- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1999
[ ] 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 incorporation (I.R.S. Employer Identification
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 _______.
23,985,927 shares of the registrant's $.01 par value Common Stock were
outstanding on June 30, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I. Item 1.
FINANCIAL INFORMATION
PANACO, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
ASSETS
As of As of
June 30, 1999 December 31, 1998
------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 4,250,000 $ 3,452,000
Accounts receivable 7,831,000 8,332,000
Accounts receivable-employee 4,000 18,000
Prepaid and other 672,000 268,000
-------------- --------------
Total current assets 12,757,000 12,070,000
-------------- --------------
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties, proved 251,571,000 238,377,000
Oil and gas properties, unproved 15,536,000 15,128,000
Less accumulated depletion, depreciation,
and amortization (163,497,000) (152,782,000)
-------------- --------------
Net oil and gas properties 103,610,000 100,723,000
-------------- --------------
PIPELINES AND EQUIPMENT
Pipelines and equipment 26,295,000 26,252,000
Less accumulated depreciation (4,740,000) (3,415,000)
-------------- --------------
Net pipelines and equipment 21,555,000 22,837,000
-------------- --------------
OTHER ASSETS
Deferred debt costs, net 3,064,000 3,359,000
Employee note receivable 300,000 300,000
Restricted deposits and other 5,114,000 4,083,000
-------------- --------------
Total other assets 8,478,000 7,742,000
-------------- --------------
TOTAL ASSETS $ 146,400,000 $ 143,372,000
============== ==============
The accompanying notes are an integral part of this statement.
-2-
PANACO, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
As of As of
June 30, 1999 December 31, 1998
------------- -----------------
CURRENT LIABILITIES
Accounts payable $ 19,172,000 $ 16,976,000
Interest payable 2,701,000 2,745,000
Revolving credit facility 24,000,000 13,500,000
-------------- --------------
Total current liabilities 45,873,000 33,221,000
-------------- --------------
LONG-TERM DEBT 102,249,000 102,249,000
STOCKHOLDERS' EQUITY
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;
23,985,927 and 23,704,955 shares
issued and outstanding, respectively 243,000 240,000
Additional paid-in capital 69,444,000 69,197,000
Treasury stock, held at cost (592,000) (592,000)
Retained deficit (70,817,000) (60,943,000)
-------------- --------------
Total stockholders' equity (deficit) (1,722,000) 7,902,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 146,400,000 $ 143,372,000
============== ==============
COMMITMENTS AND CONTINGENCIES
The accompanying notes are an integral part of this statement.
-3-
PANACO, Inc.
Consolidated Statements of Income (Operations)
For the Six Months Ended June 30,
(Unaudited)
1999 1998
--------------- ---------------
REVENUES
Oil and natural gas sales $ 19,772,000 $ 24,328,000
COSTS AND EXPENSES
Lease operating expense 8,405,000 8,648,000
Depletion, depreciation & amortization 12,339,000 15,948,000
General and administrative expense 1,740,000 2,063,000
Production and ad valorem taxes 371,000 396,000
Exploratory dry hole expense 845,000 4,922,000
Impairment of oil and gas properties - 1,063,000
Geological and geophysical expense 564,000 794,000
------------- --------------
Total 24,264,000 33,834,000
------------- --------------
OPERATING LOSS (4,492,000) (9,506,000)
------------- --------------
OTHER INCOME (EXPENSE)
Interest income 35,000 751,000
Interest expense (5,417,000) (4,959,000)
------------- --------------
Total (5,382,000) (4,208,000)
------------- --------------
LOSS BEFORE INCOME TAXES (9,874,000) (13,714,000)
INCOME TAX (BENEFIT) - (3,498,000)
------------- --------------
NET LOSS $ (9,874,000) $ (10,216,000)
============= ==============
Net loss per share $ (0.41) $ (0.43)
============= ==============
Basic Shares Outstanding 23,894,339 23,961,390
============= ==============
Diluted Shares Outstanding 23,894,339 23,961,390
============= ==============
The accompanying notes are an integral part of this statement.
-4-
PANACO, Inc.
Consolidated Statements of Income (Operations)
For the Three Months Ended June 30,
(Unaudited)
1999 1998
---------------- ----------------
REVENUES
Oil and natural gas sales $ 10,601,000 $ 13,578,000
COSTS AND EXPENSES
Lease operating expense 4,285,000 4,586,000
Depletion, depreciation & amortization 5,709,000 8,941,000
General and administrative expense 946,000 909,000
Production and ad valorem taxes 217,000 196,000
Exploratory dry hole expense 845,000 3,482,000
Impairment of oil and gas properties - 505,000
Geological and geophysical expense 177,000 386,000
-------------- --------------
Total 12,179,000 19,005,000
-------------- --------------
OPERATING LOSS (1,578,000) (5,427,000)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income 23,000 327,000
Interest expense (2,694,000) (2,534,000)
-------------- --------------
Total (2,671,000) (2,207,000)
-------------- --------------
LOSS BEFORE INCOME TAXES (4,249,000) (7,634,000)
INCOME TAX (BENEFIT) - (2,225,000)
-------------- --------------
NET LOSS $ (4,249,000) $ (5,409,000)
============== ==============
Net loss per share $ (0.18) (0.23)
============== ==============
Basic Shares Outstanding 23,985,927 23,972,215
============== ==============
Diluted Shares Outstanding 23,985,927 23,972,215
============== ==============
The accompanying notes are an integral part of this statement.
-5-
PANACO, Inc.
