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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 June 30, 1997
[ ] 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)
1050 West Blue Ridge Boulevard, PANACO Building,
Kansas City, Missouri 64145-1216
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 942 - 6300
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 _______ .
20,382,087 shares of the registrant's $.01 par value Common Stock
were outstanding at June 30, 1997.
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PANACO, INC.
Condensed Balance Sheets
(Unaudited)
ASSETS As of As of
June 30, 1997 December 31, 1996
------------------------ ------------------------
CURRENT ASSETS
Cash and cash equivalents 1,353,000 1,736,000
Accounts receivable 6,030,000 6,197,000
Investment in common stock 1,701,000 1,642,000
Prepaid and other 552,000 424,000
------------------------ ------------------------
Total current assets 9,636,000 9,999,000
------------------------ ------------------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 130,410,000 125,283,000
Oil and gas properties, unproved 7,324,000 7,128,000
Less: accumulated depreciation, depletion,
amortization and valuation allowances (87,374,000) (81,871,000)
------------------------ ------------------------
Net oil and gas properties 50,360,000 50,540,000
------------------------ ------------------------
PROPERTY, PLANT AND EQUIPMENT
Pipelines and equipment 13,280,000 10,534,000
Less: accumulated depreciation (806,000) (327,000)
------------------------ ------------------------
Net property, plant and equipment 12,474,000 10,207,000
------------------------ ------------------------
OTHER ASSETS
Restricted deposits 1,992,000 2,115,000
Loan costs, net 127,000 611,000
Other 252,000 296,000
------------------------ ------------------------
Total other assets 2,371,000 3,022,000
------------------------ ------------------------
TOTAL ASSETS $ 74,841,000 $ 73,768,000
======================== ========================
The accompanying notes are an integral part of this statement
2
PANACO, INC.
Condensed Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY As of As of
June 30, 1997 December 31, 1996
------------------------ -------------------------
CURRENT LIABILITIES
Accounts payable 5,770,000 6,246,000
Interest payable 263,000 524,000
Current portion of long-term debt - -
------------------------ -------------------------
Total current liabilities 6,033,000 6,770,000
------------------------ -------------------------
LONG-TERM DEBT 28,000,000 49,500,000
------------------------ -------------------------
STOCKHOLDERS' EQUITY
Preferred Shares, $.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding - -
Common Shares, $.01 par value, 40,000,000 shares authorized; 20,382,087
and 14,350,255 shares issued and outstanding, respectively 204,000 143,000
Additional paid-in capital 53,593,000 31,490,000
Retained earnings (deficit) (12,989,000) (14,135,000)
------------------------ -------------------------
Total stockholders' equity 40,808,000 17,498,000
------------------------ -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 74,841,000 $ 73,768,000
======================== =========================
The accompanying notes are an integral part of this statement
3
PANACO, INC.
Statements of Income (Operations)
For the Six Months Ended June 30,
(Unaudited)
1997 1996
------------------ -------------------
REVENUES
Oil and natural gas sales $ 14,287,000 $ 10,808,000
COSTS AND EXPENSES
Lease operating 5,122,000 4,184,000
Depletion, depreciation & amortization 6,184,000 3,812,000
General and administrative 389,000 382,000
Production and ad valorem taxes 174,000 327,000
Exploration expenses 67,000 -
West Delta fire loss - 500,000
------------------ -------------------
Total 11,936,000 9,205,000
------------------ -------------------
NET OPERATING INCOME 2,351,000 1,603,000
------------------ -------------------
OTHER INCOME (EXPENSE)
Unrealized gain on investment in common stock 60,000 -
Interest expense, net (1,265,000) (902,000)
------------------ -------------------
Total (1,205,000) (902,000)
------------------ -------------------
NET INCOME BEFORE INCOME TAXES 1,146,000 701,000
INCOME TAXES - -
------------------ -------------------
NET INCOME $ 1,146,000 $ 701,000
================== ===================
Net income per share $ 0.07 $ 0.06
================== ===================
The accompanying notes are an integral part of this statement
4
PANACO, INC.
Statements of Income (Operations)
For the Three Months Ended June 30,
(Unaudited)
1997 1996
------------------ -------------------
REVENUES
Oil and natural gas sales $ 6,220,000 $ 3,469,000
COSTS AND EXPENSES
Lease operating 2,210,000 1,829,000
Depletion, depreciation & amortization 3,072,000 1,326,000
General and administrative 191,000 197,000
Production and ad valorem taxes 89,000 116,000
Exploration expenses - -
West Delta fire loss - 500,000
------------------ -------------------
Total 5,562,000 3,968,000
------------------ -------------------
NET OPERATING INCOME (LOSS) 658,000 (499,000)
------------------ -------------------
OTHER INCOME (EXPENSE)
Interest expense, net (344,000) (450,000)
------------------ -------------------
Total (344,000) (450,000)
------------------ -------------------
NET INCOME (LOSS) BEFORE INCOME TAXES 314,000 (949,000)
INCOME TAXES - -
------------------ -------------------
NET INCOME (LOSS) $ 314,000 $ (949,000)
================== ===================
Net income (loss) per share $ 0.02 $ (0.08)
================== ===================
The accompanying notes are an integral part of this statement
5
PANACO, INC.
