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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report : October 6, 1997
Commission File Number 0-26662
PANACO, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction or incorporation)
43 - 1593374
(IRS Employer Identification No.)
1050 West Blue Ridge Boulevard, PANACO Building,
Kansas City, MO 64145-1216
(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code: (816) 942 - 6300
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<PAGE>
Item 2. Acquisition or Disposition of Assets
On July 17, 1997 PANACO, Inc. agreed to acquire Goldking Companies, Inc.
and on July 30, 1997 entered into the Restated Merger Agreement with The Union
Companies, Inc. ("Union"), Leonard C. Tallerine, Jr. and Mark C. Licata,
(together, the "Shareholders"). Prior to the merger, Messrs. Tallerine and
Licata owned all of the capital stock of Union. Union was a holding company
which owned directly or indirectly all of the capital stock of Goldking
Companies, Inc., Goldking Oil and Gas Corp., Goldking Trinity Bay Corp.,
Goldking Production Company, Hill Transportation Co., Inc. and Umbrella Point
Gathering, L.L.C. Union was merged into a newly formed subsidiary of PANACO,
Goldking Acquisition Corp. ("Goldking"). The transaction was closed on July 31,
1997. Goldking will be operated as a wholly owned subsidiary of PANACO. Leonard
C. Tallerine, Jr., will remain as Chairman and CEO of Goldking and become a
Vice-President and a Director of PANACO and Mark C. Licata will become
Vice-President-General Counsel and a Director of PANACO.
Goldking was founded in 1968 and began by exploring for oil and gas along
the Texas and Louisiana Gulf Coast. It grew as an independent oil and gas
company by sponsoring limited partnership drilling funds during the 1970's and
early 1980's, eventually participating in the drilling of over 1,000 wells and
operating over 420 wells during the period of 1981 to 1986. Goldking began
converting the limited partnership interests into working interests in the mid
to late 1980's. It emphasized contract operating activities, while providing
sound operating results and financial conservatism for the working interest
owners. Since the acquisition by the Messrs. Tallerine and Licata in 1991,
Goldking returned to its exploration and production roots as an aggressive
independent explorationist, producer and operator.
With the acquisition PANACO obtained estimated additional proved reserves
of 50 Bcf equivalent as of July 1, 1997 from approximately 178 wells located
throughout the Gulf Coast, along with another estimated 75 Bcf equivalent of
probable and possible reserves. The acquisition included a sizable and
attractive portfolio of exploration prospects developed using 3-D seismic data,
an extensive development program and a seasoned staff of 17 oil and gas
professionals experienced in all aspects of Gulf Coast operations. PANACO
acquired two pipelines as a part of the transaction. The acquisition gives
PANACO a prominent position in the currently very active Lower Frio/Vicksburg
area in Trinity Bay, Chambers County, Texas with existing production,
exploration prospects generated using recent 3-D seismic data and significant
pipeline capacity.
Goldking brings to PANACO a complement of reserves with approximately 43%
of its proved reserves in oil and an average reserve life of over twelve years.
The acquisition also increases PANACO's presence in the onshore and state waters
area of the Gulf Coast, where Goldking has a good reputation, name recognition
and expertise and experience in operations. Over the last eighteen months
Goldking has had a 67% success rate on wells drilled with the support of 3-D
seismic. Over 88% of its reserves are operated, giving the Company control over
its reserves. This has allowed Goldking to increase its proved reserves by more
than five times since 1995 and increase total reserves by more than six times
since 1995.
The purchase price for the transaction consisted of $7,500,000 in cash,
$6,000,000 in notes and 3,154,930 PANACO common shares. Of the cash portion,
$6,500,000 was advanced on PANACO's revolving bank loan. Goldking had
$13,000,000 in net liabilities as of July 31, 1997. A finder's fee was paid to
First Union Capital Markets Corp. with 84,000 PANACO common shares. The
transaction will be accounted for as a purchase, with the value of the PANACO
common shares recorded at $4.45 per share.
<PAGE>
<TABLE>
<CAPTION>
Goldking Oil & Gas Corp.
Well List
Lease Name Field County State Reservoir WI NRI
<S> <C> <C>
CRAWFORD 161 NO. 2 ANGELINA JEFFERSON TX UVIGERINA 27.61 20.83
GREAT RIVER DEEP BASTIAN BAY PLAQUEMINES LA LUBBEN/PRAIRIE 33.33 25.07
S/L 14267 EXTENSION BASTIAN BAY PLAQUEMINES LA G-A (P) SAND 33.33 25.07
S/L 14267 NO. 1 BASTIAN BAY PLAQUEMINES LA 7870' SAND 33.33 25.07
S/L 14267 NO. 2 BASTIAN BAY PLAQUEMINES LA G-A (P) SAND 33.33 25.07
S/L 14267 NO.2(BP1) BASTIAN BAY PLAQUEMINES LA G-C (P) SAND 33.33 25.07
S/L 14267 NO.2(BP2) BASTIAN BAY PLAQUEMINES LA G-B (P) SAND 33.33 25.07
S/L 14267 NO.2(BP3) BASTIAN BAY PLAQUEMINES LA G-III (O) SAND 33.33 25.07
SCHWING NO. 1 BAYOU SORREL IBERVILLE LA CIB HAZ 57.13 40.58
BAYOU TORTILLION LOC. 1 BAYOU TORTILLION PLAQUEMINES LA 9750' SAND 16.67 12.49
SCOTT PAPER GU NO. 2-1 BIG ESCAMBIA ESCAMBIA AL SMACKOVER - 0.10
GIANELLONI NO. 1 BURTVILLE N. E. BATON ROUGE LA 11000' DEEP 89.27 68.56
GIANELLONI NO. 4 TWIN BURTVILLE N. E. BATON ROUGE LA 9650' SAND 89.30 67.48
MIAMI CORP "J" NO. 1 CHENIERE PERDUE CAMERON LA A RA SUA 17.12 14.27
MIAMI CORP "J" NO. 4 CHENIERE PERDUE CAMERON LA E SAND RA SUA 31.05 23.85
MIAMI CORP "J" NO. 5 CHENIERE PERDUE CAMERON LA D SAND 31.05 23.85
MIAMI CORP "J" NO. 6 CHENIERE PERDUE CAMERON LA F SAND 53.86 40.61
MIAMI CORP "O" NO. 3 CHENIERE PERDUE CAMERON LA 9100 40.79 32.71
MIAMI CORP "O" NO. 4 CHENIERE PERDUE CAMERON LA 9100 40.79 32.71
MIAMI CORP "O" NO. 6 CHENIERE PERDUE CAMERON LA 8990' SAND 43.93 31.21
MIAMI CORP "O" NO. 7 CHENIERE PERDUE CAMERON LA B-1 SAND 35.28 28.55
I.P. FARMS NO. 2U CHOCOLATE BAYOU, S. BRAZORIA TX FRIO 12,300 6.56 4.78
I.P. FARMS NO. 4 CHOCOLATE BAYOU, S. BRAZORIA TX FRIO 10,700 6.67 4.78
I.P. FARMS NO. 5 CHOCOLATE BAYOU, S. BRAZORIA TX FRIO "E" SAND 10.00 7.50
I.P. FARMS NO. 6 CHOCOLATE BAYOU, S. BRAZORIA TX FRIO MIDDLE 10.00 7.50
CLEMENS LOC. 2 CLEMENS, SOUTH BRAZORIA TX FRIO SANDS 10.00 7.50
CLEMENS LOC. 3 CLEMENS, SOUTH BRAZORIA TX FRIO SANDS 10.00 7.50
CLEMENS S/T 8 GU #1 CLEMENS, SOUTH BRAZORIA TX FRIO "A" 10.00 7.50
BLACKSTONE MIN. A NO. 1 CLEVELAND LIBERTY TX COCKFIELD A 5.66 4.52
DAVIDSON RANCH CENTRAL
PROCESSING FACILITY
Davidson 15 #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson 15 #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson 15 #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson 15 #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson 15 #5 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson 15 #6 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson 15 #7 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson 15 #8 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson 15 #9 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson A #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson A #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson A #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson A #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson A #5 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson A #6 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Davidson A #7 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen A #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen A #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen A #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen A #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen B #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen B #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen B #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen B #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen B #5 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen B #6 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen C #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen C #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen C #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen C #5 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen C #6 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen D #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen D #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