Consolidated Statement of Cash Flows
For the Six Months Ended June 30,
(Unaudited)
1999 1998
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,874,000) $ (10,216,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depletion, depreciation and amortization 12,339,000 15,948,000
Impairment of oil and gas properties - 1,063,000
Exploratory dry hole expense 845,000 4,922,000
Deferred income tax benefit - (3,498,000)
Changes in operating assets and liabilities:
Accounts receivable 501,000 529,000
Prepaid and other (175,000) (681,000)
Accounts payable 2,196,000 2,501,000
Interest payable (44,000) 233,000
------------- --------------
Net cash provided by operating activities 5,788,000 10,801,000
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of oil and gas properties - 23,000
Capital expenditures and acquisitions (14,490,000) (49,569,000)
Increase in restricted deposits (1,250,000) (156,000)
------------- --------------
Net cash used by investing activities (15,740,000) (49,702,000)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 250,000 -
Short-term borrowings 10,500,000 24,549,000
Repayment of long-term debt - (18,000,000)
------------- --------------
Net cash provided by financing activities 10,750,000 6,549,000
------------- --------------
NET INCREASE (DECREASE) IN CASH 798,000 (32,352,000)
CASH AT BEGINNING OF YEAR 3,452,000 36,909,000
------------- --------------
CASH AT JUNE 30 $ 4,250,000 $ 4,557,000
============= ==============
The accompanying notes are an integral part of this statement.
-6-
PANACO, Inc.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
(Unaudited)
Amount ($)
----------------------------------------------------------------------
Number of Additional
Common Common Paid-in Treasury Retained
Shares Stock Capital Stock Deficit
----------- ------------- -------------- ------------ -------------
Balances, December 31, 1998 23,704,955 $ 240,000 $ 69,197,000 $ (592,000) $ (60,943,000)
Net Loss - - - - (9,874,000)
Common shares issued to the ESOP 280,972 3,000 247,000 - -
---------- ------------ -------------- ------------ --------------
Balances, June 30, 1999 23,985,927 $ 243,000 $ 69,444,000 $ (592,000) $ (70,817,000)
========== ============ ============== ============ ==============
The accompanying notes are an integral part of this statement.
-7-
PANACO, Inc.
NOTES TO CONDENSED CONSOLIDATED 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 June 30, 1999 and December 31, 1998 and the
results of operations and cash flows for the periods ended June 30, 1999 and
1998. 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, 1998. These financial statements should be read in
conjunction with the financial statements and notes included in the Form 10-K.
Results for the six months and three months ended June 30, 1998 have been
restated to reflect the proper timing of adjustments made during the fourth
quarter of 1998 that related to prior quarters in that year.
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.
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 costs estimated to
ultimately prove nonproductive, based on experience, are amortized over an
average holding period. As unproved leaseholds are determined to be productive,
the related costs are transferred to proved leaseholds. 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. In addition, other factors such as probable and
possible reserves are taken into consideration when justified by economic
conditions and actual or planned drilling. The Company recorded an asset
impairment for the year ended December 31, 1998 of $20.4 million, primarily due
to lower oil and natural gas prices.
Pipelines and other 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
-8-
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
For purposes of the consolidated statement of cash flows, the Company
considers all cash investments purchased with original maturities of three
months or less to be cash equivalents. Cash payments for interest totaled
$5,868,000 and $5,018,000 during the first six months of 1999 and 1998,
respectively. Cash payments for income taxes totaled $0 during the first six
months of 1999 and 1998, 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 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 $2.4 million. In connection with its 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
The Company is subject to various 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.
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 plaintiffs' property.
Pursuant to the purchase and sale 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. However, NEG is in Chapter 11
bankruptcy proceedings, and so any action by the Company to assert its indemnity
rights against NEG is currently stayed. Counsel for the Company have prepared
and may file a motion to lift the stay so that the Company may assert its
indemnification rights against NEG. But even if the Company is successful in
proving its right to indemnity, NEG's judgmentworthiness is questionable because
of the bankruptcy.
Pursuant to another purchase and sale agreement, the Company may owe
indemnity to Shell and Exxon, from which it had acquired the property prior to
selling same to NEG. The Company may have insurance coverage for the claims
asserted in the petition, and has notified or is in the process of notifying all
insurance carriers that might provide coverage under their policies. 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-
Note 6 - LONG-TERM DEBT
The Company currently has a $20.0 million capital budget for 1999, which is
subject to change upon review by management and the board of directors. To date,
the majority of this capital budget has either already been expended or
committed to by the Company. In conjunction with an amendment to the loan
agreement, on April 13, 1999 the borrowing base under the line of credit was
reduced to $25.0 million, see "Bank Facility." The amendment provided for $4.0
million reductions in this borrowing base on June 30, 1999 and September 30,
1999. On June 30, 1999 the Bank Facility was again amended to provide for a
waiver of the $4.0 million reductions on June 30, 1999 and September 30, 1999.
This new amendment provided for reductions of $750,000 per month until such time
as the borrowing base was redetermined in accordance with the agreement. This
amendment also waived any financial covenant deficiencies for the quarter ended
June 30, 1999 and reduced those covenants for the quarter ended September 30,
1999. The financial covenants revert back to those contained in the original
agreement for the quarter ending December 31, 1999. The Company believes that
the remainder of its 1999 capital budget, principal reductions and other
commitments will be funded by its cash flow from operations.
The loan agreementcontains certain covenants including a requirement to
maintain a positive indebtedness to cash flow ratio, a positive working capital
ratio, a certain tangible net worth, as well as limitations on future debt,
guarantees, liens, dividends, mergers, and sale of assets. At June 30, 1999 the
Company was in compliance with these. However, the Company has classified this
debt as a current liability since it is possible the Company will fail to meet
these covenants on or before December 31, 1999. The failure to satisfy these
covenants, or any of the other covenants in the Bank Facility would constitute
an event of default thereunder and, subject to grace periods, may permit the
lenders to accelerate the indebtedness outstanding under the Bank Facility and
demand immediate payment thereof. In such event, the Company could be required
to sell certain oil and gas assets, sell equity securities or obtain additional
bank financing. No assurance can be given that such transactions can be
consummated on terms acceptable to the Company or its lenders, whose approval
may be required. In this situation, if the Company is unable to raise the
necessary funds, the Company could become in default on the full amount of its
indebtedness, which includes the Senior Notes. The holders of the Senior Notes
have acceleration rights, subject to certain grace periods, if the Company is in
default under the Bank Facility.