Statement of Changes in Stockholders' Equity
(Unaudited)
Amount ($)
Number of Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit)
----------------- ---------------- ----------------- -----------------
Balances, December 31, 1996 14,350,255 $ 143,000 $ 31,490,000 $(14,135,000)
Net Income - - - 1,146,000
Common shares issued - Offering 6,000,000 60,000 21,954,000 -
Common shares issued - ESOP
contribution and stock bonuses 31,832 1,000 149,000 -
----------------- ---------------- ----------------- -----------------
Balance, June 30, 1997 20,382,087 $ 204,000 $ 53,593,000 $(12,989,000)
================= ================ ================= =================
The accompanying notes are an integral part of this statement
6
PANACO, INC.
Statement of Cash Flows
Six Months Ended June 30,
(Unaudited)
1997 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,146,000 $ 701,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization 6,184,000 3,812,000
Unrealized gain on investment in common stock (60,000) -
Other, net 16,000 -
Changes in operating assets and liabilities:
Accounts receivable 167,000 473,000
Prepaid and other 400,000 (41,000)
Accounts payable (476,000) 2,365,000
Interest payable (261,000) 78,000
----------------- -----------------
Net cash provided by operating activities 7,116,000 7,388,000
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of oil and gas properties 24,000 -
Capital expenditures and acquisitions (8,160,000) (3,440,000)
Decrease/(increase) in restricted deposits 123,000 (1,735,000)
----------------- -----------------
Net cash used by investing activities (8,013,000) (5,175,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock offering proceeds, net 22,014,000 -
Long-term debt proceeds 4,500,000 -
Repayment of long-term debt (26,000,000) (4,000,000)
Issuance of common stock-exercise of warrants - 1,837,000
----------------- -----------------
Net cash used by financing activities 514,000 (2,163,000)
----------------- -----------------
NET INCREASE (DECREASE) IN CASH (383,000) 50,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,736,000 1,198,000
----------------- -----------------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 1,353,000 $ 1,248,000
================= =================
The accompanying notes are an integral part of this statement
7
PANACO, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position as of June 30, 1997 and December 31, 1996 and the results of operations
and changes in stockholder's equity and cash flows for the periods ended June
30, 1997 and 1996. Most adjustments made to the financial statements are of a
normal, recurring nature. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, certain information
and footnote disclosures, including significant accounting policies, normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1996.
Note 2 - OIL AND GAS PROPERTIES AND PIPELINES AND EQUIPMENT
The Company utilizes the successful efforts method of accounting for its
oil and gas properties. Under the successful efforts method, lease acquisition
costs are capitalized. Exploratory drilling costs are also capitalized pending
determination of proved reserves. If proved reserves are not discovered, the
exploratory costs are expensed. All development costs are capitalized. Interest
on unproved properties is capitalized based on the carrying amount of the
properties. Provision for depreciation and depletion is determined on a
field-by-field basis using the unit-of-production method. The carrying amounts
of proven and unproved properties are reviewed periodically on a
property-by-property basis, based on future net cash flows determined by an
independent engineering firm, with an impairment reserve provided if conditions
warrant.
Pipelines and equipment are carried at cost. Oil and natural gas
pipelines are depreciated on the straight-line method over the useful lives of
fifteen years. Other property is also depreciated on the straight-line method
over the useful lives, which range from five to seven years.
Note 3 - CASH FLOW INFORMATION
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with original maturities of six months
or less to be cash equivalents. Cash payments for interest, net of capitalized
interest, totaled $1,526,000 and $744,000 for the first six months of 1997 and
1996, respectively.
Note 4 - RESTRICTED DEPOSITS
The Company is party to various escrow and trust agreements which
provide for monthly deposits into escrow and trust accounts to satisfy future
plugging and abandonment obligations. The terms of the agreements vary as to
deposit amounts, based upon fixed monthly amounts or percentages of the
properties' net income. With respect to plugging and abandonment operations,
funds are partially or completely released upon the presentation by the Company
to the escrow agent or trustee of evidence that the operation was or is being
conducted in compliance with applicable laws and regulations. These amounts are
included on the financial statements as Restricted Deposits.
8
Note 5 - INVESTMENT IN COMMON STOCK
In connection with the sale of the Bayou Sorrel Field to National
Energy Group, Inc. in 1996, the Company received 477,612 shares of National
Energy Group, Inc. common stock. The Company has classified this asset as a
trading security. At June 30, 1997 the estimated market value of the stock was
$1,701,000, with an unrealized gain of $60,000 recognized in the first three
months of 1997 to reflect the increase in market value from December 31, 1996.
Subsequent to June 30, the shares of National Energy Group, Inc. common stock
have been sold with no significant gain or loss being realized.
Note 6 - NET INCOME PER SHARE
The net income per share for the six months ended June 30, 1997 and
1996 has been calculated based on 18,247,926 and 12,206,886 weighted average
shares outstanding, respectively and 20,382,087 and 12,345,361 for the three
months ended June 30, 1997 and 1996, respectively. Weighted average shares
outstanding are the only shares included in this calculation. The Company does
not present a fully diluted earnings per share amount as options and warrants
outstanding at June 30, 1997 do not dilute per share amounts by 3% or more and
the shares issuable upon conversion of the 1996 Convertible Subordinated Notes
are not considered common stock equivalents and are also anti-dilutive.
