the Exchange Offer are
being acquired in the ordinary course of business of the person receiving such
New Notes, whether or not such person is the holder, (ii) if it is not a
broker-dealer, neither the holder nor any such other person is engaging in or
intends to engage in a distribution of such New Notes, (iii) neither the holder
nor any such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes, and (iv) neither the holder
nor any such other person is an Aaffiliate" (as defined in Rule 405 of the
Securities Act) of the Company. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from the Company), may
participate in the Exchange Offer but may be deemed an Aunderwriter" under the
Securities Act and, therefore, must acknowledge in the Letter of Transmittal
that it will deliver a prospectus in connection with any resale of such New
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an Aunderwriter" within the meaning of the Securities Act. See "Plan of
Distribution."
<PAGE>
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or, with respect to the DTC and its participants, electronic
instructions in which the tendering holder acknowledges its receipt of and
agreement to be bound by the Letter of Transmittal), and all other required
documents. If any tendered Old Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be resumed without expense to the tendering holder thereof (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility system may make book-entry delivery of Old Notes being tendered by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or copy thereof, with
any required signature guarantees and any other required documents, must, in any
case other than as set forth in the following paragraph, be transmitted to and
received by the Exchange Agent at the address set forth under "The Exchange
Offer - Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
The DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through the DTC. To accept the Exchange Offer through
ATOP, participants in the DTC must send electronic instructions to the DTC
through the DTC's communication system in place of sending a signed, hard copy
Letter of Transmittal. The DTC is obligated to communicate those electronic
instructions to the Exchange Agent. To tender Old Notes through ATOP, the
electronic instructions sent to the DTC and transmitted by the DTC to the
Exchange Agent must contain the character by which the participant acknowledges
its receipt of and agrees to be bound by the Letter of Transmittal.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH THE DEPOSITORY'S
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. THE LETTER OF
TRANSMITTAL MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO
December 29, 1997.
Guaranteed Delivery Procedures
If a registered holder of the Old Notes desires to tender such Old
Notes and the Old Notes are not immediately available, or time will not permit
such holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered Old Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
<PAGE>
Withdrawal Rights
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
(for DTC participants) electronic ATOP transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and principal amount at maturity of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender, and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. All questions as
to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described under "The Exchange Offer - Procedures for Tendering" at any time on
or prior to the Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or exchange New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) the Exchange Offer shall violate applicable law or any applicable
interpretation of the staff of the Commission; or
(b) any action or proceeding is instituted or threatened in any court or by any
governmental agency that might materially impair the ability of the Company
to proceed with the Exchange Offer or any material adverse development has
occurred in any existing action or proceeding with respect to the Company;
or
(c) any governmental approval has not been obtained, which approval the Company
shall deem necessary for the consummation of the Exchange Offer.
<PAGE>
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering holders (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility), (ii) extend the Exchange Offer and retain
all Old Notes tendered prior to the expiration of the Exchange Offer, subject,
however, to the rights of holders to withdraw such Old Notes (see "The Exchange
Offer") or (iii) waive such unsatisfied conditions with respect to the Exchange
Offer and accept all properly tendered Old Notes which have not been withdrawn.
If such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such
five-to-ten-business-day period.
Exchange Agent
All executed Letters of Transmittal should be directed to the Exchange
Agent. UMB Bank, N.A., has been appointed as Exchange Agent for the Exchange
Offer. Questions, requests for assistance and requests for additional copies of
this Prospectus or of the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
By Registered, Certified Mail or Overnight Courier:
UMB Bank, N.A. UMB Bank, N.A.
Attn: Corporate Trust Attn: Corporate Trust
1 Battery Park Plaza, 8th Floor or c/o United Missouri Trust Company
New York, NY 10004-1405 of New York
1 Battery Park Plaza, 8th Floor
New York, NY 10004-1405
Via Facsimile: Via Facsimile:
(212) 514-5730 (816) 221-0438
For Information Call: For Information Call:
(212) 968-1990 (816) 860-7428
Solicitations of Tenders; Fees and Expenses
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, among
others.
Transfer Taxes
Holders who tender their Old Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith, except that holders who
instruct the Company to register New Notes in the name of, or request that Old
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
The Company has entered into a new $75 million revolving credit
facility (the "New Credit Facility") from First Union National Bank of North
Carolina, as Administrative Agent and Banque Paribas (collectively, the
"Lenders"). The purpose of the New Credit Facility is to provide funds for
working capital support and general corporate purposes and to have available
letters of credit. Upon Closing of the Offering and the application of the
proceeds thereof, the Company's prior Bank Facility was completely paid down and
the New Credit Facility is fully available, subject to the terms and conditions
thereof, for the future needs of the Company.
The New Credit Facility is a revolving credit subject to a borrowing
base determination made April 1 and October 1 of each year by the Lenders. The
initial borrowing base is $40 million, all of which is presently available. The
initial borrowing base will be subject to a reduction of $4 million on April 1,
1998 unless redetermined on an evaluation of the Company's oil and natural gas
assets. If at any time the borrowing base is determined to be less than the
current loan balance, the Company will be required to pay down the excess in two
equal payments due three and six months after notification from the
Administrative Agent.
Under the terms of the New Credit Facility, the Company must maintain a
ratio of EBITDA to consolidated interest expense of not less than 2.0 to 1 until
December 31, 1998 and 2.5 to 1 thereafter. The Company must also maintain
current assets of not less than current liabilities.
The Company may elect to pay interest on the New Credit Facility at
either the Bank's prime rate or at LIBOR plus 1 to 1.75%, depending upon the
percentage of utilization of borrowing base. LIBOR is the London Interbank
Offered Rate 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.
The New Credit Facility has a maturity of five years with no required
principal payments until maturity, provided that the outstanding principal
balance does not exceed the Borrowing Base determinations established from time
to time by the Lenders. Indebtedness under the New Credit Facility will
constitute Senior Indebtedness. Outstanding indebtedness will be secured by
first priority mortgages and security interests taken by the Lenders in
substantially all properties and assets owned by the Company (including its
subsidiaries). All of the capital stock of the Subsidiary Guarantors will be
pledged pursuant to the New Credit Facility. The Subsidiary Guarantors have also
guaranteed the New Credit Facility.
The representations and warranties, conditions to extensions of credit,
events of default and indemnifications will be substantially the same as under
the prior Bank Facility. The New Credit Facility also contains certain other
covenants, including a minimum tangible net worth test, and negative covenants
imposing limitations on mergers, additional indebtedness, and pledges and sales
of assets.
<PAGE>
DESCRIPTION OF NOTES
The Old Notes were issued under an indenture (the "Indenture") dated as
of October 9, 1997 by and among the Company, the Subsidiary Guarantors and UMB
Bank, N.A., as Trustee (the "Trustee"). Upon the issuance of the New Notes, if
any, or the effectiveness of a Shelf Registration Statement (as defined), the
Indenture will be subject to and governed by the provisions of the Trust
Indenture Act of 1939, as amended (the "TIA").
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the TIA and all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA as in effect on the date of the Indenture. A
copy of the form of Indenture may be obtained from the Company. The definitions
of certain capitalized terms used in the following summary are set forth below
under "Certain Definitions." For purposes of this "Description of Notes"
section, references to the "Company" include only Panaco, Inc. and not its
Subsidiaries.
The Notes are general unsecured obligations of the Company ranking pari
passu in right of payment to all unsubordinated indebtedness of the Company and
rank senior in right of payment to all subordinated indebtedness of the Company.
The Guarantees are general unsecured obligations of the Subsidiary Guarantors
and rank pari passu in right of payment to all unsubordinated indebtedness of
the Subsidiary Guarantors and rank senior in right of payment to all
subordinated indebtedness of the Subsidiary Guarantors. However, the Notes are
effectively subordinated to all secured indebtedness of the Company and the
Subsidiary Guarantors to the extent of the value of the assets securing such
indebtedness. As of June 30, 1997, on a pro forma basis after giving effect to
the Offering and the application of the proceeds therefrom, the Company has no
secured indebtedness outstanding other than a production payment classified as
debt owed to Domain Energy (formerly Tenneco) currently valued at $1.7 million.
The Notes have been issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as paying agent and registrar for the Notes. The Notes may
be presented for registration of transfer and exchange at the offices of the
registrar, which initially will be the Trustee's corporate trust office. The
Company may change any paying agent and registrar without notice to Holders. The
Company will pay principal (and premium, if any) on the Notes at the Trustee's
corporate office in New York, New York. At the Company's option, interest may be
paid at the Trustee's corporate trust office or by check mailed to the
registered addresses of the Holders. Any Old Notes that remain outstanding after
the completion of the Exchange Offer, together with the New Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture. See "The Exchange Offer."
Principal, Maturity and Interest
The Notes are limited in aggregate principal amount to $200,000,000
aggregate principal amount, of which $100,000,000 aggregate principal amount
were issued in the offering of the Notes. Additional amounts may be issued in
one or more series from time to time subject to the limitations set forth under
"Certain Covenants Limitation on Incurrence of Additional Indebtedness." The
Notes will mature on October 1, 2004. Interest on the Notes will accrue at the
rate of 10 5/8% per annum and will be payable semi-annually in cash on each
April 1 and October 1, commencing on April 1, 1998, to the Persons who are
registered Holders at the close of business on the March 15 and September 15,
respectively, immediately preceding the applicable interest payment date.
Interest on the Notes will accrue from and including the most recent date to
which interest has been paid or, if no interest has been paid, from and
including the date of issuance.
The Notes are not entitled to the benefit of any mandatory sinking
fund.
<PAGE>
Redemption
Optional Redemption. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after October
1, 2001, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the 12-month period commencing on June 1 of the years set forth
below, plus, in each case, accrued interest, if any, thereon to the date of
redemption:
Year Percentage
---- ---------
2001............................. 105.313%
2002............................. 102.656%
2003 and thereafter.............. 100.000%
Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to October 1, 2000, the Company may, at its option, use all or
a portion of the net cash proceeds of one or more Equity Offerings (as defined)
to redeem up to 35% of the aggregate principal amount of the Notes originally
issued at a redemption price equal to 110.625% of the aggregate principal amount
of the Notes to be redeemed, plus accrued interest, if any, thereon to the date
of redemption; provided, however, that at least 65% of the aggregate principal
amount of Notes originally issued remains outstanding immediately after giving
effect to any such redemption. In order to effect the foregoing redemption with
the proceeds of any Equity Offering, the Company shall make such redemption not
more than 60 days after the consummation of any such Equity Offering.
Selection and Notice of Redemption
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes, or portions thereof, for redemption will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not then listed on a national securities exchange, on a pro rata basis, by lot
or by such other method as the Trustee shall deem fair and appropriate;
provided, however, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part; and provided, further, that if a partial redemption is made
with the proceeds of an Equity Offering, selection of the Notes or portions
thereof for redemption shall be made by the Trustee only on a pro rata basis or
on as nearly a pro rata basis as is practicable (subject to the procedures of
DTC), unless such method is otherwise prohibited. Notice of redemption shall be
mailed by first-class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the applicable redemption date,
interest will cease to accrue on Notes or portions thereof called for redemption
as long as the Company has deposited with the paying agent for the Notes funds
in satisfaction of the applicable redemption price pursuant to the Indenture.
Guarantees
Each Subsidiary Guarantor has unconditionally guaranteed, on a senior
basis, jointly and severally, to each Holder and the Trustee, the full and
prompt performance of the Company's obligations under the Indenture and the
Notes, including the payment of principal of and interest on the Notes. The
Guarantees are effectively subordinated in right of payment to all existing and
future secured Indebtedness of the related Subsidiary Guarantor to the extent of
the value of the assets securing such Indebtedness.
<PAGE>
The obligations of each Subsidiary Guarantor are limited to the maximum
amount which, after giving effect to all other contingent and fixed liabilities
of such Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Subsidiary Guarantor under its Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. Each
Subsidiary Guarantor that makes a payment or distribution under its Guarantee
shall be entitled to a contribution from each other Subsidiary Guarantor in an
amount pro rata, based on the net assets of each Subsidiary Guarantor,
determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell
its assets to the Company or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary without limitation, or with or to other Persons upon the
terms and conditions set forth in the Indenture. See "Certain Covenants Merger,
Consolidation and Sale of Assets." In the event all of the Capital Stock of a
Subsidiary Guarantor is sold by the Company and/or one or more of its Restricted
Subsidiaries and the sale complies with the provisions set forth in "Certain
Covenants - Limitation on Asset Sales," such Subsidiary Guarantor's Guarantee
will be released.
Separate financial statements of the Subsidiary Guarantors are not
included herein because such Subsidiary Guarantors are jointly and severally
liable with respect to the Company's obligations under the Indenture and the
Notes, and the aggregate net assets, earnings and equity of the Subsidiary
Guarantors and the Company are substantially equivalent to the net assets,
earnings and equity of the Company on a consolidated basis.
Change of Control
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest, if any, thereon to the date of purchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). A Change of Control Offer shall remain open for a period of 20
Business Days or such longer period as may be required by law. Holders electing
to have a Note purchased pursuant to a Change of Control Offer will be required
to surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Note completed, to the paying agent for the
Notes at the address specified in the notice prior to the close of business on
the third Business Day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing. Additionally,
the occurrence of a Change of Control would constitute an event of default under
the Senior Credit Facility which would permit the lenders thereunder to
accelerate all indebtedness under the Senior Credit Facility.
<PAGE>
Neither the Board of Directors of the Company nor the Trustee may waive
the covenant relating to the Company's obligation to make a Change of Control
Offer. Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. Consummation of any
such transaction in certain circumstances may require repurchase of the Notes,
and there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such repurchase. Such restrictions and
the restrictions on transactions with Affiliates may, in certain circumstances,
make more difficult or discourage any leveraged buy-out of the Company by the
management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. Other than
Permitted Indebtedness, the Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume, guarantee, acquire, become liable, contingently or otherwise, with
respect to, or otherwise become responsible for payment of (collectively,
Aincur") any Indebtedness (including, without limitation, Acquired
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness, or any
of its Restricted Subsidiaries may incur Acquired Indebtedness, if on the date
of the incurrence of such Indebtedness, after giving pro forma effect to the
incurrence thereof and the receipt and application of the proceeds therefrom,
the Consolidated EBITDA Coverage Ratio would have been greater than 2.25 to 1.0
on or prior to September 30, 1998, and greater than 2.5 to 1.0 thereafter.
Restricted Subsidiaries that are Subsidiary Guarantors may guarantee
any Indebtedness incurred by the Company pursuant to the preceding paragraph,
and, for purposes of determining any particular amount of Indebtedness incurred
under this covenant, such guarantees shall not be deemed to be the incurrence of
any Indebtedness.
Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition of Capital
Stock or otherwise) or is merged with or into the Company or any Restricted
Subsidiary or which is secured by a Lien on an asset acquired by the Company or
a Restricted Subsidiary (whether or not such Indebtedness is assumed by the
acquiring Person) shall be deemed incurred at the time the Person becomes a
Restricted Subsidiary or at the time of the asset acquisition, as the case may
be.
<PAGE>
The Company will not, and will not permit any Subsidiary Guarantor to,
incur any Indebtedness which by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinated in right of payment to any
Indebtedness of the Company or such Subsidiary Guarantor, as the case may be,
other than the Notes and the Guarantees unless such Indebtedness is also by its
terms (or by the terms of any agreement governing such Indebtedness) made
expressly subordinate in right of payment to the Notes or the Guarantee of such
Subsidiary Guarantor, as the case may be, pursuant to subordination provisions
that are substantially identical to the subordination provisions of such
Indebtedness (or agreement) that are most favorable to the holders of such other
Indebtedness of the Company or such Subsidiary Guarantor, as the case may be.
Maintenance of Adjusted Consolidated Net Tangible Assets. If Adjusted
Consolidated Net Tangible Assets are less than 125% of the Indebtedness of the
Company and its Restricted Subsidiaries on a consolidated basis at the end of
any fiscal quarter, which event shall not have been remedied and shall be
continuing at the end of the next succeeding fiscal quarter (the last day of
such succeeding fiscal quarter being hereinafter referred to as a "Deficiency
Date"), then the Company shall be obligated to make an offer (a "Deficiency
Offer") to all of the Holders to repurchase Notes, on a date not more than 60
nor less than 30 days after the Deficiency Date (the "Deficiency Payment Date"),
in an aggregate principal amount (the "Deficiency Offer Amount") that would be
sufficient to cause Adjusted Consolidated Net Tangible Assets to thereafter
equal or exceed 125% of the Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis , at a purchase price (the "Deficiency
Purchase Price") equal to 100% of the principal amount of the Notes, together
with accrued and unpaid interest, if any, to the Deficiency Payment Date. The
Deficiency Offer is required to remain open for at least 20 Business Days and
until the close of business on the Deficiency Payment Date.
As of June 30, 1997, after giving effect to the consummation of the
offering of the Notes, Adjusted Consolidated Net Tangible Assets would have been
approximately $193 million, or 189% of the Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis.
In order to effect such Deficiency Offer, the Company shall, not later
than the 45th day after the Deficiency Date, mail to each Holder a notice of the
Deficiency Offer, which notice shall govern the terms of the Deficiency Offer
and shall state, among other things, the procedures that Holders must follow to
accept the Deficiency Offer. If the aggregate principal amount of Notes validly
tendered and not withdrawn by Holders thereof exceeds the Deficiency Offer
Amount, Notes to be purchased will be selected on a pro rata basis.
If a Deficiency Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Deficiency Purchase
Price for all of the Notes that might be delivered by Holders seeking to accept
the Deficiency Offer. In the event a Deficiency Payment Date occurs at a time
when the Company does not have available funds sufficient to pay the Deficiency
Purchase price, an Event of Default would occur under the Indenture.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Deficiency Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
<PAGE>
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than (x)
dividends or distributions made to the Company or any Restricted Subsidiary of
the Company or (y) dividends or distributions payable solely in Qualified
Capital Stock of the Company or warrants, rights or options to purchase or
acquire shares of Qualified Capital Stock of the Company) on or in respect of
shares of the Capital Stock of the Company or any Restricted Subsidiary to
holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Company or any Restricted Subsidiary
or any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock (other than through the exchange therefor solely of Qualified
Capital Stock of the Company or warrants, rights or options to purchase or
acquire shares of Qualified Capital Stock of the Company), (c) make any
principal payment on, purchase, defease, redeem, prepay, decrease or otherwise
acquire or retire for value, prior to any scheduled final maturity, scheduled
repayment or scheduled sinking fund payment, any Indebtedness of the Company or
a Restricted Subsidiary that is subordinate or junior in right of payment to the
Notes or such Restricted Subsidiary's Guarantee, as the case may be, or (d) make
any Investment (other than a Permitted Investment) (each of the foregoing
actions set forth in clauses (a), (b), (c) and (d) being referred to as a
"Restricted Payment"), if at the time of such Restricted Payment or immediately
after giving effect thereto, (i) a Default or an Event of Default shall have
occurred and be continuing or (ii) the Company is not able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with "C Limitation on Incurrence of Additional Indebtedness" above or
(iii) the aggregate amount of Restricted Payments (including such proposed
Restricted Payment) made subsequent to the Issue Date (the amount expended for
such purposes, if other than in cash, being the fair market value of such
property as determined reasonably and in good faith by the Board of Directors of
the Company) shall exceed the sum of: (A) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company earned subsequent to the Issue Date and on or prior to
the last date of the Company's fiscal quarter immediately preceding such
Restricted Payment (the "Reference Date") (treating such period as a single
accounting period); plus (B) 100% of the aggregate net cash proceeds received by
the Company from any Person (other than a Restricted Subsidiary of the Company)
from the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company; plus (C) without
duplication of any amounts included in clause (iii)(B) above, 100% of the
aggregate net cash proceeds of any equity contribution received by the Company
from a holder of the Company's Capital Stock (excluding, in the case of clauses
(iii)(B) and (C), any net cash proceeds from an Equity Offering to the extent
used to redeem the Notes); plus (D) an amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends, interest
payments, repayments of loans or advances, or other transfers of cash, in each
case to the Company or to any Restricted Subsidiary of the Company from
Unrestricted Subsidiaries (but without duplication of any such amount included
in calculating cumulative Consolidated Net Income of the Company), or from
resignations of Unrestricted Subsidiaries as Restricted Subsidiaries (in each
case valued as provided in "Limitation on Designation of Unrestricted
Subsidiaries" below), not to exceed, in the case of any Unrestricted Subsidiary,
the amount of Investments previously made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary and which was treated as a Restricted
Payment under the Indenture; plus (E) without duplication of the immediately
preceding subclause (D), an amount equal to the lesser of the cost or net cash
proceeds received upon the sale or other disposition of any Investment made
after the Issue Date which had been treated as a Restricted Payment (but without
duplication of any such amount included in calculating cumulative Consolidated
Net Income of the Company); plus (F) $1.0 million.