Note 7 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
The reserve information presented in the following table was 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, 1998 7,454,000 81,249,000
Extensions and discoveries 1,768,000 10,176,000
Production (551,000) (6,304,000)
--------- ----------
Estimated reserves at June 30, 1999 8,671,000 85,121,000
========= ==========
No major discovery or other favorable or adverse event has caused a
significant change in the estimated proved reserves since June 30, 1999. 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.
-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 insure against certain risks, the
adequacy of its loss reserves, fluctuations in commodity prices, the inherent
limitations in the ability 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 fluctuating relationship of the supply of most fossil fuels
relative to the demand for such products and other uncertainties in the world
energy markets. These industry conditions should be considered when this
analysis of the Company's operations is read.
Liquidity and Capital Resources
- -------------------------------
The Company currently has a $20.0 million capital budget for 1999, which is
subject to change upon review by management and the board of directors. To date,
the majority of this capital budget has either already been expended or
committed to by the Company. In conjunction with an amendment to the loan
agreement, on April 13, 1999 the borrowing base under the line of credit was
reduced to $25.0 million, see "Bank Facility." The amendment provided for $4.0
million reductions in this borrowing base on June 30, 1999 and September 30,
1999. On June 30, 1999 the Bank Facility was again amended to provide for a
waiver of the $4.0 million reductions on June 30, 1999 and September 30, 1999.
This new amendment provided for reductions of $750,000 per month until such time
as the borrowing base was redetermined in accordance with the agreement. This
amendment also waived any financial covenant deficiencies for the quarter ended
June 30, 1999 and reduced those covenants for the quarter ended September 30,
1999. The financial covenants revert back to those contained in the original
agreement for the quarter ending December 31, 1999. The Company believes that
the remainder of its 1999 capital budget, principal reductions and other
commitments will be funded by its cash flow from operations.
Bank Facility
On June 30, 1999 the Company amended its reducing, revolving line of credit
(the "Bank Facility") which is designed to provide the Company up to $75.0
million depending on the Company's borrowing base, as determined by the lenders.
The Company's borrowing base at June 30, 1999 was $24.3 million, with
outstanding principal under the revolver of $24.0 million. The principal amount
of the loan is due October 22, 2002. However, at no time may the Company have
-11-
outstanding borrowings in excess of its borrowing base. The third amendment to
the Bank Facility requires principal reductions of $750,000 per month until such
time as the borrowing base is redetermined in accordance with the agreement.
Interest on the loan is computed at the bank's prime rate or at 1.5 to 2.25%
(depending upon the percentage of the facility being used) over the applicable
London Interbank Offered Rate ("LIBOR") on Eurodollar loans. Eurodollar loans
can be for terms of one, two, three or six months and interest on such loans is
due at the expiration of the terms of such loans, but no less frequently than
every three months. The Bank Facility is collateralized by a first mortgage on
the Company's offshore properties. The amendment on June 30, 1999 provides for
the establishment of a lockbox and cash collateral account, as described in the
agreement, with the administrative agent no later than August 31, 1999.
The loan agreement contains certain covenants including a requirement to
maintain a positive indebtedness to cash flow ratio, a positive working capital
ratio, a certain tangible net worth, as well as limitations on future debt,
guarantees, liens, dividends, mergers, and sale of assets. At June 30, 1999 the
Company was in compliance with these. However, the Company has classified this
debt as a current liability since it is possible the Company will fail to meet
these covenants on or before December 31, 1999. The failure to satisfy these
covenants, or any of the other covenants in the Bank Facility would constitute
an event of default thereunder and, subject to grace periods, may permit the
lenders to accelerate the indebtedness outstanding under the Bank Facility and
demand immediate payment thereof. In such event, the Company could be required
to sell certain oil and gas assets, sell equity securities or obtain additional
bank financing. No assurance can be given that such transactions can be
consummated on terms acceptable to the Company or its lenders, whose approval
may be required. In this situation, if the Company is unable to raise the
necessary funds, the Company could become in default on the full amount of its
indebtedness, which includes the Senior Notes. The holders of the Senior Notes
have acceleration rights, subject to certain grace periods, if the Company is in
default under the Bank Facility. Due to the restrictive covenants and borrowing
base limitations imposed by the Bank Facility the Company is evaluating several
alternative sources of funding to improve its current liquidity and to provide
resources for continued reserve growth.
Property Acquisition
On May 14, 1998 the Company entered into a definitive agreement with BP
Exploration and Oil, Inc. (the "BP Acquisition") to acquire BP's 100% working
interest in East Breaks Blocks 165 and 209 and 75% working interest in High
Island Block 587. The acquisition was accounted for using the purchase method
and closed on May 26, 1998. PANACO became the operator of all three blocks
effective June 1, 1998. The Company acquired the properties for $19.6 million in
cash. Included in the acquisition is the production platform, located in 863
feet of water in East Breaks Block 165. The Company also acquired 31.72 miles of
12" pipeline, with capacity of over 20,000 barrels of oil per day, which ties
the production platform to the High Island Pipeline System, the major oil
transportation system in the area. It also acquired 9.3 miles of 12 3/4"
pipeline, which ties the production platform to the High Island Offshore System,
the major gas transportation system in the area.
