--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26662
PANACO, Inc.
(Exact name of registrant as specified in its charter)
Delaware 43 - 1593374
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1100 Louisiana Street, Suite 5100
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 970 - 3100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No _______.
24,323,521 shares of the registrant's $.01 par value Common Stock were
outstanding on September 30, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PANACO, Inc.
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
ASSETS
As of As of
September 30, 2000 December 31, 1999
-------------------- -------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,154,000 $ 5,575,000
Accounts receivable, net of an allowance of
$714,000 and $671,000, respectively 17,211,000 9,675,000
Accounts receivable-employee 326,000 16,000
Prepaid and other 1,344,000 729,000
---------------- ----------------
Total current assets 21,035,000 15,995,000
---------------- ----------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 283,062,000 262,043,000
Less proved property accumulated depletion,
depreciation and amortization (192,211,000) (175,048,000)
Net unproved oil and gas properties 1,884,000 1,893,000
---------------- ----------------
Net oil and gas properties 92,735,000 88,888,000
---------------- ----------------
PIPELINES AND EQUIPMENT
Pipelines and equipment 26,367,000 26,327,000
Less accumulated depreciation (8,117,000) (6,130,000)
---------------- ----------------
Net pipelines and equipment 18,250,000 20,197,000
---------------- ----------------
OTHER ASSETS
Deferred income taxes 25,931,000 -
Deferred debt costs, net 3,511,000 4,456,000
Employee note receivable - 300,000
Restricted deposits 7,120,000 5,602,000
---------------- -----------------
Total other assets 36,562,000 10,358,000
---------------- -----------------
TOTAL ASSETS $ 168,582,000 $ 135,438,000
================ =================
(continued)
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
PANACO, Inc.
Consolidated Condensed Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
As of As of
September 30, 2000 December 31, 1999
-------------------- -------------------
CURRENT LIABILITIES (Unaudited)
<S> <C> <C>
Accounts payable $ 28,618,000 $ 20,408,000
Interest payable 5,573,000 3,003,000
Current portion of long-term debt 23,068,000 -
---------------- ----------------
Total current liabilities 57,259,000 23,411,000
---------------- ----------------
DEFERRED CREDITS 1,697,000 -
LONG-TERM DEBT 102,249,000 138,902,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Shares, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding - -
Common Shares, $.01 par value,
100,000,000 shares authorized;
24,323,521 and 23,986,521 shares
issued and outstanding, respectively 246,000 243,000
Additional paid-in capital 68,976,000 68,852,000
Accumulated deficit (61,845,000) (95,970,000)
---------------- ----------------
Total stockholders' equity (deficit) 7,377,000 (26,875,000)
---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 168,582,000 $ 135,438,000
================ ================
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
PANACO, Inc.
Consolidated Statements of Operations
For the Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
REVENUES
Oil and natural gas sales $ 63,499,000 $ 30,607,000
COSTS AND EXPENSES
Lease operating expense 16,359,000 12,382,000
Depletion, depreciation & amortization 20,614,000 18,492,000
General and administrative expense 3,474,000 3,127,000
Production and ad valorem taxes 1,454,000 654,000
Geological and geophysical expense 1,171,000 963,000
Exploratory dry hole expense 794,000 942,000
Impairment of oil and gas properties - 5,693,000
Severance expense 746,000 -
Lawsuit recovery (990,000) -
-------------- ---------------
Total 43,622,000 42,253,000
-------------- ---------------
OPERATING INCOME (LOSS) 19,877,000 (11,646,000)
OTHER INCOME (EXPENSE)
Interest income 113,000 78,000
Interest expense (11,689,000) (9,037,000)
-------------- ---------------
Total (11,576,000) (8,959,000)
-------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 8,301,000 (20,605,000)
INCOME TAX EXPENSE (BENEFIT) (25,824,000) -
-------------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 34,125,000 (20,605,000)
EXTRAORDINARY ITEM-Loss on early retirement of debt - (132,000)
-------------- ---------------
NET INCOME (LOSS) $ 34,125,000 $ (20,737,000)
============== ===============
Net income (loss) per share $ 1.41 $ (0.87)
============== ===============
Basic Shares Outstanding 24,241,116 23,925,204
============== ===============
Diluted Shares Outstanding 24,241,116 23,925,204
============== ===============
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
PANACO, Inc.
Consolidated Statements of Operations
For the Three Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
REVENUES
Oil and natural gas sales $ 25,918,000 $ 10,481,000
COSTS AND EXPENSES
Lease operating expense 6,283,000 3,977,000
Depletion, depreciation & amortization 8,062,000 6,153,000
General and administrative expense 1,174,000 1,059,000
Production and ad valorem taxes 489,000 283,000
Geological and geophysical expense 319,000 399,000
Exploratory dry hole expense 347,000 97,000
Impairment of oil and gas properties - 5,693,000
Severance expense 746,000 -
--------------- ----------------
Total 17,420,000 17,661,000
--------------- ----------------
OPERATING INCOME (LOSS) 8,498,000 (7,180,000)
OTHER INCOME (EXPENSE)
Interest income 39,000 43,000
Interest expense (3,853,000) (3,594,000)
--------------- ----------------
Total (3,814,000) (3,551,000)
--------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 4,684,000 (10,731,000)
INCOME TAX EXPENSE 1,778,000 -
--------------- ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,906,000 (10,731,000)
EXTRAORDINARY ITEM-Loss on early retirement of debt - (132,000)
--------------- ----------------
NET INCOME (LOSS) $ 2,906,000 $(10,863,000)
=============== ================
Net income (loss) per share $ 0.12 $ (0.45)
=============== ================
Basic Shares Outstanding 24,323,521 23,985,927
=============== ================
Diluted Shares Outstanding 24,323,521 23,985,927
=============== ================
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
PANACO, Inc.
Consolidated Statement of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ 34,125,000 $(20,737,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes (25,931,000) -
Depletion, depreciation and amortization 20,614,000 18,492,000
Impairment of oil and gas properties - 5,693,000
Exploratory dry hole expense 794,000 942,000
ESOP stock contribution 127,000 250,000
Extraordinary item-loss on early retirement of debt - 132,000
Changes in assets and liabilities:
Accounts receivable (7,546,000) (989,000)
Accounts payable 8,210,000 6,333,000
Deferred credits 1,697,000 -
Interest payable 2,570,000 (2,745,000)
Prepaid and other (615,000) (191,000)
--------------- ---------------
Net cash provided by operating activities 34,045,000 7,180,000
--------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Sale of oil and gas properties - 378,000
Capital expenditures and acquisitions (22,009,000) (17,911,000)
Increase in restricted deposits (1,518,000) (1,250,000)
--------------- ---------------
Net cash used in investing activities (23,527,000) (18,783,000)
--------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Long-term debt borrowings 11,415,000 39,580,000
Repayment of long-term debt (25,000,000) (24,000,000)
Additional deferred financing costs (354,000) (1,737,000)
---------------- ---------------
Net cash provided by (used in) financing activities (13,939,000) 13,843,000
---------------- ---------------
NET INCREASE (DECREASE) IN CASH (3,421,000) 2,240,000
CASH AT BEGINNING OF YEAR 5,575,000 3,452,000
---------------- ---------------
CASH AT SEPTEMBER 30 $ 2,154,000 $ 5,692,000
================ ===============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
PANACO, Inc.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Amount ($)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Additional Total
Common Common Paid-in Accumulated Stockholders'
Shares Stock Capital Deficit Equity (Deficit)
--------------- ---------------- ---------------- ------------------ ------------------
Balances, December 31, 1999 23,986,521 $ 243,000 $ 68,852,000 $ (95,970,000) $ (26,875,000)
Net Income - - - 34,125,000 34,125,000
Common shares issued to the ESOP 337,000 3,000 124,000 - 127,000
--------------- ---------------- ---------------- ------------------ ------------------
Balances, September 30, 2000 24,323,521 $ 246,000 $ 68,976,000 $ (61,845,000) $ 7,377,000
=============== ================ ================ ================== ==================
</TABLE>
The accompanying notes are an integral part of this statement.