The Financial Accounting Standards Board issued FASB Statement 128,
"Earnings Per Share", in February 1997. FASB 128 modifies the way companies
report earnings per share information. The Company will be required to adopt
FASB 128 for the year ending December 31, 1997. All prior periods will be
restated to conform with the statement. The Company does not believe that
adoption of FASB 128 will materially affect earnings per share data previously
reported.
Note 7 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The reserves presented in the following table are prepared by the
Company based upon reports of independent petroleum engineers and are estimates
only and should not be construed as being exact amounts. All reserves presented
are proved reserves that are defined as estimated quantities which geological
and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions.
Proved developed and undeveloped reserves Oil Gas
(Bbls) (Mcf)
December 31, 1996 2,239,000 41,446,000
Purchase of minerals-in-place -0- -0-
Production (188,000) (4,421,000)
Revisions of previous estimates -0- -0-
----------------- -----------------
Estimated reserves at June 30, 1997 2,051,000 37,025,000
============ ===========
No major discovery or other favorable or adverse event has caused a significant
change in the estimated proved
9
reserves since June 30, 1997 other than the acquisition of the Goldking
Companies, Inc., see Note 9-Subsequent Events. The Company does not have proved
reserves applicable to long-term supply agreements with governments or
authorities. All proved reserves are located in the United States.
Note 8 - INCOME TAXES
The Company has not recorded an income tax provision due to net
operating loss carryforwards for federal income tax purposes of $16,000,000 at
December 31, 1996 which are available to offset future federal taxable income
through 2011.
Note 9 - SUBSEQUENT EVENTS
On July 31, the Company completed its acquisition of Goldking
Companies, Inc., for a combination of cash, notes, 3,238,930 PANACO Common
Shares and the assumption of liabilities. The acquisition will be accounted for
as a purchase. With the acquisition PANACO obtains over 50 Bcf equivalent of oil
and natural gas reserves, a sizable and attractive portfolio of exploration,
development projects and 3-D seismic data and a seasoned staff of oil and gas
professionals experienced in Gulf Coast operations.
10
PART I
Item 2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking Statements
Forward-looking statements in this Form 10-Q, future filings by the
Company with the Securities and Exchange Commission, the Company's press
releases and oral statements by authorized officers of the Company are intended
to be subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking statements
involve risks and uncertainty, including without limitation, the risk of a
significant natural disaster, the inability of the Company to ensure against
certain risks, the adequacy of its loss reserves, fluctuations in commodity
prices, the inherent limitations in the inability to estimate oil and gas
reserves, changing government regulations, as well as general market conditions,
competition and pricing. The Company believes that forward-looking statements
made by it are based upon reasonable expectations. However, no assurances can be
given that actual results will not differ materially from those contained in
such forward-looking statements. The words "estimate", "anticipate", "expect",
"predict", "believe" and similar expressions are intended to identify
forward-looking statements.
General
The oil and gas industry has experienced significant volatility in
recent years because of the oversupply of most fossil fuels relative to the
demand for such products and other uncertainties in the world energy markets.
These industry conditions should be considered when this analysis is read.
Accordingly, the energy market has been unsettled, making it difficult to
predict future prices.
Liquidity and Capital Resources
On March 5, 1997 the Company completed an offering of 8,403,305 common
shares at $4.00 per share, $3.728 net of the underwriter's commission. The
offering consisted of 6,000,000 shares sold by the Company and 2,403,305 shares
sold by shareholders, primarily Amoco Production Company (2,000,000 shares) and
lenders advised by Kayne, Anderson Investment Management, Inc. (373,305 shares).
The Company's net proceeds of $22,000,000 from the offering were used to prepay
$13,500,000 of its 12% subordinated debt and the remaining was temporarily paid
on the Company's revolving bank loan and will ultimately be used for the
development of its properties and for future acquisitions.
On October 8, 1996 the Company amended its Bank Facility with First
Union National Bank of North Carolina (60%) and Banque Paribas (40%). The loan
is a reducing revolver designed to provide up to $40,000,000 depending on the
borrowing base, as determined by the lenders. The borrowing base on July 31,
1997 was $30,000,000. At June 30, 1997 the Company had $19,500,000 outstanding
under the loan. The principal amount of the loan is due July 1, 1999. However,
at no time may the Company have outstanding borrowings under the Bank Facility
in excess of its borrowing base. Interest on the loan is computed at the bank's
prime rate or at 1 to 1 3/4% (depending upon the percentage of the facility
being used) over the applicable London Interbank Offered Rate ("LIBOR") on
Eurodollar loans. Eurodollar loans can be for terms of one, two, three or six
months and interest on such loans is due at the expiration of the terms of such
loans, but no less frequently than every three months. Management feels that
this Bank Facility greatly facilitates its ability to make necessary capital
expenditures to maintain and improve production from its properties and makes
available to the Company additional funds for future acquisitions.
11
From time to time the Company has borrowed funds from institutional
lenders who are represented by Kayne, Anderson Investment Management, Inc. In
each case these loans are due at a stated maturity, require payments of interest
only at 12% per annum, 45 days after the end of each calendar quarter, and are
secured by a second mortgage on the Company's offshore oil and gas properties.
The loans were as follows:
(a) 1993 Subordinated Notes. In 1993, $5,000,000 was borrowed, due
December 31, 1999, but prepayable at any time. These Notes were prepaid on March
6, 1997 with a portion of the proceeds from the common share offering.