<PAGE>
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph shall not prohibit: (1) the payment of any dividend or
redemption payment within 60 days after the date of declaration of such dividend
or the applicable redemption if the dividend or redemption payment, as the case
may be, would have been permitted on the date of declaration; (2) if no Default
or Event of Default shall have occurred and be continuing, the acquisition of
any shares of Capital Stock of the Company, through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Restricted
Subsidiary of the Company) of shares of Qualified Capital Stock of the Company;
(3) if no Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company or a Restricted Subsidiary that
is subordinate or junior in right of payment to the Notes or such Restricted
Subsidiary's Guarantee, as the case may be, either (a) solely in exchange for
shares of Qualified Capital Stock of the Company or warrants, rights or options
to purchase or acquire shares of Qualified Capital Stock of the Company, or (b)
through the application of net proceeds of a substantially concurrent sale for
cash (other than to a Restricted Subsidiary of the Company) of (I) shares of
Qualified Capital Stock of the Company or (II) Refinancing Indebtedness, (4) if
no Default or Event of Default shall have occurred and be continuing, the
acquisition, in odd-lot purchase transactions, of shares of the Company's Common
Stock, which purchases will not exceed $100,000 in the aggregate in any calendar
year; and (5) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of shares of the Company's Common Stock pursuant to
Company repurchase options in stock option agreements between the Company and
employees of the Company and its subsidiaries, which purchases will not exceed
$1,000,000 in the aggregate in any calendar year. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (iii) of the immediately preceding paragraph, amounts expended
pursuant to clauses (1), (2), (4) and (5) shall be included in such calculation.
Limitation on Asset Sales. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(a) the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of (as determined in good
faith by the Company's Board of Directors or senior management of the Company);
(b) (i) at least 85% of the consideration received by the Company or such
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the
form of cash or Cash Equivalents and is received at the time of such
disposition; and (c) upon the consummation of an Asset Sale, the Company shall
apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 270 days of receipt thereof either (i) to
repay or prepay Indebtedness outstanding under the Senior Credit Facility,
including, without limitation, a permanent reduction in the related commitment,
(ii) to repay or prepay any Indebtedness of the Company that is secured by a
Lien permitted to be incurred pursuant to "Limitation on Liens" below, (iii) to
make an investment in properties or assets that replace the properties or assets
that were the subject of such Asset Sale or in properties or assets that will be
used in the business of the Company and its Restricted Subsidiaries as existing
on the Issue Date or in businesses reasonably related thereto ("Replacement
Assets"), (iv) to an investment in Crude Oil and Natural Gas Related Assets or
(v) a combination of prepayment and investment permitted by the foregoing
clauses (c)(i) through (c)(iv). On the 271st day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(c)(i) through (c)(iv) of the next preceding sentence (each a "Net Proceeds
Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have been
received by the Company or such Restricted Subsidiary but which have not been
applied on or before such Net Proceeds Offer Trigger Date as permitted in
clauses (c)(i) through (c)(iv) of the next preceding sentence (each a "Net
Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary, as the case may be, to make an offer to purchase (a "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a pro rata basis, that principal amount of Notes purchasable with
the Net Proceeds Offer Amount at a price equal to 100% of the principal amount
of the Notes to be purchased, plus accrued and unpaid interest, if any, thereon
to the date of purchase; provided, however, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5.0 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $5.0 million shall be applied as required pursuant to this
paragraph).
<PAGE>
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "Merger, Consolidation and
Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company
and its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (a) the consideration for
such Asset Sale constitutes Replacement Assets and/or Crude Oil and Natural Gas
Related Assets and (b) such Asset Sale is for fair market value; provided,
however, that any consideration not constituting Replacement Assets and Crude
Oil and Natural Gas Related Assets received by the Company or any of its
Restricted Subsidiaries in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the two immediately preceding paragraphs.
Notice of each Net Proceeds Offer will be mailed to the record Holders
as shown on the register of Holders within 30 days following the Net Proceeds
Offer Trigger Date, with a copy to the Trustee, and shall comply with the
procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds
Offer, Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly tender
Notes with an aggregate principal amount exceeding the Net Proceeds Offer
Amount, Notes of tendering Holders will be purchased on a pro rata basis (based
on principal amounts tendered). A Net Proceeds Offer shall remain open for a
period of 20 Business Days or such longer period as may be required by law.
The Company's ability to repurchase Notes in a Net Proceeds Offer is
restricted by the terms of the Senior Credit Facility and may be prohibited or
otherwise limited by the terms of any then existing borrowing arrangements and
the Company's financial resources.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
<PAGE>
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances,
or to pay any Indebtedness or other obligation owed, to the Company or any other
Restricted Subsidiary; (c) guarantee any Indebtedness or any other obligation of
the Company or any Restricted Subsidiary; or (d) transfer any of its property or
assets to the Company or any other Restricted Subsidiary (each such encumbrance
or restriction, a "Payment Restriction"), except for such encumbrances or
restrictions existing under or by reason of: (i) applicable law; (ii) the
Indenture; (iii) the Senior Credit Facility; (iv) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary; (v) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to such Restricted Subsidiary, or
the properties or assets of such Restricted Subsidiary, other than the Person or
the properties or assets of the Person so acquired; (vi) agreements existing on
the Issue Date to the extent and in the manner such agreements are in effect on
the Issue Date; (vii) customary restrictions with respect to a Restricted
Subsidiary of the Company pursuant to an agreement that has been entered into
for the sale or disposition of Capital Stock or assets of such Restricted
Subsidiary to be consummated in accordance with the terms of the Indenture
solely in respect of the assets or Capital Stock to be sold or disposed of;
(viii) any instrument governing a Permitted Lien, to the extent and only to the
extent such instrument restricts the transfer or other disposition of assets
subject to such Permitted Lien; or (ix) an agreement governing Refinancing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (ii), (iii), (v) or (vi) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Refinancing Indebtedness are no less favorable
to the Holders in any material respect as determined by the Board of Directors
of the Company in their reasonable and good faith judgment than the provisions
relating to such encumbrance or restriction contained in the applicable
agreement referred to in such clause (ii), (iii), (v) or (vi).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company
will not cause or permit any of its Restricted Subsidiaries to issue any
Preferred Stock (other than to the Company or to a Wholly Owned Restricted
Subsidiary) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary.
Limitation on Liens. Other than Permitted Liens, the Company will not,
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or permit or suffer to exist any Liens of any
kind against or upon any property or assets of the Company or any of its
Restricted Subsidiaries (whether owned on the Issue Date or acquired after the
Issue Date) or any proceeds therefrom, or assign or otherwise convey any right
to receive income or profits therefrom unless (a) in the case of Liens securing
Indebtedness that is expressly subordinate or junior in right of payment to the
Notes or any Guarantee, the Notes or such Guarantee, as the case may be, are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens at least to the same extent as the Notes are senior in
priority to such Indebtedness and (b) in all other cases, the Notes and the
Guarantees are equally and ratably secured.
<PAGE>
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or in a series of related transactions, consolidate or merge with or
into any Person, or sell, assign, transfer, lease, convey or otherwise dispose
of (or cause or permit any Restricted Subsidiary to sell, assign, transfer,
lease, convey or otherwise dispose of) all or substantially all of the Company's
assets (determined on a consolidated basis for the Company and its Restricted
Subsidiaries), whether as an entirety or substantially as an entirety to any
Person unless: (a) either (i) the Company shall be the surviving or continuing
corporation or (ii) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and its Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any state
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (b)
immediately after giving effect to such transaction and the assumption
contemplated by clause (a)(ii)(y) above (including giving effect to any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Company or such Surviving Entity, as the case
may be, (i) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction and
(ii) shall be able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to "Limitation on Incurrence of Additional
Indebtedness" above; (c) immediately before and immediately after giving effect
to such transaction and the assumption contemplated by clause (a)(ii)(y) above
(including, without limitation, giving effect to any Indebtedness incurred or
anticipated to be incurred and any Lien granted in connection with or in respect
of the transaction), no Default or Event of Default shall have occurred or be
continuing; (d) each Subsidiary Guarantor, unless it is the other party to the
transactions described above, shall have by supplemental indenture to the
Indenture confirmed that its Guarantee of the Notes shall apply to such Person's
obligations under the Indenture and the Notes; (e) if any of the properties or
assets of the Company or any of its Restricted Subsidiaries would upon such
transaction or series of related transactions become subject to any Lien (other
than a Permitted Lien), the creation and imposition of such Lien shall have been
in compliance with "Limitation on Liens" above; and (f) the Company or the
Surviving Entity, as the case may be, shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition, and, if a supplemental indenture is required in connection with
such transaction, such supplemental indenture, comply with the applicable
provisions of the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied; provided, however, that such
counsel may rely, as to matters of fact, on a certificate or certificates of
officers of the Company.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the foregoing,
in which the Company is not the continuing corporation, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
and the Notes with the same effect as if such surviving entity had been named as
such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under "Limitation on Asset Sales") will not, and the
Company will not cause or permit any Subsidiary Guarantor to, consolidate with
or merge with or into any Person other than the Company or another Subsidiary
Guarantor that is a Wholly Owned Restricted Subsidiary unless: (a) the entity
formed by or surviving any such consolidation or merger (if other than the
Subsidiary Guarantor) or to which such sale, lease, conveyance or other
disposition shall have been made is a corporation organized and existing under
the laws of the United States or any state thereof or the District of Columbia;
(b) such entity assumes by execution of a supplemental indenture all of the
obligations of the Subsidiary Guarantor under its Guarantee; (c) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; and (d) immediately after giving effect to such
transaction and the use of any net proceeds therefrom on a pro forma basis, the
Company could satisfy the provisions of clause (b) of the first paragraph of
this covenant. Any merger or consolidation of a Subsidiary Guarantor with and
into the Company (with the Company being the surviving entity) or another
Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary need only
comply with clause (d) of the first paragraph of this covenant.
<PAGE>
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into, amend or permit or suffer to exist any transaction or
series of related transactions (including, without limitation, the purchase,
sale, lease or exchange of any property, the guaranteeing of any Indebtedness or
the rendering of any service) with, or for the benefit of, any of their
respective Affiliates (each an "Affiliate Transaction"), other than (i)
Affiliate Transactions permitted under paragraph (b) of this covenant and (ii)
Affiliate Transactions that are on terms that are fair and reasonable to the
Company or the applicable Restricted Subsidiary and are no less favorable to the
Company or the applicable Restricted Subsidiary than those that might reasonably
have been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of the Company or such Restricted
Subsidiary. All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $1.0 million
shall be approved by the Board of Directors of the Company, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $10.0 million, the Company shall,
prior to the consummation thereof, obtain a favorable opinion as to the fairness
of such transaction or series of related transactions to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial point of
view, from an Independent Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Board of Directors or senior
management of the Company or such Restricted Subsidiary, as the case may be;
(ii) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided, however, that such transactions are not otherwise
prohibited by the Indenture; and (iii) Restricted Payments permitted by the
Indenture.
Limitation on Restricted and Unrestricted Subsidiaries. The Board of
Directors of the Company may, if no Default or Event of Default shall have
occurred and be continuing or would arise therefrom, designate an Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that (i) any such
redesignation shall be deemed to be an incurrence as of the date of such
redesignation by the Company and its Restricted Subsidiaries of the Indebtedness
(if any) of such redesignated Subsidiary for purposes of "Limitation on
Incurrence of Additional Indebtedness" above, (ii) unless such redesignated
Subsidiary shall not have any Indebtedness outstanding, other than Indebtedness
which would be Permitted Indebtedness, no such designation shall be permitted if
immediately after giving effect to such redesignation and the incurrence of any
such additional Indebtedness the Company could not incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to "Limitation on
Incurrence of Additional Indebtedness" above and (iii) such Subsidiary assumes
by execution of a supplemental indenture all of the obligations of a Subsidiary
Guarantor under a Guarantee.
The Board of Directors of the Company also may, if no Default or Event
of Default shall have occurred and be continuing or would arise therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if (i) such
designation is at that time permitted under "Limitation on Restricted Payments"
above and (ii) immediately after giving effect to such designation, the Company
could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to "Limitation on Incurrence of Additional Indebtedness" above. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
the filing with the Trustee of a certified copy of the resolution of the Board
of Directors giving effect to such designation or redesignation and an officers'
certificate certifying that such designation or redesignation complied with the
foregoing conditions and setting forth in reasonable detail the underlying
calculations. In the event that any Restricted Subsidiary is designated an
Unrestricted Subsidiary in accordance with this covenant, such Restricted
Subsidiary's Guarantee will be released.
<PAGE>
For purposes of the covenant described under "Limitation on Restricted
Payments" above, (i) an "Investment" shall be deemed to have been made at the
time any Restricted Subsidiary is designated as an Unrestricted Subsidiary in an
amount (proportionate to the Company's equity interest in such Subsidiary) equal
to the net worth of such Restricted Subsidiary at the time that such Restricted
Subsidiary is designated as an Unrestricted Subsidiary; (ii) at any date the
aggregate amount of all Restricted Payments made as Investments since the Issue
Date shall exclude and be reduced by an amount (proportionate to the Company's
equity interest in such Subsidiary) equal to the net worth of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary, not to exceed, in the case of any such redesignation of
an Unrestricted Subsidiary as a Restricted Subsidiary, the amount of Investments
previously made by the Company and its Restricted Subsidiaries in such
Unrestricted Subsidiary (in each case (i) and (ii) Anet worth" to be calculated
based upon the fair market value of the assets of such Subsidiary as of any such
date of designation); and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
Notwithstanding the foregoing, the Board of Directors may not designate
any Subsidiary of the Company to be an Unrestricted Subsidiary if, after such
designation, (a) the Company or any Restricted Subsidiary (i) provides credit
support for, or a guarantee of, any Indebtedness of such Subsidiary (including
any undertaking, agreement or instrument evidencing such Indebtedness) or (ii)
is directly or indirectly liable for any Indebtedness of such Subsidiary or (b)
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, any Restricted Subsidiary which is not a Subsidiary of the
Subsidiary to be so designated.
Subsidiaries of the Company that are not designated by the Board of
Directors as Restricted or Unrestricted Subsidiaries will be deemed to be
Restricted Subsidiaries. Notwithstanding any provisions of this covenant, all
Subsidiaries of an Unrestricted Subsidiary will be Unrestricted Subsidiaries.
Additional Subsidiary Guarantees. If the Company or any of its
Restricted Subsidiaries transfers or causes to be transferred, in one
transaction or a series of related transactions, any property to any Restricted
Subsidiary that is not a Subsidiary Guarantor, or if the Company or any of its
Restricted Subsidiaries shall organize, acquire or otherwise invest in or hold
an Investment in another Restricted Subsidiary having total consolidated assets
with a book value in excess of $500,000 that is not a Subsidiary Guarantor, then
such transferee or acquired or other Restricted Subsidiary shall (a) execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes and
the Indenture on the terms set forth in the Indenture and (b) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and constitutes
a legal, valid, binding and enforceable obligation of such Restricted
Subsidiary. Thereafter, such Restricted Subsidiary shall be a Subsidiary
Guarantor for all purposes of the Indenture.
Limitation on Conduct of Business. The Company will not, and will not
permit any of its Restricted Subsidiaries to, engage in the conduct of any
business other than the Crude Oil and Natural Gas Business.
Reports to Holders. The Company will deliver to the Trustee within 15
days after the filing of the same with the Commission, copies of the quarterly
and annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders or prospective Holders (upon request) with such
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the
other provisions of Section 314(a) of the TIA.
Events of Default
The following events will be defined in the Indenture as "Events of
Default":
(a) the failure to pay interest (including any Additional
Interest) on any Notes when the same becomes due and payable and the
default continues for a period of 30 days;
<PAGE>
(b) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds
Offer);
(c) a default in the observance or performance of any other
covenant or agreement contained in the Indenture which default
continues for a period of 45 days after the Company receives written
notice specifying the default (and demanding that such default be
remedied) from the Trustee or the Holders of at least 25% of the
outstanding principal amount of the Notes (except in the case of a
default with respect to observance or performance of any of the terms
or provisions of "Change of Control" or "Certain Covenants - Merger,
Consolidation and Sale of Assets" or "Limitation on Asset Sales," which
will constitute an Event of Default with such notice requirement but
without such passage of time requirement);
(d) a default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any Indebtedness of the Company or of any Restricted Subsidiary (or the
payment of which is guaranteed by the Company or any Restricted
Subsidiary), whether such Indebtedness now exists or is created after
the Issue Date, which default (i) is caused by a failure to pay
principal of or premium, if any, or interest on such Indebtedness after
any applicable grace period provided in such Indebtedness on the date
of such default (a Apayment default") or (ii) results in the
acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there
has been a payment default or the maturity of which has been so
accelerated, aggregates at least $5 million;
(e) one or more judgments in an aggregate amount in excess of $5
million (unless covered by insurance by a reputable insurer as to which
the insurer has not disclaimed coverage) shall have been rendered
against the Company or any of its Restricted Subsidiaries and such
judgments remain undischarged, unpaid or unstayed for a period of 60
days after such judgment or judgments become final and non-appealable;
(f) certain events of bankruptcy affecting the Company or any of
its Significant Subsidiaries; or
(g) any of the Guarantees cease to be in full force and effect or
any of the Guarantees are declared to be null and void or invalid and
unenforceable or any of the Subsidiary Guarantors denies or disaffirms
its liability under its Guarantees (other than by reason of release of
a Subsidiary Guarantor in accordance with the terms of the Indenture).
The Indenture provides that, if an Event of Default (other than an
Event of Default specified in clause (f) above relating to the Company) shall
occur and be continuing, the Trustee or the Holders of at least 25% in principal
amount of outstanding Notes may declare the principal of, premium, if any, and
accrued and unpaid interest on all the Notes to be due and payable by notice in
writing to the Company and the Trustee specifying the Event of Default and that
it is a Anotice of acceleration," and the same shall become immediately due and
payable. If an Event of Default specified in clause (f) above relating to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
<PAGE>
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (a) if the rescission would not
conflict with any judgment or decree, (b) if all existing Events of Default have
been cured or waived except nonpayment of principal or interest that has become
due solely because of such acceleration, (c) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (d) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (e) in the event of the cure or waiver of an
Event of Default of the type described in clause (f) of the description of
Events of Default above, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived; provided, however, that such counsel may rely, as to matters of fact,
on a certificate or certificates of officers of the Company. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
The Indenture provides that, at any time prior to the declaration of
acceleration of the Notes, the Holders of a majority in principal amount of the
Notes may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any Notes.
The Indenture provides that Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture and under the TIA.