7
<PAGE>
PANACO, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position as of September 30, 2000 and December 31, 1999 and
the results of operations and cash flows for the periods ended September 30,
2000 and 1999. Most adjustments made to the financial statements are of a
normal, recurring nature. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, certain information
and footnote disclosures, including significant accounting policies, normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). A more
complete description of the accounting policies followed by the Company are set
forth in Note 1 to the Company's financial statements in Form 10-K for the year
ended December 31, 1999. These financial statements should be read in
conjunction with the financial statements and notes included in the Form 10-K.
Certain reclassifications of prior period statements have been made to
conform with current reporting practices.
Weighted average options to purchase 1,150,000 shares of common stock at
$4.45 per share were outstanding during 1999 and the first and second quarters
of 2000. The options were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the common shares. These options were issued in 1997 to officers
and directors and expired June 20, 2000.
Note 2 - OIL AND GAS PROPERTIES AND PIPELINES AND EQUIPMENT
The Company utilizes the successful efforts method of accounting for its
oil and gas operations. Under the successful efforts method, lease acquisition
costs are initially capitalized. Exploratory drilling costs are also capitalized
pending determination of proved reserves. If proved reserves are not discovered,
the exploratory costs and associated lease acquisition costs are expensed. All
development costs are capitalized. Non-drilling exploratory costs, including
geological and geophysical costs and delay rentals, are expensed. Unproved
leaseholds with significant acquisition costs are assessed periodically, on a
property-by-property basis, and a loss is recognized to the extent, if any, that
the cost of the property has been impaired. Unproved leaseholds whose
acquisition costs are not individually significant are aggregated, and the
portion of such are amortized over an average holding period. As unproved
leaseholds are determined to be productive, the related costs are transferred to
proved leaseholds. The provision for depreciation and depletion is determined on
a depletable unit basis using the unit-of-production method. Estimated future
abandonment costs are recorded by charges to depreciation and depletion expense
over the lives of the proved reserves of the properties.
The Company performs a review for impairment of proved oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review. For each depletable unit determined to be impaired, an
impairment loss equal to the difference between the carrying value and the fair
value of the depletable unit will be recognized. Fair value, on a depletable
unit basis, is estimated to be the present value of expected future cash flows
computed by applying estimated future oil and gas prices, as determined by
management, to estimated future production of oil and gas reserves over the
economic lives of the reserves. Future cash flows are based upon the Company's
estimate of proved reserves.
8
<PAGE>
PANACO, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Property and equipment are carried at cost. Oil and natural gas pipelines
and equipment are depreciated on the straight-line method over their estimated
lives, primarily fifteen years. Other property is also depreciated on the
straight-line method over their estimated lives, ranging from three to ten
years. Fees for processing oil and natural gas for others are treated as a
reduction of lease operating expense related to the facilities and
infrastructure.
Note 3 - CASH FLOW INFORMATION
Cash payments for interest totaled $9,275,000 and $11,963,000 during the
first nine months of 2000 and 1999, respectively. Cash payments for income taxes
totaled $50,000 and $0 during the first nine months of 2000 and 1999,
respectively.
Note 4 - RESTRICTED DEPOSITS
Pursuant to existing agreements the Company is required to deposit funds in
bank trust and escrow accounts to provide a reserve against satisfaction of its
eventual responsibility to plug and abandon wells and remove structures when
certain fields no longer produce oil and gas. Through November 30, 1997 the
Company funded $900,000 into an escrow account with respect to the West Delta
Fields. At that time, the Company completed its obligation for the funding under
the West Delta agreement. The Company has entered into an escrow agreement with
Amoco Production Company under which the Company deposits, for the life of the
fields, in a bank escrow account ten percent (10%) of the net cash flow, as
defined in the agreement, from the Amoco properties. The Company has established
the "PANACO East Breaks 110 Platform Trust" in favor of RLI, Underwriter's
Indemnity. This trust required an initial funding of $846,720 in December 1996,
and remaining deposits of $250,000 due at the end of each quarter until the
balance in the account reaches $5.4 million. In connection with the BP
Acquisition, the Company deposited $1.0 million into an escrow account on July
1, 1998. On the first day of each quarter thereafter, the Company deposits
$250,000 into the escrow account until the balance in the escrow account reaches
$6.5 million.
Note 5 - COMMITMENTS AND CONTINGENCIES
An action was filed against the Company in Louisiana, along with Exxon
Pipeline Company ("Exxon"), National Energy Group, Inc. ("NEG"), Mendoza Marine,
Inc., Shell Western Exploration & Production, Inc. ("Shell"), and the Louisiana
Department of Transportation and Development. The petition was filed in August
1998, and alleges that, in 1997 and perhaps earlier, leaks from a buried crude
oil pipeline contaminated the plaintiff's property.
Pursuant to the purchase and sales agreement between the Company and NEG,
NEG is required to indemnify the Company from any damages attributable to NEG's
operations on the property after the sale. Pursuant to another purchase and sale
agreement, the Company may owe indemnity to Shell and Exxon, from whom it
acquired the property prior to selling same to NEG. The Company believes that it
has insurance coverage for the claims asserted in the petition, and has notified
all insurance carriers that might provide coverage under its policies. The
Company's insurance carrier at the time of the incident assumed all of the
ongoing legal costs for the case effective July 1, 1999. Some discovery has
occurred in the case, but discovery is not yet complete. Therefore, at this
point it is not possible to evaluate the likelihood of an unfavorable outcome,
or to estimate the amount or range of potential loss.
9
<PAGE>
PANACO, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of liability, if any, with the respect to these actions would not
materially affect the financial position of the Company or its results of
operation.
Note 6 - LONG-TERM DEBT
In October 1999 the Company put in place a new credit facility. The loan is
a reducing revolver which will provide the Company with up to $60 million,
depending on the borrowing base. The Company's borrowing base at September 30,
2000 was $60.0 million, with availability of $34.7 million. The principal amount
of the loan is due September 30, 2001, and may be extended for an additional
year at the option of the Company. Interest on the loan is computed at Wells
Fargo's prime rate plus .5% to 3.0%, depending on the percentage of the facility
being used. The Credit Facility is collateralized by a first mortgage on most of
the Company's properties. The loan agreement contains certain covenants
including an EBITDA (as defined in the agreement) to interest expense ratio of
at least 1.5 to 1.0 and a working capital ratio (as defined in the agreement) of
at least .25 to 1.0. The loan agreement also contains limitations on additional
debt, dividends, mergers and sales of assets. At September 30, 2000 the Company
was in compliance with all of the requirements of its long-term debt.