(b) 1996 Tranche A Convertible Subordinated Notes. On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable any time after May
8, 1998. After August 28, 1997 the Notes are convertible into 2,060,606 common
shares on the basis of $4.125 per share. The Company may deliver up to
$2,000,000 in payment-in-kind notes in satisfaction of interest payment
obligations.
(c) 1996 Tranche B Bridge Loan Subordinated Notes. On October 8, 1996,
$8,500,000 was borrowed, due October 8, 2003, but prepayable any time. These
Notes were prepaid on March 6, 1997 with a portion of the proceeds of the common
share offering.
The product prices received by the Company, net of the impact of hedge
transactions discussed below, averaged $2.47 per Mcf for natural gas and $17.96
per barrel for oil for the six months ended June 30, 1997. Cash flow is
currently being used for capital expenditures, reduce liabilities and to pay
general and administrative overhead. Starting in 1997 the Company's natural gas
hedge transactions are based upon published gas pipeline index prices instead of
the NYMEX. This change has mitigated the risk of price differences due to
transportation. In 1997, 14,000 MMBtu per day has been hedged, reducing to
10,000 MMBtu per day in 1998 and 7,000 MMBtu per day in 1999. The Company is
hedging at a swap price of $1.80 per MMBtu for 1997 with varying levels of
participation (93% in January to 40% in September ) in settlement prices above
the $1.80 per MMBtu swap price level. In 1997 the Company has also hedged its
oil prices by selling the equivalent of 720 barrels of oil per day at $20.00,
with a 60% participation in prices above the $20.00 swap price level. Management
has generally used hedge transactions to protect its cash flows when the
Company's levels of long-term debt have been higher and refrained from hedge
transactions when long-term debt has been lower. For accounting purposes, gains
or losses on swap transactions are recognized in the production month to which a
swap contract relates.
At June 30, 1997, 84% of the Company's total assets were represented by
oil and gas properties and pipelines and equipment, net of depreciation,
depletion and amortization.
In 1991 certain lenders received a net profits interest (NPI) in the
West Delta properties. During the six months ended June 30, 1997, payments with
respect to this NPI totaled $190,000.
12
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. Each month, until
November 1997, $25,000 is deposited in a bank escrow account to satisfy such
obligations with respect to a portion of its West Delta properties. The Company
has entered into an escrow agreement with Amoco Production Company under which
the Company will deposit, for the life of the fields, in a bank escrow account
ten percent (10%) of the net cash flow, as defined in the agreement, for the
Amoco properties. The Company has established the "PANACO East Breaks 110
Platform Trust" in favor of the Minerals Management Service of the U.S.
Department of the Interior. This trust required an initial funding of $846,720
in December 1996, and remaining deposits of $244,320 due at the end of each
quarter in 1999 and $144,000 due at the end of each quarter in 2000 for a total
of $2,400,000. In addition, the Company has $9,250,000 in surety bonds to secure
its plugging and abandonment operations.
Through the six months ended June 30, 1997 the Company had spent
$8,093,000 in capital expenditures, approximately $2 million of which was for
the completion of oil and gas pipelines in the West Delta Fields and the
remainder was primarily for development of its oil and gas properties. Through
June 30, 1996 the Company had raised $1,837,000 in equity as a result of the
exercise of warrants. On March 5, 1997 the Company completed an offering of
8,403,305 common shares at $4.00 per share, $3.728 net of the underwriter's
commission. The offering consisted of 6,000,000 shares sold by the Company, from
which it received $22,000,000. The Company's proceeds were used to prepay
$13,500,000 of its 12% subordinated debt and the remaining was temporarily paid
on the Company's revolving bank loan and will ultimately be used for the
development of its properties and for future acquisitions.
Results of Operations
For the six months ended June 30, 1997 and 1996:
"Oil and natural gas sales" increased 32% for the first six months of
1997. Significant increases in both natural gas and oil production were the
primary factor in the increase in revenues. The former Amoco properties,
acquired in October 1996 coupled with the resumption of production from the West
Delta fields have combined to outweigh the sale of the Bayou Sorrel Field in
September 1996. The Company's development program on the former Amoco properties
has increased production from those fields steadily since the acquisition in
October.
Production. Natural gas production increased 21% to 4,421,000 Mcf in
1997 from 3,666,000 Mcf in 1996. Oil production increased 25% in 1997 to 188,000
barrels, from 151,000 barrels in 1996. Results for 1997 include production from
the former Amoco properties, purchased in October 1996. Results for 1997 also
include increased production from the West Delta Fields, which were shut-in from
April 24, 1996 until October 1996. They do not include production from the Bayou
Sorrel Field which was sold September 1, 1996. Bayou Sorrel was primarily an oil
field and produced only a small amount of gas in 1996.
In March, 1997 the federal production from the West Delta Block 58 was
brought back on-line for the first time since April 1996 with the completion of
a dual six inch, eight mile pipeline to the West Delta central processing
facility, Tank Battery #3. This pipeline also allowed Tana Oil and Gas
Corporation and Samedan Corporation to resume production from their wells,
drilled on farm-outs from the Company, on which the Company receives overriding
royalty revenue and fees for processing the oil and gas.