During the existence of an Event of Default, the Trustee is required to exercise
such rights and powers vested in it under the Indenture and use the same degree
of care and skill in its exercise thereof as a prudent person would exercise or
use under the circumstances in the conduct of his or her own affairs. Subject to
the provisions of the Indenture relating to the duties of the Trustee, whether
or not an Event of Default shall occur and be continuing, the Trustee is under
no obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer's knowledge of any
Default or Event of Default (provided that such officers shall provide
certification as to the existence of any Default or Event of Default at least
annually whether or not they know of any Default or Event of Default) that has
occurred and, if applicable, describe such Default or Event of Default and the
status thereof.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have its
obligations and the corresponding obligations of the Subsidiary Guarantors
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding Notes, and
satisfied all of its obligations with respect to the Notes, except for (a) the
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on the Notes when such payments are due, (b) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (c) the rights, powers, trust,
duties and immunities of the Trustee and the Company's obligations in connection
therewith and (d) the Legal Defeasance provisions of the Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations of
the Company released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (other
than non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under A- Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
<PAGE>
In order to exercise either Legal Defeasance or Covenant Defeasance, (a)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in United States dollars, non-callable United States
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the Notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be; (b) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (i) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, provided, however, such opinion of counsel shall
not be required if all the Notes will become due and payable on the maturity
date within one year or are to be called for redemption within one year under
arrangements satisfactory to the Trustee, (c) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (d) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under the Indenture
or any other agreement or instrument to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound; (f) the Company shall have delivered to the
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders over any other creditors of
the Company or with the intent of defeating, hindering, delaying or defrauding
any other creditors of the Company or others; (g) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been complied
with; provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Company; (h) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; provided, however, that such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company; and (i) certain other customary conditions precedent are satisfied.
<PAGE>
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (a) either (i) all the Notes, theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (ii) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (b)
the Company has paid all other sums payable under the Indenture by the Company;
and (c) the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with; provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Company.
Modification of the Indenture
From time to time, the Company, the Subsidiary Guarantors and the
Trustee, without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies, to
comply with any requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the TIA or to make any change that
would provide any additional benefit or rights to the Holders or that does not
adversely affect the rights of any Holder. In formulating its opinion on such
matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel;
provided, however, that in delivering such opinion of counsel, such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company. Other modifications and amendments of the Indenture may be made with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no amendment may: (a) reduce the amount of
Notes whose Holders must consent to an amendment; (b) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Notes; (c) reduce the principal of or
change or have the effect of changing the fixed maturity of any Notes, or change
the date on which any Notes may be subject to redemption or repurchase, or
reduce the redemption or repurchase price therefor; (d) make any Notes payable
in money other than that stated in the Notes; (e) make any change in provisions
of the Indenture protecting the right of each Holder to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment, or permitting Holders of a majority in
principal amount of Notes to waive Defaults or Events of Default; (f) amend,
change or modify in any material respect the obligation of the Company to make
and consummate a Change of Control Offer in the event of a Change of Control or
make and consummate a Net Proceeds Offer with respect to any Asset Sale that has
been consummated or modify any of the provisions or definitions with respect
thereto; (g) modify or change any provision of the Indenture or the related
definitions affecting the ranking of the Notes or any Guarantee in a manner
which adversely affects the Holders; or (h) release any Subsidiary Guarantor
from any of its obligations under its Guarantee or the Indenture otherwise than
in accordance with the terms of the Indenture.
Governing Law
The Indenture provides that the Indenture, the Notes and the Guarantees
are governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the law of another jurisdiction would be
required thereby.
The Trustee
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
<PAGE>
The Indenture and the provisions of the TIA contain certain limitations
on the rights of the Trustee, should it become a creditor of the Company or a
Subsidiary Guarantor, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided, however, that if the Trustee acquires any conflicting
interest as described in the TIA, it must eliminate such conflict or resign.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in
the Indenture. Reference is made to the form of Indenture for the full
definition of all such terms, as well as any other terms used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries (i) existing at the time such Person becomes a Restricted
Subsidiary or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or (ii) which becomes Indebtedness of the Company or
a Restricted Subsidiary in connection with the acquisition of assets from such
Person, in each case not incurred in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination,
<PAGE>
(a) the sum of (i) discounted future net revenues from proved oil
and gas reserves of the Company and its consolidated Subsidiaries,
calculated in accordance with Commission guidelines (before any state
or federal income tax), as estimated by one or more reputable firms of
independent petroleum engineers as of a date no earlier than the date
of the Company's latest annual consolidated financial statements, as
increased by, as of the date of determination, the estimated discounted
future net revenues from (A) estimated proved oil and natural gas
reserves acquired since the date of such year-end reserve report, and
(B) estimated oil and natural gas reserves attributable to upward
revisions of estimates of proved oil and gas reserves since the date of
such year-end reserve report due to exploration, development or
exploitation activities, in each case calculated in accordance with
Commission guidelines (utilizing the prices utilized in such year-end
reserve report), and decreased by, as of the date of determination, the
estimated discounted future net revenues from (C) estimated proved oil
and natural gas reserves produced or disposed of since the date of such
year-end reserve report and (D) estimated oil and natural gas reserves
attributable to downward revisions of estimates of proved oil and
natural gas reserves since the date of such year-end reserve report due
to changes in geological conditions or other factors which would, in
accordance with standard industry practice, cause such revisions, in
each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report);
provided, however, that, in the case of each of the determinations made
pursuant to clauses (A) through (D), such increases and decreases shall
be as estimated by the Company's petroleum engineers, unless in the
event that there is a Material Change as a result of such acquisitions,
dispositions or revisions, then the discounted future net revenues
utilized for purposes of this clause (a) (i) shall be confirmed in
writing, by one or more reputable firms of independent petroleum
engineers (which may be the Company's independent petroleum engineers
who prepare the Company's annual reserve report), plus (ii) the
capitalized costs that are attributable to oil and natural gas
properties of the Company and its Subsidiaries to which no proved oil
and natural gas reserves are attributable, based on the Company's books
and records as of a date no earlier than the date of the Company's
latest annual or quarterly financial statements, plus (iii) the Net
Working Capital on a date no earlier than the date of the Company's
latest consolidated annual or quarterly financial statements, plus (iv)
with respect to each other tangible asset of the Company or its
consolidated Restricted Subsidiaries specifically including, but not to
the exclusion of any other qualifying tangible assets, the Company's or
its consolidated Restricted Subsidiaries' Crude Oil and Natural Gas
Related Assets (to the extent not included in (i), (ii) and (iii) above
or otherwise in this clause (iv)) (less any remaining deferred income
taxes which have been allocated to such Crude Oil and Natural Gas
Related Assets), land, equipment, leasehold improvements, investments
carried on the equity method, restricted cash and the carrying value of
marketable securities, the greater of (A) the net book value of such
other tangible asset on a date no earlier than the date of the
Company's latest consolidated annual or quarterly financial statements
or (B) the appraised value, as estimated by a qualified Independent
Advisor, of such other tangible assets of the Company and its
Restricted Subsidiaries, as of a date no earlier than the date of the
Company's latest audited financial statements, plus (v) to the extent
deducted in the calculation of clause (i) above, reserves against
plugging and abandonment expenses; provided, that such reserves shall
be included under this clause (v) only to the extent of any cash
deposited by the Company against such liabilities, minus
(b) minority interests and, to the extent not otherwise taken into
account in determining Adjusted Consolidated Net Tangible Assets, any
natural gas balancing liabilities of the Company and its consolidated
Restricted Subsidiaries reflected in the Company's latest audited
financial statements.
In addition to, but without duplication of, the foregoing, for purposes of this
definition, "Adjusted Consolidated Net Tangible Assets" shall be calculated
after giving effect, on a pro forma basis, to (1) any Investment not prohibited
by the Indenture, to and including the date of the transaction giving rise to
the need to calculate Adjusted Consolidated Net Tangible Assets (the "Assets
Transaction Date"), in any other Person that, as a result of such Investment,
becomes a Restricted Subsidiary of the Company, (2) the acquisition, to and
including the Assets Transaction Date (by merger, consolidation or purchase of
stock or assets), of any business or assets, including, without limitation,
Permitted Industry Investments, and (3) any sales or other dispositions of
assets permitted by the Indenture (other than sales of Hydrocarbons or other
mineral products in the ordinary course of business) occurring on or prior to
the Assets Transaction Date.
"Affiliate" means, with respect to any specified Person, (a) any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or under common control with, such specified Person and (b)
any Related Person of such Person. The term Acontrol" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms Acontrolling" and
Acontrolled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "Certain
Covenants - Limitations on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
<PAGE>
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, exchange, lease (other than operating leases entered into in the
ordinary course of business), assignment or other transfer for value by the
Company or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Restricted Subsidiary of
(a) any Capital Stock of any Restricted Subsidiary; or (b) any other property or
assets (including any interests therein) of the Company or any Restricted
Subsidiary, including any disposition by means of a merger, consolidation or
similar transaction; provided, however, that Asset Sales shall not include (i)
the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company in a transaction which is made in
compliance with the provisions of "Certain Covenants - Merger, Consolidation and
Sale of Assets," (ii) any Investment in an Unrestricted Subsidiary which is made
in compliance with the provisions of "Certain Covenants - Limitation on
Restricted Payments," (iii) disposals or replacements of obsolete equipment in
the ordinary course of business, (iv) the sale, lease, conveyance, disposition
or other transfer (each, a "Transfer") by the Company or any Restricted
Subsidiary of assets or property to the Company or one or more Restricted
Subsidiaries, (v) any disposition of Hydrocarbons or other mineral products for
value in the ordinary course of business and (vi) the Transfer by the Company or
any Restricted Subsidiary of assets or property in the ordinary course of
business; provided, however, that the aggregate amount (valued at the fair
market value of such assets or property at the time of such Transfer) of all
such assets and property Transferred since the Issue Date pursuant to this
clause (vi) shall not exceed $1,000,000 in any one year.
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other
day on which banking institutions in the City of New York are required or
authorized by law or other governmental action to be closed.
"Capital Stock" means (a) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and including any
warrants, options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing and (b) with respect to any Person that is
not a corporation, any and all partnership or other equity interests of such
Person.
"Capitalized Lease Obligation" means, as to any Person, the discounted
present value of the rental obligations of such Person under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation at such date, determined in accordance with GAAP.
<PAGE>
"Cash Equivalents" means (a) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United States or any
political subdivision of any such state or any public instrumentality thereof
maturing within one year from the date of acquisition thereof and, at the time
of acquisition, having one of the two highest ratings obtainable from either
Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"); (c) commercial paper maturing no more than one year from the date
of creation thereof and, at the time of acquisition, having a rating of at least
A-1 from S&P or at least P-1 from Moody's; (d) certificates of deposit or
bankers' acceptances maturing within one year from the date of acquisition
thereof issued by any bank organized under the laws of the United States or any
state thereof or the District of Columbia or any United States branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $250 million; (e) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clause (a) above entered into with any bank meeting the qualifications specified
in clause (d) above and (f) money market mutual or similar funds having assets
in excess of $100 million.
"Change of Control" means the occurrence of one or more of the
following events: (a) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Company to any Person or group of related Persons for purposes
of Section 13(d) of the Exchange Act (a "Group") (whether or not otherwise in
compliance with the provisions of the Indenture); (b) the approval by the
holders of Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (c) any Person or Group shall
become the owner, directly or indirectly, beneficially or of record, of shares
representing more than 20% of the aggregate ordinary voting power represented by
the issued and outstanding Capital Stock of the Company; provided, that, if any
Person or Group shall become the owner, directly or indirectly, beneficially or
of record, of shares representing up to 50% of the aggregate ordinary voting
power of the Company's Capital Stock as a result of the acquisition by the
Company or any of its subsidiaries from such Person or Group of Crude Oil and
Natural Gas Related Assets, such ownership shall not constitute a Change of
Control; or (d) the replacement of a majority of the Board of Directors of the
Company over a two-year period from the directors who constituted the Board of
Directors of the Company at the beginning of such period with directors whose
replacement shall not have been approved (by recommendation, appointment,
nomination or election, as the case may be) by a vote of at least a majority of
the Board of Directors of the Company then still in office who either were
members of such Board of Directors at the beginning of such period or whose
election as a member of such Board of Directors was previously so approved.
"Change of Control Offer" has the meaning set forth under "Change of
Control."
"Change of Control Payment Date" has the meaning set forth under
"Change of Control."
"Commission" means the Securities and Exchange Commission.
"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company Properties" means all Properties, and equity, partnership or
other ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Company or the Subsidiaries, which business activities are not prohibited
by the terms of the Indenture.
"Consolidated EBITDA" means, for any period, the sum (without
duplication) of (a) Consolidated Net Income and (b) to the extent Consolidated
Net Income has been reduced thereby, (i) all income taxes of the Company and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary, unusual or non-recurring
gains or losses or taxes attributable to sales or dispositions outside the
ordinary course of business), (ii) Consolidated Interest Expense, (iii) the
amount of any Preferred Stock dividends paid by the Company and its Restricted
Subsidiaries and (iv) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in accordance
with GAAP.
<PAGE>
"Consolidated EBITDA Coverage Ratio" means, with respect to the Company,
the ratio of (a) Consolidated EBITDA of the Company during the four full fiscal
quarters for which financial information in respect thereof is available (the
"Four Quarter Period") ending on or prior to the date of the transaction giving
rise to the need to calculate the Consolidated EBITDA Coverage Ratio (the
"Transaction Date") to (b) Consolidated Fixed Charges of the Company for the
Four Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect (without duplication) on a pro
forma basis for the period of such calculation to (a) the incurrence or
repayment of any Indebtedness of the Company or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (b) any Asset
Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of its Restricted Subsidiaries (including any Person who becomes
a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness, and also
including, without limitation, any Consolidated EBITDA attributable to the
assets which are the subject of the Asset Acquisition or Asset Sale during the
Four Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period. If the Company or any of its
Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if the Company or the Restricted Subsidiary, as the
case may be, had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated EBITDA Coverage Ratio," (i) interest on outstanding Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (ii) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Four Quarter
Period; (iii) notwithstanding clauses (i) and (ii) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (a) Consolidated Interest Expense
(including any premium or penalty paid in connection with redeeming or retiring
Indebtedness of the Company and its Restricted Subsidiaries prior to the stated
maturity thereof pursuant to the agreements governing such Indebtedness), plus
(b) the product of (i) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(ii) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local
income tax rate of such Person, expressed as a decimal.
<PAGE>
"Consolidated Interest Expense" means, with respect to the Company for
any period, the sum of, without duplication: (a) the aggregate of the interest
expense of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (i) any amortization of original issue discount, (ii) the net costs
under Interest Swap Obligations, (iii) all capitalized interest and (iv) the
interest portion of any deferred payment obligation; and (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and its Restricted Subsidiaries during such
period, as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company for any
period, the aggregate net income (or loss) of the Company and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom (a)
after-tax gains from Asset Sales or abandonments or reserves relating thereto,
(b) after-tax items classified as extraordinary or nonrecurring gains, (c) the
net income of any Person acquired in a Apooling of interests" transaction
accrued prior to the date it becomes a Restricted Subsidiary or is merged or
consolidated with the Company or any Restricted Subsidiary, (d) the net income
(but not loss) of any Restricted Subsidiary to the extent that the declaration
of dividends or similar distributions by that Restricted Subsidiary of that
income is restricted by charter, contract, operation of law or otherwise, (e)
the net income of any Person in which the Company has an interest, other than a
Restricted Subsidiary, except to the extent of cash dividends or distributions
actually paid to the Company or to a Restricted Subsidiary by such Person, (f)
income or loss attributable to discontinued operations (including, without
limitation, operations disposed of during such period whether or not such
operations were classified as discontinued) and (g) in the case of a successor
to the Company by consolidation or merger or as a transferee of the Company's
assets, any net income (or loss) of the successor corporation prior to such
consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person as of any date means the
consolidated stockholders' equity of such Person, determined on a consolidated
basis in accordance with GAAP, less (without duplication) amounts attributable
to Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to the Company, for
any period, the aggregate depreciation, depletion, amortization and other
non-cash expenses of the Company and its Restricted Subsidiaries reducing
Consolidated Net Income of the Company for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Consolidation" means, with respect to any Person, the consolidation of
the accounts of the Restricted Subsidiaries of such Person with those of such
Person, all in accordance with GAAP; provided, however, that Aconsolidation"
will not include consolidation of the accounts of any Unrestricted Subsidiary of
such Person with the accounts of such Person. The term Aconsolidated" has a
correlative meaning to the foregoing.
"Covenant Defeasance" has the meaning set forth under "Legal Defeasance
and Covenant Defeasance."
"Crude Oil and Natural Gas Business" means (i) the acquisition,
exploration, development, operation and disposition of interests in oil, natural
gas and other Hydrocarbon properties located in the Western Hemisphere, (ii) the
gathering, marketing, treating, processing, storage, selling and transporting of
any production from such interests or properties of the Company or of others and
(iii) activities incidental to the foregoing.
"Crude Oil and Natural Gas Hedge Agreements" means, with respect to any
Person, any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that are designed to provide protection against oil and natural gas
price fluctuations.
<PAGE>
"Crude Oil and Natural Gas Properties" means all Properties, including
equity or other ownership interests therein, owned by any Person which have been
assigned Aproved oil and gas reserves" as defined in Rule 4-10 of Regulation S-X
of the Securities Act as in effect on the Issue Date.
"Crude Oil and Natural Gas Related Assets" means any Investment or
capital expenditure (but not including additions to working capital or
repayments of any revolving credit or working capital borrowings) by the Company
or any Subsidiary of the Company which is related to the Crude Oil and Natural
Gas Business.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Deficiency Date" has the meaning set forth under "Maintenance of
Adjusted Consolidated Net Tangible Assets."
"Deficiency Offer" has the meaning set forth under "Maintenance of
Adjusted Consolidated Net Tangible Assets."
"Deficiency Offer Amount" has the meaning set forth under "Maintenance
of Adjusted Consolidated Net Tangible Assets."
"Deficiency Payment Date" has the meaning set forth under "Maintenance
of Adjusted Consolidated Net Tangible Assets."
"Deficiency Purchase Price" has the meaning set forth under
"Maintenance of Adjusted Consolidated Net Tangible Assets."
"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is mandatorily redeemable at the sole option of the
holder thereof, in whole or in part, in either case, on or prior to the final
maturity of the Notes.
"Equity Offering" means an offering of Qualified Capital Stock of the
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.
"Fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Company acting reasonably and in good faith and shall be evidenced by a
Board Resolution of the Company delivered to the Trustee; provided, however,
that (a) if the aggregate non-cash consideration to be received by the Company
or any Restricted Subsidiary from any Asset Sale shall reasonably be expected to
exceed $5.0 million or (B) if the net worth of any Restricted Subsidiary to be
designated as an Unrestricted Subsidiary shall reasonably be expected to exceed
$5.0 million, then fair market value shall be determined by an Independent
Advisor.
<PAGE>
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.
"Holder" means any Person holding a Note.
"Hydrocarbons" means oil, natural gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all constituents, elements or compounds thereof and products
processed therefrom.
"Incur" has the meaning set forth under "Certain Covenants -
Limitation on Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication,
(a) all Obligations of such Person for borrowed money, (b) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(c) all Capitalized Lease Obligations of such Person, (d) all Obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable), (e) all Obligations for the
reimbursement of any obligor on a letter of credit, banker's acceptance or
similar credit transaction, (f) guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (a) through (e) above and clause
(h) below, (g) all Obligations of any other Person of the type referred to in
clauses (a) through (f) above which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (h) all Obligations under Crude Oil and Natural Gas Hedge
Agreements, Currency Agreements and Interest Swap Obligations and (i) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed redemption
price or repurchase price. For purposes hereof, the Amaximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased on any date
on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the
Company. The Aamount" or Aprincipal amount" of Indebtedness at any time of
determination as used herein represented by (a) any Indebtedness issued at a
price that is less than the principal amount at maturity thereof shall be the
face amount of the liability in respect thereof, (b) any Capitalized Lease
Obligation shall be the amount determined in accordance with the definition
thereof, (c) any Interest Swap Obligations included in the definition of
Permitted Indebtedness shall be zero, (d) all other unconditional obligations
shall be the amount of the liability thereof determined in accordance with GAAP
and (e) all other contingent obligations shall be the maximum liability at such
date of such Person.
"Independent Advisor" means a nationally recognized investment banking
or accounting firm, or a reputable engineering firm, (a) which does not, and
whose directors, officers and employees or Affiliates do not, have a direct or
indirect material financial interest in the Company and (b) which, in the
judgment of the Board of Directors of the Company, is otherwise disinterested,
independent and qualified to perform the task for which it is to be engaged.