Note 7 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, and in June 2000, the FASB issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133. These statements establish
standards of accounting for and disclosures of derivative instruments and
hedging activities. These statements are effective for fiscal years beginning
after June 15, 2000. The Company is evaluating the impact of the provisions and
believes it will not have a material impact on the Company's financial condition
or results of operations.
Note 8 - INCOME TAXES
At December 31, 1999 the Company had a tax valuation allowance of
approximately $29 million against its deferred tax assets. As of June 30, 2000,
the Company determined that it was more likely than not that the deferred tax
assets would be realized. This determination was based on current projections of
future taxable income. This analysis included current estimates of future oil
and natural gas prices in addition to recent reserve additions. Current
projections of future taxable income are sufficient to utilize our deferred tax
assets due to higher commodity prices and reserve additions, therefore the
valuation allowance was removed.
10
<PAGE>
PANACO, Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
These projections of future taxable income are management's best estimates,
using current reserve estimates, estimates of future commodity prices and other
information currently available. While the Company believes that the assumptions
used in these projections are reasonable, unfavorable future events such as a
decrease in commodity prices could result in a reduction in some or all of the
deferred tax assets in a future period. The $29 million benefit recorded for the
removal of the valuation allowance during the second quarter of 2000 has been
offset by a $3.1 million deferred tax liability. This deferred tax liability was
generated during the nine months ended September 30, 2000; resulting in an
overall tax benefit of $25.9 million for the nine months ended September 30,
2000.
Note 9 - SEVERANCE EXPENSE
Effective October 1, 2000 the Company's President and Chief Executive
Officer resigned his position as an employee and director of the Company.
Pursuant to an employment contract between the Company and the employee, the
employee was entitled to receive two years of salary and benefits for past
service with the Company. The Company had the right to offset the amounts due
the employee with principal and interest on a promissory note due the Company.
The severance charge incurred in the third quarter of 2000 relates to the
settlement of all amounts due the employee under the agreement, including the
remaining salary and coverage under the Company's various insurance policies.
The employee was paid a portion of this amount due in October 2000 and the
remaining amount due the employee will be offset against the principal amount of
the promissory note in January 2001. Effective October 15, 2000 the Company's
Chief Operating Officer took over as President of the Company.
11
<PAGE>
PART I
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements
With the exception of historical information, the matters discussed in this
Form 10-Q contain forward-looking statements. The forward-looking statements we
make, not only in this Form 10-Q, but also in press releases, oral statements
and other reports that we file with the Securities and Exchange Commission
("SEC") are intended to be subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate to future
results of operations, the ability to satisfy future capital requirements, the
growth of our Company and other matters. You are cautioned that all
forward-looking statements involve risks and uncertainties. The words
"estimate," "anticipate," "expect," "predict," "believe" and similar expressions
are intended to qualify these forward-looking statements. We believe that the
forward-looking statements that we make are based on reasonable expectations.
However, due to the nature of the business we are in and other factors, we can
not assure you that the actual results of our Company will not differ from those
expectations.
General
The oil and natural gas industry has experienced significant volatility in
recent years because of the fluctuatory relationship of the supply of most
fossil fuels relative to the demand for those products and other uncertainties
in the world energy markets. You should consider the volatility of this industry
when reading the following.
Liquidity and Capital Resources
In implementing our business strategy of increasing our reserve base and
cash flows from operations, we have reinvested our cash flows from operations as
capital expenditures and as a reduction of debt. During the first nine months of
2000, our net cash provided by operating activities totaled $34.0 million,
which, along with cash on hand, was used to fund capital expenditures of $22.0
million, for required restricted deposit increases of $1.5 million and to reduce
debt by $13.6 million. Our capital expenditures of $22.0 million for the first
nine months of 2000 represent a 23 % increase over capital expenditures totaling
$17.9 million for the comparable period of 1999.
For the year 2000, our Board of Directors has approved a $30 million
capital budget for new projects in addition to projects that began in late 1999
and continued into the first quarter of 2000 for a total budget of $39 million.
This budget is based primarily on the resources available to us at this time. We
believe that our cash flows from operations will fund this level of capital
expenditures in addition to reducing outstanding debt.
In an attempt to reduce interest costs, we keep as little cash on hand as
possible and apply available cash to our Credit Facility balance. The timing of
receipt of monies due us and the payment of amounts due others also affects our
working capital. These two factors caused us to have a working capital deficit
on September 30 2000, excluding the current portion of long-term debt, of $13.2
million. We believe that our cash flow from operations and borrowing
availability under our Credit Facility will be sufficient to fund this working
capital deficit in addition to our ongoing operations, capital expenditures and
additional reduction of debt. As the initial term of the Credit Facility is
through September 20, 2000, we have classified the balance outstanding under
12
<PAGE>
this facility as current. We have the option to extend the term of the Credit
Facility for an additional year or we may replace the facility during 2001.
Credit Facility
Our primary source of capital beyond discretionary cash flows is our Credit
Facility. Our Credit Facility is secured by a first mortgage on most of our oil
and natural gas properties, and is used primarily as development capital on
properties that we own. We may also use the Credit Facility for working capital
support, to provide letters of credit and general corporate purposes.
In October 1999 we put in place a new Credit Facility, with Foothill
Capital Corp. as the Agent, and includes Foothill Partners, L.P. and Ableco
Finance, a subsidiary of Cereberus Capital Management, L.P. This Credit Facility
is a $60 million line, with a term of two years, and extendable for an
additional year at our option. Borrowings under this Facility bear interest at
rates ranging from prime plus .5% up to prime plus 3.0% depending on the amount
borrowed. We had $23.1 million outstanding at September 30, 2000, a decrease of
$12.9 million during the third quarter of 2000. We anticipate reducing our
outstanding balance during the fourth quarter of 2000.
The Credit Facility is a revolving credit agreement subject to monthly
borrowing base determinations. These determinations are made using internally
prepared engineering reports, using a two-year average of NYMEX future commodity
process and are based on our semi-annual third party reserve reports.
Indebtedness under this Credit Facility constitutes senior indebtedness with
respect to the Senior Notes.
Under the terms of this Credit Facility, we must maintain a ratio of
trailing twelve-month EBITDA to net interest expense of not less than 1.5 to 1.0
throughout the term of the Facility. We must also maintain a working capital
ratio, as defined in the agreement, of not less than .25 to 1.0. Also, the
Credit Facility contains certain limitations on mergers, additional indebtedness
and pledging or selling assets. We were in compliance with all covenants on
September 30, 2000 and anticipate compliance throughout the term of the loan.
Senior Note offering
On October 9, 1997, we issued $100 million principal amount of 10 5/8%
Senior Notes due October 1, 2004. Interest on the Notes is payable semi-annually
in arrears on each April 1 and October 1, commencing April 1, 1998.
Commodity price hedges
We follow a hedging strategy designed to protect against the possibility of
severe price declines due to market volatility. We usually make hedging
decisions to assure a payout of a specific acquisition or development project.