McMullen D #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin A #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin A #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin A #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin A #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin B #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin B #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin B #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin B #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Meybin B #5 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber A #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber A #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber A #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber A #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber A #5 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber A #7 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber B #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber B #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber B #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber B #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber B #5 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber B #7 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Scheuber B #8 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins A #1 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins A #2 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins A #3 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins A #4 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
Wilkins A #6 DAVIDSON RANCH CROCKETT TX PENN 7890 * *
DAVIDSON, C.E. III NO. 3 DAVIDSON RANCH CROCKETT TX PENNSYLVANIAN 7890 1.28 0.91
DAVIDSON, C.E. III NO. 4 DAVIDSON RANCH CROCKETT TX PENNSYLVANIAN 7890 1.28 0.91
DDAVIDSON RANCHOM JR A 12 CROCKETT TX PENNSYLVANIAN 7890 1.28 0.96
DAVIDSON, JOE TOM JR. A 2 DAVIDSON RANCH CROCKETT TX PENNSYLVANIAN 7890 1.28 0.96
DAVIDSON, JOE TOM JR. A 4 DAVIDSON RANCH CROCKETT TX PENNSYLVANIAN 7890 1.28 0.96
DEVILLIER, O.C. ET AL 2 DEVILLIER CHAMBERS TX VICKSBURG 100.00 78.01
DEVILLIER, O.C. ET AL 5 DEVILLIER CHAMBERS TX VICKSBURG 100.00 79.00
DOERING RANCH NO. 2 DOERING RANCH FRIO TX BUDA 0.08 0.05
FRANK DOERING NO. 1 DOERING RANCH FRIO TX BUDA 0.08 0.05
FRANK DOERING NO. 3 DOERING RANCH FRIO TX BUDA 0.08 0.05
R.K. HARLAN NO. 1 DOERING RANCH FRIO TX BUDA 0.01 0.01
R.K. HARLAN NO. 4 DOERING RANCH FRIO TX BUDA 0.01 0.01
NE.TCHENIEREAPERDUE NO. 1 CAMERON LA AMPH B 51.29 39.26
ELAM UNIT NO. 1-A EL CAMPO WHARTON TX YEGUA D-3 - 0.06
MACH NO. 1 EL CAMPO WHARTON TX YEGUA - 0.47
BARTOS NO. 1 EL CAMPO NE WHARTON TX YEGUA - 0.03
PROSEN, R.J. NO. 1 FANT LIVE OAK TX WILCOX 11700 0.99 0.76
DEL VALLE NO. 1 FORT ST. PHILIP PLAQUEMINES LA G SAND 43.33 33.45
FORT ST. PHILIP LOC 1 FORT ST. PHILIP PLAQUEMINES LA G SAND 43.33 33.45
MCLANE TEXAS TRUST E #2 GARWOOD COLORADO TX FRIO 3200 0.09 0.07
WILBERTS "C" NO. 1 GROSS TETE W. BATON ROUGE LA ROWE RA SUA 48.10 37.56
HERBERT-BROUSSARD B-1 GUM ISLAND JEFFERSON TX HACKBERRY 4 0.03 0.02
POINT RAY LOC. 2 HALTER ISLAND TERREBONNE LA UPPER MIOCENE 30.00 22.80
HELIS #1 IBERIA, S.W. IBERIA LA MA - 5 SAND 37.59 23.09
HELIS #4 IBERIA, S.W. IBERIA LA MA-3 36.61 22.49
MCVEA NO. 1 IRENE EAST BATON ROUGE LA TUSC "C" - 1.27
U TUSC RA SU FIELD UNIT IRENE EAST BATON ROUGE LA UPPER TUSC "A" & "B" - 0.11
A L COX ET AL 33-5 #1 JOHNS RANKIN MS SMACKOVER - 0.24
CALEY T JONES 33-10 NO. 2 JOHNS RANKIN MS SMACKOVER - 0.24
E N ROSS UNIT 34-14 NO. 1 JOHNS RANKIN MS SMACKOVER - 0.28
E N ROSS UNIT 34-14 NO. 3 JOHNS RANKIN MS SMACKOVER - 0.28
LLAKECCOMORES. WIDE UNIT JASPER MS SMACKOVER - 0.70
MIAMI CORP "D" NO. 2 LITTLE CHENIERE CAMERON LA 6400' SAND - -
MIAMI CORP "P" NO. 1 LITTLE CHENIERE CAMERON LA 7470' SAND 44.16 30.03
MIAMI CORP "S" NO. 2 LITTLE CHENIERE CAMERON LA 7080 SD - -
BROUGHTON WE 11-6 #1 LOVETTS CREEK MONROE AL SMACKOVER - 2.00
CMONTICELLORBACH NO. 1 LAWRENCE MS SLIGO 10.20 7.85
DALTON LABORDE NO.1 NESSER E. BATON ROUGE LA NS 5500 RASU 80.63 57.61
DALTON LABORDE NO.2 NESSER E. BATON ROUGE LA NS 5500 RASU 57.82 44.46
DALTON LABORDE NO.3 NESSER E. BATON ROUGE LA NS 5500 RASU - -
G-MEN LOC. 1 NUECES BAY NUECES TX MID FRIO 100.00 78.99
BIRDSONG GU NO.1 OAK HILL GREGG TX COTTON VALLEY - 0.02
COLLIER GU NO.1 OAK HILL GREGG TX COTTON VALLEY - -
LAKE CHEROKEE G.U. NO.1 OAK HILL GREGG TX COTTON VALLEY - -
MARY C. ARMSTRONG NO. 2 OVERTON ADAMS MS BARKSDALE 24.82 18.62
MARY C. ARMSTRONG NO. 3 OVERTON ADAMS MS BARKSDALE 24.82 18.62
MARY C. ARMSTRONG NO. 6 OVERTON ADAMS MS BARKSDALE - -
VAUGHEY NO. 1 OWEN CREEK FRANKLIN MS BARKSDALE 36.90 28.86
A. B. LAWRENCE PETKAS CHAMBERS TX FRIO 7650 - -
TROY CASEY LEASE PETKAS CHAMBERS TX FRIO 7650 3.60 2.50
YOCKEY NO. 1 PHASE FOUR WHARTON TX YEGUA 10500 - 0.07
AGNES WEST PLACEDO EAST VICTORIA TX FRIO 6200 0.37 0.28
LEFEBVRE NO. 1 PORT ALLEN W. BATON ROUGE LA DEEP 100.00 75.00
MARTINEZ A NO. 1 RINCON STARR TX 5530' SAND 20.41 14.85
RF FEDERAL NO. 1 ROXIE FRANKLIN MS BENBROOK 36.90 32.83
RF FEDERAL NO. 2 ROXIE FRANKLIN MS MCKITTRICK - -
M. D. D. DUPONT NO. 1 SCOTT LAFAYETTE LA STUTES RB SUA - 3.00
CROSBY SR NO. 1 TAR CREEK NORTH WILKINSON MS MCKITTRICK - -
CROSBY SR NO. 2 TAR CREEK NORTH WILKINSON MS WILSON 30.01 22.51
STATE TRACT 73-3A(RC1) UMBRELLA POINT CHAMBERS TX FRIO F-1 SAND 100.00 85.00
STATE TRACT 74 F-5 UNIT UMBRELLA POINT CHAMBERS TX FRIO F-5 SAND 100.00 83.50
STATE TRACT 74-3A UMBRELLA POINT CHAMBERS TX FRIO F-14 SAND 100.00 83.50
STATE TRACT 74-5 UMBRELLA POINT CHAMBERS TX FRIO F-8 SAND 100.00 83.50
STATE TRACT 74-9 UMBRELLA POINT CHAMBERS TX FRIO F-10 SAND 100.00 83.50
STATE TRACT 87 F-5 UNIT UMBRELLA POINT CHAMBERS TX FRIO F-5 SAND 100.00 83.50
STATE TRACT 87-1(RC1) UMBRELLA POINT CHAMBERS TX FRIO F-1 SAND 100.00 83.50
STATE TRACT 87-10(RC1) UMBRELLA POINT CHAMBERS TX FRIO F-11 SAND 100.00 83.50
STATE TRACT 87-11U(RC1) UMBRELLA POINT CHAMBERS TX FRIO F-8 SAND 100.00 83.50
STATE TRACT 87-12 L UMBRELLA POINT CHAMBERS TX FRIO F-15 SAND 100.00 83.50
STATE TRACT 87-6U UMBRELLA POINT CHAMBERS TX FRIO F-4 SAND 100.00 83.50
STATE TRACT 87-9 UMBRELLA POINT CHAMBERS TX FRIO F-8 - -
STATE TRACT 88 F-15 UNIT UMBRELLA POINT CHAMBERS TX FRIO F-15 100.00 85.00
STATE TRACT 88 F-5 UNIT UMBRELLA POINT CHAMBERS TX FRIO F-5 100.00 85.00
STATE TRACT 88-13B UMBRELLA POINT CHAMBERS TX FRIO F-10 SAND 100.00 85.00
STATE TRACT 88-14B L UMBRELLA POINT CHAMBERS TX FRIO F-5 SAND 100.00 85.00
STATE TRACT 88-5B(RC1) UMBRELLA POINT CHAMBERS TX FRIO F-6/7 SAND 100.00 87.50
STATE TRACT 88-6B(RC1) UMBRELLA POINT CHAMBERS TX FRIO F-1A SAND 100.00 87.50
STATE TRACT 88-7B(RC1) UMBRELLA POINT CHAMBERS TX FRIO F-8 SAND 100.00 87.50
BRIGHT SPOT NO. 1 UMBRELLA POINT DEEP CHAMBERS TX FRIO F-18 100.00 83.50
DEEP LOCATION NO. 1 UMBRELLA POINT DEEP CHAMBERS TX FRIO F-28 100.00 83.50
DEEP LOCATION NO. 2 UMBRELLA POINT DEEP CHAMBERS TX FRIO F-28 100.00 83.50
STRAGO-BYRD 26-13 #2 VOCATION MONROE AL 14000 SMACKOVER 12.50 9.37
SL 750 "A" WHITE POINT FIELD NUECES TX 6000' SAND 50.00 39.00
W. LAKE ARTHUR ST W. LAKE ARTHUR JEFF DAVIS LA MIOCENE 20.00 14.40
WYELLOWLCREEKRWESTUNIT WAYNE MS EUTAW - 0.53
</TABLE>
* Average WI % is 1.5 %, average NRI % is .96% for wells included in the
DAVIDSON RANCH CENTRAL PROCESSING FACILITY.