Senior Note offering
On October 9, 1997, the Company issued $100.0 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. Of the $96.2 million net proceeds, $55.5 million was used to repay
substantially all of the Company's outstanding indebtedness with the remaining
$40.7 million used for capital expenditures and the BP Acquisition.
-12-
Common Stock offering
On March 5, 1997 the Company completed an offering of 8.4 million common
shares at $4.00 per share, $3.728 net of the underwriter's commission. The
offering consisted of 6.0 million shares sold by the Company and 2.4 million
shares sold by shareholders, primarily Amoco Production Company (2.0 million
shares) and lenders advised by Kayne, Anderson Investment Management, Inc.
(373,305 shares). The Company's net proceeds of $22 million from the offering
were used to prepay $13.5 million of its 12% subordinated debt and the remaining
funds were temporarily paid on the Company's revolving bank loan and ultimately
used for the development of its properties.
Commodity price hedges
In 1999 the Company's natural gas hedge transactions are based upon
published gas pipeline index prices. The Company has natural gas hedged in
quantities ranging from 7,300 to 37,300 MMbtu per day in each month in 1999 for
a total of 8,770,000 MMbtu, at pipeline prices averaging approximately $1.99 per
MMbtu, for a NYMEX equivalent of approximately $2.14 per MMbtu. The Company has
hedged 218 MMbtu for each day in 2000 at an average pipeline index swap price of
$1.87.
The Company has hedged a total of 540,000 bbls of oil in 1999 at an average
NYMEX West Texas Intermediate equivalent floor price of $15.34 per bbl. The
number of hedged bbls per day ranges from 232 to 2,232. Of the oil hedged, 1,000
bbls per day have a floor price of $15.00 per bbl and a cap price of $19.12 per
bbl and another 1,000 bbls per day have a floor price of $15.00 per bbl and a
cap price of $17.50 per bbl. If the NYMEX equivalent prices exceed the cap price
for the period in which the Company has a cap price in effect, the Company must
pay the difference to the company that effected the swap for the total number of
bbls hedged. The Company has hedged 232 Bbls of oil for each day in 2000 at an
average price of $17.35 per Bbl.
Due to an increase in NYMEX future commodity prices since the inception
date of the respective hedge agreements, as of June 30, 1999, the fair value of
these agreements is a $1.7 million loss.
The Company produces and sells natural gas, oil and natural gas liquids. As
a result, its financial results can be significantly affected by changes in
these commodity prices. The Company uses derivative financial instruments to
hedge its exposure to changes in the market price of natural gas and oil. While
commodity financial instruments are intended to reduce the Company's exposure to
declines in these market prices, the commodity financial instruments may also
limit the Company's gains from increases in the market price of natural gas and
oil. As a result, gains and losses on commodity financial instruments are
generally offset by similar changes in the realized prices of natural gas and
oil. Gains or losses on these transactions are recognized in the production
month to which a hedge contract relates.
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. 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
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 $2.4 million. In connection with
the BP Acquisition, the Company deposited $1.0 million into an escrow account on
-13-
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. In addition, the Company has $9.3 million in surety bonds to
secure its plugging and abandonment operations.
Capital expenditures
Capital expenditures totaled $14.5 million for the first six months of
1999, which represents a 71% decrease from the $49.6 capital expenditures
incurred in the comparable period of 1998. The capital expenditures incurred in
1999 were primarily for the development of the East Breaks 165 Field, which was
acquired in May 1998, and property acquisition and well costs incurred in the
Price Lake Field (Stallion prospect) and North Cowards Gully Field. These
expenditures were funded with cash flows from operations and borrowings under
the Bank Facility, accounting for the $10.5 million increase in debt outstanding
at June 30, 1999. The decrease in capital expenditures is primarily due to the
decrease in availability of capital resources from lower commodity prices. The
Company's total capital budget for 1999 is $20.0 million, the majority of which
has already been expended or committed to spend.
Results of Operations
- ---------------------
For the six months ended June 30, 1999 and 1998:
- ------------------------------------------------
"Oil and natural gas sales" decreased 19% for the first six months of 1999
due to the combination of a 14% decrease in total production and a 5% decrease
in total oil and natural gas sales prices. Natural gas production decreased 32%
in 1999 while oil production increased 71%.
PRODUCTION. Natural gas production decreased 32%, to 6.3 billion cubic feet
("Bcf") in 1999, from 9.3 Bcf in 1998. The shut in of the West Delta Fields and
reduced production from the High Island 309 Fields accounted for the largest
part of the decreases. Production from the High Island 309 Fields decreased from
4.2 Bcf in 1998 to 1.8 Bcf in 1999 due to repair work being done on the
production facilities in the first quarter of 1999 while the remainder of the
reduction was due to natural production declines. The West Delta Fields produced
1.8 Bcf of natural gas in 1998 versus .7 Bcf in 1999 for the most part due to
production being shut in while Tennessee Gas Pipeline repairs were being made.
The BP acquisition in May 1998 added 1.0 Bcf of production in 1999, which offset
part of the overall decreased production.
Oil production increased 71% in 1999 to 551,000 barrels, from 322,000
barrels in 1998. The primary factor in the increased oil production was the
acquisition of the East Breaks 165 Field in May 1998, which is primarily an oil
field.
PRICES. Average natural gas prices, including the impacts of hedging
transactions, decreased 11% in 1999, from $2.07 per Mcf in 1998 to $1.84 in
1999. The Company's natural gas hedge program had the effect of decreasing the
natural gas price realized by $0.04 per Mcf during 1999 and $0.01 per Mcf during
1998. The Company has natural gas hedged in quantities ranging from 7,300 to
37,300 MMbtu per day in each month in 1999 for a total of 8,770,000 MMbtu, at
pipeline prices averaging approximately $1.99 per MMbtu, for a NYMEX equivalent
of approximately $2.14 per MMbtu.