For the year 2000, we have options to put oil and natural gas, that we
produce, to a purchaser at an agreed upon price. The natural gas put option is
for 10,000 MMbtu per day at a NYMEX price of $2.04 per MMbtu. The cost of the
natural gas put option was $366,000, which is being amortized over the period
the hedged item is produced, fiscal year 2000. We also have two oil put options
in place, each for 1,000 barrels of oil per day. The first oil put option began
March 1, 2000 and continues through December 31, 2000 at NYMEX price of $20.00
per barrel. The second oil put option begins October 1, 2000 and continues
through September 30, 2001. The oil put options cost a total of $640,000 and are
being amortized over the period the hedged item is produced. In addition, for
the remainder of 2000 only, we have swaps in place on an average of 232 barrels
13
<PAGE>
of oil for each day at $17.00 per barrel. This swap was assumed with the
acquisition of Goldking in 1997.
On September 30, 2000 our open hedge position had a fair value of estimated
future losses totaling $615,000. A 10% adverse change in prices would cause
these estimated future losses to increase to $635,000.
We produce and sell natural gas, oil and natural gas liquids. As a result,
our financial results can be significantly affected by changes in these
commodity prices. We use derivative financial instruments to attempt to hedge
our exposure to changes in the market price of natural gas and oil. While
commodity financial instruments are intended to reduce exposure to declines in
these market prices, the commodity financial instruments may also limit the
gains from increases in the market price of natural gas and oil. Gains or losses
on these transactions are recognized in the production month to which a hedge
contract relates.
Capital expenditures
Capital expenditures totaled $22.0 million for the first nine months of
2000, which represents a 23% increase over the $17.9 million of capital
expenditures incurred in the comparable period of 1999. The capital expenditures
incurred in 2000 were primarily for the drilling of development wells in five
fields that we operate, as follows.
In late June 2000, we began a new development program in the East Breaks
109 and 110 Fields, with the aid of 3-D seismic, which we purchased in late
1998. These Fields are in approximately 700 feet of water in the Gulf of Mexico.
We own a 100% working interest in these Fields and are the operator. Through
September 30, 2000 we had spent $6.8 million for the first new well drilled in
these Fields since we acquired them in July 1995. This first well was completed
and began production in October 2000. The second well was spud in October 2000
and we have four additional projects scheduled for 2000 and 2001 in these
Fields.
During the first quarter of 2000 we completed a second well in the Price
Lake Field, located in Cameron Parish, Louisiana. We own approximately 51% of
both wells in the Price Lake Field and are the operator. We spent $4.2 million
in capital expenditures in the Price Lake Field through the first nine months of
2000.
During the second and third quarters of 2000 we spent $3.1 million
recompleting wells in the East Breaks 165 Field. This Field is also in the Gulf
of Mexico, in approximately 900 feet of water. We own a 100% working interest
and are the operator of the Field.
During the first quarter of 2000 we spent $2.8 million for a new
development well in the Umbrella Point Field. This well was completed and began
production during March 2000. This Field is located in Galveston Bay, Texas. We
own an 80% working interest in the new well and are the operator of the Field.
During the first quarter of 2000 we spent $0.8 million for a new
development well in the West Delta Field, located offshore Louisiana, in
Plaquemines Parish. This well was completed and began production in February
2000. During the third quarter we spent an additional $0.8 million beginning
location work for two new wells to be drilled during the fourth quarter of 2000.
We own a 100% working interest in the Field and are the operator.
In addition, we participated in several smaller capital projects and we
acquired minority, non-operating interests in our North Coward's Gully Field and
in the East Breaks 109 Fields, giving us essentially 100% ownership of both of
these Fields. These expenditures were funded with cash flows from operations in
14
<PAGE>
addition to cash on hand. Our total capital expenditures during the remainder of
fiscal year 2000 are estimated to be $10 to $12 million.
Results of Operations
For the nine months ended September 30, 2000 and 1999:
"Oil and natural gas sales"
Production and Prices:
<TABLE>
<CAPTION>
% Increase
2000 1999 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Natural gas production (MMcf) 10,701 8,383 28%
Average price per Mcf
excluding hedging $ 3.73 $ 2.21 69%
Average price per Mcf
including hedging $ 3.70 $ 1.98 87%
Oil Production (MBbl) 818 863 (5%)
Average price per Bbl
excluding hedging $ 29.78 $ 16.90 76%
Average price per Bbl
including hedging $ 29.23 $ 16.27 80%
</TABLE>
Natural gas production increased 28%, while oil production decreased 5%
during the first nine months of 2000 when compared to the first nine months of
1999. The resumption of capital spending during the fourth quarter of 1999 and
continuing increase during 2000 resulted in additional production in several
fields that we operate. This additional production resulted in offsetting
production declines that occur naturally on some of our other properties.
The fields that we experienced increased production from were the Price
Lake Field, which essentially did not produce during the first nine months of
1999. Initial production from the Price Lake Field began in September 1999 and
was increased further with a second successful well completed in March 2000. We
also increased production with two successful projects in the Umbrella Point
Field. A workover of the ST #74-10 well in December 1999 was the primary factor
in increasing natural gas production in the Umbrella Point Field. We also
completed a successful development well in this Field, the ST #87-12, which did
not begin production until March 2000.
"Lease operating expense" increased to $16.4 million during the first nine
months of 2000 compared to $12.4 million in 1999. On an Mcf equivalent ("Mcfe")
basis, lease operating expenses also increased to $1.05 in 2000 from $0.91 in
1999. Part of our increased capital and project spending in 2000 included a
number of workover and repair expenditures totaling approximately $5.2 million
during the first nine months of 2000. These types of expenditures are expensed
as they are incurred. The largest of these expenses was incurred at our East
Breaks 165 Fields. During the second and third quarters of 2000 we spent
approximately $3.3 million for MMS mandated repairs of production tubing on
several wells.
15
<PAGE>
"Depletion, depreciation and amortization" increased $2.1 million primarily
due to a 15% increase in total production, which was offset slightly by a 3%
decrease in the depletion rate per Mcfe. On an Mcfe basis, depletion,
depreciation and amortization decreased to $1.32 in 2000 from $1.36 in 1999. The
primary factor in decreased depletion, depreciation and amortization per Mcfe
was higher unproved property amortization during 1999 than in 2000. During the
third and fourth quarters of 1999 most of our unproved property costs were
impaired, reducing the amount of amortization during 2000.
"General and administrative expense" increased $0.3 million during the
first nine months of 2000 primarily due to higher salaries, wages and benefits.
"Production and ad valorem taxes" increased $0.8 million, or 122%, during
the first nine months of 2000 primarily due to two factors. Production taxes on
oil sales are calculated based on the value of the oil being sold which
increased significantly with a 80% increase in our realized oil prices. Our
production mix during 2000 also changed to include more production from
properties onshore, or in state waters, which are subject to severance taxes.
"Geological and geophysical expense" increased $0.2 million during the
first nine months of 2000. The increase relates to drilling activity and related
required geological work during the first nine months of 2000, including the
purchase 3-D seismic for further development of a field that we operate.
"Exploratory dry hole expense" decreased $0.1 million during the first nine
months of 2000. The costs incurred in 2000 relate to three wells that were
completed and are currently producing. The expense related to each of these
wells represent the incremental costs for drilling to exploratory zones in the
wells that did not contain an economical quantity of reserves. These incremental
expenditures were expensed based on their proportional costs of the entire well.
The third well with exploratory dry hole expenses was not completed until early
November 2000. As such, we anticipate an additional approximately $1 million of
exploratory dry hole expense during the fourth quarter of 2000.