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of business acquired.
The required audited financial information is not currently
available but management expects to file the information
within 45 days.
(b) Pro Forma Financial Information.
The required pro forma financial information is not currently
available but management expects to file the information
within 45 days.
(c) Exhibits
10.18 Restated Merger Agreement dated July 30, 1997
between PANACO, Inc., The Union Companies,
Inc., Leonard C. Tallerine, Jr. and Mark C. Licata.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PANACO, Inc.
Date: August 15, 1997 /s/Todd R. Bart
------------------- ----------------------
Todd R. Bart
Secretary
<PAGE>
RESTATED
MERGER AGREEMENT
This Restated Merger Agreement is as of the 1st day of July, 1997, by,
between, and among PANACO, INC., a Delaware corporation ( "Panaco") and THE
UNION COMPANIES, INC., a Texas corporation ("Union"), and LEONARD C. TALLERINE,
JR. and MARK C. LICATA (together, the "Shareholders").
WHEREAS, Union desires to merge with Goldking Acquisition Corp., a
wholly-owned subsidiary of Panaco to be formed under the laws of Delaware
("PanSub"), and Panaco and PanSub desire to acquire Union and its subsidiaries
in a transaction qualifying under Sec. 368(a)(1)(A) and Sec 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended; and
WHEREAS, Union owns, either directly or indirectly, all of the
outstanding capital stock of Goldking Companies, Inc., a Delaware corporation,
Goldking Oil & Gas Corp., a Texas corporation, Goldking Trinity Bay Corp., a
Texas corporation, Goldking Production Company, a Texas corporation, Hill
Transportation Co., Inc., a Louisiana corporation, and Umbrella Point Gathering,
L.L.C., a Texas limited liability company (collectively, the "Subsidiaries", and
each is individually a "Subsidiary"); and
WHEREAS, the parties have reached agreement regarding such merger.
NOW, THEREFORE, for valuable consideration and the mutual covenants and
agreements herein contained, Panaco, Union and the Shareholders agree as
follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. On the Closing Date (as defined below), in
accordance with the corporation laws of the States of Texas and Delaware, this
Agreement and the Plan of Merger contained in the Certificate of Merger, to be
prepared as soon as practicable following the execution hereof and reflecting in
substance the terms and conditions hereof, Union shall be merged with and into
PanSub, which will be formed as a Delaware corporation as soon as practicable
following the date hereof (the "Merger"). Following the Merger, the separate
existence of Union shall cease and PanSub shall continue as the surviving
corporation and as a wholly-owned subsidiary of Panaco. PanSub, in its capacity
as the corporation surviving the Merger, is sometimes hereinafter referred to as
the "Surviving Corporation."
Section 1.2 Effect of Merger. The Surviving Corporation shall, at and
after the Closing Date, possess all the rights, privileges, powers and
franchises, of a public as well as of a private nature, of each of PanSub and
Union (collectively the "Constituent Corporations"), subject to all of the
restrictions, disabilities and duties of each of the Constituent Corporations;
and all property, real, personal and mixed, and all debts due on whatever
account, and all other things in action, and all and
<PAGE>
every other interest, of or belonging to or due to each of the Constituent
Corporations, shall be taken and deemed to be transferred to and vested in the
Surviving Corporation without further act or deed; and all property, rights,
privileges, powers and franchises, and all and every other interest shall
thereafter be the property of the Surviving Corporation as effectively as if
they were of the several Constituent Corporations; but all rights of creditors
and all liens upon any property of any of the Constituent Corporations shall be
preserved unimpaired, and all the debts, liabilities and duties of the
Constituent Corporations shall thenceforth attach to the Surviving Corporation,
and may be enforced against the Surviving Corporation to the same extent as if
said debts, liabilities and duties had been incurred or contracted by it.
Specifically, but not by way of limitation, all interests of Union in and to the
capital stock of the Subsidiaries shall continue and shall not in any way be
impaired by the Merger.
Section 1.3 Closing. The Closing shall take place at the Houston
offices of Panaco, Inc., at 1:00 p.m. local time on July 29, 1997, or at such
other place and time as Panaco and Union shall agree. The closing shall be
effective upon the filing with the Delaware Secretary of State of a Certificate
of Merger (the "Closing" or the "Closing Date"). Either Panaco or Union may
terminate this Agreement if the Closing has not occurred by July 31, 1997.
Section 1.4 Certificate of Incorporation and By-laws; Directors and
Officers. The Certificate of Incorporation and the By-laws of PanSub, as in
effect immediately prior to the Closing, shall, from and after the Closing, be
the Certificate of Incorporation and By-laws of the Surviving Corporation and
thereafter shall continue to be its Certificate of Incorporation and By-laws
until amended as provided therein, except that as part of the Merger, the
Certificate of Incorporation of PanSub shall be amended to change its name to
"Goldking Companies, Inc." The directors and the officers of PanSub immediately
prior to the Closing shall continue as the directors and officers, respectively,
of the Surviving Corporation immediately after the Closing, to hold office in
accordance with the Certificate of Incorporation and By-laws of the Surviving
Corporation until their respective successors are duly elected and qualified.
Section 1.5 Conversion of Securities. On the Closing Date, by virtue of
the Merger and without any action on the part of Union, Panaco, PanSub, or the
holder of any of the following securities:
(a) each share of common stock of Union, the same being 10,000 shares
of common stock, par value $.10 per share (the "Shares") shall be cancelled and
extinguished and shall be converted into and become a right to receive from
PanSub the Merger Consideration (as hereinafter defined) for each Share, in
accordance with Section 1.6, and no other rights;
(b) each Share or any other capital stock held in the treasury of
Union, or owned by Union or any subsidiary immediately prior to the Closing Date
shall automatically be cancelled and retired and no payment shall be made with
respect thereto; and
(c) each Share of PanSub's common stock, issued and outstanding
immediately prior to the Closing Date shall be remain unchanged.
<PAGE>
The "Merger Consideration" for each Share shall equal the result
obtained by dividing the Acquisition Price (as hereinafter defined) by the total
number of Shares issued and outstanding immediately prior to the Closing Date
(excluding shares to be cancelled pursuant to Section 1.5(b), above).