Average oil prices, including the impacts of hedging transactions,
decreased 6%, to $14.78 per barrel, from $15.71 per barrel in 1998. The 1999 oil
hedge program had the effect of increasing the average net oil price realized by
$0.18 per barrel. The Company has hedged a total of 540,000 bbls of oil in 1999
at an average NYMEX West Texas Intermediate equivalent floor price of $15.34 per
bbl. The number of hedged bbls per day ranges from 232 to 2,232. Of the oil
-14-
hedged, 1,000 bbls per day have a floor price of $15.00 per bbl and a cap price
of $19.12 per bbl and another 1,000 bbls per day have a floor price of $15.00
per bbl and a cap price of $17.50 per bbl. If the NYMEX equivalent prices exceed
the cap price for the period in which the Company has a cap price in effect, the
Company must pay the difference to the company that effected the swap for the
total number of bbls hedged.
"Lease operating expense" increased to 43% of oil and natural gas sales,
from 36% in 1998. On an Mcf equivalent ("Mcfe") basis, lease operating expenses
also increased from $0.77 in 1998 to $0.87 in 1999. These increases are
primarily due to the decreases in production discussed above.
"Depletion, depreciation and amortization" decreased $3.6 million in large
part due to a lower unit of production cost in 1999, in conjunction with a
decrease in production. The amount per Mcfe decreased from $1.42 in 1998 to
$1.28 in 1999.
"General and administrative expense" decreased $322,000 in 1999 primarily
due to a reduced provision for bad debts and cost savings from a consolidation
of offices in 1998, offset somewhat by an increase in outside legal fees
incurred in connection with various corporate legal matters during the first
quarter of 1999. The Company resolved several of these matters during the second
quarter and anticipates a reduction in these fees for the remainder of 1999.
"Exploratory dry hole expense" decreased $4.1 million in 1999 as a result
of the Company's limited exploratory well participation in 1999. While the
Company believes that its continued participation in a modest amount of
exploratory activities is an important factor in increasing shareholder value,
the amount budgeted for 1999 is significantly less than that incurred during
1998.
"Geological and geophysical expense" decreased in 1999 as a result of
reduced seismic acquisition costs and lower salaries and contract labor
expenses.
"Interest income" decreased primarily due to a decrease in cash on hand in
1999 versus the comparable period of 1998. The interest income earned in 1998
related to the excess proceeds from the Company's Senior Note offering completed
in October 1997. These excess proceeds were utilized in May 1998 for the BP
Acquisition.
"Income tax benefit" decreased in 1999 due to the complete elimination of a
deferred income tax liability recorded in connection with an acquisition in
1997. The Company has not recorded a deferred income tax asset to date based on
uncertainty regarding its utilization of over $40.2 million net operating loss
carryforwards.
For the three months ended June 30, 1999 and 1998:
- --------------------------------------------------
"Oil and natural gas sales" decreased 22% for the second quarter of 1999
primarily due to a 25% decrease in total production. Natural gas production
decreased 42% in 1999 while oil production increased 40%.
PRODUCTION. Natural gas production decreased 42%, to 2.9 Bcf in 1999, from
5.1 Bcf in 1998. The declines in production from the West Delta Fields and High
Island 309 Fields accounted for the largest part of the decreases. Production
from the High Island 309 Fields was lower during the second quarter of 1999
primarily due to natural production declines. Natural gas production from the
High Island 309 Fields decreased from 2.0 Bcf in 1998 to .9 Bcf in 1999. The
-15-
West Delta Fields produced .9 Bcf of natural gas in 1998 versus .3 Bcf in 1999.
The BP Acquisition in May 1998 added 429,000 Mcf of production in 1999,
offsetting part of the decreased production.
Oil production increased 40% in 1999 to 289,000 barrels, from 206,000
barrels in 1998. The primary factor in the increased oil production was the
acquisition of the East Breaks 165 Field in May 1998, which is primarily an oil
field.
PRICES. Average natural gas prices, including the impacts of hedging
transactions, decreased 7% in 1999, from $2.06 per Mcf in 1998 to $1.92 in 1999.
The Company's natural gas hedge program had the effect of decreasing the natural
gas price realized by $0.14 and $0.06 per Mcf during the second quarters of 1999
and 1998, respectively. The Company has natural gas hedged in quantities ranging
from 7,300 to 37,300 MMbtu per day in each month in 1999 for a total of
8,770,000 MMbtu, at pipeline prices averaging approximately $1.99 per MMbtu, for
a NYMEX equivalent of approximately $2.14 per MMbtu.
Average oil prices, including the impacts of hedging transactions,
increased 11%, to $17.06 per barrel, from $15.32 per barrel in 1998. The 1999
oil hedge program had the effect of increasing the average net oil price
realized by $0.20 per barrel. The 1998 oil hedge program increased the average
realized oil price per barrel by $2.30. The Company hedged a total of 540,000
bbls of oil in 1999 at an average NYMEX West Texas Intermediate equivalent floor
price of $15.34 per bbl. The number of hedged bbls per day ranges from 232 to
2,232. Of the oil hedged, 1,000 bbls per day have a floor price of $15.00 per
bbl and a cap price of $19.12 per bbl and another 1,000 bbls per day have a
floor price of $15.00 per bbl and a cap price of $17.50 per bbl. If the NYMEX
equivalent prices exceed the cap price for the period in which the Company has a
cap price in effect, the Company must pay the difference to the company that
effected the swap for the total number of bbls hedged.
"Lease operating expense" increased to 40% of oil and natural gas sales,
from 34% in 1998. On an Mcfe basis, lease operating expenses also increased from
$0.73 in 1998 to $0.92 in 1999. These increases are primarily due to the
decreases in production discussed above.