"Impairment of oil and gas properties" incurred during 1999 was a result of
the Company's regular review of the recoverability of the property costs
incurred from the estimated future net cash flows related to those assets. The
impairment incurred in 1999 was a result of the decision not to develop the
unproved properties that had been allocated unproved property values in
connection with acquisitions made in 1996 and 1997.
"Severance expense" relates to the termination of the employment contract
with our former Chief Executive Officer and President.
"Lawsuit recovery" relates to a lawsuit that we had filed in 1996, in
conjunction with our insurance carrier, related to a property that we operate.
Our part of the lawsuit was primarily for time value of delayed revenues from a
fire caused by a third party service company. The judgement against the service
companies' insurance carrier was appealed on April 7, 2000 and was subsequently
settled for which we received $990,000.
"Income tax benefit" reflects a reduction of our deferred income tax
valuation allowance. At December 31, 1999 we had a tax valuation allowance of
approximately $29 million against our deferred tax assets. As of June 30, 2000,
we determined that it was more likely than not that the deferred tax assets
would be realized. This determination was based on our current projections of
future taxable income. This analysis included current estimates of future oil
and natural gas prices in addition to recent reserve additions. Our current
projections of future taxable income are sufficient to utilize our deferred tax
assets due to higher commodity prices and reserve additions, therefore the
valuation allowance was removed.
16
<PAGE>
These projections of future taxable income are management's best estimates,
using current reserve estimates, estimates of future commodity prices and other
information currently available. While we believe that the assumptions used in
these projections are reasonable, unfavorable future events such as a decrease
in commodity prices could result in a reduction in some or all of the net
deferred tax assets in a future period. The $29 million benefit recorded for the
removal of the valuation allowance has been offset by a $3.1 million deferred
tax liability that was generated during the nine months ended September 30,
2000, resulting in an overall tax benefit of $25.9 million for the nine months
ended September 30, 2000.
"Interest expense" increased due to a combination of higher average
borrowings and an increase in the prime rate, upon which our Credit Facility
interest rate is based on.
For the three months ended September 30, 2000 and 1999:
"Oil and natural gas sales"
Production and Prices:
<TABLE>
<CAPTION>
% Increase
2000 1999 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Natural gas production (MMcf) 3,867 2,079 86%
Average price per Mcf
excluding hedging $ 4.52 $ 3.22 40%
Average price per Mcf
including hedging $ 4.50 $ 2.36 91%
Oil Production (MBbl) 277 312 (11%)
Average price per Bbl
excluding hedging $31.45 $19.91 58%
Average price per Bbl
including hedging $30.81 $17.86 73%
</TABLE>
The resumption of capital spending during the fourth quarter of 1999 and
continuing in 2000 resulted in increased natural gas production in several
fields that we operate. This additional production more than offset production
declines that occur naturally on other properties.
The fields that we experienced increased production from were the Price
Lake Field, which did not produce during the second quarter of 1999. Initial
production from the Price Lake Field began in September 1999 and was increased
further with a second successful well completed in March 2000. We also increased
production with two successful projects in the Umbrella Point Field. A workover
of the ST #74-10 well in December 1999 was the primary factor in increasing
natural gas production in the Umbrella Point Field. We also completed a
successful development well in this Field, the ST #87-12, which began production
in March 2000. In addition, a project completed during the second quarter of
2000 in which we own a 33% working interest and is operated by a third party,
also increased our and oil and natural gas production during the third quarter
of 2000.
"Lease operating expense" increased $2.3 million during the third quarter
of 2000 compared to the comparable period in 1999. On an Mcf equivalent basis,
17
<PAGE>
lease operating expenses also increased to $1.14 in 2000 from $1.01 in 1999.
Part of our increased capital and project spending in 2000 included a number of
workover and repair expenditures during the second quarter of 2000, which are
expensed as they are incurred. The largest of which were incurred at our East
Breaks 165 Field. We spent approximately $2.2 million for MMS mandated repairs
of production tubing on several wells in that Field.
"Depletion, depreciation and amortization" increased $1.9 million, or 31%,
primarily due to a 40% increase in total production. On an Mcfe basis,
depletion, depreciation and amortization decreased to $1.46 in 2000 from $1.56
in 1999. The primary factor in decreased depletion, depreciation and
amortization per Mcfe was higher unproved property amortization during 1999 than
in 2000. During the third and fourth quarters of 1999 most of our unproved
property costs were impaired, reducing the amount of amortization during 2000.
"General and administrative expense" increased $0.1 million during 2000
primarily due to higher salaries, wages and benefits.
"Production and ad valorem taxes" increased $0.2 million, or 73%, during
the third quarter of 2000 due to two factors. Production taxes on oil sales are
calculated based on the value of the oil being sold which increased
significantly with a 73% increase in our realized oil prices. Our production mix
during 2000 also changed to include more production from properties onshore, or
in state waters, which are subject to severance taxes.
"Geological and geophysical expense" decreased $0.1 million during the
third quarter of 2000. The decrease is primarily due to 3-D seismic costs
incurred during the third quarter of 1999.
"Exploratory dry hole expense" increased $0.3 million during the third
quarter of 2000. The costs incurred in 2000 relate to a well that was completed
in early November 2000. The expense related to this well represents the
incremental costs for drilling to exploratory zones in the well that did not
contain an economical quantity of reserves. The incremental expenditures were
expensed based on their proportional costs of the entire well. This well was not
completed until early November 2000. As such, we anticipate an additional
approximately $1 million of exploratory dry hole expense during the fourth
quarter of 2000.
"Impairment of oil and gas properties" incurred during the third quarter of
1999 was a result of the Company's regular review of the recoverability of the
property costs incurred from the estimated future net cash flows related to
those assets. The impairment incurred in 1999 was a result of the decision not
to develop the unproved properties that had been allocated unproved property
values in connection with acquisitions made in 1996 and 1997.
"Severance expense" relates to the termination of an employment contract
with our former Chief Executive Officer and President.
"Income tax expense" is a deferred tax provision against our income before
income taxes using our effective tax rate. The provision is recorded as an
offset to our deferred tax asset.
"Interest expense" increased due to a combination of higher average
borrowings during the third quarter of 2000 along with an increase in the prime
rate, upon which our Credit Facility interest rate is based on.
18
<PAGE>
Other Contingencies
We are subject to various legal proceedings and claims that arise in the
ordinary course of business. We believe, based on the information available to
us, that the amount of liability, if any, with the respect to these actions
would not materially affect the financial position of the Company or its results
of operation.
An action was filed against the Company, Exxon Pipeline Company ("Exxon"),
National Energy Group, Inc. ("NEG"), Mendoza Marine, Inc., Shell Western
Exploration & Production, Inc. ("Shell") and the Louisiana Department of
Transportation and Development. The petition was filed in August 1998, and
alleges that, in 1997 and perhaps earlier, leaks from a buried crude oil
pipeline contaminated the plaintiff's property. Pursuant to the purchase and
sale agreement between the Company and NEG, NEG is required to indemnify us from
any damages attributable to NEG's operations on the property after the sale.