<PAGE>
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
(i) loan, advance or other extension of credit (including, without limitation, a
guarantee) or capital contribution to by means of any transfer of cash or other
property (valued at the fair market value thereof as of the date of transfer)
others or any payment for property or services for the account or use of others,
(ii) purchase or acquisition by such Person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued by, any
Person (whether by merger, consolidation, amalgamation or otherwise and whether
or not purchased directly from the issuer of such securities or evidences of
Indebtedness), (iii) guarantee or assumption of the Indebtedness of any other
Person (other than the guarantee or assumption of Indebtedness of such Person or
a Restricted Subsidiary of such Person which guarantee or assumption is made in
compliance with the provisions of "Certain Covenants - Limitation on Incurrence
of Additional Indebtedness" above), and (iv) other items that would be
classified as investments on a balance sheet of such Person prepared in
accordance with GAAP. Notwithstanding the foregoing, "Investment" shall exclude
extensions of trade credit by the Company and its Restricted Subsidiaries on
commercially reasonable terms in accordance with normal trade practices of the
Company or such Restricted Subsidiary, as the case may be. The amount of any
Investment shall not be adjusted for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment. If the
Company or any Restricted Subsidiary sells or otherwise disposes of any Capital
Stock of any Restricted Subsidiary such that, after giving effect to any such
sale or disposition, it ceases to be a Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Capital Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Legal Defeasance" has the meaning set forth under "Legal Defeasance
and Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Material Change" means an increase or decrease of more than 10% during
a fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and natural gas reserves
of the Company and consolidated Subsidiaries (before any state or federal income
tax); provided, however, that the following will be excluded from the Material
Change calculation: (i) any acquisitions during the quarter of oil and natural
gas reserves that have been estimated by independent petroleum engineers and on
which a report or reports exist, (ii) any disposition of properties existing at
the beginning of such quarter that have been disposed of as provided in "Certain
Covenants - Limitation on Asset Sales", and (iii) any reserves added during the
quarter attributable to the drilling or recompletion of wells not included in
previous reserve estimates, but which will be included in future quarters.
<PAGE>
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
received by the Company or any of its Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking into
account any reduction in consolidated tax liability due to available tax credits
or deductions and any tax sharing arrangements, (c) repayment of Indebtedness
that is required to be repaid in connection with such Asset Sale, and (d)
appropriate amounts (determined by the Chief Financial Officer of the Company)
to be provided by the Company or any Restricted Subsidiary, as the case may be,
as a reserve, in accordance with GAAP, against any post-closing adjustments or
liabilities associated with such Asset Sale and retained by the Company or any
Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale (but excluding any
payments which, by the terms of the indemnities will not, be made during the
term of the Notes).
"Net Proceeds Offer" has the meaning set forth under "Certain Covenants
- - Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "Certain
Covenants - Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth under
"Certain Covenants - Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under
"Certain Covenants - Limitation on Asset Sales."
"Net Working Capital" means (i) all current assets of the Company and
its consolidated Subsidiaries, minus (ii) all current liabilities of the Company
and its consolidated Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
prepared in accordance with GAAP.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Payment Restriction" has the meaning set forth under "Certain
Covenants - Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries."
"Permitted Indebtedness" means, without duplication, each of the
following:
(a) the Exchange Notes, the Private Exchange Notes, if any, the Guarantees and
refinancings thereof with Indebtedness constituting Permitted Refinancing
Indebtedness;
(b) Indebtedness incurred pursuant to the Senior Credit Facility in an
aggregate principal amount at any time outstanding not to exceed the
greater of (1) $40.0 million or (2) the sum of (A) $10.0 million and (B)
20% of Adjusted Consolidated Net Tangible Assets, reduced by any required
permanent repayments (which are accompanied by a corresponding permanent
commitment reduction) thereunder (it being recognized that a reduction in
the borrowing base in and of itself shall not be deemed a required
permanent repayment);
(c) Interest Swap Obligations of the Company or a Restricted Subsidiary
covering Indebtedness of the Company or a Restricted Subsidiary; provided,
however, that such Interest Swap Obligations are entered into to protect
the Company and Restricted Subsidiaries from fluctuations in interest rates
on Indebtedness incurred in accordance with the Indenture to the extent the
notional principal amount of such Interest Swap Obligations does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
<PAGE>
(d) Indebtedness of a Restricted Subsidiary to the Company or to a Wholly Owned
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Wholly Owned Restricted Subsidiary, in each case subject to no
Lien held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary; provided, however, that if as of any date any Person other than
the Company or a Wholly Owned Restricted Subsidiary owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date
shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;
(e) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary for so
long as such Indebtedness is held by a Wholly Owned Restricted Subsidiary,
in each case subject to no Lien; provided, however, that (i) any
Indebtedness of the Company to any Wholly Owned Restricted Subsidiary that
is not a Subsidiary Guarantor is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under the Indenture and the
Notes and (ii) if as of any date any Person other than a Wholly Owned
Restricted Subsidiary owns or holds any such Indebtedness or holds a Lien
in respect of such Indebtedness, such date shall be deemed the incurrence
of Indebtedness not constituting Permitted Indebtedness by the Company;
(f) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except
in the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within two Business Days of incurrence;
(g) Indebtedness of the Company or a Restricted Subsidiary represented by
letters of credit for the account of the Company or such Restricted
Subsidiary, as the case may be, in order to provide security for workers'
compensation claims, payment obligations in connection with self-insurance,
bid, plugging and abandonment bonds, performance or surety bonds or
completion guarantees or similar requirements in the ordinary course of
business;
(h) Indebtedness of the Company or a Restricted Subsidiary outstanding on the
Issue Date and refinancings thereof with Indebtedness constituting
Permitted Refinancing Indebtedness;
(i) Capitalized Lease Obligations and Purchase Money Indebtedness of the
Company or any of its Restricted Subsidiaries not to exceed $5.0 million at
any one time outstanding;
(j) Obligations arising in connection with Crude Oil and Natural Gas Hedge
Agreements of the Company or a Restricted Subsidiary;
(k) Indebtedness under Currency Agreements; provided, however, that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and its
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(l) additional Indebtedness of the Company or any of its Restricted
Subsidiaries in an aggregate principal amount at any time outstanding not
to exceed the greater of (i) $10.0 million or (ii) 5.0% of Adjusted
Consolidated Net Tangible Assets of the Company; and
(m) Indebtedness of a Restricted Subsidiary constituting Permitted Refinancing
Indebtedness and which refinances Acquired Indebtedness.
<PAGE>
"Permitted Industry Investments" means (i) capital expenditures, including,
without limitation, acquisitions of Company Properties and interests therein;
(ii) (a) entry into operating agreements, joint ventures, working interests,
royalty interests, mineral leases, unitization agreements, pooling arrangements
or other similar or customary agreements, transactions, properties, interests or
arrangements, and Investments and expenditures in connection therewith or
pursuant thereto, in each case made or entered into in the ordinary course of
the oil and natural gas business, and (b) exchanges of Company Properties for
other Company Properties of at least equivalent value as determined in good
faith by the Board of Directors of the Company; and (iii) Investments of
operating funds on behalf of co-owners of Crude Oil and Natural Gas Properties
of the Company or the Subsidiaries pursuant to joint operating agreements.
"Permitted Investments" means (a) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary that is not subject to any Payment
Restriction; (b) Investments in the Company by any Restricted Subsidiary;
provided, however, that any Indebtedness evidencing any such Investment held by
a Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (c) Investments in cash and Cash Equivalents;
(d) Investments made by the Company or its Restricted Subsidiaries as a result
of consideration received in connection with an Asset Sale made in compliance
with "Certain Covenants - Limitation on Asset Sales" above; and (e) Permitted
Industry Investments.
"Permitted Liens" means each of the following types of Liens:
(a) Liens existing as of the Issue Date to the extent and in the manner such
Liens are in effect on the Issue Date (and any extensions, replacements or
renewals thereof covering property or assets secured by such Liens on the
Issue Date);
(b) Liens securing Indebtedness outstanding under the Senior Credit Facility;
(c) Liens securing the Notes and the Guarantees;
(d) Liens of the Company or a Restricted Subsidiary on assets of any Restricted
Subsidiary;
(e) Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture
and which has been incurred in accordance with the provisions of the
Indenture; provided, however, that such Liens (x) are no less favorable to
the Holders and are not more favorable to the lienholders with respect to
such Liens than the Liens in respect of the Indebtedness being Refinanced
and (y) do not extend to or cover any property or assets of the Company or
any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced;
(f) Liens for taxes, assessments or governmental charges or claims either (x)
not delinquent or (y) contested in good faith by appropriate proceedings,
and as to which the Company or a Restricted Subsidiary, as the case may be,
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
<PAGE>
(g) statutory and contractual Liens of landlords to secure rent arising in the
ordinary course of business to the extent such Liens relate only to the
tangible property of the lessee which is located on such property and Liens
of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and
other Liens imposed by law incurred in the ordinary course of business for
sums not yet delinquent or being contested in good faith, if such reserve
or other appropriate provision, if any, as shall be required by GAAP shall
have been made in respect thereof;
(h) Liens incurred or deposits made in the ordinary course of business (x) in
connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or (y) to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(i) judgment and attachment Liens not giving rise to an Event of Default;
(j) easements, rights-of-way, zoning restrictions, restrictive covenants, minor
imperfections in title and other similar charges or encumbrances in respect
of real property not interfering in any material respect with the ordinary
conduct of the business of the Company or any of its Restricted
Subsidiaries;
(k) any interest or title of a lessor under any Capitalized Lease Obligation;
provided that such Liens do not extend to any property or assets which are
not leased property subject to such Capitalized Lease Obligation;
(l) Liens securing Purchase Money Indebtedness of the Company or any Restricted
Subsidiary; provided, however, that (x) the Purchase Money Indebtedness
shall not be secured by any property or assets of the Company or any
Restricted Subsidiary other than the property and assets so acquired or
constructed (except for proceeds, improvements, rents and similar items
relating to the property or assets so acquired), and (y) the Lien securing
such Indebtedness shall be created within 90 days of such acquisition or
construction;
(m) Liens securing reimbursement obligations with respect to commercial letters
of credit which encumber documents and other property relating to such
letters of credit and products and proceeds thereof;
(n) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(o) Liens securing Interest Swap Obligations which Interest Swap Obligations
relate to Indebtedness that is otherwise permitted under the Indenture and
Liens securing Crude Oil and Natural Gas Hedge Agreements;
<PAGE>
(p) Liens securing Acquired Indebtedness incurred in accordance with "Certain
Covenants Limitation on Incurrence of Additional Indebtedness" above;
provided, however, that (x) such Liens secured such Acquired Indebtedness
at the time of and prior to the incurrence of such Acquired Indebtedness by
the Company or a Restricted Subsidiary and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary, and (y) such Liens do not extend
to or cover any property or assets of the Company or of any of its
Restricted Subsidiaries other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company or a Restricted Subsidiary (except for
proceeds, improvements, rents and similar items relating to the property or
assets so secured) and are no more favorable to the lienholders than those
securing the Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary;
(q) Liens on, or related to, properties and assets of the Company and its
Subsidiaries to secure all or a part of the costs incurred in the ordinary
course of business of exploration, drilling, development, production,
processing, gas gathering, transportation, marketing or storage, or
operation thereof;
(r) Liens on pipeline or pipeline facilities, Hydrocarbons or properties and
assets of the Company and its Subsidiaries which arise out of operation of
law;
(s) royalties, overriding royalties, revenue interests, net revenue interests,
net profit interests, reversionary interests, production payments,
production sales contracts, preferential rights of purchase, operating
agreements, working interests and other similar interests, properties,
arrangements and agreements, all as ordinarily exist with respect to
Properties and assets of the Company and its Subsidiaries or otherwise as
are customary in the oil and gas business;
(t) with respect to any Properties and assets of the Company and its
Subsidiaries, Liens arising under, or in connection with, or related to,
farm-out, farm-in, joint operation, area of mutual interest agreements
and/or other similar or customary arrangements, agreements or interests
that the Company or any Subsidiary determines in good faith to be necessary
for the economic development of such Property;
(u) any (x) interest or title of a lessor or sublessor under any lease, (y)
restriction or encumbrance that the interest or title of such lessor or
sublessor may be subject to (including, without limitation, ground leases
or other prior leases of the demised premises, mortgages, mechanics' liens,
tax liens, and easements), or (z) subordination of the interest of the
lessee or sublessee under such lease to any restrictions or encumbrance
referred to in the preceding clause (y); and
(v) Liens in favor of collecting or payor banks having a right of set-off,
revocation, refund or charge-back with respect to money or instruments of
the Company or any Restricted Subsidiary on deposit with or in possession
of such bank.
"Permitted Refinancing Indebtedness" means, with respect to any
Indebtedness, Indebtedness to the extent representing a Refinancing of such
Indebtedness, in each case that does not (i) result in an increase in the
aggregate principal amount of Indebtedness of such Person as of the date of such
proposed Refinancing (plus the amount of any premium required to be paid under
the terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company and its Restricted Subsidiaries in
connection with such Refinancing) or (ii) create Indebtedness with (x) a
Weighted Average Life to Maturity that is less than the Weighted Average Life to
Maturity of the Indebtedness being Refinanced or (y) a final maturity earlier
than the final maturity of the Indebtedness being Refinanced; provided, however,
that (1) such Refinancing Indebtedness shall be incurred solely by the obligor
of the Indebtedness being Refinanced and (2) if such Indebtedness being
Refinanced is subordinate or junior to the Notes or a Guarantee, then such
Refinancing Indebtedness shall be subordinate to the Notes or such Guarantee, as
the case may be, at least to the same extent and in the same manner as the
Indebtedness being Refinanced.
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.
<PAGE>
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"Property" means, with respect to any Person, any interests of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, Capital Stock,
partnership interests and other equity or ownership interests in any other
Person.
"Private Exchange Notes" means senior subordinated notes of the
Company, guaranteed by the Subsidiary Guarantors, issued in exchange for the
Notes and identical in all material respects to the Exchange Notes, except for
the placement of a restrictive legend on such Private Exchange Notes.
"Purchase Money Indebtedness" means Indebtedness the net proceeds of
which are used to finance the cost (including the cost of construction) of
property or assets acquired in the normal course of business by the Person
incurring such Indebtedness.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Reference Date" has the meaning set forth under "Certain Covenants -
Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Subsidiary Guarantors and the
Initial Purchasers.
"Related Person" of any Person means any other Person directly or
indirectly owning 10% or more of the outstanding voting Common Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the equity interest in such Person).
"Replacement Assets" has the meaning set forth under "Certain Covenants
- Limitation on Asset Sales."
"Restricted Payment" has the meaning set forth under "Certain
Covenants - Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company that has
not been designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with "Certain Covenants - Limitation on Restricted and
Unrestricted Subsidiaries" above. Any such designation may be revoked by a Board
Resolution of the Company delivered to the Trustee, subject to the provisions of
such covenant.
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any Property,
whether owned by the Company or any Restricted Subsidiary at the Issue Date or
later acquired which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.
<PAGE>
"Senior Credit Facility" means the Amended and Restated Credit
Agreement by and among the Company, First Union National Bank, individually and
as agent, and each of the Lenders named therein, or any successor or replacement
agreement and whether by the same or any other agent, lender or group of
lenders, together with the related documents thereto (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreements extending the maturity of, refinancing, replacing, increasing or
otherwise restructuring all or any portion of the Indebtedness under such
agreements.
"Significant Subsidiary" shall have the meaning set forth in Rule
1.02(w) of Regulation S-X under the Securities Act.
"Subsidiary," with respect to any Person, means (a) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (b) any
other Person of which at least a majority of the voting interests under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means (a) each of the Company's Restricted
Subsidiaries as of the Issue Date and (b) each of the Company's Restricted
Subsidiaries that in the future executes a supplemental indenture in which such
Restricted Subsidiary agrees to be bound by the terms of the Indenture as a
Subsidiary Guarantor; provided, however, that any Person constituting a
Subsidiary Guarantor as described above shall cease to constitute a Subsidiary
Guarantor when its Guarantee is released in accordance with the terms of the
Indenture.
"Surviving Entity" has the meaning set forth under "Certain Covenants -
Merger, Consolidation and Sale of Assets."
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with "Certain Covenants
Limitation on Restricted and Unrestricted Subsidiaries" above. Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities normally entitled to vote in the
election of directors are owned by the Company or another Wholly Owned
Restricted Subsidiary.
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of Old Notes for New Notes, but does not
purport to be a complete analysis of all potential tax effects. The discussion
is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, Internal Revenue Service rulings and pronouncements and judicial
decisions now in effect, all of which are subject to change at any time by
legislative, judicial or administrative action. Any such changes may be applied
retroactively in a manner that could adversely affect a holder of the New Notes.
The description does not consider the effect of any applicable foreign, state,
local or other tax laws or estate or gift tax considerations.
EACH HOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO IT OF EXCHANGING OLD NOTES FOR NEW NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The exchange of Old Notes for New Notes should not be an exchange or
otherwise a taxable event to a holder for federal income tax purposes.
Accordingly, a holder should have the same adjusted issue price, adjusted basis
and holding period in the New Notes as it had in the Old Notes immediately
before the exchange.
BOOK-ENTRY; DELIVERY AND FORM
Except as described in the next paragraph, the Notes (and the related
guarantees) initially will be represented by one or more permanent global
certificates in definitive, fully registered form (the "Global Notes"). The
Global Notes will be deposited on the Issue Date with, or on behalf of, The
Depository Trust Company, New York, New York ("DTC") and registered in the name
of a nominee of DTC. The Global Notes will be subject to certain restrictions on
transfer set forth therein and will bear the legend regarding such restrictions
set forth under the heading "Transfer Restrictions" herein.
Notes (i) originally purchased by or transferred to Aforeign
purchasers" (as defined in "Transfer Restrictions") or (ii) held by QIBs or
institutional Accredited Investors who are not QIBs who elect to take physical
delivery of their certificates instead of holding their interests through a
Global Note (and which are thus ineligible to trade through DTC) (collectively
referred to herein as the "Non-Global Purchasers") will be issued in registered
form (the "Certificated Security"). Upon the transfer to a QIB of any
Certificated Security initially issued to a Non-Global Purchaser, such
Certificated Security will, unless the transferee requests otherwise or the
Global Notes have previously been exchanged in whole for Certificated
Securities, be exchanged for an interest in a Global Note. For a description of
the restrictions on the transfer of Certificated Securities and any interest in
the Global Notes, see "Transfer Restrictions."
The Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchasers and ownership of beneficial interests in the Global Notes will be
limited to persons who have accounts with DTC (Aparticipants") or persons who
hold interests through participants. QIBs and institutional Accredited Investors
who are not QIBs may hold their interests in the Global Notes directly through
DTC if they are participants in such system, or indirectly through organizations
which are participants in such system.
<PAGE>
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any), interest (including
Additional Interest) on, the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any
payment of principal, premium, if any, interest (including Additional Interest)
on the Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Notes as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary
way through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to
be taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Notes
for Certificated Securities, which it will distribute to its participants and
which will be legended as set forth under the heading "Transfer Restrictions."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a Aclearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly (Aindirect participants").
<PAGE>
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Notes, which certificates will bear the legends
referred to under the heading "Transfer Restrictions."
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until February 15, 1998, all dealers effecting transactions in
the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who my receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an Aunderwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a Prospectus, a
broker-dealer will not be deemed to admit that it is an Aunderwriter" within the
meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus or any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company agreed to pay all expenses incident to
the Exchange Offer (including the expenses of counsel for the Holders of the Old
Notes) other than commissions or concessions of any broker-dealers and will
indemnify the holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
See "The Exchange Offer" for additional information concerning the
Exchange Offer and interpretations of the Commission's staff with respect to
prospectus delivery obligations of broker-dealers.
<PAGE>
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for
the Company by Shughart Thomson & Kilroy, P.C., Kansas City, Missouri.
INDEPENDENT ACCOUNTANTS
The audited balance sheet of the Company as of December 31, 1996 and
the related audited statements of operations, stockholders' equity and cash
flows for the year then ended, included and incorporated by reference in this
Prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report which is included and incorporated by
reference herein.