"Depletion, depreciation and amortization" decreased $3.2 million in large
part due to a lower unit of production cost in the second quarter of 1999, in
conjunction with a decrease in production. The amount per Mcfe decreased from
$1.42 in 1998 to $1.22 in 1999.
"Exploratory dry hole expense" decreased $2.6 million in 1999 as a result
of the Company's limited exploratory well participation in 1999. While the
Company believes that its continued participation in a modest amount of
exploratory activities is an important factor in increasing shareholder value,
the amount budgeted for 1999 is significantly less than that incurred during
1998.
"Geological and geophysical expense" decreased in 1999 as a result of
reduced seismic acquisition costs and lower salaries and contract labor
expenses.
"Interest income" decreased primarily due to a decrease in cash on hand in
1999 versus the comparable period of 1998. The interest income earned in 1998
related to the excess proceeds from the Company's Senior Note offering completed
in October 1997.
-16-
Year 2000 Issue
- ---------------
The various problems that may result from the use of date codes in software
and other machinery is referred to as the "Year 2000 Issue." The once common
practice of using a two-digit identifier for the year in a date may cause a
program or system to become faulty or inoperative on or prior to January 1,
2000. This document serves as an informational disclosure regarding the Y2K
assessment activities for the Company under the Year 2000 Information and
Readiness Disclosure Act of 1998.
The Company established a program during 1998 to ensure that, to the extent
reasonably possible, all systems are or will be Year 2000 ready prior to the end
of 1999. The Year 2000 Program ("Y2K Program"), designed with the assistance of
an outside consultant, consists of five phases: (a) Assessment -which includes
compiling an inventory of assets, including significant third-party supplier and
customer relationships, (b) Repair/Upgrade/Replace -including an analysis of the
assets to determine compliance or non-compliance and repairing, upgrading or
replacing those that are non-compliant, (c) Compliance Testing, (d) Contingency
Planning, and (e) Roll-over Planning.
A team consisting of the Company's managers of Information Technology,
Finance and Operations has been established as the Year 2000 Compliance Project
Team. With the assistance of its outside consultant, the Team has designed an
aggressive schedule to identify information technology ("IT") and non-IT assets
requiring readiness upgrades, and a timetable for performance and testing of the
affected systems. In addition, the Y2K Program calls for validation of
compliance by significant suppliers and customers.
Once identified, detailed remediation steps will be scheduled to ensure
that internal systems and significant external suppliers and customers meet Y2K
compatibility requirements, or that sufficient contingency plans are in place.
Current Status
As of August 1999, the Company's Year 2000 assessment is not complete. An
inventory of computing, communications and facility systems has been prepared
and validated. Significant third-party suppliers and customers have also been
identified for validation.
The Company has substantially completed the inventory for both its IT and
non-IT systems. The Y2K Program calls for the completion of all phases for both
IT and non-IT systems by year-end 1999.
The Company is also performing a review of significant third party
suppliers, customers and purchasers and, where available, is surveying the
public Year 2000 statements issued by them. Additionally, it has sent
questionnaires to certain third party suppliers and customers requesting
information regarding their vulnerability to Year 2000 issues. The Company
intends to pursue appropriate responses to these inquiries and evaluate the
responses it receives to determine if alternate business actions will be
necessary. Management expects to complete the third party assessment phase by
August 31, 1999, at which time contingency plans will be developed.
Costs
The estimated total costs for Y2K readiness has been nominal. It is
anticipated that such costs for complete Y2K readiness will continue to be
nominal. In addition, there have been no material capital expenditures for Y2K
and there is not anticipated to be material capital expenditures, as it is
believed at this point that most major critical field operations do not have
date sensitive equipment. The Company does not separately track the internal
-17-
costs incurred for the Y2K project as such costs are principally the related
payroll costs for its information systems group. Remediation and testing is
scheduled to be completed during the 3rd quarter of 1999.
Contingency Plans
Should any systems, customers or significant suppliers be determined to
have questionable remediation potential, the Year 2000 Compliance Project Team
will establish a contingency plan to address the at-risk area. This will be
decided during the analysis phase of the overall project now underway. The
Company is unable at this time to determine what contingency plans, if any,
should be implemented. As the Company progresses through the Y2K Program and
identifies specific risk areas, it intends to timely implement appropriate
remedial actions and contingency plans.
Risks
The failure to correct a Year 2000 problem could result in the interruption
or failure of certain normal business activities or operations. The Company
believes that the greatest risks lie in its (a) financial systems applications,
(b) embedded chips in field equipment, (c) and third parties. A significant Year
2000-related disruption in these systems could disrupt financial and accounting
functions, crude oil and natural gas production, transportation, and marketing
activities. This disruption could have a material adverse effect on the
Company's operating results and liquidity.
The Company is not presently aware of any vendor related Year 2000 issue
that is likely to result in any disruption of this type. Although there is
inherent uncertainty in the Year 2000 issue, the Company expects that as it
progresses in its Y2K Program, the level of uncertainty about the impact of the
Year 2000 issue will be reduced significantly.
Conclusion and Disclaimers
These estimates and conclusions contain forward-looking statements and are
based on management's best estimates of future events. PANACO's expectations
about risks, future costs, and the timely completion of its Year 2000
remediation are subject to uncertainties that could cause actual results to
differ materially from the statements made in this readiness disclosure.
Changes in Accounting Principles
- --------------------------------
Accounting for Derivatives
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and for Hedging Activities," provides guidance for
accounting for derivative instruments and hedging activities. In July 1999, SFAS
No. 137 "Deferring Statement 133's Effective Date," was issued which delays the
effective date for one year, to fiscal years beginning after June 15, 2000. The
Company has not yet completed an evaluation of the impact of the provisions of
SFAS No. 133.