Pursuant to another purchase and sale agreement, we may owe indemnity to
Shell and Exxon, from whom we acquired the property prior to selling same to
NEG. We believe we have insurance coverage for the claims asserted in the
petition, and have notified all insurance carriers that might provide coverage
under our policies. The Company's insurance carrier at the time of the incident
assumed all of the ongoing legal costs for the case effective July 1, 1999. Some
discovery has occurred in the case, but discovery is not yet complete.
Therefore, at this point it is not possible to evaluate the likelihood of an
unfavorable outcome, or to estimate the amount or range of potential loss.
Item 3a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity price hedges
We follow a hedging strategy designed to protect against the possibility of
severe price declines due to market volatility. We usually make hedging
decisions to assure a payout of a specific acquisition or development project.
For the year 2000, we have options to put oil and natural gas, that we
produce, to a purchaser at an agreed upon price. The natural gas put option is
for 10,000 MMbtu per day at a NYMEX price of $2.04 per MMbtu. The cost of the
natural gas put option was $366,000, which is being amortized over the period
the hedged item is produced, fiscal year 2000. We also have two oil put options
in place, each for 1,000 barrels of oil per day. The first oil put option began
March 1, 2000 and continues through December 31, 2000 at NYMEX price of $20.00
per barrel. The second oil put option begins October 1, 2000 and continues
through September 30, 2001. The oil put options cost a total of $640,000 and are
being amortized over the period the hedged item is produced. In addition, for
the remainder of 2000 only, we have swaps in place on an average of 232 barrels
of oil for each day at $17.00 per barrel. This swap was assumed with the
acquisition of Goldking in 1997. On September 30, 2000 our open hedge position
had a fair value of estimated future losses totaling $615,000. A 10% adverse
change in prices would cause these estimated future losses to increase to
$635,000.
19
<PAGE>
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.26 Second amendment to credit agreement dated September 29, 2000.
10.27 Employment agreement between the Company and Robert G. Wonish.
27 Financial Date Schedule.
(b) Reports on Form 8-K
October 26, 2000 Change in ownership of Senior Notes due 2004.
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 thereunto duly authorized.
PANACO, Inc.
Date: November 10, 2000 /s/ Todd R. Bart
----------------------- -----------------------------------
Todd R. Bart, Chief Financial Officer
<PAGE>
Exhibit 10.26
-------------
SECOND AMENDMENT TO AMEND AND RESTAED
LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(this "Amendment") is made and entered into as of September 29, 2000, by and
among: PANACO, INC., a Delaware corporation ("Borrower") which is the sole
surviving corporation of the merger by Panaco Production Company, a Texas
corporation ("PPC"), with and into Panaco, Inc. and is the successor-by-merger
to PPC thereunder; the financial institutions listed on the signature pages
hereof (such financial institutions, together with their respective successors
and assigns, are referred to hereinafter each individually as a "Lender" and
collectively as the "Lenders"); and FOOTHILL CAPITAL CORPORATION, a California
corporation, as agent for the Lenders ("Agent").
RECITALS
--------
A. Borrower, Panaco Production Company (prior to its merger with and into
Borrower), Agent and Lenders have entered into that certain Amended and Restated
Loan and Security Agreement, dated as of September 30, 1999, as amended by that
certain First Amendment to Amended and Restated Loan and Security Agreement,
dated November 30, 1999 (as so amended, the "Loan Agreement").
B. PPC and Goldking Acquisition Corporation, a Delaware corporation, merged
with and into Borrower (the "Merger"), with Borrower being the sole surviving
entity of the Merger.
C. Borrower, Agent and Lenders desire to amend the Loan Agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:
AGREEMENT
---------
ARTICLE I
Amendments to Loan Agreement
----------------------------
1.01 Amendment to Section 7.21 of the Loan Agreement. Effective as of the
date hereof, Section 7.21 of the Loan Agreement is hereby amended and restated
to read in its entirety as follows:
"7.21 Capital Expenditures. Make capital expenditures in excess of (a)
$40,000,000 during Borrower's fiscal year ending December 31, 2000, or (b)
$30,000,000 during any fiscal year of Borrower ending on or after January 1,
2001."
1.02 Amendment to Section 1.6 of the Loan Agreement. Effective as of the
date of the merger of PPC with and into Panaco, Section 1.6 of the Loan
Agreement is hereby amended to add the following at the end of such section:
"Notwithstanding the foregoing provisions of this Section 1.6 and any other
provisions of this Agreement referring either to PPC (whether as a Borrower or
otherwise) or to GAC, from and after the date of the merger of PPC and GAC with
and into Panaco, with Panaco being the sole surviving entity, as required by and
in accordance with Section 3.3(d) of this Agreement, it is understood that
(a) all references to "Borrower" or "Borrowers" shall refer solely to Panaco and
shall no longer be understood to refer to and include PPC and (b) for all
purposes of this Agreement and the other Loan Documents, including, without
limitation, for purposes of making representations and warranties and complying
<PAGE>
with covenants and agreements, neither PPC nor GAC shall continue to maintain a
separate existence, both such entities having been merged with and into Panaco,
with Panaco being the sole surviving entity."
ARTICLE II
Conditions Precedent
--------------------
2.01 Conditions to Effectiveness. The effectiveness of this Amendment is
subject to the satisfaction of the following conditions precedent in a manner
satisfactory to Agent, unless specifically waived in writing by Agent:
(a) Agent shall have received this Amendment, duly executed by Borrower.
(b) Agent shall have received the Amendment Fee described in Section 4.11
of this Amendment.
(c) The representations and warranties contained herein and in the Loan
Agreement and the other Loan Documents, as each is amended hereby, shall be true
and correct as of the date hereof, as if made on the date hereof.
(d) No Default or Event of Default shall have occurred and be continuing,
unless such Default or Event of Default has been otherwise specifically waived
in writing by Agent and to the extent required by the Loan Agreement, the
Lenders.
(e) All corporate proceedings taken in connection with the transactions
contemplated by this Amendment and all documents, instruments and other legal
matters incident thereto shall be satisfactory to Agent and its legal counsel.
ARTICLE III
Ratifications, Representations and Warranties
---------------------------------------------
3.01 Ratifications. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions set forth in
the Loan Agreement and the other Loan Documents, and, except as expressly
modified and superseded by this Amendment, the terms and provisions of the Loan
Agreement and the other Loan Documents are ratified and confirmed and shall
continue in full force and effect. Borrower, Agent and Lenders agree that the
Loan Agreement and the other Loan Documents, as amended hereby, shall continue
to be legal, valid, binding and enforceable in accordance with their respective
terms.
3.02 Representations and Warranties. Borrower hereby represents and
warrants to Agent and each Lender that (a) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed
and/or delivered in connection herewith have been authorized by all requisite
corporate action on the part of Borrower and will not violate the Articles of
Incorporation or Bylaws of Borrower; (b) attached hereto as Annex A is a true,
correct and complete copy of presently effective resolutions of Borrower's Board
of Directors authorizing the execution, delivery and performance of this
Amendment and any and all other Loan Documents executed and/or delivered in
connection herewith, certified by the Secretary of Borrower; (c) the
representations and warranties contained in the Loan Agreement, as amended
hereby, and any other Loan Document are true and correct on and as of the date
hereof; (d) no Default or Event of Default under the Loan Agreement, as amended
hereby, has occurred and is continuing, unless such Default or Event of Default
has been specifically waived in writing by Agent and to the extent required by
the Loan Agreement, the Lenders; (e) Borrower is in full compliance with all
<PAGE>
covenants and agreements contained in the Loan Agreement and the other Loan
Documents, as amended hereby; and (f) Borrower has not amended its Articles of
Incorporation or its Bylaws since the date of the Loan Agreement.