13
Prices. Natural gas prices, net of the impacts of hedging transactions,
increased from $2.21 per Mcf in 1996 to $2.47 in 1997. The 1997 natural gas
hedge program had the effect of reducing gas prices by only ($.03) per Mcf in
1997, compared to ($.52) per Mcf in 1996. The 1997 hedge program allows the
Company more participation in increases in market prices for natural gas, while
providing the price stability of no less than $1.80 per MMBtu in 1997 on 14,000
MMBtu per day in 1997. Oil prices remained relatively flat in 1997 at $17.96 per
barrel, compared to $17.92 per barrel in 1996.
"Lease operating expenses" increased $938,000, or 22% in 1997 with the
addition of interests in thirteen offshore blocks acquired in October 1996. As a
percent of revenues, lease operating expenses decreased to 36% in 1997 from 39%
in 1996.
"Depletion, depreciation and amortization" increased $2,372,000, or 62%
also in part due to the purchase of the former Amoco properties in October 1996.
The amount per Mcf equivalent also increased from $.86 in 1996 to $1.11 in 1997,
due to several factors. Downward engineering revisions by the Company's
independent petroleum engineers, Ryder Scott Company, in the West Delta and East
Breaks 110 Fields at year-end 1996 were a significant part of the increase.
Also, $4,000,000 in capital expenditures made during 1996 to rebuild Tank
Battery #3, the central processing facility for the West Delta Fields, increased
the depletion cost per Mcf.
"Production and ad valorem taxes" decreased 62% in 1997 to 1% of oil
and natural gas sales from 3% of oil and natural gas sales in 1996. The decrease
is due to the Company's shift to federal offshore waters where there are no
state severance taxes.
"Exploration expenses" incurred in 1997 resulted from an option paid to
participate in an exploratory well in the High Island Area, offshore Texas which
was condemned before the well was drilled because of a dry hole drilled by
another company on an adjacent block. There will be no further exploration
expenses associated with this prospect.
"Interest expense, net" increased 40% in 1997 primarily due to the
increased average borrowing levels in 1997 and partially due to an increased
weighted average interest rate incurred in 1997, partially offset by an increase
in interest capitalized. The average borrowing level increased to $34,000,000 in
1997 from $20,000,000 in 1996 as a result of the Amoco acquisition in October
1996. On March 6, 1997 the proceeds from a common stock offering reduced
subordinated debt by $13,500,000 and temporarily reduced bank facility debt by
$8,500,000. The weighted average borrowing rate in 1997 increased from 8.6% in
1996 to 9.2% in 1997. The increase is due to an increased percentage of
borrowing under subordinated debt agreements, bearing interest at 12%, also a
result of the Amoco acquisition in October 1996. In connection with this
acquisition, $17,000,000 was borrowed as subordinated debt, $8,500,000 of which
was prepaid in March 1997. In the 1996 period, only $5,000,000 of the
outstanding debt was borrowed under these subordinated facilities.
"Gain on investment in common stock" is the change in the estimated
market value of the Company's 477,612 shares of National Energy Group, Inc.
common stock since year-end 1996.
14
For the three months ended June 30, 1997 and 1996:
"Oil and natural gas sales" increased 79% in 1997. Significant
increases in both natural gas and oil production were the primary factor in the
increase in revenues. The former Amoco properties, acquired in October 1996
coupled with the resumption of production from the West Delta fields have
combined to outweigh the sale of the Bayou Sorrel Field in September 1996. The
Company's development program on the former Amoco properties has increased
production from those fields steadily since the acquisition in October.
Production. Natural gas production increased 74% to 2,246,000 Mcf in
1997 from 1,287,000 Mcf in 1996. Oil production increased 94% in 1997 to 108,000
barrels, from 56,000 barrels in 1996. Results for 1997 include production from
the former Amoco properties, purchased in October 1996. Results for 1997 also
include increased production from the West Delta Fields, which were shut-in from
April 24, 1996 until October 1996. They do not include production from the Bayou
Sorrel Field which was sold September 1, 1996. Bayou Sorrel was primarily an oil
field and produced only a small amount of gas in 1996.
In March, 1997 the federal production from the West Delta Block 58 was
brought back on-line for the first time since April 1996 with the completion of
a dual six inch, eight mile pipeline to the West Delta central processing
facility, Tank Battery #3. This pipeline also allowed Tana Oil and Gas
Corporation and Samedan Corporation to resume production from their wells,
drilled on farm-outs from the Company, on which the Company receives overriding
royalty revenue and fees for processing the oil and gas.
Prices. Natural gas prices, net of the impacts of hedging, increased
from $1.84 per Mcf in 1996 to $1.95 in 1997. The 1997 natural gas hedge program
had the effect of reducing gas prices by only ($.06) per Mcf in 1997, compared
to ($.72) per Mcf in 1996. The 1997 hedge program allows the Company more
participation in increases in market prices for natural gas, while providing the
price stability of no less than $1.80 per MMBtu in 1997 on 14,000 MMBtu per day
in 1997. Oil prices decreased in 1997 to $17.03 per barrel, from $19.73 per
barrel in 1996.
15
"Lease operating expenses" increased $381,000, or 21% in 1997 with the
addition of interests in thirteen offshore blocks acquired in October 1996. As a
percent of revenues, lease operating expenses decreased to 36% in 1997 from 53%
in 1996.
"Depletion, depreciation and amortization" increased $1,746,000, or
132%, primarily due to the substantial increase in production in 1997 a large
part of which is from the purchase of the former Amoco properties in October
1996. The amount per Mcf equivalent also increased from $.86 in 1996 to $1.11 in
1997, due to several factors. Downward engineering revisions by the Company's
independent petroleum engineers, Ryder Scott Company, in the West Delta and East
Breaks 110 Fields at year-end 1996 were a significant part of the increase.