Section 1.6 "Acquisition Price". The "Acquisition Price" shall equal
Twenty-Seven Million Five Hundred Thousand Dollars ($27,500,000), to be paid as
follows:
(a) Seven Million Five Hundred Thousand Dollars ($7,500,000) in cash at
Closing, by wire transfer of immediately available funds to such account or
accounts as Shareholders shall direct.
(b) Two payments in the principal amount of Three Million Dollars
($3,000,000) each, payable (respectively) on March 31, 1998 and March 31, 1999.
These amounts will be evidenced by two non-negotiable promissory notes of Panaco
(singularly a "Panaco Note" and, collectively the "Panaco Notes") which notes
shall be unsecured, but which shall provide for standard provisions regarding
default and collection of attorney fees. Panaco Notes shall bear simple interest
at a variable rate equal to the blended effective rate charged Panaco from time
to time by its bank lenders, which interest shall be due and payable quarterly.
Notwithstanding the above, Panaco agrees that the Panaco Notes shall become
immediately due and payable, in full, in the event and upon the closing date of
(i) any single or series of subordinated debt financing(s) of Panaco which
aggregates $50,000,000 of indebtedness incurred after the date hereof, subject
to any underwriter's rights to designate or consent to the use of proceeds of
such financings, (ii) in the event of change in the ownership of Panaco's common
stock of greater than 40% (other than pursuant to routine trading in said common
stock) or (iii) upon the merger, consolidation or sale of all or substantially
all of the assets of Panaco ( (ii) and (iii) are collectively referred to as a
"Change of Control"). The Panaco Notes may be prepaid, at any time, without
penalty or premium.
(c) The remaining $14,000,000 shall be in the form of 3,154,930
restricted shares of Panaco's common stock, par value $0.01 per share (the
"Panaco Stock"), and which are for the purposes of this transaction valued at
$4.4375 per share. At Closing Panaco and the Shareholders shall enter into
Registration Rights Agreements which shall grant to the Shareholders demand
registration and/or piggyback rights identical to the shareholder rights Panaco
granted to Amoco on August 26, 1996.
Section 1.7 Surrender of Certificates. Upon the Closing Date, the
Shareholders shall surrender certificates for all of the outstanding Shares and
any other capital stock of Union, with such endorsements, stock powers, or other
instruments of transfer as may be reasonably required by Panaco.
Section 1.8 Legend. Each stock certificate of Panaco issued as a
portion of the Acquisition Price hereunder shall be imprinted with a legend
stating that the securities have not been registered with the Securities and
Exchange Commission, and may not be offered or sold, directly or indirectly,
except pursuant to a registration or an exemption from registration under the
Securities Act of 1933 and any applicable blue sky law (the "Securities Acts").
The Shareholders agree not to attempt any transfer of Panaco's stock without
first complying with said legend. An appropriate stop transfer restriction will
be placed on Panaco's stock transfer records.
<PAGE>
ARTICLE II
THE SHAREHOLDERS
Section 2.1 Board Representation. Panaco agrees that the Shareholders
shall be appointed to fill newly created seats on the Board of Directors of
Panaco, effective at Closing. The Shareholders acknowledge that they will be
required to stand for re-election at upcoming annual meetings of the
stockholders of Panaco which elect the class of Directors to which each is
individually assigned. Leonard C. Tallerine, Jr. will retain his current
positions as officer and director of the Subsidiaries, subject to the direction
and will of Panaco's Board of Directors and executive officers. The Shareholders
will obtain, prior to closing, the resignations of all other persons currently
serving on the Boards of Directors of the Subsidiaries. Panaco shall designate
persons to fill all such positions.
Section 2.2 Employment. Panaco and Union agree that the Shareholders
shall be employed by Panaco, with their base compensation being annual salaries
of $200,000 for Mr. Tallerine and $150,000 for Mr. Licata, in accordance with
the customary employment practices of Panaco as determined by its Board of
Directors, including participation in all plans and benefits of Panaco available
to employees of comparable stature. The Shareholders represent and warrant that
they have no contracts, understandings or agreements with respect to their
employment or other compensation by Union and/or its Subsidiaries and any such
employment shall be terminated as of the Closing date. Each of the Shareholders'
employment shall continue at the will of Panaco, provided that the employment of
each Shareholder shall continue at least until the payment in full of the Notes
to be issued to such Shareholder pursuant to Section 1.6(b), above.
Section 2.3 Panaco Titles. Panaco agrees that Mr. Tallerine will be
appointed a Vice- President and Mr. Licata will be appointed Vice President and
General Counsel of Panaco, which appointments will continue at the discretion of
Panaco's Board of Directors.
Section 2.4 Non-Competition. Each Shareholder agrees that, without the
prior written consent of Panaco, such Shareholder will not, from the date hereof
throughout his employment by the Subsidiaries and Panaco, and for a period of
three (3) years thereafter, directly or indirectly, own, manage, operate,
control, advise or join in or participate in the ownership, management,
operation or control of or be employed by or be connected in any manner with any
oil or gas business presently in competition with the properties of the
Subsidiaries or Panaco. For these purposes, a business shall be deemed to be in
competition with the Subsidiaries or Panaco only if it owns, leases or operates
oil and gas properties within three (3) miles of the geographic boundary of the
leases and/or units listed on Schedule 2.4 (the "Goldking Major Property
Interests"). In addition, during the term of the Shareholders' employment and
for a period of three (3) years thereafter, neither Shareholder shall knowingly
solicit, entice or persuade any other employees of Panaco, PanSub, or any of its
Subsidiaries, to leave the services of Panaco, PanSub or any of its Subsidiaries
for any reason or otherwise directly or indirectly employ any such person.
Notwithstanding the above, the provisions of this Section 2.4 shall terminate
and be of no force or effect in the event of a Change in Control of Panaco or
upon the occurrence of any default under the Panaco Notes.
<PAGE>
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
The Shareholders, severally and not joint and severally, and Union
hereby covenant, represent and warrant, as follows:
Section 3.1 Organization and Standing. Union is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas. Each of the Subsidiaries is duly organized, validly existing and in good
standing under the laws of the state of its incorporation or organization. Union
and the Subsidiaries have full power and authority to own and operate their
assets, and to carry on their business as presently conducted and as proposed to
be conducted. Union has furnished Panaco with true, correct and complete copies
of its and each Subsidiary's Certificate of Incorporation, By-Laws and Minute
Books. The minute books of Union and of each Subsidiary accurately record
therein all actions of their Boards of Directors and Shareholders.
Section 3.2 Capitalization. The authorized capital stock of Union consists
solely of 1,000,000 shares of Common Stock $.10 par value; there are currently
outstanding 10,000 shares of Union common stock. All outstanding shares of Union
common stock were duly issued and are fully paid and non assessable. There are
no outstanding options, warrants and other agreements pursuant to which Union
could be required to issue any capital stock.
Section 3.3 The Subsidiaries. Union has no subsidiaries and does not
directly or indirectly control or own any interest in any corporation,
partnership, joint venture, proprietorship or other business entity other than
the Subsidiaries. Union owns all of the outstanding capital stock of Goldking
Companies, Inc. ("Goldking"), which in turn owns all of the outstanding capital
stock of Goldking Oil & Gas Corp., Goldking Production Company and Hill
Transportation Co., Inc. Goldking Oil & Gas Corp. owns all of the outstanding
capital stock of Goldking Trinity Bay Corp. Hill Transportation Co., Inc. owns
all outstanding membership interests in Umbrella Point Gathering, L.L.C.
Section 3.4 Powers of Union. Union and the Shareholders have and will have
at the Closing Date all requisite power and authority to execute and deliver
this Agreement, and to carry out and perform its obligations under the terms of
this Agreement.
Section 3.5 Authorization. All action on the part of Union and its
Shareholders necessary for the authorization, execution, delivery and
performance of this Agreement has been duly taken. This Agreement is the valid
and binding obligation of Union and the Shareholders, enforceable in accordance
with its terms, subject to bankruptcy, insolvency and similar laws and to
general principles of equity.
Section 3.6 Licenses and Permits. To the actual knowledge of the
Shareholders and Union, all material licenses, permits, concessions, franchises
and other governmental authorizations and approvals of all federal, state, local
or foreign governmental or regulatory bodies required or necessary for Union and
its Subsidiaries to carry on their business as and where presently conducted
have been duly obtained and are in full force and effect. There are no
proceedings pending or, to the
<PAGE>
actual knowledge of Union, its Subsidiaries, or the Shareholders threatened,
which are likely to result in the revocation, cancellation or suspension or any
material modification of any thereof.
Section 3.7 Financial Statements.
(a) Union has delivered to Panaco copies of the audited consolidated
and consolidating balance sheets, income statements and statements of change in
financial position of Goldking and its Subsidiaries at and for the periods ended
December 31, 1995, December 31, 1996 and similar unaudited financial statements
as of May 31, 1997 (the "Goldking Financial Statements"). Goldking Financial
Statements (except for normal year-end audit adjustments as to the May 31, 1997
unaudited financial statements, none of which either singly or in the aggregate
is material) fairly present the financial position of Goldking and its
Subsidiaries as of their respective dates and the results of their operations as
of the dates and for the periods indicated above, and have been prepared in
conformity with generally accepted accounting principles ("GAAP"), applied on a
consistent basis throughout the periods covered thereby, and no event occurring
after the date of the latest balance sheet contained in Goldking Financial
Statements would be required to be set forth in Goldking Financial Statements
under generally accepted accounting principles.
(b) Except as set forth on Schedule 3.7(b) hereto, Goldking and its
Subsidiaries have no liabilities or obligations, whether accrued, absolute,
contingent or otherwise which should have been disclosed under GAAP on the
Goldking Financial Statements, other than (i) liabilities which are fully and
adequately reflected or reserved against in the most recent balance sheet
included in Goldking Financial Statements and (ii) liabilities incurred since
the date of the most recent balance sheet included in Goldking Financial
Statements in the ordinary course of business and consistent with past practice
and none of which is materially adverse. Except as set forth on Schedule 3.7(b),
all indebtedness of Goldking and its Subsidiaries may be prepaid in full on 30
days' or less notice without penalty. Goldking and its Subsidiaries are not in
default with respect to any outstanding indebtedness for borrowed money or any
instrument relating thereto. Complete and correct copies of all instruments
(including all amendments, settlements, waivers and consents) relating to any
indebtedness for borrowed money of Goldking or any Subsidiary have been
furnished to Panaco.
(c) As of May 31, 1997, Union's sole asset consists of 100% of the
outstanding common stock of Goldking and it has no liabilities.
Section 3.8 Absence of Certain Events. Except as set forth on Schedule 3.8,
since May 31, 1997, the business of Union and its Subsidiaries has been operated
only in the ordinary and normal course and, to the Shareholders' and to Union's
knowledge, there has not been:
(a) any material adverse change in the financial condition, results of
operations or Union's Major Property Interests of Union and its Subsidiaries and
there has been no occurrence, circumstance or combination thereof which might be
expected to result in any such material adverse change thereto before or after
the Closing Date;
(b) any material damage, destruction or loss, whether covered by insurance
or not, adversely affecting Union's Major Property Interests.
<PAGE>
(c) any declaration or payment of any dividend, or any other similar
distribution, directly or indirectly, with respect to the capital stock or other
securities of Union;
(d) any direct or indirect redemption, purchase or other acquisition of the
capital stock or other securities of Union or any Subsidiary or issuance or
agreement to issue (i) shares of capital stock, (ii) rights to acquire shares of
capital stock, (iii) any securities convertible into or exchangeable for capital
stock of Union or any Subsidiary or (iv) any other securities of Union or any
Subsidiary;
(e) except as set forth on Schedule 3.17, any increase or decrease in the
compensation payable to or to become payable by Union or its Subsidiaries to any
of their officers, employees or agents, or change in any insurance, pension or
other beneficial plan, payment or arrangement made to, for or with any of such
officers, employees or agents or any commission or bonus paid to any of such
officers, key employees or agents;
(f) any assumption, guarantee, endorsement or other creation of
responsibility for the liability or obligation of any other person (whether
absolute, accrued, contingent or otherwise);
(g) any sale, assignment, transfer, lease or other disposition or
amendment, termination, release or waiver of any asset of Union or its
Subsidiaries or acquisition of any assets not in the ordinary course of business
and consistent with past practices;
(h) any discharge or satisfaction of any lien on any assets of Union or its
Subsidiaries, or the payment of any liability or obligation (whether absolute,
accrued, contingent or otherwise) of Union or its Subsidiaries, other than in
the ordinary course of the business and consistent with past practices;
(i) any mortgage, pledge, or creation of any lien with respect to any of
Union's assets or the assets of any Subsidiary;
(j) any cancellation, modification or settlement for less than the full
amount thereof of any debt or claim by or owing to Union or any Subsidiary;
(k) any transfer or grant of any right under any contracts or other
agreements, patents, patent licenses, inventions, trade names, trademarks,
service marks or copyrights, or registrations or licenses thereof or
applications therefor, or with respect to any know-how or other proprietary or
trade rights;
(l) any transaction, contract or commitment entered into which is not in
the ordinary course of business and consistent with past practices;
(m) any investment of a capital nature, either by purchase of stock or
securities, or purchase or lease of any machinery or equipment or other property
or assets, or otherwise; or
(n) any other event or condition of any character which has had or may have
a material adverse effect on Union, its Subsidiaries or their business.
<PAGE>
Section 3.9 Compliance with Other Instruments and Law, etc. Union and each
Subsidiary is not in any violation of any terms of its Certificate of
Incorporation or By-Laws, or, to the Shareholders' and to Union's actual
knowledge, of any material term or provision of any mortgage, indebtedness,
indenture, contract, agreement, instrument, judgment, or decree. To the
Shareholders' and to Union's actual knowledge, Union and each Subsidiary is in
compliance with all judgments, decrees, governmental orders, laws, statutes,
rules and regulations by which it is bound or to which it or any of its
properties or assets is subject (including without limitation all federal, state
and local laws, statutes and regulations relating to the protection of the
environment).
Section 3.10 Consents, etc. Except as set forth on Schedule 3.10, no
consent, approval, license or authorization of (or designation, declaration,
registration or filing with) any court or governmental authority or any party to
a material contract or a customer contract on the part of Union or any
Subsidiary which has not heretofore been obtained is required in connection with
the valid execution and delivery of this Agreement or the closing contemplated
hereby.
Section 3.11 Litigation. Except as set forth on Schedule 3.11, there are no
actions, suits or proceedings pending, or to the Shareholders' and to Union's
knowledge, threatened against or affecting Union or any Subsidiary.
Section 3.12 Title to and Condition of Properties.
(a) Union's present office lease expires March 31, 1998. Schedule 3.12(a)
hereto contains a true, correct and complete list of all leases owned by Union
or any Subsidiary. Said Schedule accurately sets forth the name of each lease,
nature of ownership, term, acreage, working or overriding royalty interest
percentage, net revenue interest, and any pertinent restrictions thereon. Union
and its Subsidiaries have defensible title to all the leases described on
Schedule 3.12(a) hereto, all free and clear of liens, easements, and other
encumbrances, except as noted on said Schedule 3.12(a) or reflected on Union's
Financial Statements or otherwise disclosed in this Agreement. All such leases
are in full force and effect and there is no material default or event of
default thereunder.
(b) A list of all personal property included in the assets having a fair
market or book value per unit in excess of $10,000 is included on Schedule
3.12(b) and a list of all leases of personal property under which Union or any
Subsidiary is a lessee or lessor involving personal property which can not be
cancelled on less than 90 days notice or provides for annual payments in excess
of $15,000 is included on such Schedule (copies of which have previously been
delivered to Panaco). Union and its Subsidiaries have defensible title to all of
the personal property set forth on Schedule 3.12(b) and all of the assets
reflected in the most recent Union Financial Statements or purported to have
been acquired after the date thereof, are free and clear of all liens, other
than those liens listed on such Schedule, except for such assets disposed of in
the usual and ordinary course of business consistent with past practices. All of
such assets are in Union's or its Subsidiaries' possession and control.
(c) The conduct of the business in the ordinary course is not dependent
upon the right to use the property of others, except under valid and binding
written agreements identified on Schedule 3.12(a and b) hereto.
<PAGE>
(d) Union or its Subsidiaries own or have irrevocable rights to use and all
assets and property necessary for the conduct of their business in the ordinary
course.
Section 3.13 Intangible Properties. Schedule 3.13 hereto contains a list of
all intangible properties owned, possessed, used or held by Union and its
Subsidiaries. Except for those listed on Schedule 3.13 as being licensed from
others (copies of which have previously been delivered to Panaco), Union and its
Subsidiaries own the entire right, title and interest in and to all such
intangible property. To Union's actual knowledge, all licenses listed on
Schedule 3.13 are in full force and effect and Union and its Subsidiaries are
not in default or breach thereof. None of such intangible property is subject to
any pending or threatened challenge or infringement. Except as noted on Schedule
3.13, all licenses granted by others which are essential or useful to any part
of the business are assignable without consent of or notice to any person,
without change in the terms or provisions thereof and without premium. To the
Shareholders' and to Union's actual knowledge, Union has not infringed any
intangible property of others.
Section 3.14 Contracts and Commitments.
(a) To the extent not listed on Schedule 3.7(b), Schedule 3.14(a)
hereto lists all material contracts and other agreements to which Union or any
Subsidiary is a party or by which it or any of its assets are bound (copies of
each of which have been previously delivered to Panaco). To the Shareholders'
and to Union's actual knowledge, each material contract (whether disclosed on
Schedule 3.7(b) or Schedule 3.14(a) or otherwise) is in full force and effect
and embodies the complete understanding between the parties thereto with respect
to the subject matter thereof. Except as expressly set forth on Schedule
3.14(a), to the Shareholders' and to Union's actual knowledge there exists no
default or claim thereof by any party to any material contract, (ii) there are
no facts or conditions which, if continued or noticed, would result in a default
under any material contract, (iii) no notice has been received that any person
intends to cancel, modify or terminate any material contract, or to exercise or
not to exercise any options thereunder, (iv) Union has not given any notice of
cancellation, modification or termination of any material contract or of
exercise or non-exercise of any options thereunder, and (v) each material
contract is a valid and binding agreement enforceable in accordance with its
terms.
(b) Except as set forth on Schedule 3.14(b) hereto, neither Union nor
any Subsidiary is a party to any contract for goods or services or any leases
with any stockholder, officer, director, employee or agent of Union or any
affiliate of any such person, nor are there any loans or advances to any such
persons from Union or any Subsidiary which are presently outstanding.
(c) Neither Union nor any Subsidiary has granted any outstanding power
of attorney to any person, firm or corporation for any purpose whatsoever; they
are not restricted by agreement from carrying on their business anywhere in the
world; no officer, director, shareholder or affiliate thereof has any financial
interest, direct or indirect, in any of Union's suppliers or customers, other
than a less than one percent interest in an entity traded on a securities
exchange.
(d) For purposes of this Section, the term "material contract" shall
specifically include, but shall not be limited to, (i) any agreement with any
affiliate of Union; (ii) any contract that requires Union or any of its
Subsidiaries to expend more than $20,000 in any year; (iii) any contract that
<PAGE>
contains an indemnity with respect to environmental and health and safety
matters; and (iv) any lease, title retention agreement or security interest
affecting any equipment of Union or its Subsidiaries.
Section 3.15 Insurance. A list of all policies of insurance and bonds of
any type presently in force (including without limitation all occurrence based
policies which provide coverage for events occurring in any of the five years
prior to the date hereof) with respect to the business of Union and its
Subsidiaries are set forth on Schedule 3.15 hereto.
Section 3.16 Tax Returns and Tax Audits.
(a) Union and its Subsidiaries have filed with all appropriate
governmental agencies all tax or information returns and tax reports required to
be filed. True and correct copies of the 1994 and 1995 federal income tax
returns of Union have previously been delivered to Panaco. All such returns and
reports as are based on income have been prepared on the same basis as those of
previous years. All federal, state, foreign and local income, profits,
franchise, sales, use, occupation, property, excise, severance, ad valorem,
employment or other taxes of Union and its Subsidiaries, and all interest,
penalties, assessments or deficiencies as claimed to be due by any such taxing
authority with respect to the foregoing have been fully paid.
(b) Except as listed on Schedule 3.16, neither Union nor any Subsidiary
is a party to any pending action, proceeding or examination, nor is any action
or proceeding threatened or known to be contemplated by any governmental
authority for assessment or collection of taxes or any other governmental
charges, and no claim for assessment or collection of taxes or any other
governmental charges has been asserted against Union or any Subsidiary. There
have been no reports prepared by any agent of the Internal Revenue Service with
respect to any tax matter involving Union or any Subsidiary.
Section 3.17 Employment Matters. Neither Union nor any Subsidiary has
received any written notice that it is not in compliance with all material
applicable laws, rules and regulations (federal, state, local or otherwise)
relating to employment and labor management relations, including those relating
to wages and the payment thereof, conditions of employment, hours, collective
bargaining, and the payment and withholding of taxes, and the regulations under
all the above, including state laws and regulations . Schedule 3.17 hereto lists
each employment contract and each deferred compensation plan, bonus plan, stock
option plan, employee stock purchase plan and any other employee benefit plan,
agreement, arrangement or commitment other than normal policies concerning
holidays, vacations and salary continuation during short absences for illnesses
or other reasons maintained by Union and its Subsidiaries, copies of which have
been delivered to Panaco. Neither Union nor any Subsidiary has received any
written notice that it is not in compliance with all such employee benefit plans
and the terms of any plan documents.
Section 3.18 Reservoir Engineering Reports. The information supplied by
Union for the preparation of the reservoir engineering report delivered to
Panaco was true and accurate in all material respects.
Section 3.19 Bank Accounts and Signing Authority. Except as set forth on
Schedule 3.19 hereto, Union and its Subsidiaries have no account or safe deposit
box in any bank or other financial
<PAGE>
institution and no person has any power, whether singly or jointly, to sign any
checks on behalf to Union or any Subsidiary to withdraw any money or other
property from any bank, brokerage or other account of Union or any Subsidiary.
Schedule 3.19 also sets forth the name of all persons authorized to borrow money
or sign notes on behalf of Union or its Subsidiaries.
Section 3.20 Environmental Matters. To the best of the Shareholders' and
Union's actual knowledge and except as disclosed in Schedule 3.20 or except as
would result in liability to Union and its Subsidiaries not exceeding $100,000
in the aggregate: (i) Union and its Subsidiaries have obtained or caused to have
been obtained all permits, licenses and authorizations required under federal,
state and local laws with respect to pollution or protection of the environment
required for their business, including laws related to actual or threatened
releases, emissions or discharges of pollutants, contaminants or hazardous
substances or other toxic materials or wastes into ambient air, surface water,
ground water or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transportation or handling of
pollutants, contaminants or hazardous substances or other toxic materials or
wasters, including with limitation, the Oil Pollution Act of 1990
("Environmental Laws"), and all such permits, licenses, and other authorizations
are currently in full force and effect; (ii) Union and its Subsidiaries are in
compliance in all material respects with all applicable Environmental Laws and
all terms and conditions of such permits, licenses and authorizations; and (iii)
there has been no release, and no threat of a release in violation of any
Environmental Law arising from, based upon, associated with, or related to
Union's and each Subsidiary's use, ownership, or operation of their properties
and such use and operation by any predecessors in title, except for matters that
have been remedied and that have had no, and have no continuing, material
adverse effect upon their assets.
Except as disclosed in Schedule 3.20, neither Union nor any Shareholder
is aware of or has received a written notice of a claim, or an alleged claim
(collectively, "Environmental Claims") that (i) Union or any Subsidiary has
violated, or is about to violate, any Environmental Law; (ii) there has been a
release, or there is a threat of a release, in violation of any Environmental
Law on, to, or from any of their properties for which they are or may be liable
to any third party for injury to or death of any person, persons, or other
living things, or damage to or loss or destruction of property; (iii) Union or
any Subsidiary may be or is liable, in whole or in part, for the presence,
handling, management, storage, transportation, processing, treatment, disposal,
release, threatened release, migration or escape of any pollutant, waste,
contaminant, or hazardous, extremely hazardous, or toxic material, substance,
chemical or waste identified, defined or regulated as such under any
Environmental Law (including, without limitation, all costs arising under any
theory of recovery, in law or at equity), whether based on negligence, strict
liability, or otherwise, including, without limitation the costs of cleaning up,
remediating, removing or responding to a release or a threat of a release in
violation of any Environmental Law or for personal injury, property damage costs
or other related costs, expenses, losses, damages, penalties, fines, liabilities
and obligations (including interest paid or accrued, attorneys' fees and court
costs relating thereto); or (iv) the properties of Union or any Subsidiary are
subject to a lien in favor of any governmental entity for any liability, costs,
or damages under any Environmental Laws arising from, or any costs incurred by
such governmental entity in response to, a release in violation of any
Environmental Law. Neither Union nor any Shareholder is otherwise aware of any
facts, conditions or circumstances that could reasonably be expected to give
rise to any Environmental Claim or any claim or assertion that Union, any
Subsidiary, or their properties or the ownership or operation thereof is not in
compliance with Environmental Laws or
<PAGE>
the terms or conditions of any of the permits, licenses and other
authorizations, except for claims that would not reasonably exceed the sum of
$100,000 per occurrence in liability.
Section 3.21 Bankruptcy. There are no bankruptcy, insolvency or
reorganization proceedings pending, being contemplated by or, to their best
knowledge, threatened against Union or any Subsidiary.
Section 3.22 Disclosure. None of Union Financial Statements, or any
representation or warranty or other provision contained herein, or in any
document, report, schedule or certificate delivered or to be delivered to Panaco
in connection with this Agreement or the transactions contemplated hereby,
contains or will contain any untrue statement of a fact or omits or will omit to
state a fact necessary in order to make the statements contained therein not
misleading. Disclosure of any document or state of facts in any Schedule
delivered to Panaco pursuant to this Agreement shall be deemed disclosure of
such document or state of facts in any other Schedule where the same disclosure
may be deemed to be required; provided, however, that this provision shall in no
way limit the Shareholders' or Union's responsibility to provide true and non
misleading disclosure.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders hereby represent and warrant to Panaco as follows:
Section 4.1 Authorization. The Shareholders have and will have at the
Closing Date all requisite power and authority to execute and deliver this
Agreement and to carry out and perform their obligations under the terms of this
Agreement. All action on the part of Union and its Shareholders necessary for
the authorization, execution, delivery and performance of this Agreement has
been duly taken. This Agreement is the valid and binding obligation of the
Shareholders and Union, enforceable in accordance with its terms, subject to
bankruptcy, insolvency and similar laws and to general principles of equity.
Section 4.2 The Shares. The Shareholders have good and marketable title
to the Shares and have the absolute right to sell, assign and transfer same to
Panaco, free and clear of all liens, pledges and encumbrances of any kind.
Section 4.3 Investment Intent. In receiving Panaco's Stock as a portion
of the consideration hereunder, the Shareholders represent to Panaco that they
are acting for their own account, for the purpose of investment, and not with a
view to the distribution or re-sale of any of the common stock of Panaco. The
Shareholders are experienced in evaluating oil and gas companies such as Panaco
and have the knowledge necessary to evaluate the merits and risks of an
investment in Panaco. Each Shareholder is an "accredited investor" pursuant to
the definition set forth in Rule 501(a) promulgated under the Securities Act of
1933. The Shareholders have had the opportunity to ask questions, review
publicly available information and to inquire further of Panaco regarding all
other matters deemed necessary.
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PANACO
Panaco hereby represents and warrants to Union and the Shareholders as
follows:
Section 5.1 Organization and Standing. Panaco is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Panaco has full power and authority to own and operate its assets and
to carry on its business as presently conducted and as proposed to be conducted.
Section 5.2 Authorization. The execution, delivery and performance of
this Agreement by Panaco does not and will not conflict with, breach, violate or
cause a default under any contract, agreement or instrument to which such Panaco
is a party or by which its assets are bound or violate any law, statute, rule or
regulation applicable to such Panaco. This Agreement when executed and delivered
by Panaco will constitute a valid and legally binding obligation of Panaco,
enforceable in accordance with its terms, subject to bankruptcy, insolvency and
similar laws and to general principles of equity. All action on the part of
Panaco necessary in the authorization, execution, delivery and performance of
this Agreement has been taken.
Section 5.3 Panaco's Stock. Panaco's Stock to be received by the
Shareholders will be, when delivered, validly issued and outstanding, fully paid
and non-assessable, and free and clear of all liens, pledges and encumbrances of
any kind, except for the restrictions on transfer set forth in Section 1.4
above.
Section 5.4 Reports.
(a) Panaco has made available to the Shareholders true and complete
copies of (a) all annual, quarterly and other reports (the "Reports") and all
definitive proxy solicitation materials filed with the Securities and Exchange
Commission ("SEC") pursuant to the Securities Exchange Act of 1934 since
December 31, 1995, and (b) its Prospectus pertaining to its most recent
registered public offering of common stock dated February 14, 1997, together
with all amendments and supplements thereto. As of the respective dates of the
Reports and the Prospectus, the same did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Since December 31, 1995, Panaco has filed
with the SEC all material reports, registration statements and other material
filings required to be filed with the Securities and Exchange Commission under
its rules and regulations.
(b) The financial statements (including any related notes or schedules)
included in the Annual Reports on Form 10-K under the 1934 Act of Panaco for the
fiscal years ended December 31, 1995 and 1996 (the "Panaco Financial
Statements") filed with the SEC comply as to form in all material respects with
applicable accounting requirements and with the rules and regulations of the SEC
with respect thereto, were prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be noted
therein or in the notes or schedules thereto), and fairly present the
consolidated financial position of Panaco as of December 31, 1995 and 1996
<PAGE>
(the "Panaco Balance Sheet Date") and the results of its operations, cash flows
and stockholders' equity for each of the two years in the two-year period ended
December 31, 1995 and 1996 respectively.
(c) Panaco has made available to the Shareholders copies of all
Schedule 13D filings in its possession received during the six months prior to
the Closing Date with respect to the common stock of Panaco.
(d) Panaco has no liabilities or obligations of any nature (absolute,
accrued, contingent or otherwise), except (i) those which are accrued or
otherwise fully reflected in Panaco Financial Statements of (ii) those incurred
in the ordinary course of business since Panaco Balance Sheet Date.
Section 5.5 Investment Intent. In acquiring Union and its Subsidiaries
by merger hereunder, Panaco represents that it is acting for its own account,
for the purpose of investment, and not with a view to the distribution or
re-sale of any securities acquired hereby. Panaco is an "accredited investor"
pursuant to the definition set forth in Rule 501(a) promulgated under the
Securities Act of 1933.
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.1 Conditions to Panaco's Obligations. The obligations of Panaco
are subject to the fulfillment of the following conditions as of the Closing
Date, the waiver of which shall not be effective against Panaco unless Panaco
consents in writing thereto.
(a) The representations and warranties made in Articles III and IV hereof
shall be true and correct when made, and shall be true and correct on the
Closing Date with the same force and effect as though made on and as of such
date.
(b) The Shareholders shall have performed and complied in all material
respects with all agreements, covenants and conditions contained in this
Agreement required to be performed or complied with prior to or at the Closing,
and there shall have been no material adverse change in the properties or
financial condition of Union and its Subsidiaries.
(c) Union shall deliver to Panaco an opinion of outside counsel in the form
attached hereto as Exhibit 6.1(c).
Section 6.2 Conditions to the Shareholders' and Union's Obligations. The
obligations of the Shareholders and Union are subject to the fulfillment of the
following conditions as of the Closing Date, the waiver of which shall not be
effective against the Shareholders and Union unless the Shareholders consent in
writing thereto.
<PAGE>
(a) The representations and warranties made in Article V hereof shall
be true and correct when made, and shall be true and correct on the Closing Date
with the same force and effect as though made on and as of such date.
(b) Panaco shall have performed and complied in all material respects
with all agreements, covenants and conditions contained in this Agreement
required to be performed or complied with prior to or at the Closing, and there
shall have been no material adverse change in the properties or financial
condition of Panaco.
Section 6.3 Conditions to Obligations of Each Party. The obligations of
each party are subject to the fulfillment of the following conditions as of the
Closing Date:
(a) No suit, action or other proceedings shall be pending before any
court or governmental commission, board or agency in which it is sought by a
person or entity other than the parties hereto or any of their affiliates,
officers or directors, to restrain, enjoin or otherwise prohibit the
consummation of the transactions contemplated by this Agreement, or to obtain
substantial damages in connection with this Agreement or the transactions
contemplated herein, nor shall their be any investigation by any governmental
agency pending or threatened which might result in any such suit, action, order
or other proceedings seeking to restrain or prohibit the consummation of this
Agreement or the transactions contemplated herein.
(b) All consents and approvals, if any, whether required contractually
or by applicable federal, state, or local law, or otherwise necessary for the
execution, delivery and performance of this Agreement, shall have been obtained
by the Closing Date and shall not have been withdrawn or revoked.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Access to Properties and Records. From and after the date
of this Agreement, Union and the Shareholders shall cause Union and its
Subsidiaries to afford to Panaco, its officers, attorneys, accountants,
engineers and other authorized representatives, free and full access to the
offices, properties, books, records, contracts, documents and records of Union
and its Subsidiaries in order that Panaco may have full opportunity to make
whatever investigation it shall desire of the affairs of Union and its
Subsidiaries.