ARTICLE IV
Miscellaneous Provisions
------------------------
4.01 Survival of Representations and Warranties. All representations and
warranties made in the Loan Agreement or any other Loan Document, including,
without limitation, any document furnished in connection with this Amendment,
shall survive the execution and delivery of this Amendment and the other Loan
Documents, and no investigation by Agent or any closing shall affect the
representations and warranties or the right of Agent and the Lenders to rely
upon them.
4.02 Reference to Loan Agreement. Each of the Loan Agreement and the other
Loan Documents, and any and all other Loan Documents, documents or instruments
now or hereafter executed and delivered pursuant to the terms hereof or pursuant
to the terms of the Loan Agreement, as amended hereby, are hereby amended so
that any reference in the Loan Agreement and such other Loan Documents to the
Loan Agreement shall mean a reference to the Loan Agreement, as amended hereby.
4.03 Expenses of Agent and Lenders. As provided in the Loan Agreement,
Borrower agrees to pay on demand all costs and expenses incurred by Agent and
Lenders in connection with the preparation, negotiation, and execution of this
Amendment and the other Loan Documents executed pursuant hereto and any and all
amendments, modifications, and supplements thereto, including, without
limitation, the costs and fees of Agent's and Lenders' legal counsel, and all
costs and expenses incurred by Agent and Lenders in connection with the
enforcement or preservation of any rights under the Loan Agreement, as amended
hereby, or any other Loan Documents, including, without, limitation, the costs
and fees of Agent's and Lenders' legal counsel.
4.04 Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
4.05 Successors and Assigns. This Amendment is binding upon and shall inure
to the benefit of Agent, each Lender and Borrower and their respective
successors and assigns, except that Borrower may not assign or transfer any of
its rights or obligations hereunder without the prior written consent of Agent.
4.06 Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
4.07 Effect of Waiver. No consent or waiver, express or implied, by Agent
or any Lender to or for any breach of or deviation from any covenant or
condition by Borrower shall be deemed a consent to or waiver of any other breach
of the same or any other covenant, condition or duty.
4.08 Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
4.09 Applicable Law. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
4.10 Final Agreement. THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS, EACH
AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT
<PAGE>
TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE LOAN
AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO
MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS
AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY EACH BORROWER
AND AGENT.
4.11 Amendment Fee. In consideration of the execution of this Amendment,
Borrower agrees to pay to Agent on the date of this Amendment an amendment fee
of $50,000, which fee shall be fully earned and non-refundable as of the date of
this Amendment.
[remainder of page intentionally left blank; signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
BORROWER:
---------
PANACO, INC.
By:/s/ Todd R. Bart
--------------------------------
Title: Chief Financial Officer
----------------------------
AGENT:
------
FOOTHILL CAPITAL CORPORATION,
as Agent for the Lenders
By:/s/ Sheri Fenenbock
--------------------------------
Title: Vice President
----------------------------
LENDERS:
--------
FOOTHILL CAPITAL CORPORATION, as a Lender
By:/s/ Sheri Fenenbock
--------------------------------
Title: Vice President
----------------------------
ABLECO FINANCE LLC, as a Lender
By:/s/
--------------------------------
Title: ----------------------------
<PAGE>
Exhibit 10.27
-------------
EMPLOYMENT AGREEMENT
PANACO, INC., ("Panaco") hereby employs ROBERT G. WONISH (hereinafter referred
to as "Employee") to be employed and serve as President and Chief Operating
Officer, effective September 15, 2000, on the following terms and conditions:
WITNESSETH
1. Duties. Employee shall perform such services regarding the operations of
Panaco as the Board of Directors may from time to time request. Employee shall
at all times faithfully, with diligence, and to the best of his ability,
experience and talents, perform all the duties that may be required of and from
him pursuant to the terms of this Agreement. It is expressly understood and
agreed that in the performance of his duties and obligations hereunder, Employee
shall at all times be subject to the direction and control of the Board of
Directors of Panaco.
2. Term and Renewal. The initial term of employment contemplated by this
Agreement shall commence effective September 15, 2000, and continue for a term
of one (1) year. Thereafter, this Agreement shall automatically renew for a
consecutive term of one (1) year each, upon expiration of the initial term and
each renewal term hereunder, unless terminated upon thirty (30) days written
notice.
3. Compensation. In consideration of the work and other services that Employee
performs for Panaco hereunder, Panaco shall pay Employee the following:
(a) Base Salary. During the term hereof, Panaco shall pay Employee a gross
annual salary of $250,000, payable semi-monthly in accordance with the
company's normal payroll policies, subject to withholding for federal
income tax, social security, state and local taxes, if any, and any
other sums that Panaco my be legally required to withhold. Employee
will be eligible for all cost of living adjustments that are awarded
to Panaco employees.
(b) Vacation. Employee shall be entitled to vacation in accordance with
vacation policies of Panaco from time to time in effect with respect
to the executive employees of Panaco.
(c) Other Benefits. During the term of this Agreement, Employee shall be
entitled to participate in all employee benefit plans from time to
time made available to the executives or general employees of Panaco.
(d) Insurance. Panaco will provide Employee and Employee's dependant's
with coverage under a policy of hospitalization and major medical
insurance and dental coverage at no cost to the Employee. Panaco will
provide life insurance coverage to Employee in an amount to be
determined by the company.
(e) Bonuses. Panaco will provide Employee with a yearly bonus that is
determined by and at the discretion of the Board of Directors. The
Board of Directors can elect to not issue any bonus for any given year
that this contract is valid. It is also understood that Employee will
be granted a bonus for the calendar year of 2000 payable in January,
2001 with the amount to be equal to or greater than $25,000.
<PAGE>
(f) Stock Options. Panaco, at the full discretion of the Board of
Directors, may issue stock options to Employee at any time during the
term of this contract. The quantity and pricing of such options is to
be determined solely by the Board of Directors.
4. Expenses. Panaco shall reimburse Employee for all reasonable expenses and
disbursements incurred by Employee in connection with Employee's duties
hereunder, including expenses for entertainment and travel, as are consistent
with the policies and procedures of Panaco.
5. Confidential Information. Employee acknowledges that in the course of
employment by Panaco, Employee will receive certain trade secrets and
confidential information belonging to Panaco which Panaco desires to protect as
confidential. For the purposes of this Agreement, the term "confidential
information" shall mean information of any nature and in any form which at the
time is not generally known to those persons engaged in business similar to that
conducted by Panaco. Employee agrees that such information is confidential and
that he will not reveal such information to anyone other than officers,
directors and employees of Panaco. Upon termination of employment, for any
reason, Employee shall surrender to Panaco all papers, documents and other
property of Panaco.