The audited financial statements of the Company as of December 31, 1995
and 1994 and for the years then ended have been audited by Barrett & Associates,
independent certified public accountants ("Barrett"), as stated in their report
which is included and incorporated by reference herein. The change in
accountants from Barrett to Arthur Andersen LLP was effective for 1996 and was
not due to any disagreements between the Company and Barrett. Barrett's reports
for 1995 and 1994 did not contain any adverse opinions or disclaimers of
opinions and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
The consolidated financial statements of Goldking Companies, Inc. as of
December 31, 1996 and 1995, and for each of the two years then ended, included
and incorporated by reference in this Prospectus, have been audited by Ernst &
Young LLP, independent public accountants, as stated in their report which is
included and incorporated by reference herein.
EXPERTS
The reference to the report of Ryder Scott Co. ("Ryder Scott"),
independent petroleum engineers, contained herein estimating the Proved
Reserves, future net cash flows from such Proved Reserves and the SEC PV-10 of
such estimated future net cash flows for the Company's properties as of
September 1, 1997 is made in reliance upon the authority of such firm as an
expert with respect to such matters. References to the report of Ryder Scott Co.
shall include the audit by Ryder Scott of (a) the report of W.D. Von Gonten &
Co., Petroleum Engineers estimating the Proved Reserves, future net cash flows
from such Proved Reserves and the SEC PV-10 of such estimated future net cash
flows for the Goldking Properties and (b) the report of McCune Engineering, P.E.
estimating the Proved Reserves, future net cash flows from such Proved Reserves
and the SEC PV-10 of such estimated future net cash flows for the Company's
onshore properties, both as of September 1, 1997.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and information heretofore filed with the
Securities and Exchange Commission (the "Commission") by the Company are hereby
incorporated by reference into this Prospectus:
1. The Company's amended Annual Report on Form 10-K/A for the year ended
December 31, 1996, filed on April 11, 1997;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, filed on May 15, 1997;
3. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997, as filed on August 15, 1997; and
4. The Company's Current Report on Form 8-K dated August 15, 1997, as amended
by Form 8K/A filed on October 7 and October 10, 1997.
5. The Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, as filed on November 17, 1997.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), prior to the termination of the Offering shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any and all of the documents incorporated
by reference herein (other than exhibits to such documents which are not
specifically incorporated by reference in such documents). Written requests for
such copies should be directed to the Company, The PANACO Building, 1050 West
Blue Ridge Boulevard, Kansas City, Missouri 64145, Attention: Todd R. Bart,
Chief Financial Officer. Telephone requests may be directed to Mr. Bart at (816)
942-6300.
<PAGE>
GLOSSARY
The terms defined in this glossary are used throughout this Prospectus.
2-D Seismic. Seismic data and the related technology used to acquire
and process such data to yield a two-dimensional view of a
Aslice" of the subsurface.
3-D Seismic. Seismic data and the related technology used to acquire
and process such data to yield a three-dimensional picture of the
subsurface. 3-D Seismic is created by the propagation of sound
waves through sedimentary rock layers, which are then detected
and recorded as they are reflected and refracted back to the
surface. By measuring the time taken for the sound to return and
applying computer technology to process the resulting data in
volume, imagery of significantly greater accuracy and usefulness
than older-style 2-D Seismic can be created.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas.
Bcfe.One billion cubic feet of natural gas equivalents converting one
Bbl of oil to six Mcf of natural gas.
Btu. British Thermal Unit, the quantity of heat required to raise one
pound of water by one degree Fahrenheit.
Condensate. A hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude
oil.
Developed Acreage. The number of acres which are allocated or
assignable to producing wells or wells capable of production.
Dry Hole. A well found to be incapable of producing either oil or
natural gas in sufficient quantities to justify completion as an
oil or natural gas well.
Estimated Future Net Revenues. Revenues from production of oil and
natural gas, net of all production-related taxes, lease operating
expenses and capital costs.
Exploratory Well. A well drilled to find and produce oil or natural
gas in an unproved area, to find a new reservoir in a field
previously found to be productive of oil or natural gas in
another reservoir.
Farmout. An agreement whereby the lease owner agrees to allow another
to drill a well or wells and thereby earn the right to an
assignment of a portion or all of the lease, with the original
lease owner typically retaining an overriding royalty interest
and other rights to participate in the lease.
Grossacres or gross wells. The total acres or wells, as the case may
be, in which a working interest is owned.
Group3-D Seismic. Seismic procured by a group of parties or shot
on a speculative basis by a seismic company.
<PAGE>
MBbl. One thousand Bbls of oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcfe.One thousand cubic feet of natural gas equivalents
converting one Bbl of oil to six Mcf of natural gas.
Mcfe/d. Mcfe per day.
MMbbl. One million Bbls of oil or other liquid hydrocarbons.
MMbtu. One million Btu.
MMcf. One million cubic feet of natural gas.
MMcfe. One million cubic feet of natural gas equivalents
converting one Bbl of oil to six Mcf of natural gas.
Natural Gas Equivalent. The amount of natural gas having the same
Btu content as a given quantity of oil, with one Bbl of oil
being converted to six Mcf of natural gas.
Net Acres or Net Wells. The sum of the fractional working
interests owned in gross acres or gross wells.
Net Oil and Gas Sales. Oil and natural gas sales less oil and
natural gas production expenses.
Net Pay. The thickness of a productive reservoir capable of
containing hydrocarbons.
Net Production. Production that is owned by the Company less
royalties and production due others.
Net Revenue Interest. A share of the Working Interest that does
not bear any portion of the expense of drilling and
completing a well and that represents the holder's share of
production after satisfaction of all royalty, overriding
royalty, oil payments and other nonoperating interests.
Overriding Royalty Interest. An interest in an oil and natural
gas property entitling the owner to a share of oil and
natural gas production free of costs of exploration and
production.
Payout. 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.
Productive Well. A well that is producing oil or natural gas or
that is capable of production in paying quantities.
Proprietary 3-D Seismic. Seismic privately procured and owned by
the procurer.
Proved Developed Non-Producing Reserves. Reserves that consist of
(i) Proved Reserves from wells which have been completed and
tested but are not producing due to lack of market or minor
completion problems which are expected to be corrected and
(ii) Proved Reserves currently behind the pipe in existing
wells and which are expected to be productive due to both
the well log characteristics and analogous production in the
immediate vicinity of the wells.
Proved Developed Producing Reserves. Reserves that can be
expected to be recovered from currently producing zones
under the continuation of present operating methods.
<PAGE>
Proved Developed Reserves. Reserves that can be expected to be
recovered through existing wells with existing equipment and
operating methods.
Proved Reserves. The estimated quantities of oil, natural gas and
natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic
and operating conditions.
Proved Undeveloped Reserves. Proved reserves that are expected to
be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is
required for recompletion.
Recompletion. The completion for production of an existing well
bore in a different formation or producing horizon from that
in which the well was previously completed.
Reserve Life. The estimated productive life of a proved reservoir
based upon the economic limit of such reservoir producing
hydrocarbons in paying quantities assuming certain price and
cost parameters. For purposes of this Prospectus, reserve
life is calculated by dividing the Proved Reserves (on an
Mcfe basis) at the end of the period by projected production
volumes for the next 12 months.
Royalty Interest. An interest in an oil and natural gas property
entitling the owner to a share of oil and natural gas
production free of costs of production.
SEC PV-10. The present value of proved reserves is an estimate
of the discounted future net cash flows from each of the
properties at September 1, 1997, or as otherwise indicated.
Net cash flow is defined as net revenues less, after
deducting production and ad valorem taxes, future capital
costs and operating expenses, but before deducting federal
income taxes. As required by rules of the Commission, the
future net cash flows have been discounted at an annual rate
of 10% to determine their Apresent value." The present value
is shown to indicate the effect of time on the value of the
revenue stream and should not be construed as being the fair
market value of the properties. In accordance with
Commission rules, estimates have been made using constant
oil and natural gas prices and operating costs, at September
1, 1997, or as otherwise indicated.
Shut-In. To close down a producing well or field temporarily for
repair, cleaning out, building up reservoir pressure, lack
of a market or similar conditions.
Sidetrack. A drilling operation involving the use of a portion of
an existing well to drill a second hole, in which a milling
tool is used to grind out a Awindow" through the side of a
drill casing at some selected depth. The drilling bit is
then directed out of the window at a desired angle into
previously undrilled strata. From this directional start a
new hole is drilled to the desired formation depth and
casing is set in the new hole and tied back into the older
casing, generally at a lower cost because of the utilization
of a portion of the original casing.
Tcf. One trillion cubic feet of natural gas.
Undeveloped Acreage. Lease acreage on which wells have not been
drilled or completed to a point that would permit the
production of commercial quantities of oil and natural gas
regardless of whether such acreage contains proved reserves.
Working Interest. The operating interest that gives the owner the
right to drill, produce and conduct operating activities on
the property and a share of production, subject to all
royalties, overriding royalties and other burdens and to all
costs of exploration, development and operations and all
risks in connection therewith.
<PAGE>
PANACO, INC.
INDEX TO FINANCIAL STATEMENTS
Page
PANACO, INC. - AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Independent Auditors' Report F-3
Balance Sheets, December 31, 1996 and 1995 F-4
Statements of Income (Operations) for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 F-7
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-8
Notes to Financial Statements for the Years Ended
December 31, 1996, 1995 and 1994 F-10
PANACO, INC. - UNAUDITED CONDENSED FINANCIAL STATEMENTS
Balance Sheets, June 30, 1997 and December 31, 1996 F-22
Statements of Income (Operations) for the Six Months Ended
June 30, 1997 and 1996 F-24
Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1997 F-25
Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996 F-26
Condensed Notes to FinancialStatements F-27
GOLDKING COMPANIES, INC. AND SUBSIDIARIES - AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-30
Consolidated Balance Sheets, December 31, 1996 and 1995 F-31
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 F-33
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996 and 1995 F-34
Consolidated Statements of Cash Flow for the Years Ended
December 31, 1996 and 1995 F-35
Notes to Consolidated Financial Statements F-36
GOLDKING COMPANIES, INC. AND SUBSIDIARIES - UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Balance Sheets, June 30, 1997 and December 31, 1996 F-50
Statements of Income (Operations) for the Six Months Ended
June 30, 1997 and 1996 F-52
Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1997 and 1996 F-53
Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996 F-54
Condensed Notes to Financial Statements F-55
<PAGE>
Report of Independent Public Accountants
To the Board of Directors
PANACO, Inc.
We have audited the accompanying balance sheet of PANACO, Inc. (a
Delaware Corporation) as of December 31, 1996, and the related statements of
income (operations), changes in stockholders' equity and cash flows for the year
then ended. 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 audit. The financial statements of PANACO, Inc. for the
years ended December 31, 1995 and 1994 were audited by other auditors whose
report dated February 26, 1996 (except with respect to the change in accounting
for oil and gas properties, as to which the date is June 7, 1996), expressed an
unqualified opinion on those statements and included an explanatory paragraph
that described the retroactive change in accounting for oil and gas properties.
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 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the financial position of PANACO, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Kansas City, Missouri
March 7, 1997
F-2
<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 the related statements of income
(operations), changes in Stockholders' equity and cash flows for each of the two
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 the results of its operations, changes in stockholders' equity and cash
flows for each of the two 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-3
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
BALANCE SHEETS
ASSETS
December 31,
1996 1995
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,736,000 $ 1,198,000
Accounts receivable 6,197,000 4,386,000
Investment in common stock 1,642,000 ---
Prepaid and other 424,000 465,000
Total current assets 9,999,000 6,049,000
OIL AND GAS PROPERTIES, AS DETERMINED
BY THE SUCCESSFUL EFFORTS METHOD
OF ACCOUNTING
Oil and gas properties, proved 125,283,000 103,105,000
Oil and gas properties, unproved 7,128,000 ---
Less accumulated depreciation, depletion, amortization,
and valuation allowances (81,871,000) (73,620,000)
Net oil and gas properties 50,540,000 29,485,000
PROPERTY, PLANT, AND EQUIPMENT
Pipelines and equipment 10,534,000 196,000
Less accumulated depreciation (327,000) (92,000)
Net property, plant, and equipment 10,207,000 104,000
OTHER ASSET
Restricted deposits 2,115,000 ---
Loan costs, net 611,000 471,000
Other 296,000 60,000
Total other assets 3,022,000 531,000
TOTAL ASSETS $ 73,768,000 $36,169,000
The accompanying notes are an integral part of
this statement.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
1996 1995
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 6,246,000 $ 4,444,000
Interest payable 524,000 161,000
Current portion of long-term debt --- ---
Total current liabilities 6,770,000 4,605,000
LONG-TERM DEBT 49,500,000 22,390,000
STOCKHOLDERS' EQUITY
Preferred Shares, $.01 par value,
1,000,000 shares authorized; no
shares issued and outstanding --- ---
Common Shares, $.01 par value,
40,000,000 shares authorized;
14,350,255 and 11,504,615 shares
issued and outstanding, respectively 143,000 115,000
Additional paid in capital 31,490,000 21,155,000
Retained earnings (deficit) (14,135,000) (12,096,000)
Total Stockholders' Equity 17,498,000 9,174,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 73,768,000 $ 36,169,000
The accompanying notes are an integral part of
this statement.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
STATEMENTS OF INCOME (OPERATIONS)
Year Ended December 31,
1996 1995 1994
REVENUES
<S> <C> <C> <C>
Oil and gas sales $20,063,000 $18,447,000 $ 17,338,000
COSTS AND EXPENSES
Lease operating 8,477,000 8,055,000 5,231,000
Depreciation, depletion and amortization 9,022,000 8,064,000 6,038,000
General and administrative 772,000 690,000 587,000
Production and ad valorem taxes 559,000 1,078,000 1,006,000
Exploration expenses --- 8,112,000 ---
Provision for losses and (gains) on disposition
and write-down of assets --- 751,000 1,202,000
West Delta fire loss 500,000 --- ---
Total 19,330,000 26,750,000 14,064,000
NET OPERATING INCOME (LOSS) 733,000 (8,303,000) 3,274,000
OTHER INCOME (EXPENSE)
Unrealized loss on investment in common stock (258,000) --- ---
Interest expense, net (2,514,000) (987,000) (1,623,000)
Total (2,772,000) (987,000) (1,623,000)
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (2,039,000) (9,290,000) 1,651,000
INCOME TAXES --- --- ---
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (2,039,000) (9,290,000) 1,651,000
EXTRAORDINARY ITEM - LOSS ON EARLY
RETIREMENT OF DEBT --- --- (536,000)
NET INCOME (LOSS) $ (2,039,000) $ ( 9,290,000) $ 1,115,000
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) before extraordinary item (.16) (.81) .16
Extraordinary loss --- --- (.05)
Net earnings (loss) $ (.16) $ (.81) $ .11
Weighted average shares outstanding: 12,742,213 11,504,615 9,952,870
The accompanying notes are an integral part of
this statement.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Common Additional Retained
Share Paid-In Earnings
Shares Par Value Capital (Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 8,155,255 $ 82,000 $12,583,000 $(3,921,000)
Net Income --- --- --- 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 ---
Balances, December 31, 1994 10,220,138 102,000 17,586,000 (2,806,000)
Net Loss --- --- --- (9,290,000)
Exercise of stock options and warrants 1,181,602 12,000 3,137,000 ---
Issuance of new shares 102,875 1,000 432,000 ---
Balances, December 31, 1995 11,504,615 115,000 21,155,000 (12,096,000)
Net Loss --- --- --- (2,039,000)
Exercise of warrants, shares issued under
Employee Stock Ownership Plan and
Director stock bonuses 845,640 8,000 1,955,000 ---
Acquisition of properties 2,000,000 20,000 8,380,000 ---
Balances, December 31, 1996 14,350,255 $ 143,000 $31,490,000 $(14,135,000)
</TABLE>
The accompanying notes are an integral part of
this statement.
F-7
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) before extraordinary item $(2,039,000) $(9,290,000) $ 1,651,000
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion, and amortization 9,022,000 8,065,000 6,378,000
Exploration expenses --- 8,112,000 ---
Provision for losses and (gains) on disposition
and write-down of assets --- 751,000 1,202,000
Unrealized loss on investment in common stock 258,000 --- ---
ESOP stock contribution 122,000 132,000 123,000
Changes in operating assets and liabilities:
Accounts receivable (1,811,000) (2,155,000) (1,202,000)
Prepaid and other 274,000 (125,000) (501,000)
Accounts payable 1,803,000 2,916,000 (202,000)
Interest payable 363,000 (24,000) 26,000
Extraordinary loss --- --- (536,000)
Net cash provided by operating activities 7,992,000 8,382,000 6,939,000
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of oil and gas properties 9,017,000 11,000 300,000
Capital expenditures and acquisitions (42,958,000) (21,803,000) (12,101,000)
Purchase of other property and equipment, net (92,000) (38,000) (27,000)
Increase in restricted deposits (2,115,000) --- ---
Other 96,000 --- ---
Net cash used by investing activities (36,052,000) (21,830,000) (11,828,000)
CASH FLOW FROM FINANCING ACTIVITIES
Long-term debt proceeds 38,863,000 16,890,000 5,564,000
Repayment of long-term debt (11,753,000) (7,000,000) (7,326,000)
Issuance of common shares - exercise of
warrants and options 1,837,000 3,173,000 5,023,000
Additional loan costs ( 349,000) --- ---
Net cash provided by financing activities 28,598,000 13,063,000 3,261,000
NET INCREASE (DECREASE) IN CASH 538,000 (385,000) (1,628,000)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,198,000 1,583,000 3,211,000
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,736,000 $ 1,198,000 $ 1,583,000
The accompanying notes are an integral part of
this statement.
F-8
</TABLE>
<PAGE>
Supplemental schedule of non-cash investing and financing activities:
FOR THE YEAR ENDED DECEMBER 31, 1996:
The Company issued 2,000,000 shares of common stock totaling $8,400,000 to
Amoco Production Company in connection with an acquisition of oil and gas
assets.
The Company issued 2,447 shares of common stock each to two new directors.
The Company also issued 24,220 shares to the ESOP.
The Company received 477,612 shares of National Energy Group, Inc. common
stock in connection with the sale of the Bayou Sorrel Field.
FOR THE YEAR ENDED DECEMBER 31, 1995:
The Company issued 97,680 shares of common stock totaling $409,000 in exchange
for oil and gas properties.
FOR THE YEAR ENDED DECEMBER 31, 1994:
The Company farmed out an oil and gas property and retained a 12.5% overriding
royalty interest.
The Company contributed 30,850 shares to the ESOP.
Supplemental disclosures of cash flow information:
Cash paid during the year ended December 31:
1996 1995 1994
Interest $2,218,000 $1,016,000 $1,409,000
Income taxes $ --- $ --- $ ---
F-9
<PAGE>
PANACO, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
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.
Significant Risks and Uncertainties
The Company's future success is dependent upon many factors. One of these
factors involves finding and acquiring additional reserves, which could be
accomplished through successful drilling of productive wells at economic
returns, and through successful acquisitions of properties, which are subject to
uncertainties. Additional factors include competition from companies with larger
financial resources, the production of existing proved reserves (which reserve
estimates are inherently imprecise and are expected to change as future
information becomes available), the uncertainty of prices received for oil and
natural gas production (which have been volatile and are likely to be volatile
in the future) including hedged production, and the impact of changes in laws
and regulations imposed on the Company and related industries. The factors could
have a material adverse effect on the Company's business and the ability to
realize its assets.
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 income or accounts receivable.
Hedging Transactions
The Company hedges the prices of its oil and gas production through the use of
oil and natural gas futures and swap contracts within the normal course of its
business. The Company uses futures and swap contracts to reduce the effects of
fluctuations in oil and natural gas prices. Changes in the market value of these
contracts are deferred and subsequent gains and losses are recognized monthly as
adjustments to revenues in the same production period as the hedged item, based
on the difference between the index price 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.