Also, $4,000,000 in capital expenditures made during 1996 to rebuild Tank
Battery #3, the central processing facility for the West Delta Fields, increased
the depletion cost per Mcf.
"Production and ad valorem taxes" decreased 23% in 1997 to 1% of oil
and natural gas sales from 3% of oil and natural gas sales in 1996. The decrease
is due to the Company's shift to federal offshore waters from where there are no
state severance taxes.
"Interest expense, net" decreased 24% in 1997 as a result of interest
capitalized on the Company's unproved properties balances in 1997. The Company
follows the practice of capitalizing the interest on unproved property amounts
as a part of accounting for its oil and gas properties. There were no unproved
oil and gas properties in 1996. Average borrowing levels were $27,000,000 in
1997 compared with $19,000,000 in 1996. The increase in average borrowing levels
was somewhat offset by a decrease in the weighted average interest from 8.9% in
1996 to 8.7% in 1997.
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
10.19 Form of Executive Officer and
Director Indemnification Agreement
(b) Reports on Form 8-K
January 29, 1997 Sale of the Bayou Sorrel Field
August 15, 1997 Purchase of Goldking Companies, Inc.
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: August 15, 1997 /s/Todd R.Bart
-------------------- -------------------------------------
Todd R. Bart, Chief Financial Officer
16
Exhibit 10.19
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made and entered into this 15th day of July, 1997,
between Panaco, Inc., a Delaware corporation ("Corporation"), and
___________________ ________________________________________ ("Indemnitee").
WITNESSETH:
WHEREAS, Indemnitee is a member of the board of directors of the
Corporation and as such is performing a valuable service for the Corporation;
and
WHEREAS, although Indemnitee has certain rights to indemnification under
the Bylaws and Certificate of Incorporation of the Corporation, such Bylaws and
Certificate of Incorporation specifically provide that they are not exclusive
and thereby contemplate that the Corporation may enter into agreements with its
officers and directors; and
WHEREAS, the Corporation and Indemnitee desire to enter into this Agreement
to provide to Indemnitee additional rights to indemnification in consideration
of Indemnitee's continued service to the Corporation as a director;
NOW, THEREFORE, in consideration of Indemnitee's continued service as a
director of the Corporation after the date hereof and for and in consideration
of the premises and the covenants contained herein, the Corporation and
Indemnitee do hereby promise and agree as follows:
1. Indemnification. The Corporation hereby agrees to hold harmless and
indemnify Indemnitee to the fullest extent permitted by Section 145, Title 8 of
the Delaware Code, as in effect on the date of the execution of this Agreement
and as it may hereafter be amended, or any other statutory provision permitting
or authorizing such indemnification which is adopted subsequent to the execution
of this Agreement.
2. Maintenance of Insurance. So long as Indemnitee shall continue to serve
as a director of the Corporation (or shall continue at the request of the
Corporation or on behalf of the Corporation to serve as a director, officer,
employee or agent of any Other Enterprise) and thereafter so long as Indemnitee
shall be subject to any possible claim or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, investigative or appellate by reason of
the fact that Indemnitee is or was a director of the Corporation (or is or was
serving in any of said other capacities at the request of the Corporation), the
Corporation shall maintain director liability insurance. Such insurance may be
terminated if, in the business judgment of the board of directors of the
Corporation as it may exist from time to time, both (a) the premium cost for
such insurance is
unreasonable, and (b) the coverage provided by such insurance is so limited by
exclusions that there is insufficient benefit provided by such director
liability insurance.
3. Additional Indemnification. Subject only to the provisions in Sections
4, 5, 6 and 7 of this Agreement, the Corporation hereby further agrees to hold
harmless and indemnify Indemnitee:
(a) Against any and all liabilities and expenses, including without
limitation, judgments, amounts paid in settlement (provided that such settlement
and all amounts paid in connection therewith are approved in advance by the
Corporation, which approval shall not be unreasonably withheld), attorneys'
fees, ERISA excise taxes or penalties, fines and other expenses actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding (including without limitation the
investigation, defense, settlement or appear of such action, suit or
proceeding), whether civil, criminal, administrative, investigative or appellate
(including an action by or in the right of the Corporation) to which Indemnitee
is, was or at any time becomes a party, or is threatened to be made a party, by
reason of the fact that Indemnitee is, was or at any time becomes a director of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, agent or employee of any Other Enterprise; and
(b) Otherwise to the fullest extent as may be provided to Indemnitee by
the Corporation pursuant to the provisions of Article Twelfth of the
Corporation's Certificate of Incorporation, any relevant by-law, and subsection
(f) of Section 145, Title 8 of the Delaware Code relating to indemnification.
4. Limitations on Additional Indemnification (a) The Corporation will not
hold Indemnitee harmless or provide indemnification pursuant to Section 3
hereof:
(1) except to the extent that the aggregate amount of losses to be
indemnified thereunder exceeds the amount of such losses for which Indemnitee is
indemnified either pursuant to (i) the Corporation's Certificate of
Incorporation, Bylaws, vote of stockholders or disinterested directors or other
agreement, (ii) Sections 1 or 2 hereof, (iii) pursuant to any director liability
insurance purchased and maintained on behalf of Indemnitee by the Corporation,
or (iv) otherwise than pursuant to this Agreement;
(2) in respect of remuneration paid to Indemnitee if it shall be determined
by a final judgment or other final adjudication that such remuneration was in
violation of law;
(3) on account of any suit for an accounting of profits made from the
purchase or sale by Indemnitee of securities of the Corporation pursuant to
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local law;
(4) on account of Indemnitee's conduct which is finally adjudged by a court
to have been knowingly fraudulent, deliberately dishonest or willful misconduct;
or
(5) if a final adjudication by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful.