-18-
Other Contingencies
The Company is subject to various 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.
PART II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 27, 1999, the Company held its 1999 Annual Meeting of Shareholders.
At such time the following items were submitted to a vote of security holders.
Such matters were submitted to the security holders through the solicitation of
proxies.
1. Election of Class I Directors.
The following persons were elected to serve on the Board of Directors until
the 2000 Annual Meeting of Shareholders or until their successors have been duly
elected and qualified. The Directors received the votes set forth opposite their
respective names:
Name For Against Abstain
- ---- --- ------- -------
A. Theodore Stautberg, Jr. 17,742,925 495,984 0
Felix Pardo 17,743,418 495,491 0
2. Shareholders were requested to vote on a proposal to amend the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock, par value $0.01, from 40 million shares to 100 million shares. In
order to be adopted, such proposal required an affirmative vote of two-thirds of
the outstanding share (15,990,618 shares). Such amendment was approved by the
shareholders. Such proposal received 17,038,099 votes in favor, 1,096,681 votes
against, and 104,129 abstained or withheld authority to vote.
3. Shareholders were requested to vote on a proposal to amend the Company's
Certificate of Incorporation and By-Laws to allow stockholders owning 25% or
more of the outstanding shares of common stock to call (i) a special meeting of
the stockholders, or (ii) an annual meeting of the stockholders if such annual
meeting has not been called by June 1 of any year. In order to be adopted, such
proposal required an affirmative vote of 80% of the outstanding shares
(19,188,742 shares). Such amendment was rejected by the shareholders. Such
proposal received 8,286,762 votes in favor, 2,029,500 votes against, and
7,922,647 abstained or withheld authority to vote.
4. Shareholders were requested to vote on a proposal to amend the Company's
Certificate of Incorporation and Bylaws to eliminate the classification of
directors. Such amendment was rejected by the shareholders. In order to be
adopted, such proposal required an affirmative vote of two-thirds of the
outstanding shares (15,990,618 shares). Such proposal received 8,293,657 votes
in favor, 1,988,475 votes against, and 7,956,777 abstained or withheld authority
to vote.
-19-
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
10.24 Third Amendment to Amended and Restated Credit
Agreement Dated June 30, 1999
(b) Reports on Form 8-K
None
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 13, 1999 /s/ Todd R. Bart
------------------------ -------------------------------------
Todd R. Bart, Chief Financial Officer
EXHIBIT 10.24
THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") dated as of June 30, 1999 is among: PANACO, INC., a Delaware
corporation (the "Borrower"); each of the Lenders (as defined in the Credit
Agreement as hereinafter defined) that is a signatory hereto; FIRST UNION
NATIONAL BANK, a national banking association (in its individual capacity,
"First Union"), as agent for the Lenders (in such capacity, together with its
successors in such capacity, the "Administrative Agent"); and PARIBAS as
Documentation Agent.
R E C I T A L S
---------------
A. The Borrower, the Administrative Agent, the Documentation Agent and the
Lenders have entered into that certain Amended and Restated Credit Agreement
dated as of October 9, 1997 as amended by First Amendment to Credit Agreement
dated as of December 11, 1998 and Second Amendment to Amended and Restated
Credit Agreement dated as of March 31, 1999 (as amended, the "Credit
Agreement"), pursuant to which the Lenders have agreed to make certain loans and
extensions of credit to the Borrower upon the terms and conditions as provided
therein.
B. The Borrower has requested the Lenders to amend the Credit Agreement to
change the reductions of the Borrowing Base.
C. The Borrower, the Administrative Agent, the Documentation Agent and the
Lenders now desire to make certain amendments to the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration and the mutual benefits, covenants and agreements herein
expressed, the parties hereto now agree as follows:
1. All capitalized terms used in this Amendment and not otherwise defined
herein shall have the meanings ascribed to such terms in the Credit Agreement.
2. Section 1.02 of the Credit Agreement is hereby supplemented, where
alphabetically appropriate, with the addition of the following definitions:
"Third Amendment" shall mean that certain Third Amendment to
Amended and Restated Credit Agreement dated as of June 30, 1999 among
the Borrower, the Lenders, the Administrative Agent and the Documentation
Agent.
3. The automatic reductions of the Borrowing Base to occur on June 30, 1999
and September 30, 1999 as set forth in Section 4 of the Second Amendment are
hereby canceled. The Borrower and the Lenders hereby agree that the Borrowing
Base shall automatically reduce on the last day of each month by $750,000
commencing on June 30, 1999 and on each successive last day of each calendar
month thereafter until the Borrowing Base is redetermined in accordance with the
Credit Agreement. If on the last day of any month after giving effect to the
automatic reduction setforth in this Section the reduced Borrowing Base is less
than the aggregate outstanding principal amount of the Loans plus the LC
Exposure, the Borrower shall prepay such deficiency on such date.
4. Section 2.07(b) of the Credit Agreement is hereby amended to read as
follows:
"(b) Upon any redetermination of the amount of the Borrowing Base in
accordance with Section 2.08, if the redetermined Borrowing Base is
less than the aggregate outstanding principal amount of the Loans plus
the LC Exposure, the Borrower shall upon notice thereof prepay the
Loans in an aggregate principal amount equal to such excess within 30
days of receipt of written notice thereof and if a Borrowing Base
deficiency remains after prepaying all of the Loans because of LC
Exposure, pay to the Administrative Agent on behalf of the Lenders an
amount equal to such Borrowing Base deficiency to be held as cash
collateral as provided in Section 2.10(b) hereof."