Starting in 1997 the Company's hedge transactions on natural gas are based upon
published gas pipeline index prices and not the NYMEX. This change has
eliminated price differences due to transportation. For 1997, 14,000 MMBTU's per
day has been hedged, reduced to 10,000 MMBTU's per day in 1998 and 7,000 MMBTU's
per day in 1999. The Company is hedging at a swap price of $1.80/MMBTU for 1997,
with varying levels of participation (93% in January to 66% in December) in
settlement prices above $1.80/MMBTU.
F-10
<PAGE>
Starting in 1997, the Company has also hedged 720 barrels of oil for each day in
1997 at a swap price of $20.00 per barrel. The Company then has a 40%
participation in settlement prices above the swap price.
Income Taxes
The Company records income taxes in accordance with the requirements of
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.
Oil and Gas Producing Activities and Depreciation, Depletion and Amortization
The Company utilizes the successful efforts method of accounting for its oil and
gas properties. 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 unproved properties are not
depleted until a determination of any reserves has been made. 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 were $751,000 for
1995, and $1,202,000 for 1994.
Property, Plant & Equipment
Property and equipment are carried at cost. Oil and natural gas pipelines and
equipment are depreciated on the straight-line method over estimated remaining
useful lives, primarily fifteen years. Other property is also depreciated on the
straight-line method over estimated remaining useful lives, ranging from five to
seven years.
Amortization of Note Discount
Note discounts are amortized utilizing the interest method, which applies a
constant rate of interest to the book value of the note. Additional interest
expense of $234,000 was recorded in 1994 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.
Earnings (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 1995
and 1996, as the effects were not dilutive. Shares to be contributed to the ESOP
plan are treated as common share equivalents.
Statement of Cash Flows
For purposes of reporting cash flows, the Company considers all cash investments
with original maturities of three months or less to be cash equivalents.
F-11
<PAGE>
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities in the financial statements,
including the use of estimates for oil and gas reserve information and the
valuation allowance for deferred income taxes. Actual results could differ from
those estimates. 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 - ACQUISITIONS & DISPOSITIONS
On October 8,1996, the Company closed its acquisition of interests in thirteen
offshore blocks comprising six fields in the Gulf of Mexico from Amoco
Production Company ("Amoco Properties"). The purchase price for the assets
acquired in this transaction was $40.4 million, paid by the issuance of
2,000,000 Common Shares, valued at $4.20 per share, and by payment to Amoco of
$32 million in cash. Based on the assets acquired, the Company allocated
$25,737,000 of the purchase price to proved oil and gas properties, $9,273,000
to pipelines and structures and $5,390,000 to unproved oil and gas properties.
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 revolving loan was increased to $40 million, with an initial
borrowing base (credit limit) of $35 million. In addition to that facility, the
Company borrowed $17 million pursuant to the Tranche A Convertible and the
Tranche B Bridge Loan Subordinated Notes (see Note 6).
On July 12, 1995, the Company entered into a Purchase and Sale Agreement with
Zapata Exploration Company to acquire all of Zapata's offshore oil and gas
properties in the Gulf of Mexico ("Zapata Properties"). 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.
Both of these acquisitions were accounted for using the purchase method. The
results for the Amoco Properties are included in the Company's results of
operations from October 8 to December 31, 1996. The results for the Zapata
Properties are included in the Company's results of operations from July 26 to
December 31, 1995 and all of 1996.
Effective September 1, 1996, the Company sold its Bayou Sorrel Field to National
Energy Group, Inc. for $11,000,000, consisting of $9,000,000 in cash and 477,612
shares of National Energy Group, Inc. common stock. This field was purchased by
the Company on December 27, 1995 from Shell Western E & P, Inc. for $10,500,000,
which included a $204,000 broker's fee and a related receivable of $600,000. The
Company retained a 3% overriding royalty interest in the deep rights of the
field, below 11,000 feet. There was no gain or loss on the sale of the field and
the $1,738,000 remaining net book valve was assigned to this overriding royalty
interest.
F-12
<PAGE>
The following unaudited pro forma financial information assumes the Amoco and
Zapata acquisitions had been consummated January 1, 1995, and the Bayou Sorrel
sale was completed January 1, 1996. It is presented in order to comply with the
disclosure requirements of Accounting Principles Board Opinion No. 16. The pro
forma financial information does not purport to be indicative of the results of
the Company had these acquisitions occurred on the date assumed, nor is it
necessarily indicative of the future results of the Company. It should be read
together with the financial statements of the Company, including the notes
thereto.
<TABLE>
<CAPTION>
PANACO, Inc.
Unaudited Pro Forma Financial Information
For the Years Ended December 31, 1996 and 1995
1996 1995
Unaudited Unaudited
PANACO, Inc. PANACO, Inc.
Pro Forma Pro Forma
Combined Combined
<S> <C> <C>
Revenues $ 28,978,000 $ 34,598,000
Income/(loss) before extraordinary items (1,928,000) (13,213,000)
Net Income/(loss) (1,928,000) (13,213,000)
Earnings/(loss) per share $ (0.13) $ (0.98)
</TABLE>
Note 3 - WEST DELTA FIRE LOSS
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 resulted in lost
revenues of approximately $6,000,000. The fire was the principal contributor to
the losses of $.08 per share for the second quarter of 1996 and $.11 per share
for the third quarter. During the second quarter the Company expensed $500,000
for its loss as a result of this explosion. No further losses have been
recognized or are anticipated. This $500,000 amount included $225,000 in
deductibles under the Company's insurance.
The Company has spent $8,500,000 on Tank Battery #3 inclusive of the $500,000
expensed during second quarter and has received reimbursement from its insurance
company of $3,900,000, after satisfaction of the $225,000 in deductibles. The
excess of expenditures over insurance reimbursement will be capitalized as
property improvements. No additional expenditures have been made or are
anticipated.
Note 4 - INVESTMENT IN COMMON STOCK
In connection with a sale of the Bayou Sorrel to National Energy Group, Inc.,
the Company received 477,612 shares of National Energy Group, Inc. common stock.
The market value was $1,900,000 based upon the trading price of the stock on the
NASDAQ National Market.
F-13
<PAGE>
The Company has classified this investment as a trading security. At December
31, 1996 the market value of the Company's investment in National Energy Group,
Inc. was $1,642,000, with a $258,000 valuation allowance being recognized to
reflect the decrease in market value of the common stock.
Note 5 - RESTRICTED DEPOSITS
Pursuant to existing agreements the Company is required to deposit funds in bank
escrow and trust 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, ten percent (10%) of the net cash flow, as
defined in the agreement, from the Amoco properties. As of December 31, 1996 the
Company has established the "PANACO East Breaks 110 Platform Trust" 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 $9,250,000 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 supplemental 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 $300,000 Pipeline Right-of-Way Bond.
Note 6- LONG-TERM DEBT
1996 1995
Note payable (a) $ 27,500,000 $ 17,390,000
Note payable (b) 22,000,000 5,000,000
49,500,000 22,390,000
Less current portion --- ---
Long-term debt $ 49,500,000 $ 22,390,000
(a) 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 31, 1996 was $31 million, with an availability under the revolver of
$2.5 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. 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. The Company's weighted
average interest rate at December 31, 1996 was 7.29%. 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.
F-14
<PAGE>
(b) From time to time the Company has borrowed funds from institutional lenders
who are advised 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:
(i) 1993 Subordinated Notes. In 1993, $5,000,000 was borrowed, due
December 31, 1999, but prepayable at any time. The Company could have delivered
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. In March, 1997 the
Company repaid these notes.
(ii) 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, after August 28, 1997, 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.
(iii) 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. In March, 1997 the Company repaid these notes.
Maturities of long-term debt are as follows:
July 1, 1999 $27,500,000
December 31, 1999 5,000,000
October 8, 2003 17,000,000
$49,500,000
Note 7 - STOCKHOLDERS' EQUITY
During 1996, 816,526 shares were issued by virtue of the exercise of warrants at
an exercise price of $2.25 per share, 24,220 shares were contributed to the
Company's ESOP and 4,894 were issued for board of director fees. On October 8,
1996, 2,000,000 shares were issued to Amoco Production Company in connection
with an acquisition of oil and gas assets. During 1995, 1,181,602 shares were
issued by virtue of the exercise of warrants and options, 97,680 shares were
issued in connection with property acquisition costs and 5,195 shares were
issued for board of directors fees. During 1994, 2,034,033 shares were issued by
virtue of the exercise of warrants and options, and 30,850 shares were
contributed to the Company's 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 $ 122,000, $132,000 and $123,000 in costs for the
years ended December 31, 1996, 1995 and 1994, respectively.
F-15
<PAGE>
Warrants outstanding at December 31, 1996 to acquire common shares are as
follows:
Number of Price per
Shares Share Expiration Date
90,000 $2.000 July 31, 1997
160,000 $2.375 December 31, 1997
39,365 $2.000 December 31, 1997
289,365
The 1996 Tranche A Convertible Subordinated Notes are, after August 28, 1997,
convertible into 2,060,606 common shares on the basis of $4.125 share.
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, 1996
or 1995, there were no stock options outstanding.
During 1995, 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 per share, which
would have expired December 31, 1995, but were exercised by that date.
Note 8 - 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 directors. All such 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 1996, 1995 and
1994, $48,000 per year in rent was paid under the lease agreement.
The following is a schedule of future rental payments required under this
office building lease:
-----------------------------------
Year ending December 31,
-----------------------------------
1997 $ 48,000
1998 48,000
1999 48,000
2000 48,000
2001 48,000
2002-2003 92,000
$ 332,000
In 1994, 275,000 options were issued to directors at prices ranging from $2.32
to $3.94 per share. These options were exercised in 1995. Under the terms of the
Long-Term Incentive Plan, three directors were issued 73,845 options at $2.03
per share and 68,567 options at $2.19 per share in 1995 and 1994, respectively.
These options were exercised in 1995.
F-16
<PAGE>
Note 9 - INCOME TAXES
At December 31, 1996, the Company had net operating loss carry forwards for
federal income tax purposes of $16,000,000 which are available to offset future
federal taxable income through 2011. The Company's timing of its utilization of
net operating loss carry forwards may be limited in the future due to its
issuance of common stock and the related I.R.S. regulations.
Significant components of the Company's deferred tax assets as of December 31
are as follows:
1996 1995
Deferred tax assets
Fixed asset basis differences $2,312,000 $ 1,408,000
Net operating loss carry forwards 6,342,000 6,306,000
Total deferred tax assets 8,654,000 7,714,000
Valuation allowance for deferred
tax assets (8,654,000) (7,714,000)
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, 1994 was $4,061,000. The net change in
the total valuation allowance for the years ended December 31, 1996 and 1995 was
an increase of $940,000 and $3,653,000, respectively.
Note 10 - COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims which arise in
the ordinary course of business operations. In the opinion of management, the
amount of liability, if any, with the respect to these actions would not
materially affect the financial position of the Company or its results of
operation.
Note 11 - FINANCIAL INSTRUMENTS
The carrying amount and fair values of the Company's financial instruments at
December 31, 1996, are as follows:
------------------------------------
Assets (Liabilities)
-----------------------------------
Carrying Amount Fair Value
Long-term fixed rate debt $ (22,000,000) $ (21,063,000)
Off balance sheet financial instruments
Letter of credit --- ---
Hedge contracts --- (897,000)
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 discounted cash flow analysis based on the Corporation's current borrowing
rates for debt with similar maturities.
F-17
<PAGE>
Letter of credit
A $1,000,000 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, 1996.
Hedge contracts
The fair values of the Company's swap contracts are estimated based on
settlement values at December 31, 1996 for volumes hedged at future dates.
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. One purchaser accounted for 49%, 69% and 83% of revenues in 1996,
1995 and 1994, respectively.
NOTE 12 - SUBSEQUENT EVENTS
On March 5, 1997, the Company completed an offering of 8,403,305 shares of
common stock at $4.00 per share, $3.728 net of the underwriter's commission,
consisting of 6,000,000 shares sold by the Company and 2,403,305 shares sold by
shareholders, primarily 2,000,000 by Amoco Production Company which were
received in connection with a property acquisition and 373,305 by lenders
advised by Kayne, Anderson Investment Management, Inc which were received in
connection with the exercise of warrants. The Company's proceeds of $22,000,000
(net of $350,000 in offering expenses) from the offering were used to repay
$13,500,000 of its Subordinated Notes, specifically the 1993 Subordinated Notes
and the 1996 Tranche B Bridge Loan Subordinated Notes. The remaining proceeds
were temporarily paid on the Company's reducing revolving loan and will
ultimately be used for the development of its properties and future
acquisitions. These payments, along with payments made from the Company's cash
flows reduced its Long-Term debt balance at $24,000,000 on March 6, 1997.
Note 13 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
<TABLE>
<CAPTION>
The following table reflects the costs incurred in oil and gas property
activities for each of the three years ended December 31:
- ------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property acquisition costs, proved $ 26,859,000 $ 12,603,000 $ 352,000
Property acquisition costs, unproved 5,390,000 --- ---
Exploration costs --- 8,112,000 ---
Development costs 8,863,000 1,497,000 11,749,000
</TABLE>
F-18
<PAGE>
Quantities of Oil and Gas Reserves
The estimates of proved developed and proved undeveloped reserve quantities at
December 31, 1996 are based upon reports of third party petroleum engineers
(Ryder Scott Company and McCune Engineering, P.E.) 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.
<TABLE>
<CAPTION>
Proved developed and undeveloped reserves:
Oil Gas
(BBLS) (MCF)
<S> <C> <C> <C> <C>
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
Production (276,000) (6,788,000)
Extensions and discoveries --- 972,000
Sale of minerals in-place (805,000) (3,102,000)
Purchase of minerals in-place 1,379,000 16,633,000
Revisions of previous estimates 41,000 (12,980,000)
Estimated reserves as of December 31, 1996 2,239,000 41,446,000
Proved developed reserves:
- -------------------------------------------------------------- ---------- ------------
Oil Gas
(BBLS) (MCF)
- -------------------------------------------------------------- ---------- ------------
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
December 31, 1996 1,867,000 39,288,000
</TABLE>
F-19
<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>
1996 1995
1994
<S> <C> <C> <C>
Future cash inflows $ 210,875,000 $140,247,000 $ 88,893,000
Future development and production costs 61,822,000 50,723,000 32,197,000
Future net cash flows 149,053,000 89,524,000 56,696,000
Future income taxes 17,899,000 11,755,000 6,304,000
Future net cash flows after income taxes 131,154,000 77,769,000 50,392,000
10% annual discount (31,313,000) (14,848,000) (8,477,000)
Standardized measure after income taxes $ 99,841,000 $ 62,921,000 $ 41,915,000
</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>
1996 1995 1994
<S> <C> <C> <C>
Beginning balance $ 62,921,000 $41,915,000 $47,379,000
Sales of oil and gas, net of production costs (11,027,000) (9,314,000) (11,047,000)
Net change in income taxes (4,116,000) (4,267,000) 5,562,000
Changes in price and production costs 44,088,000 11,498,000 (10,781,000)
Purchases of minerals in-place 45,521,000 34,415,000 ---
Sale of minerals in-place (10,518,000) --- ---
Revision of previous estimates, extensions &
discoveries, net (27,028,000) (11,326,000) 10,802,000
Ending balance $ 99,841,000 $62,921,000 $41,915,000
</TABLE>
F-20
<PAGE>
PANACO, Inc.
Condensed Financial Statements
June 30, 1997
(Unaudited)
F-21
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Condensed Balance Sheets
(Unaudited)
ASSETS As of As of
June 30, 1997 December 31, 1996
------------------------ ------------------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,353,000 $ 1,736,000
Accounts receivable 6,030,000 6,197,000
Investment in common stock 1,701,000 1,642,000
Prepaid and other 552,000 424,000
------------------------ ------------------------
Total current assets 9,636,000 9,999,000
------------------------ ------------------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 130,410,000 125,283,000
Oil and gas properties, unproved 7,324,000 7,128,000
Less: accumulated depreciation, depletion,
amortization and valuation allowances (87,374,000) (81,871,000)
------------------------ ------------------------
Net oil and gas properties 50,360,000 50,540,000
------------------------ ------------------------
PROPERTY, PLANT AND EQUIPMENT
Pipelines and equipment 13,280,000 10,534,000
Less: accumulated depreciation (806,000) (327,000)
------------------------ ------------------------
Net property, plant and equipment 12,474,000 10,207,000
------------------------ ------------------------
OTHER ASSETS
Restricted deposits 1,992,000 2,115,000
Loan costs, net 127,000 611,000
Other 252,000 296,000
------------------------ ------------------------
Total other assets 2,371,000 3,022,000
------------------------ ------------------------
TOTAL ASSETS $ 74,841,000 $ 73,768,000
'''''''''''''''''''''''' ''''''''''''''''''''''''
</TABLE>
The accompanying notes are an integral part of this statement.
F-22
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Condensed Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY As of As of
June 30, 1997 December 31, 1996
------------------------ -------------------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 5,770,000 $ 6,246,000
Interest payable 263,000 524,000
Current portion of long-term debt - -
------------------------ -------------------------
Total current liabilities 6,033,000 6,770,000
------------------------ -------------------------
LONG-TERM DEBT 28,000,000 49,500,000
------------------------ -------------------------
STOCKHOLDERS' EQUITY
Preferred Shares, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding
- -
Common Shares, $.01 par value,
40,000,000 shares authorized;
20,382,087 and 14,350,255 shares
issued and outstanding, respectively 204,000 143,000
Additional paid-in capital 53,593,000 31,490,000
Retained earnings (deficit) (12,989,000) (14,135,000)
------------------------ -------------------------
Total stockholders' equity 40,808,000 17,498,000
------------------------ -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,841,000 $ 73,768,000
'''''''''''''''''''''''' '''''''''''''''''''''''''
</TABLE>
The accompanying notes are an integral part of this statement.
F-23
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Statements of Income (Operations)
For the Six Months Ended June 30,
(Unaudited)
1997 1996
------------------- -------------------
REVENUES
<S> <C> <C>
Oil and natural gas sales $ 14,287,000 $ 10,808,000
COSTS AND EXPENSES
Lease operating 5,122,000 4,184,000
Depletion, depreciation & amortization 6,184,000 3,812,000
General and administrative 389,000 382,000
Production and ad valorem taxes 174,000 327,000
Exploration expenses 67,000 -
West Delta fire loss - 500,000
------------------- -------------------
Total 11,936,000 9,205,000
------------------- -------------------
NET OPERATING INCOME 2,351,000 1,603,000
------------------- -------------------
OTHER INCOME (EXPENSE)
Unrealized gain on investment in common stock 60,000 -
Interest expense, net (1,265,000) (902,000)
------------------- -------------------
Total (1,205,000) (902,000)
------------------- -------------------
NET INCOME BEFORE INCOME TAXES 1,146,000 701,000
INCOME TAXES - -
------------------- -------------------
NET INCOME $ 1,146,000 $ 701,000
''''''''''''''''''' '''''''''''''''''''
Net income per share $ 0.07 $ 0.06
''''''''''''''''''' '''''''''''''''''''
</TABLE>
The accompanying notes are an integral part of this statement.
F-24
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Statement of Changes in Stockholders' Equity
(Unaudited)
Amount ($)
Number of Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit)
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 14,350,255 $ 143,000 $ 31,490,000 $(14,135,000)
Net Income 1,146,000
- - -
Common shares issued - Offering 6,000,000 60,000 21,954,000 -
Common shares issued - ESOP
contribution and stock bonuses 31,832 1,000 149,000 -
----------------- ----------------- ----------------- ------------------
Balance, June 30, 1997 20,382,087 $ 204,000 $ 53,593,000 $(12,989,000)
''''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''''''''''''
</TABLE>
The accompanying notes are an integral part of this statement.
F-25
<PAGE>
<TABLE>
<CAPTION>
PANACO, INC.