(b) Notwithstanding any other provisions of this Agreement, if the
Indemnitee is or was serving as a director of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of any Other Enterprise, and has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 3
of this Agreement (including the dismissal of any such action, suit or
proceeding without prejudice), or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith to the extent he
has not been fully indemnified therefor otherwise than pursuant to this
Agreement.
5. Advancement of Expenses. Expenses (including attorneys' fees) actually
and reasonably incurred by an Indemnitee who may be entitled to indemnification
hereunder in defending an action, suit or proceeding, whether civil, criminal,
administrative, investigative or appellate, shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such Indemnitee to repay such amount if it
shall ultimately be determined that the Indemnitee is not entitled to
indemnification by the Corporation. Notwithstanding the foregoing, no advance
shall be made by the Corporation if a determination is reasonably and promptly
made by (a) the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the action, suit or proceeding from which the
advancement is requested, or (b) if a quorum is not obtainable, or even if
obtainable, if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (c) by the stockholders, that, based upon
the facts known to the Board, counsel or stockholders at the time such
determination is made, such Indemnitee acted in bad faith and in a manner that
such Indemnitee did not believe to be in or not opposed to the best interest of
the Corporation, or, with respect to any criminal proceeding, that such
Indemnitee believed or had reasonable cause to believe his conduct was unlawful.
In no event shall any advance be made in instances where the board, stockholders
or independent legal counsel
reasonably determines that such Indemnitee deliberately breached his duty to the
Corporation or its stockholders.
6. Notification and Defense of Claim. Promptly after receipt by Indemnitee
of notice of the commencement of any action, suit or proceeding, Indemnitee
will, if a claim in respect thereof is to be made against the Corporation under
this Agreement, notify the Corporation of the commencement thereof; but the
omission so to notify the Corporation will not relieve it from any liability
which it may have to Indemnitee otherwise than under this Agreement. With
respect to any such action, suit or proceeding as to which Indemnitee notifies
the Corporation of the commencement thereof:
(a) The Corporation will be entitled to participate therein at its own
expense;
(b) Except as otherwise provided below, to the extent that it may wish, the
Corporation jointly with any other indemnifying party similarly notified will be
entitled to assume the defense "hereof, with counsel satisfactory to Indemnitee.
After notice from the Corporation to Indemnitee of its election so to assume the
defense thereof, the Corporation will not be liable to Indemnitee under this
Agreement for any legal or other expenses subsequently incurred by Indemnitee in
connection with the defense thereof other than reasonable costs of investigation
or as otherwise provided below. Indemnitee shall have the right to employ its
own counsel in such action, suit or proceeding but the fees and expenses of such
counsel incurred after notice from the Corporation of its assumption of the
defense thereof shall be at the expense of Indemnitee unless (i) the employment
of counsel by Indemnitee has been authorized by the Corporation, (ii) Indemnitee
shall have reasonably concluded that there may be a conflict of interest between
the Corporation and Indemnitee in the conduct of the defense of such action, or
(iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of counsel
shall be at the expense of the Corporation. The Corporation shall not be
entitled to assume the defense of any action, suit or proceeding brought by or
on behalf of the Corporation or as to which Indemnitee shall have made the
conclusion provided for in (ii) above; and
(c) The Corporation shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any action or claim effected
without its prior written consent. The Corporation shall not settle any action
or claim in any manner which would impose any penalty or limitation on
Indemnitee without Indemnitee's written consent. Neither the Corporation nor
Indemnitee will unreasonably withhold their consent to any proposed settlement.
7. Determination of Right to Indemnification. Prior to indemnifying an
Indemnitee pursuant to this Agreement, unless ordered by a court, the
Corporation shall
determine that such Indemnitee is entitled thereto under the terms of this
Agreement. Any determination that a person shall or shall not be indemnified
under this Agreement shall be made by the board of directors by a majority vote
of a quorum consisting of directors who were not parties to the action, suit or
proceeding, or if such quorum is not obtainable, or even if obtainable, if a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion or by the stockholders, and such determination shall be final
and binding upon the Corporation; provided, however, that in the event such
determination is adverse to the Indemnitee, such Indemnitee shall have the right
to maintain an action in any court of competent jurisdiction against the
Corporation to determine whether or not such Indemnitee is entitled to such
indemnification hereunder. If such court action is successful and the Indemnitee
is determined to be entitled to such indemnification, such Indemnitee shall be
reimbursed by the Corporation for all fees and expenses (including attorneys'
fees) actually and reasonably incurred in connection with any such action
(including without limitation the investigation, defense, settlement or appeal
of such action). This Agreement shall be applicable to any claim asserted after
the date hereof whether such claim arises from acts or omissions occurring
before or after the date hereof.