6. Agreement Not To Solicit. During the initial or renewal term hereof and for a
period of two years after the termination of employment hereunder (the
"Termination Date"), regardless of how terminated, Employee will not, singly,
jointly, or as a partner, member, contractor, employee or agent of any
partnership or as an officer, director, employee, agent, contractor, stockholder
or investor in any other entity or in any other capacity, directly or
indirectly:
(a) induce, or attempt to induce, any person or party who, on the
Termination Date is employed by or affiliated with Panaco or at any
time during the term of this covenant is, or may be, or becomes an
employee of or affiliated with Panaco, to terminate his, her or its
employment or affiliation with Panaco;
(b) induce, or attempt to induce, any person, business or entity which is
or becomes a customer or supplier of Panaco, or which otherwise is a
contracting party with Panaco, as of the Termination Date, or at any
time during the term hereof, to terminate any written or oral
agreement or understanding with Panaco, or to interfere in any manner
with any relationship between Panaco and such customer or supplier;
(c) employ or otherwise engage in any capacity any person who at the
Termination Date or at any time during the period two years prior
thereto was employed, or otherwise engaged, in any capacity by Panaco
and who, by reason thereof is or is reasonably likely to be in
possession of any confidential information.
Employee acknowledges and agrees that the provisions of this paragraph
constitute a material, mutually bargained for portion of the consideration to be
delivered under this agreement and that it is a condition precedent to the
creation and existence of the obligations of Panaco hereunder.
2
<PAGE>
7. Termination of Employment.
(a) Termination for Cause. Nothing hereunder shall prevent Panaco from
terminating Employee's employment for Cause (as hereinafter defined).
Upon termination for Cause Employee shall receive his base salary only
through the date of termination, and neither Employee nor any other
person shall be entitled to any further payments from Panaco under
this Agreement. Any rights and benefits Employee may have under
employee benefit plans and programs of Panaco by reason of or after
his termination shall be determined in accordance with the terms of
such plans and programs. For purposes of this Agreement, Termination
for Cause shall mean:
(i) termination due to continued neglect of duties for which Employee
is employed after receipt of written notice thereof from the
Board of Directors of Panaco;
(ii) termination due to conduct involving moral turpitude in the
performance of duties for which Employee is employed, including,
without limitation, the commission of fraud, misappropriation or
embezzlement by Employee; or
(iii)termination due to conduct which, if not in connection with the
performance of Employee's duties hereunder, would result in
serious prejudice to the interests of Panaco if he were retained
as an employee.
(b) Death, Disability and Termination Other Than for Cause.
Notwithstanding any other term or provision of this Agreement, Panaco
may terminate Employee's employment at any time, during any initial or
renewal term hereof, for any reason it deems appropriate or for no
reason. If Employee's employment hereunder is terminated for any
reason other than Cause in accordance with paragraph 7(a), or if
Employee dies or because disabled (meaning that employee is unable to
perform his duties prescribed by section 1 of this Agreement for a
period of 180 consecutive days), then Employee shall be entitled to
payment of his base salary, at the rate in effect at the time of such
termination for a period of 12 months. Any rights and benefits
Employee may have under employee benefit plans and programs of Panaco
by reason of or after his termination shall be determined in
accordance with the terms of such plans and programs.
(c) Voluntary Termination Employee may terminate his employment at any
time upon ninety (90) days' prior written notice to Panaco; provided,
however, that Panaco, in its discretion, may cause such termination to
be effective at any time during that ninety (90) day period. Neither
Employee nor any other person shall be entitled to any further
payments from Panaco under this Agreement upon a voluntary termination
by Employee of his employment hereunder, and any rights and benefits
Employee may have under employee benefit plans and programs of Panaco
by reason of or after his termination shall be determined in
accordance with the terms of such plans and programs.
(d) Voluntary Termination for "Good Reason." Notwithstanding any other
term or provision of this Agreement, if Employee voluntarily
terminates his employment for Good Reason (as hereinafter defined),
3
<PAGE>
then Employee shall be entitled to payment of his base salary, at the
rate in effect at the time of such termination for a period of 12
months. Any rights and benefits Employee may have under employee
benefit plans and programs of Panaco by reason of or after his
termination shall be determined in accordance with the terms of such
plans and programs. "Good Reason" shall mean any of the following
(without Executive's express written consent):
(i) Employee's Base Salary is set at an amount less than 90 percent
of the greater of (a) his annual salary in effect on September
15, 2000, or (b) his annual salary in effect during the preceding
calendar year, and Employee resigns within ninety days after he
is notified of the decision to modify his Base Salary.
(ii) A substantial and material alteration in the nature or status of
Employee's responsibilities, or the assignment of duties
inconsistent with Employee's duties and responsibilities;
(iii)Employee's line of report is changed so that he is required to
report to anyone other than the Executive Committee or the Board
of Directors;
(iv) A change in Employee's titles or Panaco's employing a
co-President or Chief Executive officer;
(v) Employee is not elected as a director of Panaco at the next
annual meeting;
(vi) Any material breach by Panaco of any provision of this Agreement
if such material breach has not been cured within thirty (30)
days following written notice of such breach by Employee to the
Executive Committee setting forth with reasonable specificity the
nature of the breach.
8. Contingent Immediate Vesting of Options. Employee will be entitled to the
immediate full vesting of any existing options outstanding if his employment is
terminated prior to the end of the term of this Agreement due to one or more of
the following events:
(a) Employee's employment is terminated other than for Cause;
(b) Employee voluntarily terminates his employment for Good Reason;
(c) Employee becomes disabled; or
(d) Employee dies.
9. Notices. All notices or other communications pursuant to this contract may be
given by personal delivery, or by certified mail, addressed to the home office
of Panaco or to the last known address of Employee. Notices given by personal
delivery shall be deemed given at the time of delivery, and notices sent by
certified mail shall be deemed given when deposited with the U.S. Post Office.
4
<PAGE>
10. Entirety of Agreement. This Agreement contains the entire understanding of
the parties and all of the covenants and agreements between the parties with
respect to the employment.
11. Governing Law. This Agreement shall be construed and enforced in accordance
with, and be governed by, the laws of the State of Texas.
12. Waiver. The failure of either party to enforce any rights hereunder shall
not be deemed to be a waiver of such rights, unless such waiver is an express
waiver which has been signed by the waiving party. Waiver of one breach shall
not be deemed a waiver of any other breach of the same or any other provision
hereof.
13. Assignment. This Agreement shall not be assignable by Employee. In the event
of a future disposition of the properties and business of Panaco by merger,
consolidation, sale of assets, or otherwise, then Panaco may assign this
Agreement and all of its rights and obligations to the acquiring or surviving
entity; provided that any such entity shall assume all of the obligations of
Panaco hereunder.
14. Arbitration. Any dispute, controversy or claim arising out of or relating to
this Agreement shall be submitted to and finally settled by binding arbitration
to be held in Houston, Texas, in accordance with the rules of the American
Arbitration Association in effect on the date of this Agreement, and judgment
upon the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. All agreements contemplated herein to be entered into to
which the parties hereto are parties shall contain provisions which provide that
all claims, actions or disputes pursuant to, or related to, such agreements
shall be submitted to binding arbitration. Employer agrees to pay all fees
charged by the American Arbitration Association in connection with any
arbitration.
DATED this 11 day of October, 2000.
---- ----------
PANACO, INC. EMPLOYEE
By:/s/ Harold First By:/s/ Robert G. Wonish
------------------------- -----------------------
A member of its Executive Committee
By:/s/ A. Theodore Stautberg
-------------------------
A member of its Executive Committee
5
<PAGE>