Statement of Cash Flows
Six Months Ended June 30,
(Unaudited)
1997 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,146,000 $ 701,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depletion, depreciation and amortization 6,184,000 3,812,000
Unrealized gain on investment in common stock (60,000) -
Other, net 16,000 -
Changes in operating assets and liabilities:
Accounts receivable 167,000 473,000
Prepaid and other 400,000 (41,000)
Accounts payable (476,000) 2,365,000
Interest payable (261,000) 78,000
----------------- -----------------
Net cash provided by operating activities 7,116,000 7,388,000
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of oil and gas properties 24,000 -
Capital expenditures and acquisitions (8,160,000) (3,440,000)
Decrease/(increase) in restricted deposits 123,000 (1,735,000)
----------------- -----------------
Net cash used by investing activities (8,013,000) (5,175,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock offering proceeds, net 22,014,000 -
Long-term debt proceeds 4,500,000 -
Repayment of long-term debt (26,000,000) (4,000,000)
Issuance of common stock-exercise of warrants - 1,837,000
----------------- -----------------
Net cash used by financing activities 514,000 (2,163,000)
----------------- -----------------
NET INCREASE (DECREASE) IN CASH (383,000) 50,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,736,000 1,198,000
----------------- -----------------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 1,353,000 $ 1,248,000
''''''''''''''''' '''''''''''''''''
The accompanying notes are an integral part of this statement.
F-26
</TABLE>
<PAGE>
PANACO, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
Note 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position as of June 30, 1997 and December 31, 1996 and the results of operations
and changes in stockholder's equity and cash flows for the periods ended June
30, 1997 and 1996. Most adjustments made to the financial statements are of a
normal, recurring nature. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, certain information
and footnote disclosures, including significant accounting policies, normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1996.
Note 2 - OIL AND GAS PROPERTIES AND PIPELINES AND EQUIPMENT
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. 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. Interest
on unproved properties is capitalized based on the carrying amount of the
properties. 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 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.
Pipelines and equipment are carried at cost. Oil and natural gas
pipelines are depreciated on the straight-line method over the useful lives of
fifteen years. Other property is also depreciated on the straight-line method
over the useful lives, which range from five to seven years.
Note 3 - CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of six months
or less to be cash equivalents. Cash payments for interest, net of capitalized
interest, totaled $1,526,000 and $744,000 for the first six months of 1997 and
1996, respectively.
Note 4 - RESTRICTED DEPOSITS
The Company is party to various escrow and trust agreements which
provide for monthly deposits into escrow and trust 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 or trustee of evidence that the operation was or is being
conducted in compliance with applicable laws and regulations. These amounts are
included on the financial statements as Restricted Deposits.
F-27
<PAGE>
Note 5 - INVESTMENT IN COMMON STOCK
In connection with the sale of the Bayou Sorrel Field to National
Energy Group, Inc. in 1996, the Company received 477,612 shares of National
Energy Group, Inc. common stock. The Company has classified this asset as a
trading security. At June 30, 1997 the estimated market value of the stock was
$1,701,000, with an unrealized gain of $60,000 recognized in the first three
months of 1997 to reflect the increase in market value from December 31, 1996.
Subsequent to June 30, the shares of National Energy Group, Inc. common stock
have been sold with no significant gain or loss being realized.
Note 6 - NET INCOME PER SHARE
The net income per share for the six months ended June 30, 1997 and
1996 has been calculated based on 18,247,926 and 12,206,886 weighted average
shares outstanding, respectively and 20,382,087 and 12,345,361 for the three
months ended June 30, 1997 and 1996, respectively. Weighted average shares
outstanding are the only shares included in this calculation. The Company does
not present a fully diluted earnings per share amount as options and warrants
outstanding at June 30, 1997 do not dilute per share amounts by 3% or more and
the shares issuable upon conversion of the 1996 Convertible Subordinated Notes
are not considered common stock equivalents and are also anti-dilutive.
The Financial Accounting Standards Board issued FASB Statement 128,
"Earnings Per Share", in February 1997. FASB 128 modifies the way companies
report earnings per share information. The Company will be required to adopt
FASB 128 for the year ending December 31, 1997. All prior periods will be
restated to conform with the statement. The Company does not believe that
adoption of FASB 128 will materially affect earnings per share data previously
reported.
Note 7 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The reserves presented in the following table are prepared by the
Company based upon reports of independent petroleum engineers 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.
Proved developed and undeveloped reserves Oil Gas
(Bbls) (Mcf)
December 31, 1996 2,239,000 41,446,000
Purchase of minerals-in-place -0- -0-
Production (188,000) (4,421,000)
Revisions of previous estimates -0- -0-
Estimated reserves at June 30, 1997 2,051,000 37,025,000
No major discovery or other favorable or adverse event has caused a significant
change in the estimated proved reserves since June 30, 1997 other than the
acquisition of the Goldking Companies, Inc., see Note 9-Subsequent Events. 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.
F-28
<PAGE>
Note 8 - INCOME TAXES
The Company has not recorded an income tax provision due to net
operating loss carryforwards for federal income tax purposes of $16,000,000 at
December 31, 1996 which are available to offset future federal taxable income
through 2011.
Note 9 - SUBSEQUENT EVENTS
On July 31, the Company completed its acquisition of Goldking
Companies, Inc. for combination of cash, notes, 3,238,930 PANACO Common Shares
and the assumption of liabilities. The acquisition will be accounted for as a
purchase. With the acquisition PANACO obtains over 50 Bcf equivalent of oil and
natural gas reserves, a sizable portfolio of exploration, development projects
and 3-D seismic data and a seasoned staff of oil and gas professionals
experienced in Gulf Coast operations.
F-29
<PAGE>
Report of Independent Auditors
Board of Directors
Goldking Companies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Goldking
Companies, Inc. and Subsidiaries as of December 31, 1996, and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Goldking Companies, Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
September 2, 1997
F-30
<PAGE>
<TABLE>
<CAPTION>
Goldking Companies, Inc. & Subsidiaries
Consolidated Balance Sheets
December 31,
1996 1995
-----------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 896,000 $ 193,000
Restricted cash 1,358,000 802,000
Short-term investments 72,000 72,000
Accounts receivable, net 4,193,000 3,142,000
Advances to affiliates, officers, and shareholders 1,486,000 924,000
Prepaid expenses and other 27,000 -
-----------------------------------------------------
Total current assets 8,032,000 5,133,000
Property and equipment:
Oil and gas properties, full-cost method 23,683,000 17,718,000
Pipeline and ROW 1,682,000 1,681,000
Other property 1,104,000 1,097,000
-----------------------------------------------------
26,469,000 20,496,000
Accumulated depreciation, depletion, and amortization
(Note 9) (12,097,000) (9,852,000)
-----------------------------------------------------
14,372,000 10,644,000
Other assets:
Organization, deferred and other costs (Note 7), net of accumulated
amortization of $144,000 and $39,000 at December 31, 1996 and 1995,
respectively
1,106,000 953,000
-----------------------------------------------------
Total other assets 1,106,000 953,000
-----------------------------------------------------
Total assets $ 23,510,000 $ 16,730,000
-----------------------------------------------------
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------------------------------------
Liabilities and stockholders' equity Current liabilities:
<S> <C> <C>
Accounts payable $ 3,491,000 $ 2,876,000
Oil and gas distributions payable 2,810,000 2,484,000
Current maturities of long-term debt (Note 3) 1,243,000 1,342,000
Accrued interest 228,000 226,000
Advances from joint-interest participants 502,000 44,000
Accrued and other liabilities 119,000 403,000
------------------------------------------------------
Total current liabilities 8,393,000 7,375,000
Contingent liabilities (Note 6) 713,000 235,000
Long-term debt, net of discount of $786,000 and $929,000 at
December 31, 1996 and 1995, respectively (Note 3)
11,639,000 7,961,000
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 100,000
Issued and outstanding shares - 10,000 - -
Additional paid-in capital 1,753,000 1,753,000
Retained earnings (deficit) 1,012,000 (594,000)
------------------------------------------------------
Total stockholders' equity 2,765,000 1,159,000
''''''''''''''''''''''''''''''''''''''''''''''''''''''
Total liabilities and stockholders' equity $ 23,510,000 $ 16,730,000
''''''''''''''''''''''''''''''''''''''''''''''''''''''
See accompanying notes.
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
Goldking Companies, Inc. & Subsidiaries
Consolidated Statement of Operations
Year Ended December 31,
1996 1995
---------------------------------------------
Revenues:
<S> <C> <C>
Oil and gas revenues $ 7,637,000 $ 4,268,000
Interest income 42,000 41,000
Gain on asset sales 430,000 10,000
Miscellaneous 549,000 49,000
---------------------------------------------
Total revenues 8,658,000 4,368,000
Costs and expenses:
Lease operating expense 1,869,000 2,097,000
Taxes 669,000 491,000
Depreciation, depletion, and amortization 2,245,000 2,453,000
General and administrative expense 813,000 741,000
Interest and amortization of debt discount 1,456,000 818,000
---------------------------------------------
Total costs and expenses 7,052,000 6,600,000
'''''''''''''''''''''''''''''''''''''''''''''
Net income (loss) $ 1,606,000 $ (2,232,000)
'''''''''''''''''''''''''''''''''''''''''''''
See accompanying notes.
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
Goldking Companies, Inc. & Subsidiaries
Consoidated Statements of Stockholders' Equity
Additional Paid-In
Common Stock Retained Earnings Capital
Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ - $ 1,638,000 $ 1,753,000 $ 3,391,000
Net loss - 1995 - (2,232,000) - (2,232,000)
-------------------------------------------------------------------------
Balance at December 31, 1995 - (594,000) 1,753,000 1,159,000
Net income - 1996 - 1,606,000 - 1,606,000
-------------------------------------------------------------------------
'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
Balance December 31, 1996 $ - $ 1,012,000 $ 1,753,000 $ 2,765,000
'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
See accompanying notes.
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
Goldking Companies, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995
---------------------------------------------
Operating activities
<S> <C> <C>
Net income (loss) $ 1,606,000 $ (2,232,000)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Amortization of debt discount and deferred costs
247,000 110,000
Depreciation, depletion, and amortization 2,245,000 2,453,000
Interest expense included as debt principal 283,000 259,000
Gain on asset sales (430,000) (10,000)
Changes in operating assets and liabilities:
Restricted cash (556,000) (802,000)
Accounts receivable (1,051,000) (1,430,000)
Due from affiliates, net (562,000) (235,000)
Prepaid costs (27,000) 236,000
Other assets (258,000) (314,000)
Accounts payable 615,000 (642,000)
Oil and gas distributions payable 326,000 1,776,000
Accrued and other liabilities (282,000) 452,000
Advances from joint-interest participants 458,000 (179,000)
Contingent liabilities 478,000 235,000
---------------------------------------------
Net cash provided by (used in) operating activities 3,092,000 (323,000)
Investing activities
Proceeds from sale of property and equipment 550,000 2,865,000
Investments in property, plant, and equipment, net (6,093,000) (10,249,000)
---------------------------------------------
Net cash used in investing activities (5,543,000) (7,384,000)
Financing activities
Proceeds from long-term borrowings 4,629,000 8,903,000
Payments on long-term borrowings (1,475,000) (876,000)
Financing costs - (172,000)
---------------------------------------------
Net cash provided by financing activities 3,154,000 7,855,000
---------------------------------------------
Net increase in cash and cash equivalents 703,000 148,000
Cash and cash equivalents at beginning of year 193,000 45,000
'''''''''''''''''''''''''''''''''''''''''''''
Cash and cash equivalents at end of year $ 896,000 $ 193,000
'''''''''''''''''''''''''''''''''''''''''''''
See accompanying notes.
</TABLE>
F-35
<PAGE>
Goldking Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Organization and Summary of Significant Accounting Policies
Organization
Goldking Companies, Inc. and Subsidiaries, a Delaware corporation, was formed on
October 31, 1996 as a wholly owned subsidiary of The Union Companies, Inc.
("TUCI"), and as the direct parent of Goldking Oil & Gas Corp. ("GKOG"), a Texas
corporation; Goldking Production Company ("GKPC"), a Texas corporation; and Hill
Transportation Co., Inc. ("HTC"), a Louisiana corporation. Goldking Trinity Bay
Corp. ("GKTB"), a Texas corporation, is a wholly owned subsidiary of GKOG and
Umbrella Point Gathering Co., LLC ("UPGC"), a Texas limited liability
corporation, is a wholly owned subsidiary of HTC.
GKOG was formed on June 18, 1990 initially under the name of Union Associates,
Inc. The company became a wholly owned subsidiary of TUCI on May 15, 1992. GKTB
was formed on May 25, 1995 to acquire certain oil and gas properties in Trinity
Bay, Galveston County, Texas. GKPC was formed on January 31, 1992 as a contract
operator of oil and gas wells on the Gulf Coast and adjoining states. HTC was
formed on February 24, 1978 and owns and operates a 13-mile-long gas pipeline in
Louisiana. UPGC was formed on January 25, 1996 as a subsidiary of HTC to assist
in the buying and selling of pipelines, and has a duration of 30 years from the
date of formation.
Goldking Companies, Inc. and Subsidiaries (the "Companies") are independent
energy companies primarily engaged in the acquisition, exploration, development,
and production of crude oil and natural gas.
The formation of the Companies has been treated as a pooling of interest as of
January 1, 1995. On the formation date, Goldking Companies, Inc., exchanged with
TUCI 10,000 shares, $0.001 par value, of common stock for 100% of the
outstanding common stock of GKPC, GKOG, and HTC.
The consolidated financial statements include the accounts of the Companies, and
all significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Companies consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
F-36
<PAGE>
1. Organization and Summary of Significant Accounting Policies (continued)
Short-Term Investments
As of December 31, 1996, short-term investments consisted of various equity
securities at cost, which approximates fair market values.
Oil and Gas Properties
The Companies utilize the full-cost method to account for investments in oil and
gas properties. Under this method, all direct costs associated with the
acquisition, development, and exploration for oil and gas properties are
capitalized. Included in capitalized costs for the years ended December 31, 1996
and 1995, are internal costs that are directly identified with acquisition,
exploration, and development activities. Oil and gas properties, and estimated
future development and abandonment costs are depleted using the
units-of-production method based on the ratio of current production to estimated
proved oil and gas reserves, as prepared by independent petroleum consultants.
Costs directly associated with the acquisition and evaluation of unproved
properties are excluded from the amortization computation, until it is
determined whether or not impairment has occurred. As of December 31, 1996 and
1995, there were no such exclusions from the amortization computations.
Nominal dispositions of oil and gas properties are recorded as adjustments to
capitalized costs, with no gain or loss recognized unless such adjustments would
alter significantly the relationship between capitalized costs and proved
reserves of oil and gas.
To the extent that capitalized costs of oil and gas properties, net of
accumulated depreciation, depletion, and amortization, exceed the after-tax
discounted future net revenues of proved oil and gas reserves, such excess
capitalized costs would be charged to operations. No such write-down in book
value was required at December 31, 1996 and 1995.
Administrative Overhead Reimbursement
The Companies, as operator of drilling and/or producing properties, was
reimbursed by the nonoperators for administration, supervision, office services,
and warehousing costs on an annually adjusted fixed rate basis per well, per
month. These charges are applied as a reduction of general and administrative
expenses for purposes of the statements of operations.
F-37
<PAGE>
1. Organization and Summary of Significant Accounting Policies (continued)
Other Property
Other property and equipment are recorded at cost and are depreciated over an
estimated useful life of five years, using the straight-line method.
Production Imbalances
The Companies follow the sales method of accounting for natural gas revenues.
Under this method, revenues are recognized based on actual volumes of gas sold
to purchasers. The volumes of gas sold, however, may differ from the volumes to
which the Companies are entitled because joint interest owners may take more or
less than their ownership interest of natural gas volumes. Imbalances are
monitored to minimize significant imbalances, and such imbalances were not
significant at December 31, 1996 and 1995.
Revenues
The Companies recognize crude oil and natural gas revenues from their interests
in producing wells, as crude oil and natural gas is sold from those wells.
Revenue from the processing and gathering of natural gas is recognized in the
period the service is performed.
Income Taxes
The Companies file federal income tax returns on a consolidated basis with their
parent and other members of their affiliated group. For financial statement
purposes, income taxes are provided as though the Companies file separate income
tax returns; however, those companies incurring losses or credits are allocated
the tax benefit based on TUCI's ability to utilize such losses or credits.
The Companies account for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income, in the period that includes the
enactment date.
F-38
<PAGE>
1. Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, and to the disclosure of contingent assets
and liabilities, to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
2. Income Taxes
No income tax provision was recorded for the year ended December 31, 1996
primarily due to recognizing the benefits of operating loss carryforwards of
approximately $587,000.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996 and 1995 are as follows:
December 31
Gross deferred tax assets: 1996 1995
------------------------------------
Depreciation, depletion, and amortization $ 1,998,000 $ 1,799,000
Net operating loss carryforwards 1,638,000 1,229,000
Other 20,000 1,000
------------------------------------
Gross deferred tax assets 3,656,000 3,029,000
Valuation allowance (1,341,000) (1,499,000)
------------------------------------
Net deferred tax assets 2,315,000 1,530,000
Gross deferred tax liabilities:
Intangible drilling costs (2,315,000) (1,530,000)
''''''''''''''''''''''''''''''''''''
Net deferred tax liabilities $ - $ -
''''''''''''''''''''''''''''''''''''
At December 31, 1996, the Company had $4,550,000 of net operating losses which
will be carried forward and will expire between 2007 and 2010.
The Companies have a valuation allowance because the Companies believe that some
of the deferred tax assets may not be realizable.
F-39
<PAGE>
3. Debt
On January 9, 1996, GKOG entered into a reserve-based $10 million revolving line
of credit agreement with a bank (the "Line of Credit"), which is secured by
GKOG's oil and gas properties. This agreement replaces an existing revolving
line of credit. The amount available to be drawn under the Line of Credit is
determined by a borrowing-base calculation which is redetermined periodically by
the bank. The Line of Credit matures January 9, 1999 and bears interest at prime
plus 0.75% (9% at December 31, 1996). At December 31, 1996, the outstanding
amount advanced on the Line of Credit was $2,656,000.
GKTB entered into a loan agreement (the "Loan") in 1995 with a lending
institution in the amount of $8,772,000 secured by GKTB's properties in Trinity
Bay. Collateralized net book value at December 31, 1996 and 1995 was $8,044,000
and $6,353,000, respectively. The Loan requires quarterly principal and interest
payments beginning January 1, 1996 for a period of nine years with a subsequent
balloon payment. In addition to the scheduled principal payments, commencing
January 1, 1996, the Loan also requires a contingent principal payment equal to
a percentage of the net cash flow (as defined) for the immediately preceding
quarter. At December 31, 1996, the outstanding Loan balance was $7,288,000 and
$5,980,000, respectively. The Loan also provides for an additional payment to
the lender in the amount of $1,000,000, which serves as a discount and is being
amortized into interest expense over the term of the Loan agreement. The
additional amount is to be repaid quarterly beginning January 1, 1996 based on
percentages of the net cash flow for the immediately preceding quarter. All
payments for the additional amount will be applied first to the interest on the
additional amount and then to the principal balance. Interest not paid when due
will be added to the principal balance of the additional amount. GKTB's portion
of oil and gas sales proceeds from the Trinity Bay properties is held in a
restricted cash account by the lending institution for payment of principal and
interest. Interest rates at December 31, 1996 and 1995 were 10.73% and 10.82%,
respectively. The Loan agreement contains, among other things, provisions for
the maintenance of certain financial ratios and covenants. GKTB incurred
financing costs in connection with the Loan of $172,000, which are being
amortized over the term of the Loan. These financing costs (net of amortization)
are included in deferred costs.
During 1995, GKOG entered into an agreement with Tenneco Ventures, Inc.
("Tenneco"), pursuant to which Tenneco purchased from GKOG a Term Overriding
Royalty Interest in certain properties (the "Term Override"). The proceeds of
the Tenneco funding were used by GKOG to finance the drilling and completion of
certain unproved properties, the construction of a pipeline, and for drilling
other specified unproved prospects. The Term Override terminates when Tenneco
has received proceeds from the Term Override equal to the amount advanced by
Tenneco for the purchase of the Term Override plus an annualized internal rate
of return. During 1995, the internal rate of return per the agreement was 25%.