Section 7.2 Governing Law. Except as may be expressly set forth in this
Agreement, this Agreement shall be governed in all respects by the internal laws
of the State of Texas (without giving effect to conflicts of laws principles).
The parties agree that venue for any action arising out of this Agreement shall
be proper in Houston, Harris County, Texas.
Section 7.3 Survival. The representations, warranties, covenants and
agreements made herein (except for the covenants set forth in Section 2.4 and
Panaco's obligations to pay the Acquisition Price) shall survive any
investigation made by any party hereto and the closing of the transactions
contemplated hereby, but only for a period of thirteen (13) calendar months from
the
<PAGE>
Closing Date or until a Change in Control, whichever occurs first, at which time
all such representations, warranties, covenants and agreements shall (subject to
the above exceptions) terminate and be of no further force and effect. In any
dispute between the parties, the prevailing party shall be entitled to
reimbursement of attorney's fees.
Section 7.4 Successors and Assigns. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
Section 7.5 Amendment. Except as expressly provided herein, neither
this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
Section 7.6 Notices, etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be sent by U.S. mail,
postage prepaid, or otherwise delivered by hand or by messenger, addressed (a)
if to Panaco, at Panaco's address set forth on the relevant execution page of
this Agreement, or at such other address as such Panaco shall have furnished to
Union in writing, or (b) if to Union or Union, at the address set forth on the
relevant execution page of this Agreement, or at such other address as Union
shall have furnished to Panaco in writing.
Section 7.7 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one (1)
instrument. Closing may take place by facsimile transmission, subject to
delivery of an original executed copy to each other party.
Section 7.8 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
Section 7.9 Confidentiality. Panaco agrees to use reasonable
precautions to keep confidential, in accordance with its customary practices
with respect to its own confidential information, any non-public information
supplied to it by or on behalf of Union pursuant to this Agreement which is
known by such Panaco, or designated in writing by Union, to be confidential or a
trade secret or proprietary information of any corporation; provided that
nothing herein will limit the disclosure of any such information (a) to the
extent required by statute, rule, regulation or judicial process, (b) to counsel
for Panaco, or (c) to Panaco's auditors or accountants. Union and the
Shareholders agree to maintain the strictest confidentiality with respect to
this Agreement and the sale and purchase contemplated hereby until Panaco has
made a public announcement regarding same.
Section 7.10 Expenses Union and Panaco shall each bear their own
expenses and legal and accounting fees incurred on their respective behalf with
respect to the negotiation, execution and performance of this Agreement.
<PAGE>
Section 7.11 No Brokers. Other than the fee payable to First Union
Capital Market Corporation ("First Union"), the parties hereto have not retained
any brokers, agents or finders. Each party agrees to indemnify and hold the
other harmless from and against any Claims or with respect to any commissions,
finders fee or other remuneration due to any broker, agent or finder claiming
by, through or under such party.
Section 7.12 Further Assurances. From and after Closing, at the request
of Panaco, but without further consideration, Union and the Shareholders will
do, execute, acknowledge, and deliver all such other acts, deeds, assignments,
transfers, conveyances, powers of attorney, and assurances as may be required to
consummate and effectuate the Merger.
Section 7.13 Goldking Name. Upon a Change in Control of Panaco within
two years of the closing, then Shareholders shall have the right and option to
acquire for $1.00, at any time thereafter, the logo, trade name, and trademark
of "Goldking" and all goodwill and general intangibles associated with the name
"Goldking."
Section 7.14 Shareholders' Knowledge and Liabilities. For purposes of
this Agreement, the phrase "to the Shareholders' actual knowledge" shall mean
and refer to the knowledge of any individual Shareholder, whether or not the
other Shareholder has knowledge of such matter. In connection with all other
references to liabilities or obligations of the Shareholders, such liabilities
and obligations shall be several and not joint and several.
Section 7.15 Breach of Agreement. In the event of a breach of the
Agreement by Union, Goldking or the Shareholders (the "Merging Parties"), Panaco
agrees that the Merging Parties shall have no liability to Panaco until such
time as the aggregate amount of such liabilities incurred by Panaco as a result
of such breach equals $100,000 and then only to the extent of the amount in
excess of $100,000. In no event shall the Merging Parties' liability for all
breach in the aggregate, exceed the Acquisition Price.
Section 7.16 Prior Agreement. This Restated Merger Agreement supercedes
and replaces in its entirety that certain Merger Agreement entered into as of
July 1, 1997 by and between the parties hereto. Said prior Merger Agreement
shall be null and void and of no further force or effect.
Section 7.17 Tax-Free Reorganization. As a separate covenant which
shall survive Closing hereunder, each Shareholder agrees that such Shareholder
will not sell, exchange or otherwise dispose of the Panaco Stock received as
Merger Consideration hereunder by such Shareholder, which disposition would
disqualify the transaction as a tax-free reorganization. The survival of this
covenant shall not be limited by Section 7.3 above.
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Restated Merger
Agreement to be duly executed this 30th day of July, 1997.
PANACO, INC.
Notice Address:
1050 West Blue Ridge Blvd By:
Kansas City, MO 64145-1216 Name: H. James Maxwell
Title: President
THE UNION COMPANIES, INC.
Notice Address:
1221 McKinney, Suite 1800 By:
Houston, TX 77010 Name: Mark C. Licata
Title: President
SHAREHOLDERS:
LEONARD C. TALLERINE, JR.
MARK C. LICATA
<PAGE>
Stock Purchase Exhibits and Schedules
Schedule 2.4 Major Property Interests
Schedule 3.7(b) Liabilities and Obligations
Schedule 3.8 Subsequent Events
Schedule 3.10 Required Consents
Schedule 3.11 Litigation
Schedule 3.12(a) Leases
Schedule 3.12(b) Personal Property
Schedule 3.13 Intangible Properties
Schedule 3.14(a) Material Contracts
Schedule 3.14(b) Interested Party Transactions
Schedule 3.15 Insurance
Schedule 3.16 Tax Proceedings
Schedule 3.17 Employment Contracts and Plans
Schedule 3.19 Bank Accounts and Signing Authority
Schedule 3.20 Environmental Matters
Exhibit 6.1(c) Opinion of Counsel
<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
<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>
<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>
<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>
<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>
<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>
<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.
<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.
<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.
<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.
<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.
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
==================
<PAGE>
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.
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 $ -
<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.
<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.
<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.
<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>
<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>
<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>
<PAGE>
Goldking Companies, Inc. & Subsidiaries
Condensed Financial Statements
June 30, 1997
(Unaudited)
<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>
<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>
<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>
<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>
<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>
<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, included in this memorandum.
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 included elsewhere in this memorandum may not be presented in the
same format or amounts may be classified differently than those contained in
these financial statements.
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
Offering Memorandum and certain historical financial data with respect of
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 of 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 on 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, Inc. Pro Forma Goldking Pro Forma PANACO,Inc.
ASSETS At Adjustments Pro Forma Adjustments ProFoma
6/30/97 (a) Combined (h) Combined
CURRENT ASSETS
<S> <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>
PANACO, INC.
Unaudited Pro Forma Combined Statement of Income (Operations)
For the Six Months Ended June 30, 1997
(Amounts in thousands except per share data)
Goldking
Goldking Acquisition PANACO, Offering PANACO,
Inc. Inc.
Acquisition Pro Forma Pro Pro Forma Pro Forma
Forma
PANACO, (a) Adjustments Combined Adjustments Combined
Inc.
---------------------- ------------------------- ------------ ------------
REVENUES
<S> <C> <C> <C> <C> <C> <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 6,187 974 - 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) $(0.10)
========== ========= ============
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 effects of the Goldking
Acquisition and the application of the proceeds and incurrence of indebtedness
for the Offering as if 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 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.
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 of 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.
AcquisitionPro Forma Pro Forma Transactions Pro Forma Pro Forma Pro Forma
PANACO, (a) Adjustments Combined (e) Combined Adjustments Combined
Inc.
--------------------- ------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C> <C> <C> <C> <C> <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 WEIGHTEDAVERAGE
SHARES $ (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 of the Offering as if all had consummated on January
1, 1996. It reflects a preliminary allocation of the purchase price for 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 "1996 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 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 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 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 of liquidity.