-2-
5. The Credit Agreement is hereby amended by adding the following Section
8.11:
"Section 8.11 Cash Collateral Account Agreement. On or before August 31,
1999, the Borrower shall enter into a lock box arrangement including a cash
collateral account agreement (collectively, the "Cash Collateral Account
Agreement") with the Administrative Agent in form and substance acceptable to
the Administrative Agent and shall have notified the respective purchasers of
the Borrower's and its Subsidiaries' Hydrocarbons to direct all proceeds arising
from the sale of the Borrower's and its Subsidiaries' Hydrocarbons to be
transferred by check or wire transfer to the account set forth in the Cash
Collateral Account Agreement. Promptly, each time after the Borrower or a
Subsidiary confirms a sale or enters into a contract in connection with its
Hydrocarbons, the Borrower shall provide for the the dircetion of proceeds as
required by the previous sentence and send to the Administrative Agent a copy of
such confirmation or contract. The Cash Collateral Account Agreement and the
Liens and security interests established in such Cash Collateral Account
Agreement will continue until all the Indebtedness under this Agreement is paid
in full and this Agreement is terminated."
6. The Lenders hereby agree to waive any default of Sections 9.13 and 9.14
for the fiscal quarter ending June 30, 1999 only and to waive any default of
Section 9.12 for the period commencing on June 30, 1999 and ending on September
29, 1999.
7. Sections 9.12, 9.13 and 9.14 of the Credit Agreement are hereby amended
to read as follows:
"Section 9.12 CURRENT RATIO. The Borrower will not permit its Current Ratio
as of the end of any fiscal quarter of the Borrower to be less than 0.75 to 1.0
at September 30, 1999 and 1.0 to 1.0 at the end of any fiscal quarter
thereafter. As used in this Section 9.12, "CURRENT RATIO" shall mean, as of any
time, the ratio of (i) current assets at such time, plus unused availability
under the Aggregate Commitments, minus the sum of (A) prepaid expenses at such
time, (B) advance payments on wells at such time, and (C) the aggregate book
value of all of the Borrower's assets held for sale and classified as a current
asset on the Borrower's balance sheet, to (ii) current liabilities at such time,
minus current maturities on the Notes at such time.
Section 9.13 TANGIBLE NET WORTH. The Borrower will not permit its Tangible
Net Worth as of the end of any fiscal quarter of the Borrower to be less than a
negative $7,500,000 at September 30, 1999 and at the end of any fiscal quarter
thereafter less than an amount equal to 85% of Tangible Net Worth as March 31,
1999 plus 85% of the Borrower's Net Income (only if positive) for each fiscal
quarter of the Borrower after December 31, 1998, plus 75% of the net proceeds of
any new issuance of capital stock or other equity securities of the Borrower
issued after March 31, 1999.
Section 9.14 INTEREST COVERAGE RATIO. The Borrower will not permit its
Interest Coverage Ratio as of the end of any fiscal quarter of the Borrower
(calculated quarterly as of the last day of each fiscal quarter) to be less than
(i) 1.5 to 1.0 for the fiscal quarter ended September 30, 1999 and (ii) 2.5 to
1.0 for any fiscal quarter thereafter. For the purposes of this Section 9.14,
"Interest Coverage Ratio" shall mean the ratio of (i) EBITDA for the four fiscal
quarters ending on such date to (ii) cash interest payments made for such four
fiscal quarters of the Borrower and its Consolidated Subsidiaries.
8. This Amendment shall become binding on the Lenders when, and only when,
the following conditions shall have been satisfied and the Administrative Agent
shall have received each of the following, as applicable, in form and substance
satisfactory to the Administrative Agent or its counsel:
(a) counterparts of this Amendment and the Ratification attached hereto
executed by the Borrower, the Guarantors and the Lenders; and
(b) such other documents as it or its counsel may reasonably request.
-4-
9. The parties hereto hereby acknowledge and agree that, except as
specifically supplemented and amended, changed or modified hereby, the Credit
Agreement shall remain in full force and effect in accordance with its terms.
10. The Borrower hereby reaffirms that as of the date of this Amendment,
the representations and warranties contained in Article VII of the Credit
Agreement, as amended by this Amendment, are true and correct on the date hereof
as though made on and as of the date of this Amendment, except as such
representations and warranties are expressly limited to an earlier date.
11. THIS AMENDMENT (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND
ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF TEXAS, OTHER THAN THE CONFLICT OF LAWS RULES THEREOF.
12. This Amendment may be executed in two or more counterparts, and it
shall not be necessary that the signatures of all parties hereto be contained on
any one counterpart hereof; each counterpart shall be deemed an original, but
all of which together shall constitute one and the same instrument.
[SIGNATURES BEGIN NEXT PAGE]
-5-
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first above written.
BORROWER: PANACO, INC.
- ---------
By:--------------------------
Name:
Title:
LENDER AND ADMINISTRATIVE AGENT: FIRST UNION NATIONAL BANK
- --------------------------------
By:--------------------------
Name:
Title:
LENDER AND DOCUMENTATION AGENT: PARIBAS
- -------------------------------
By:--------------------------
Name:
Title:
By:--------------------------
Name:
Title:
S-1
RATIFICATION
Each of the undersigned (a "Guarantor") hereby agrees that its liabilities
under its respective Guaranty Agreement guaranteeing the indebtedness,
obligations and liabilities under that certain Amended and Restated Credit
Agreement dated October 9, 1997, as amended, shall remain enforceable against
such Guarantor in accordance with the terms of its Guaranty and shall not be
reduced, altered, limited, lessened or in any way affected by the execution and
delivery of this Second Amendment to Amended and Restated Credit Agreement. Each
Guarantor hereby confirms and ratifies its liabilities under its Guaranty in all
respects.
PANACO PRODUCTION COMPANY
By:--------------------------
Name:
Title:
GOLDKING ACQUISITION CORP.
By:--------------------------
Name:
Title:
S-2