During 1996, the agreement was renegotiated to state an internal rate of return
of 18% retroactively to day one of the agreement. Current year balances have
been adjusted to reflect the change in rates. At December 31, 1996 and 1995,
$2,633,000 and $2,035,000, respectively, were outstanding and reflected as
long-term debt.
F-40
<PAGE>
3. Debt (continued)
Based on third-party reserve estimates at December 31, 1996, the future revenue
attributable to the Term Override will not be sufficient to pay the 18% rate of
return necessary to terminate the Term Override as described above. There is no
recourse to the Companies if the proceeds from the Term Override are
insufficient to pay the 18% rate of return. The difference between the 18% rate
of return and the amounts paid to Tenneco from the Term Override since September
1996 was $100,000 and is not reflected in the balance sheets of the Companies.
If future revenues are insufficient to allow payment of the principal balance,
reductions to the liability will be applied against the full cost pool. Accrued
interest prior to September 1996 was added to the outstanding principal balance.
Interest paid on outstanding debt during 1996 and 1995 was $1,244,000 and
$301,000, respectively.
Scheduled debt maturities for the next five years and thereafter are as follows:
1997 $ 1,243,000
1998 1,146,000
1999 1,003,000
2000 955,000
2001 955,000
Thereafter 8,366,000
------------------
Total 13,668,000
Less discount 786,000
''''''''''''''''''
Net $ 12,882,000
''''''''''''''''''
4. Related Party Transactions
Advances to affiliates are incurred by the Companies in the ordinary course of
business, and include $693,000 and $295,000 advanced to officers of the Company
as of December 31, 1996 and 1995, respectively. Such balances have no terms
related to settlement and do not bear interest. The respective parties' intent
for settlement has been used as a basis for classifying such balances in the
financial statements.
During 1996 and 1995, $21,000 and $2,000, respectively, of legal fees were
incurred by the Companies for services performed by Looper, Reed, Mark & McGraw,
Incorporated, a law firm in which the president of the Companies was associated.
5. Noncash Transactions
During 1995, a debt agreement was entered into which requires a $1,000,000
payment in addition to the actual borrowed amount. The amount, reflected as a
discount to debt, is being amortized over the anticipated life of the agreement.
During 1996 and 1995, interest expense of $283,000 and $259,000, respectively,
was included as principal on outstanding debt balances.
F-41
<PAGE>
6. Commitments and Contingencies
Litigation
From time to time, the Companies are involved in litigation relating to claims
arising out of their operations in the normal course of business. At December
31, 1996 and 1995, the Companies were not engaged in any legal proceedings that
are expected, individually or in the aggregate, to have a material adverse
effect on the Companies' financial statements.
Contingent Liabilities
The Companies are involved in disputes with several oil companies, acting in
their capacities as the operators of wells in which GKOG owns an interest.
Management believes the operators have made a number of excessive charges in
connection with operating the wells, and the Companies are on record as opposing
those charges and being unwilling to pay them. Pending further negotiations,
these amounts, totaling $713,000 and $235,000 as of December 31, 1996 and 1995,
respectively, have been reclassified from current accounts payable to contingent
liabilities.
Concentration of Credit Risk
Financial instruments which potentially expose the Companies to credit risk
consist principally of trade receivables and crude oil and natural gas price
swap agreements. Accounts receivable are generally from companies with
significant oil and gas marketing activities which would be impacted by
conditions or occurrences affecting that industry (see Note 7).
Leases
For the years ended December 31, 1996 and 1995, the Companies incurred rent
expense of approximately $132,000 and $126,000, respectively. Future minimum
rental payments are as follows at December 31, 1996:
1997 $ 128,000
1998 $ 39,000
1999 $ 10,000
2000 $ 10,000
2001 $ 4,000
Thereafter $ -
F-42
<PAGE>
7. Financial Derivatives
The Companies have only limited involvement with derivative financial
instruments and do not use them for trading purposes. They are used to manage
well-defined price risks.
During 1996 and 1995, GKTB entered into a crude oil price swap and oil and gas
put options with third parties. These instruments hedge against potential
fluctuations in future prices for GKTB's anticipated production volumes based on
current engineering estimates. The instruments qualify as hedges; therefore, any
gain and losses will be recorded when related oil or gas production has been
delivered. The cost of entering into the instruments has been recorded as a
deferred cost on the balance sheets and is being amortized over the life of the
instruments. At December 31, 1996 and 1995, the unamortized deferred cost is
$459,000 and $263,000, respectively, which is being amortized to revenues on a
straight-line basis over the terms of the related contracts.
At December 31, 1996, the crude oil swap agreement was for 110,194 barrels at
$17.12 from January 1, 1997 through December 31, 2000. Gas put options were for
an aggregate 529,425 MMBtu at $1.87 from January 1, 1997 through December 31,
2000. Oil put options were for an aggregate 55,112 barrels at $17.62 from
January 1, 1997 through December 31, 2000.
At December 31, 1995, the crude oil swap agreement was for 148,000 barrels at
$17.12 from August 1995 through December 2000. Gas put options were for an
aggregate 730,000 MMBtu at $1.87 from August 1995 through December 2000. Oil put
options were for an aggregate 74,000 barrels at $17.62 from August 1995 through
December 2000.
If a mark-to-market adjustment were recorded at December 31, 1996, these
derivative contracts would result in a net loss of $600,000. However, GKTB
intends to maintain these options through their maturity as long-term hedges of
crude oil and natural gas price risk from producing activities. Therefore, the
losses implied by the mark-to-market calculation have not been recognized.
Oil and gas revenues were decreased by $266,000 in 1996 and increased by $12,000
in 1995 as a result of such hedging activity.
8. Determination of Fair Values of Financial Instruments
Fair value for cash, accounts receivables, investments, payables, and long-term
debt approximates carrying value. The fair market values of advances to
affiliates, officers, and stockholders, and notes receivable, affiliates are not
practicable to determine.
F-43
<PAGE>
9. Accumulated Depreciation, Depletion, and Amortization
The balances relating to accumulated depreciation, depletion, and amortization
("DD&A") as of December 31, 1996 and 1995 have changed subsequent to our audit
report issued April 9, 1997. Upon auditing the 1995 amount, which was unaudited
in the April 9, 1997 report. DD&A expense for 1995 was increased $1,121,000 and
accumulated DD&A was increased from $8,731,000 to $9,852,000 as of December 31,
1996. Accumulated DD&A increased from $10,976,000 to $12,097,000 as of December
31, 1996, as a result of this change.
10. Major Customers
The Companies sell their production under contracts with various purchasers,
with certain domestic purchasers accounting for sales of 10% or more per year as
follows:
1996 25%, 18%, 16%
1995 38%
11. Subsequent Event
On July 31, 1997, Goldking was acquired by Panaco, Inc.
F-44
<PAGE>
Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited
The following supplemental information regarding the oil and gas activities of
the Company is presented pursuant to the disclosure requirements promulgated by
the Securities and Exchange Commission and Statement of Financial Accounting
Standards ("SFAS") No. 69, Disclosure About Oil and Gas Activities.
The following estimates of reserve quantities and related standardized measure
of discounted future net cash flow are estimates only, and do not purport to
reflect realizable values or fair market values of the Companies' reserves. The
Companies emphasize that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of producing oil and
gas properties. Additionally, the prices of oil and gas have been very volatile
and downward changes in prices can significantly affect quantities that are
economically recoverable. Accordingly, these estimates are expected to change as
future information becomes available and the changes may be significant. All of
the Companies' proved reserves are located in the United States.
Proved reserves are estimated reserves of crude oil and natural gas 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.
The standardized measure of discounted future net cash flows is 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 estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses. The estimated future net
cash flows are then discounted using a rate of 10% a year to reflect the
estimated timing of the future cash flows.
The Company has not filed any reserve estimates with any federal authorities or
agencies.
F-45
<PAGE>
<TABLE>
<CAPTION>
Proved Oil and Gas Reserve Quantities
Oil Gas
reserves reserves
(bbls.) (Mcf)
----------------- ----------------
<S> <C> <C> <C> <C>
Balance December 31, 1994 1,103,817 8,554,300
Revisions of previous estimates 312,639 1,464,600
Purchases of reserves in place 195,209 1,372,000
Sales of reserves in place (232,300) (655,500)
Extensions, discoveries, and other additions 139,704 1,834,900
Production (207,778) (1,342,300)
----------------- ----------------
Balance December 31, 1995 1,311,291 11,228,000
Revisions of previous estimates 111,277 514,300
Purchases of reserves in place 787,600 2,178,700
Sales of reserves in place - -
Extensions, discoveries, and other additions 143,900 6,349,000
Production (144,938) (1,619,100)
''''''''''''''''' ''''''''''''''''
Balance December 31, 1996 2,209,130 18,650,900
''''''''''''''''' ''''''''''''''''
Proved developed reserves:
December 31, 1994 1,066,822 7,444,200
December 31, 1995 1,010,644 9,668,100
December 31, 1996 1,396,569 11,741,700
</TABLE>
F-46
<PAGE>
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves
Year ended
December 31, 1996 December 31, 1995
--------------------- ---------------------
<S> <C> <C>
Future cash inflows $ 105,553,000 $ 53,072,000
Future production and development costs (44,132,000) (20,812,000)
Future income tax expenses (16,303,000) (7,545,000)
--------------------- ---------------------
Future net cash flows 45,118,000 24,715,000
10% annual discount for estimated timing of
cash flows (15,021,000) (7,237,000)
--------------------- ---------------------
Standardized measure of discounted future net
cash flows $ 30,097,000 $ 17,478,000
''''''''''''''''''''' '''''''''''''''''''''
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
Year ended
December 31, 1996 December 31, 1995
--------------------- ---------------------
Beginning balance $ 17,478,000 $ 10,248,000
Changes in future development costs (5,631,000) 531,000
Purchases of reserves in place 8,292,000 2,751,000
Sales of reserves in place - (1,973,000)
Sales of oil and gas produced (4,516,000) (3,509,000)
Net changes in price and production costs (7,014,000) 830,000
Extensions, discoveries, and other additions 12,543,000 4,528,000
Revisions of previous quantity estimates 12,626,000 5,837,000
Accretion of discount 1,874,000 957,000
Net changes in income taxes (5,555,000) (2,722,000)
--------------------- ---------------------
Ending balance $ 30,097,000 $ 17,478,000
--------------------- ---------------------
</TABLE>
F-47
<PAGE>
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves (continued)
Year ended
December 31, 1996December 31, 1995
------------------------------------
Costs incurred
<S> <C> <C>
Property acquisition costs - unproved leases $1,807,000 $1,215,000
Property acquisition costs - proved properties 1,598,000 7,220,000
Exploration costs 135,000 -
Development costs 2,995,000 1,814,000
Year ended December 31,
1996 1995 1994
------------------------------------------------------
Other information
Amortization per dollar of gross sales revenue
0.27 0.53 .38
Average sales price per barrel (oil) 19.35 16.61 15.28
Average sales price per Mcf (gas) 2.19 1.56 1.89
Average sales price per net equivalent barrel*
15.24 12.95 13.68
Average production cost per net equivalent barrel
5.12 7.85 12.10
*Natural gas converted to equivalent barrels using conversion ratio of 6:1.
</TABLE>
F-48
<PAGE>
Goldking Companies, Inc. & Subsidiaries
Condensed Financial Statements
June 30, 1997
(Unaudited)
F-49
<PAGE>
<TABLE>
<CAPTION>
Goldking Companies, Inc. & Subsidiaries
Condensed Balance Sheets
(Unaudited)
As of As of
June 30, 1997 December 31, 1996
-----------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 341,000 $ 896,000
Restricted cash 401,000 1,358,000
Short-term investments 72,000 72,000
Accounts receivable, net 2,714,000 4,193,000
Advances to affiliates, officers, and shareholders 1,714,000 1,486,000
Prepaid expenses and other 40,000 27,000
-----------------------------------------------
Total current assets 5,282,000 8,032,000
Property and equipment:
Oil and gas properties, full-cost method 27,262,000 23,683,000
Pipeline and ROW 1,682,000 1,682,000
Other property 1,157,000 1,104,000
-----------------------------------------------
30,101,000 26,469,000
Accumulated depreciation, depletion, and amortization
(13,070,000) (12,097,000)
-----------------------------------------------
17,031,000 14,372,000
Other assets:
Organization, deferred and other costs, net of accumulated amortization of
$141,000 and $141,000 at June 30, 1997 and December 31,1996, respectively
1,026,000 1,106,000
-----------------------------------------------
Total other assets 1,026,000 1,106,000
-----------------------------------------------
Total assets $ 23,339,000 $ 23,510,000
-----------------------------------------------
</TABLE>
F-50
<PAGE>
<TABLE>
<CAPTION>
As of As of
June 30, 1997 December 31, 1996
-----------------------------------------------
Liabilities and stockholders' equity Current liabilities:
<S> <C> <C>
Accounts payable $ 3,960,000 $ 3,491,000
Oil and gas distributions payable 1,633,000 2,810,000
Current maturities of long-term debt 1,181,000 1,243,000
Accrued Interest 247,000 228,000
Advances from joint-interest participants 112,000 502,000
Accrued and other liabilities 73,000 119,000
-----------------------------------------------
Total current liabilities 7,206,000 8,393,000
Contingent liabilities 654,000 713,000
Long-term debt, net of discount of $714,000 and $786,000 at June 30, 1997 and
December 31, 1996, respectively
13,102,000 11,639,000
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 100,000
Issued and outstanding shares - 10,000 - -
Additional paid-in capital 1,753,000 1,753,000
Retained earnings 624,000 1,012,000
-----------------------------------------------
Total stockholders' equity 2,377,000 2,765,000
'''''''''''''''''''''''''''''''''''''''''''''''
Total liabilities and stockholders' equity $ 23,339,000 $ 23,510,000
'''''''''''''''''''''''''''''''''''''''''''''''
See accompanying notes.
</TABLE>
F-51
<PAGE>
<TABLE>
<CAPTION>
Goldking Companies, Inc. & Subsidiaries
Statements of Income (Operations)
For the Six Months Ended June 30,
(Unaudited)
1997 1996
---------------------------------------------
Revenues:
<S> <C> <C>
Oil and gas revenues $ 3,531,000 $ 3,176,000
Interest income 53,000 17,000
Miscellaneous 64,000 276,000
---------------------------------------------
Total revenues 3,648,000 3,469,000
Costs and expenses:
Lease operating expense 1,573,000 818,000
General and administrative expense 401,000 457,000
Production and ad valorem taxes 281,000 223,000
Interest 807,000 848,000
Depreciation, depletion, and amortization 974,000 624,000
---------------------------------------------
Total costs and expenses 4,036,000 2,970,000
'''''''''''''''''''''''''''''''''''''''''''''
Net income (loss) $ (388,000) $ 499,000
'''''''''''''''''''''''''''''''''''''''''''''
See accompanying notes.
</TABLE>
F-52
<PAGE>
<TABLE>
<CAPTION>
Goldking Companies, Inc. & Subsidiaries
Statements of Stockholders' Equity
(Unaudited)
Additional Paid-In
Common Stock Retained Earnings Capital
Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances December 31, 1995 $ - $ (594,000) $ 1,753,000 $ 1,159,000
Net Income - 1,606,000 - 1,606,000
---------------------------------------------------------------------
Balance December 31, 1996 - 1,012,000 $ 1,753,000 2,765,000
Net income - (388,000) - (388,000)
'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
Balance June 30, 1997 $ - $ 624,000 $ 1,753,000 $ 2,377,000
'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
See accompanying notes.
</TABLE>
F-53
<PAGE>
<TABLE>
<CAPTION>
Goldking Companies, Inc. & Subsidiaries
Statements of Cash Flows
Six Months Ended June 30,
(Unaudited)
1997 1996
---------------------------------------------
Operating activities
<S> <C> <C>
Net income (loss) $ (388,000) $ 499,000
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation, depletion, and amortization 974,000 624,000
Changes in operating assets and liabilities:
Restricted cash 957,000 (169,000)
Accounts receivable 1,251,000 (289,000)
Prepaid costs (13,000) (87,000)
Accounts payable 469,000 1,234,000
Oil and gas distributions payable (1,177,000) -
Accrued and other liabilities (417,000) 117,000
Contingent liabilities (59,000) -
Other 80,000 -
---------------------------------------------
Net cash provided by (used in) operating activities 1,677,000 1,929,000
Investing activities
Investments in property, plant, and equipment, net (3,633,000) (3,250,000)
---------------------------------------------
Net cash used in investing activities (3,633,000) (3,250,000)
Financing activities
Net proceeds from long-term borrowings 1,401,000 1,754,000
Net decrease in cash and cash equivalents (555,000) 433,000
Cash and cash equivalents at beginning of period 896,000 193,000
'''''''''''''''''''''''''''''''''''''''''''''
Cash and cash equivalents at end of period $ 341,000 $ 626,000
'''''''''''''''''''''''''''''''''''''''''''''
See accompanying notes.
</TABLE>
F-54
<PAGE>
Goldking Companies, Inc. & Subsidiaries
Condensed Notes to Financial Statements
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments necessary to present fairly the financial position as of
June 30, 1997 and December 31, 1996 and the results of operations and changes in
stockholder's equity and cash flows for the periods ended June 30, 1997 and
1996. Most adjustments made to the financial statements are of a normal,
recurring nature. Although the Companies believe that the disclosures are
adequate to make the information presented not misleading, certain information
and footnote disclosures, including significant accounting policies, normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). These
financial statements should be read in conjunction with the Companies' annual
audited financial statements.
On July 30, 1997, PANACO, Inc. acquired the Goldking Companies for a combination
of cash, shareholder notes, PANACO Common Shares and the assumption of debt. The
acquisition by PANACO did not include the Goldking Companies advances receivable
from affiliates or a real estate investment, both owned by the Goldking
Companies. Certain reclassification entries have been made to the Companies'
historical financial statement amounts to provide for accounting and reporting
consistency with PANACO, Inc. For that reason, unaudited pro forma financial
information may not be presented in the same format or amounts may be classified
differently than those contained in these financial statements.
F-55
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy any securities other than the securities to
which it relates or any offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
----------------------
TABLE OF CONTENTS -------------------------
Page
PROSPECTUS
Available Information............................3 -------------------------
Prospectus Summary...............................4
Risk Factors....................................17
Use of Proceeds.................................24
Capitalization..................................24
Unaudited Pro Forma Combined Financial Data.....25
Selected Consolidated Financial Data............32
Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 33
Business and Properties.........................44 [LOGO]
Management......................................64
Principal Stockholders and Share Ownership
of Management.................................72
Certain Relationships and Related Transactions..74
The Exchange Offer..............................75
Description of New Credit Facility..............83
Description of Notes............................84
Certain United States Federal Income Tax $100,000,000
Considerations...............................116
Book-Entry; Delivery and Form..................116
Plan of Distribution...........................118 10 5/8% Series B Senior Notes
Legal Matters..................................119 due 2004
Independent Accountants........................119
Experts........................................119
Incorporation of Certain Documents
by Reference.................................120 November 17, 1997
Glossary.......................................121
Index to Consolidated Financial Statements.....F-1
----------------------
Until February 15, 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the Notes, whether or not participating in the
original distribution, may be required to deliver a prospectus. This is in a
ddition to the obligation of dealers to deliver a prospectus when acting as un
derwriters and with respect to their unsold allotments or subscriptions.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 882074
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,353,000
<SECURITIES> 1,701,000
<RECEIVABLES> 6,030,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,636,000
<PP&E> 151,014,000
<DEPRECIATION> 88,180,000
<TOTAL-ASSETS> 74,841,000
<CURRENT-LIABILITIES> 6,033,000
<BONDS> 0
0
0
<COMMON> 143,000
<OTHER-SE> 40,604,000
<TOTAL-LIABILITY-AND-EQUITY> 74,841,000
<SALES> 14,287,000
<TOTAL-REVENUES> 14,287,000
<CGS> 0
<TOTAL-COSTS> 11,936,000
<OTHER-EXPENSES> 60,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,265,000
<INCOME-PRETAX> 1,146,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,146,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,146,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