8. Certain Definitions. For purposes of this Agreement, references to
"Other Enterprise" shall include without limitation any other corporation,
partnership, joint venture, trust or employee benefit plan; references to "fine"
or "fines" shall include any excise taxes assessed on Indemnitee with respect to
any employee benefit plan; references to "defense" shall include investigations
of any action, suit or proceeding as well as appeals in any threatened, pending
or completed action, suit or proceeding and shall also include any defensive
assertion of a cross claim or counterclaim; and references to "serving at the
request of the Corporation" shall include any service as a director of the
Corporation which imposes duties on, or involves services by, Indemnitee with
respect to an employee benefit plan, its participants or beneficiaries; and if
Indemnitee acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
he shall be deemed to have acted in a manner "not opposed to the best interests
of the Corporation" as referred to in this Agreement. For the purpose of this
Agreement, unless the board of directors of the Corporation shall determine
otherwise, any Indemnitee who shall serve as an officer or director of any Other
Enterprise of which the Corporation, directly or indirectly, is a stockholder or
creditor, or in which the Corporation is in any way interested, shall be
presumed to be serving as such director or officer at the request of the
Corporation. In all other instances where any Indemnitee shall serve as a
director, officer, employee or agent of an Other Enterprise, if it is not
otherwise established that such Indemnitee is or was serving as such director,
officer, employee or agent at the request of the Corporation, the board of
directors of the Corporation shall determine whether such Indemnitee is or was
serving at the request of the Corporation, and it shall not be
necessary to show any actual or prior request for such service, which
determination shall be final and binding on the Corporation and the Indemnitee
seeking indemnification.
9. Continuation and Enforcement of Indemnification.
(a) The Corporation expressly confirms and agrees that it has entered
into this Agreement and assumes the obligations imposed on the Corporation
hereby in order to induce Indemnitee to continue as a director of the
Corporation and acknowledges that Indemnitee is relying upon this Agreement in
continuing in such capacity. The rights to indemnification and advancement of
expenses created by or provided pursuant to this Agreement are bargained-for
conditions of Indemnitee's acceptance and/or maintenance of his election or
appointment as a director of the Corporation and such rights shall continue
after Indemnitee has ceased to be a director of the Corporation or a director,
officer, employee or agent of any Other enterprise and shall inure to the
benefit of Indemnitee's heirs, executors, administrators and estate.
(b) Indemnitee expressly confirms and agrees that under no
circumstances shall the language or any of the promises and covenants contained
in this Agreement be construed or interpreted as creating a contract of
employment.
(c) To the fullest extent permitted by the laws of the State of
Delaware, Indemnitee shall have the right to maintain an action in any court of
competent jurisdiction to enforce and/or recover damages for breech of the
rights to indemnification created by or provided pursuant to the terms of this
Agreement. If such court action is successful, Indemnitee shall be reimbursed by
the Corporation for all fees and expenses (including attorneys' fees) actually
and reasonably incurred in connection with such action (including without
limitation the investigation, defense, settlement or appeal of such action).
10. Non-Exclusivity. The right to indemnification pursuant to this
Agreement shall not be deemed exclusive of any other rights of indemnification
to which Indemnitee may be entitled under any statute, other agreement, the
Certificate of Incorporation, Bylaws, pursuant to a vote of stockholders or
disinterested directors, insurance policy or otherwise, both as to actions in
his official capacity and as to action in another capacity while holding his
directorship, and shall not limit in any way any right the Corporation may have
to create additional or independent or supplementary obligations to indemnify
Indemnitee.
11. Severability. Each of the provisions of this Agreement is a separate
and distinct agreement independent of the others, and if any provision of this
Agreement or the application of any provision hereof to any person or
circumstance is held invalid, illegal or unenforceable by a court for any reason
whatsoever, the remaining provisions
of this Agreement and the application of such provision to other persons or
circumstances shall not be affected thereby. The parties hereto expressly agree
that any provision hereof held invalid, illegal or unenforceable shall be
construed and modified by the court finding such provision invalid, illegal or
unenforceable to the extent necessary so as to render such provision valid and
enforceable as against all persons or entities and to provide the maximum
possible protection to the person subject to indemnification hereunder within
the bounds of validity, legality and enforceability. Without limiting the
generality of the foregoing, if the Indemnitee is entitled to indemnification
under this Agreement by the Corporation for some or a portion of the judgments,
amounts paid in settlement, attorneys' fees, ERISA excise taxes or penalties,
fines or other expenses actually and reasonably incurred by the Indemnitee in
connection with any threatened, pending or completed action, suit or proceeding
(including without limitation, the investigation, defense, settlement or appeal
of such action, suit or proceeding), whether civil, criminal, administrative,
investigative or appellate, but not, however, for all of the total amount
thereof, the Corporation shall nevertheless indemnify the Indemnitee for the
portion thereof to which such person is entitled.
12. Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the laws of the State of Delaware without regard to
any of its conflict of law rules.
13. Modification; Survival. This Agreement constitutes the entire agreement
of the parties relating to the subject matter hereof and no amendment,
modification, termination or cancellation of this Agreement shall be effective
unless in writing signed by both parties hereto. The provisions of this
Agreement shall survive the termination of Indemnitee's service as a director
and/or officer of the Corporation with respect to actions, suits or proceedings
brought or instituted in respect of any action taken or the failure to take any
action occurring prior to such termination of service.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement and affixed their signatures hereto as of the date first above
written.
___________________________, Indemnitee
PANACO, INC.
By:
Title: