1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-14334
VENUS EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3299127
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1250 N.E. LOOP 410, SUITE 1000, SAN ANTONIO, TX 78209
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (210) 930-4900
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, $0.01 par value
(Title of Class)
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant (all directors, officers and holders of five percent or more of
the Common Stock of the Company are presumed to be affiliates for purposes of
this calculation), computed by reference to the closing bid price of such stock
on March 28, 2000, was approximately $3,200,000. As of March 28, 2000, the
Registrant had outstanding 11,086,682 shares of Common Stock.
1
2
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K will be
included in the Registrant's definitive Proxy Statement for its 2000 Annual
Shareholder Meeting. It is expected that the Proxy Statement will be filed with
the Commission not later than April 29, 2000.
TABLE OF CONTENTS
PART I....................................................................................................3
ITEM 1. BUSINESS.....................................................................................3
ITEM 2. PROPERTIES..................................................................................21
ITEM 3. LEGAL PROCEEDINGS...........................................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................21
PART II..................................................................................................23
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................23
ITEM 6. SELECTED FINANCIAL DATA.....................................................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................32
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......32
PART III.................................................................................................32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................32
ITEM 11. EXECUTIVE COMPENSATION......................................................................33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................33
PART IV..................................................................................................33
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES....................................................33
2
3
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains statements that are considered
"forward-looking statements," as defined in the Private Securities Litigation
Reform Act of 1995 and as described under "-Forward-Looking Statements" in this
Item 1 -"BUSINESS." Actual results may differ materially from those contemplated
by the forward-looking statements herein.
Certain oil and gas terms and abbreviations are defined in this Item 1 under
"BUSINESS - Definitions of Certain Oil and Gas Terms." Those terms are usually
capitalized in the text.
GENERAL
We apply advanced geoscience technology to the exploration for and exploitation
of undiscovered onshore oil and gas reserves in the United States. In addition,
our business plan includes the acquisition of producing properties. We presently
have oil and gas properties, acreage and production in nine states. Our emphasis
is on oil and gas exploration and development projects and prospects in Texas,
Louisiana, Oklahoma and Utah, with our current primary focus being in the
Expanded Yegua Trend of the Upper Texas Gulf Coast and the Cotton Valley Trend
of East Texas and Western Louisiana. We incorporated in the State of Delaware in
September 1985. Our Company's management team has been responsible for the
discovery, development and exploitation of relatively significant reserves of
oil and gas for privately held predecessor companies over the past 30 years.
Our immediate predecessor (from an accounting perspective) commenced business in
May 1996, with primary assets of an inventory of exploration Prospects and
Prospect Leads and some undeveloped oil and gas fields. This new entity had very
little oil and gas production and its Proved Reserves totaled 2.8 bcfe at
December 31, 1996.
On June 30, 1999, we acquired an interest in oil and gas producing properties in
Jackson Parish, Louisiana. The total purchase price was $27.6 million; however
in order to finance the acquisition at no net cash outlay to us, we gave up 50%
of the acquisition to another company that agreed to arrange 100% of the capital
required to close the acquisition. To facilitate the financing of the
acquisition with our 50% co-venturer, the properties were acquired by a limited
liability company in which we owned 50%. On December 31, 1999, we sold our
interest in the properties, and we realized a pre-tax gain on the sale of $4.7
million, of which $4.3 million was recorded in 1999, and the balance in 2000
when contingencies related to part of the properties sold were cleared. This
acquisition was a product of our strategy under which our explorationists, after
conducting regional trend studies in areas they deemed to be prospective,
identify producing oil and gas fields with exploitation potential as acquisition
targets. Then, management utilizes its contacts with larger companies to tender
unsolicited offers to purchase the properties so identified. The acquisition of
the Jackson Parish properties is discussed in more detail below under
"--Acquisitions, Strategic Alliances and Divestitures of Selected Properties."
During 1999, due to the significant decline in oil and natural gas prices during
1998 and our shortage of capital, we participated in drilling very few wells.
During 1999, we participated in the drilling of 5 gross (.25 net) wells, of
which 4 gross (.18 net) wells were completed as producers and 1 gross (.07 net)
well was a dry hole. Of these wells, 1 gross (.07 net) was exploratory, and 4
gross (.18 net) wells were development. We anticipate drilling or participating
in the drilling of five (5) development wells and three (3) exploration wells
during 2000 if we arrange sufficient financing. Depending on the success of
those wells, we may drill additional wells in 2000.
During November 1999, we completed a successful fracture stimulation of a well
that we operate in Constitution field in Jefferson County, Texas. This well, the
No. 1 Westbury Farms, was originally completed in March 1998 as a gas condensate
well through perforations in the middle Yegua Formation at depths between 13,910
and 13,940 feet. After disappointing initial completion results, the well was
restimulated on November 17, 1999. After 22 hours, the well was producing at a
rate of 3.5 million cubic feet of gas and 554 barrels of condensate plus 420
barrels of frac load water per day through a 14/64" choke, with 6,310 pounds per
square inch tubing pressure. During the month of March 2000 the well produced an
estimated daily average production of 3.6 million cubic feet of gas, 469 barrels
of condensate and 63 barrels of water through 13/64" choke with 5,380 pounds per
square inch tubing pressure. Venus is the operator of the well. The Company
holds approximately 4,946 gross (4,538 net) acres in this field and owns a 15%
working interest in the field. Because of the successful restimulation, we have
proposed to the non-operating owners to drill an additional
3
4
development well, designated the No. 1 Apache G.U. well. The estimated cost of
this well through costs of completion and equipment is $3.7 million, and our 15%
share of these costs is $0.6 million. A three-dimensional seismic survey of the
Constitution field was shot, processed and interpreted during 1999. The
information obtained from this seismic survey has been integrated with
subsurface geological information by our technical staff. The results of this
technical analysis have caused our staff to estimate that 6 proved, undeveloped
drill sites with a total of 11 zones exist in Constitution field. The
independent engineering consulting firm of Ryder Scott Company concurred with
this estimate.
Proved Reserves as of December 31, 1999, totaled 11.1 Bcfe, a decrease of 2 Bcfe
(15%) from the 13.1 Bcfe that we reported at year-end 1998. The decrease is due
to our selling non-core oil and gas producing properties during 1999. These
properties had Proved Reserves of 3.9 Bcfe at December 31, 1998. Production for
1999 totaled .8 Bcfe. The 4.7 Bcfe of reserve decrease due to selling properties
and 1999 production was offset by 2.8 Bcfe of net new reserves added through
discoveries, extensions and revisions of reserves on our existing properties. In
1999, average daily net production decreased to 2,250 Mcfe/day from 3,521
Mcfe/day in 1998, a 36% decrease. Approximately 37% of the decrease, or 462
Mcfe/day, is due to the sale of properties during the first quarter 1999. The
balance of the decrease is due to a decline in production on existing wells.
Most of the reserve additions discussed above occurred during the later part of
the year and are undeveloped reserves so there was little contribution by these
added reserves to 1999 production. As of December 31, 1999, approximately 39% of
our reserves were natural gas reserves. As of December 31, 1998, approximately
68% (55% after adjusting for the property divestiture during the first quarter
1999) of our reserves were natural gas reserves. Venus operates 46% of its Net
Wells.
BUSINESS STRATEGY
Venus's strategy consists of:
o Exploration for oil and natural gas reserves in geographic areas where we
have expertise
o Exploitation and development drilling in existing oil and gas fields
o Strategic acquisitions of producing properties with upside potential
EXPLORATION - We conduct exploration programs for new oil and gas reserves and
undiscovered fields in geological trends that are considered to contain an
undiscovered resource base of oil and natural gas. We use advanced geoscience
technology to conduct these programs. The reason we participate in high-risk
exploration is because this gives us the opportunity to participate in discovery
of substantial oil and gas reserves and the resultant rapid growth in asset
values which can occur. Because of the inherent uncertainty and high financial
risk associated with the outcome of individual drilling prospects, we attempt to
maintain an inventory of many exploratory Prospect Leads from which drilling
prospects are confirmed and generated. We have used this strategy successfully
in the past. We typically attempt to reduce our financial risk and to obtain
financing for a large portion of the exploration costs through sale to oil and
gas industry co-venturers of working interest in prospects originated by us.
Because of the decline in oil prices in 1998 and the reduction of capital
available for exploration budgets, both for the oil and gas industry in general
and for us specifically, we reduced exploration activity and continue to work
only selected prospects believed to have extraordinary merit during this period
of low availability of exploration capital. In order to add a greater degree of
certainty to the growth of the company, exploration only represents one of three
avenues of potential growth. The other two important components of our growth
plans are exploitation of existing oil and gas fields and acquisition of
producing properties with enhanced potential.
Our exploration team currently concentrates on two primary geographical focus
areas: the Yegua Trend of the Texas and Louisiana Gulf Coast and the Cotton
Valley Trend of East Texas and North Louisiana. Secondary areas are the South
Midland Basin and select areas in the mid-continent. We have an inventory of
many exploration Prospects and Prospect Leads, and we are reactivating
exploratory drilling projects so that when, and if, industry drilling budgets
are restored for exploration, we will have drilling projects available in which
to offer participation to industry co-venturers. The primary geoscience
technologies we use to evaluate Prospects and Prospect Leads are 2-D and 3-D
seismic surveys and the subsurface geological studies used to interpret the data
gathered by these seismic surveys. A seismic survey sends pulses of sound from
the surface down into the earth and records the echoes reflected back to the
surface. By calculating the speed at which sound travels through the various
layers of rock, we can estimate the depth to the reflecting surface. We use
computers to perform calculations. It then becomes possible to create an
interpretation of the possible rock structures at the subsurface depth of the
target formations. This information enables us to estimate the size of a
potential oil and gas reservoir and to pick the best location for drilling an
exploratory well. Considerable computer resources and geophysical expertise are
required to process and to interpret the 3-D survey and to transform it into a
useable product. These geological and geophysical technologies are utilized in
both exploration for new oil and gas fields and reservoirs and in exploitation
and
4
5
development of previously discovered fields. Our in-house technical capability
is an important ingredient in our current and continuing ability to conduct
comprehensive exploration programs and in exploitation of existing fields.
EXPLOITATION AND DEVELOPMENT OF PRODUCING FIELDS - In addition to exploring for
new oil and gas reserves in previously undiscovered fields, we also use advanced
geoscience technology to exploit and to develop oil and gas reserves in
currently producing fields. The fields being exploited or developed consist of
fields discovered by us or fields discovered by others but that we believe are
not fully developed. We are conducting active exploitation and development
activities in 7 different fields in Texas, Oklahoma and Utah. Our working
interest in those fields varies in size from 2.5% to 100%, and we operate in 4
of the 7 active fields. During 1999, due to the significant decline in oil and
natural gas prices during 1998 and our shortage of capital, we emphasized
acquiring and expanding reserves in existing oil and gas fields rather than
exploring for new reserves in unestablished areas. In November 1999 we
successfully restimulated our #1 Westbury Farms well in the Constitution Field,
Jefferson County, Texas. As a result of this successful restimulation, our
proved reserves in the field increased by 2.9 Bcfe.
ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES OF SELECTED PROPERTIES - We
will continue to seek strategic producing property acquisitions that offer
near-term production enhancement potential and longer-term development drilling
potential. These opportunities on properties we acquire can be investigated
through the application of advanced technology by our technical team. We also
seek to accomplish strategic acquisitions of producing assets with development
and exploratory potential through strategic alliances with other oil and gas
companies. We may also sell non-strategic properties as a part of our effort to
concentrate on our focus areas. Significant acquisitions and divestures are
discussed below.
Purchase of Producing Properties by EXUS Energy - On June 30, 1999,
EXUS Energy, LLC, (EXUS) a Delaware limited liability company owned 50% by EXCO
Resources, Inc. (EXCO) and 50% by us, completed the acquisition of oil and
natural gas properties located in Jackson Parish, Louisiana. We identified this
acquisition as a result of our strategy under which our explorationists, working
in their focus areas, identify acquisition candidates with exploitation
potential. The properties included 17 producing wells and, as part of the
financing arrangement, EXCO operated them after the closing. The properties
included about 8,000 acres, of which about 80% was developed. In order to
finance the acquisition at no net cash outlay to us, we negotiated a financing
arrangement with EXCO, who agreed to arrange the 100% financing. We selected
EXCO because our agreement with the seller allowed for a relatively short period
of time to close the transaction and EXCO was in a position to close the
financing within our time constraint.
The purchase price, before closing adjustments, was $28.5 million, and after
adjustments, it was approximately $27.6 million. The adjustments principally
reflected production since March 1, 1999, the effective date of the acquisition.
EXUS funded the purchase with $14 million drawn under its credit facility and
$14 million of equity capital.
Of the initial $14 million of EXUS equity capital, EXCO provided $7 million from
its cash on hand, and we provided $7 million from borrowed funds. On June 30,
1999, we borrowed $7 million from EXCO under the terms of an $8 million
convertible promissory note, which essentially meant that we obtained 100%
financing for our share of the acquisition. All borrowings under the note were
secured by a first priority lien providing a security interest in our membership
interest in EXUS and in our distribution and income rights in EXUS.
On June 30, 1999, EXUS entered into a credit facility with NationsBank, N.A. as
administrative agent and lender. The credit facility provided for borrowings up
to $50 million. All borrowings under the credit facility were secured by a first
lien mortgage providing a security interest in substantially all assets owned by
EXUS, including all mineral interests.
Sale of EXUS Properties - On December 31, 1999, we sold our interest in
the EXUS properties in Jackson Parish, Louisiana, as did EXCO. The gross
purchase price for our interest was $18.9 million, and we recorded a pre-tax
gain of $4.3 million in 1999, and we expect to record a pre-tax gain of
approximately $0.4 million during the first quarter 2000, when contingencies
related to part of the properties sold were cleared.
To effect the sale, EXUS distributed the properties to EXCO and us, as
the owners of EXUS, in equal portions. EXCO and we then sold our undivided
interests effective December 31, 1999. The instruments of conveyance were
executed and delivered into escrow on December 31, 1999, and the cash
consideration was delivered to the escrow agent on January 6, 2000. We agreed to
the delay in the payment because of concerns about the potential for a Y2K
disruption to the banking system.
On January 6, 2000, we used $7.1 million of the net proceeds to repay
our share of the EXUS Energy bank debt under the NationsBank credit facility, $7
million to repay our convertible note to EXCO Resources, $250,000 to satisfy a
5
6
prepayment penalty under the EXCO convertible note, and $3.7 million to reduce
our bank debt. The balance of our bank debt, $152,000 was paid on March 30,
2000.
Sale of Properties in Barbour County, West Virginia - On January 27,
1999, we sold our oil and gas properties in West Virginia for a gross purchase
price of $1,170,000. We used $1 million of the net purchase price to reduce our
outstanding bank debt. The properties included interests in 58 wells and a
pipeline system that serviced many of the wells. We also sold our interest in a
limited partnership that owned property rights in oil and gas wells in West
Virginia. During 1998, the production from these properties was the equivalent
of 145,385 thousand cubic feet of natural gas, or about 11.3% of our total 1998
production. According to the estimates of the proved reserves included in our
Annual Report on Form 10-K for the year ended December 31, 1998, the properties
we sold were 10.9% of our total proved reserves as of December 31, 1998.
Sale of H.E. White Unit, Freestone County, Texas - On February 12,
1999, we sold our interest in the H.E. White Unit in Freestone County, Texas, to
Petroleum Development Corporation and Warren Resources, Inc. for a gross
purchase price of $1,150,000. Out of the net proceeds, we used $650,000 to
reduce our outstanding bank debt. The properties that we sold included interests
in 3 existing wells with production of 41,841 thousand cubic feet of natural gas
during 1998, or about 3.3% of our total 1998 production. According to the
estimates of proved reserves included in our Annual Report on Form 10-K for the
year ended December 31, 1998, the properties we sold were 17.5% of our total
proved reserves as of December 31, 1998.
RECENT DEVELOPMENTS (SINCE DECEMBER 31, 1999) - Below is an update of
significant developments during the first quarter 2000.
Going Concern Opinion - In KPMG LLP's opinion on the results of its
audit of our financial statements for fiscal 1998, KPMG stated that the
financial statements had been prepared assuming we would continue as a going
concern. Our auditors stated that our recurring losses from operations and
accumulated deficit raised substantial doubt about our ability to continue as a
going concern. To address the going concern situation and our failure to comply
with some covenants of our credit facility, and our lack of liquidity in late
1998 and 1999, we developed a plan which included the following:
o selling non-core properties
o reducing office personnel
o continuing development of projects that have a lower degree of geological
and engineering risk relative to the economic investment and
anticipated rate of return
o using our technical expertise and our network of contacts in the industry
to acquire attractive packages of oil and gas properties that are
already producing and that have undrilled potential
o raising equity capital
Although we have not yet raised equity capital, we have been successful enough
in implementing our plan that KPMG LLP's opinion on the results of its audit of
our financial statements for fiscal 1999 does not contain an explanatory
paragraph related to going concern as it did in fiscal 1998. As a direct result
of the sale of our interest in the EXUS properties and our realization of a $4.3
million pre-tax gain in 1999, we were able to repay our bank debt. As discussed
directly below, we have received a commitment letter from a new lender that we
believe will be sufficient to fund our working capital needs for 2000.
New Credit Facility. On April 12, 2000, the Company obtained a
commitment from a new lender for a one year, $15 million secured revolving line
of credit. We expect to close the facility within 30 days. Under the terms of
the commitment, the new credit facility will provide the Company with an initial
borrowing base of $2.5 million. The borrowing base will decline at the rate of
$50,000 per month beginning May 1, 2000 and continue until the next borrowing
base redetermination on October 1, 2000. Borrowing base redeterminations will be
performed at least semi-annually as of April 1 and October 1. The company may
request interim redeterminations. Changes in the borrowing base are solely at
the discretion of the lender based on the lender's then current engineering
standards and are subject to the lender's credit approval process. Mandatory
prepayment is required to the extent outstanding amounts under the credit
facility exceed the borrowing base. Outstanding balances under the facility will
bear interest at the lender's prime rate plus 1%. A facility fee of 1% of the
initial borrowing base is due on or before closing. A 3/4% facility fee will be
due on all incremental increases in the borrowing base, and a 3/8% per annum fee
is due on the unused portion of the borrowing base. The Company will also be
required to pay a $5,000 engineering fee for the initial borrowing base
determination and for each subsequent redetermination. The facility will be
secured by all of the Company's oil and gas properties and will contain usual
and standard covenants such as: debt and lien restrictions; dividend and
distribution prohibitions; liquidity, leverage,
6
7
net worth and debt service coverage ratios; and financial statement reporting
requirements. The new credit facility will require us to hedge at least 50% of
our oil and gas production for twelve months. We expect to have the hedge
in place during the second quarter 2000.
Nasdaq Listing. On April 26, 1999, the Nasdaq SmallCap Market(SM)
notified us about its concern about our ability to sustain compliance with its
continued listing requirements. It also notified us about the possibility that
we could be delisted because our tangible net worth was below the $2 million
minimum required by the Nasdaq SmallCap Market. We sent Nasdaq a written
response that supplied the information that it requested. On August 30, 1999,
Nasdaq advised us that it intended to delist us effective with the close of
business on September 8, 1999. We asked for, and were granted, a hearing by a
Nasdaq Listing Qualifications Panel so that we could appeal the Nasdaq staff's
determination and so that we could request additional time to implement our plan
to achieve compliance with Nasdaq listing requirements. That hearing was held on
October 14, 1999, and the panel ruled that we could maintain our listing through
the end of 1999 on the condition that we completed a transaction in that interim
period that would allow us to file with the SEC and Nasdaq a report of net
tangible assets of at least $3.6 million, or $1.6 million above the Nasdaq
minimum. The $1.6 million was to provide a cushion to ensure continued
compliance through 2000. The panel subsequently extended that deadline until
January 18, 2000.
As reported above, we sold the EXUS Energy properties on December 31, 1999, and
on January 18, 2000, we sent the NASDAQ Listing Qualification Panel an unaudited
pro forma balance sheet that shows tangible net assets of $3,300,000 as of
November 30, 1999. We requested that it accept that level of tangible net assets
as sufficient and remove the conditional status of our listing. We also pointed
out that since we would be reporting net income for 1999 in excess of $500,000
we would meet Nasdaq listing requirements under an alternative test. On January
28, 2000, the panel informed us that it had granted our requests.
Gain on Sale of Properties. As discussed above under the caption
"Acquisitions, Strategic Alliances and Divestitures of Selected Properties"
during the first quarter 2000 we expect to record a gain on the sale of
approximately $0.4 million related to the sale of our remaining interest in the
EXUS properties. We expect to record an extraordinary loss of $250,000 related
to a penalty on the prepayment of the amount we borrowed from EXCO to acquire
the properties. In addition, we will record a reversal of $70,000 in accrued
imputed interest that will not have to be paid because of the prepayment.
Exploratory Dry Hole. During March 2000 we drilled the No. 1 Trailor,
Waxia Prospect, St. Landry Parish, Louisiana. The well was a dry hole and we
expect to record $30,000 in dry hole cost during the first quarter 2000 related
to this well. This is the first of three exploratory wells we plan to
participate in 2000. All three wells have relatively little cost exposure to us.
Gain on Sale of Other Assets. During the first quarter 2000 we sold an
asset classified as other assets on our financial statements for $253,000. We
expect to record a gain of approximately $198,000 during the first quarter 2000
related to the sale of the asset.
Management Departures. During the first quarter 2000, E.L. Ames, III,
our Vice President, and John H. Sowell, III, our corporate secretary and
in-house land manager and legal counsel, resigned their positions with the
Company to pursue other business opportunities. We do not believe these
departures will have a material adverse effect on the Company. In the first
quarter 2000 we expect to record approximately $166,000 in severance cost
related to these departures.
FORWARD-LOOKING STATEMENTS - This Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Those
statements are contained under this Item 1 "-Business," under Item 7
"-Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K. The forward-looking statements are
identified by language that speaks of future events. For example, words such as
"may," "could," "believe," "expect," "intend," "anticipate," "estimate,"
"continue," "projected," "future," "will," "seek," and "plan". The
forward-looking statements address such matters as geological estimates of oil
and gas reserves, exploratory and development drilling plans and schedules,
capital expenditures, availability of capital resources, financial projections,
present values of future production, financing assumptions and other statements
that are not historical facts. Although statements involving those matters are
based on information available at the time this Annual Report on Form 10-K was
prepared and although Venus believes that its statements are based on reasonable
assumptions, it can give no assurance that its goals will be achieved or that
the level of production or financial return expected can be achieved. Some of
the important factors that could cause actual results to differ materially from
those predicted in the forward-looking statements include (i) state and federal
regulatory developments and statutory changes, (ii) the timing and extent of
changes in commodity prices and markets, (iii) the timing and extent of success
in acquiring leasehold interests and in discovering, developing or acquiring oil
and gas reserves, (iv) the conditions
7
8
of the capital and equity markets during the periods covered by the
forward-looking statements, (v) reliance on estimates of reserves, (vi) drilling
results, (vii) the Company's success in raising additional capital to fund its
operations and to fund the execution of its strategy, and (viii) other matters
beyond the control of the Company; e.g., the risk factors listed below.
RISK FACTORS
Financial Covenant Defaults - During 1998 our financial situation
deteriorated in large part due to a downturn in oil and gas prices, a lack of
cash flow and an inability to raise capital to finance new drilling projects or
acquisitions of oil and gas properties. During the last half of 1998 and
throughout 1999 we received a series of waivers from our lender for defaults
under our revolving credit agreement, including a waiver through March 31, 2000,
for defaults existing as of December 31, 1999. Our first waiver was granted
effective August 18, 1998. During the last half of 1999 and the first quarter
2000 our financial condition improved as a result of the $4.7 million pre-tax
gain we realized from selling our interest in the EXUS Properties (see
discussion above under Acquisitions in the Business Strategy section) and our
recent success in the Constitution Field (also discussed above under
Exploitation in the Business Strategy section). These improvements allowed us to
repay our revolving credit facility and obtain a commitment for a new credit
facility. However, we have had a history of financial covenant defaults and
other than recording gains from the sale of properties or other assets, we do
not expect to generate net earnings until Development Wells are drilled and
successfully completed. Also, oil and natural gas prices are volatile and an
unexpected drop in crude oil or natural gas prices could cause us, at some point
in the future, to become out of compliance of our new credit facility.
Accordingly, although we intend to be in compliance with our new financial
covenants, there is no assurance that we can do so.
Substantial Capital Requirements - The cash flow generated by current
operations is only sufficient to fund our general and administrative expenses.
We rely on bank and other financing to implement our business plan. Although we
believe that our new credit facility is sufficient to fund our business plan for
2000, future availability of credit will depend on the success of our
development program and our ability to stay in compliance with our credit
facility debt covenants.
Lack of Liquidity - Our assets are predominately real property rights
and intellectual information that we developed regarding those properties and
other geographical areas that we are studying for exploration and development.
The market for these types of properties fluctuates and can be very small.
Therefore, our assets can be very illiquid and not easily converted to cash.
Even if a sale can be arranged, the price may be significantly less than what we
believe the properties are worth. That lack of liquidity can have materially
adverse effects on our strategic plans, normal operations and credit facilities.
Lack of Profitable Operations - Since commencing operations in 1996,
Venus Exploration has not reported operating profits. We incurred net losses of
approximately $2,007,000 for the year ended December 31, 1996, $4,168,000 for
the year ended December 31, 1997, and $8,670,000 for the year ended December 31,
1998. Although we are reporting net income of $1,010,000 for 1999, this was a
result of reporting a $4.8 million pre-tax gain from the sale of properties. In
1999 we reported a $3 million operating loss.
We may never generate sufficient revenues to achieve profitability, excluding
gains that we may report from sales of assets. Even if we attain profitability,
we may not sustain or increase profitability on a quarterly or annual basis in
the future. At December 31, 1999, we had an accumulated deficit of approximately
$15.2 million.
Non-Traditional Financing to Fund Business Plan - We may use
non-traditional sources of financing to acquire properties or to fund our
capital expenditures, including the costs of drilling wells. For example, if we
find unencumbered properties to buy, we may use financing that is secured only
by those properties and the oil and gas production from those properties. In an
arrangement like that, the lender will have no recourse against our other
assets, and it may require us to pay a higher rate of interest on the
indebtedness.
In addition, we may issue short-term or bridge financing, including
indebtedness, or issue preferred stock or other securities in order to raise
capital. Given our recent financial condition, if we issue these securities, the
purchaser may require us to pay a premium or to agree to more onerous conversion
or other terms.
Volatility of Oil and Gas Prices - Historically, the market prices for
oil and gas have been volatile, and they are likely to continue to be volatile
in the future. We sell most of our oil and gas at current market prices rather
than through fixed-price contracts. Thus, volatility in market prices can
jeopardize our financial condition, operating results and future growth. Sharply
reduced oil and gas prices during 1998 and early 1999 hurt our results of
operations, our access to capital,
8
9
and the estimated value of our oil and gas reserves. They also increased our
operating losses. The price volatility is the result of factors beyond our
control including:
o domestic and foreign political conditions,
o the overall supply of, and demand for, oil and gas,
o the price of imports of oil and gas,
o weather conditions,
o the price and availability of alternative fuels,
o overall economic conditions,
o exploration and drilling costs,
o pipeline availability and transportation costs, and
o federal and state regulatory and statutory developments.
On a pro forma basis for the twelve months ended December 31, 1999, taking into
account the sales of non-core properties and the EXUS properties, our 1999
production was 61% crude oil and condensate; however, our earnings and cash flow
are sensitive to fluctuations in both oil and gas prices. Excluding production
from properties sold during 1999, a $0.10 per Mcf change in gas prices would
have resulted in approximately $29,000 difference in gross revenues for the
twelve months ended December 31, 1999. Also on a pro forma basis, a $1.00 per
Bbl change in oil prices would have resulted in approximately $84,000 difference
in gross revenue for the twelve months ended December 31, 1999.
Debt Financing - We plan to incur significant indebtedness as we
execute our exploration, exploitation and acquisition strategy. A high debt
structure may require us to pursue non-traditional and more expensive financing.
The higher level of indebtedness that we intend to maintain will have several
important effects on future operations, including:
o a substantial portion of our cash flow from operations will be used to pay
interest on the outstanding debt and will not be available for other
purposes,
o our bank credit agreement will likely limit the uses of capital,
o our ability to obtain additional financing in the future may be impaired,
and
o since the interest on our indebtedness likely will be calculated with a
variable rate, increases in that rate could further decrease our
liquidity.
Replacement and Expansion of Reserves - Our financial condition and
results of operations depend substantially upon our ability to find or acquire
additional oil and gas reserves that are economically viable and to successfully
develop those reserves. If we are unable to do so, our proved reserves will
generally decline as those reserves are produced. As used in this prospectus,
the term "proved reserves" means the estimated quantities of oil and gas that
the geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions and current regulatory practices.
The value of our company is directly related to our level of reserves. We must
replace our reserves, even during periods of low oil and gas prices when it is
difficult to raise the capital necessary to finance acquisitions or development.
Without successful exploration, development or acquisition activities, our
reserves, production and revenues will decline rapidly. We may not be able to
find or acquire new reserves or to profitably develop and produce new reserves.
Exploration Risks - Our business strategy focuses in part on adding
reserves through exploration, where the risks are greater than in acquisitions
and development drilling. By definition, exploration involves operations in
areas about which little is actually known. We use 3-D seismic data and other
advanced technologies to identify possible new reserve locations and to reduce
our exploration risk, but exploratory drilling remains speculative. Even when
extensively used and properly interpreted, 3-D seismic data and other similar
visualization techniques only assist geoscientists in identifying subsurface
structures and hydrocarbon indicators. They do not conclusively allow an
interpreter to know if hydrocarbons in the form of oil or gas are present or if
they are economically producible. Our use of 3-D seismic data and other
technologies also requires greater pre-drilling expenditures than traditional
drilling strategies. We could incur losses as a result of these higher
expenditures. We may fail to increase our reserves through exploration.
Acquisition Risks - Part of our business plan is to acquire properties
already producing oil and gas and to increase the reserves attributable to those
properties through development drilling. The successful acquisition of producing
properties requires an assessment of recoverable reserves, future oil and gas
prices, operating costs and potential environmental and contractual liabilities.
Our assessment, however, will not reveal all existing or potential problems, nor
will it permit us to become sufficiently familiar with the properties to fully
assess their deficiencies and capabilities. We do not perform
9
10
inspections on every well or pipeline, and structural and environmental problems
are not necessarily observable even when an inspection is undertaken. Even when
we identify problems, the seller may not be willing, or financially able, to
give contractual protection against the problems, and we may decide to assume
environmental and other liabilities in connection with acquired properties.
After a property is acquired, we may discover environmental liabilities that may
exceed our total net worth. These factors and others can turn an apparently
beneficial acquisition into a financially disastrous liability.
Drilling and Operating Risks - A large part of our business plan is to
drill exploratory wells. Exploratory wells are wells drilled into horizons with
little or no history of oil or gas production. Our business plan heightens many
of the considerable risks associated with drilling in general. We encounter
unexpected circumstances more often when we drill exploratory wells versus other
types of wells, because we are often drilling at locations and into formations
about which there is little or no information because few or no wells have been
drilled at that location before. Moreover the probability that we will discover
and produce oil or gas from an exploratory well is lower than drilling a
development well where the chances of success are greater because of the
existence of nearby wells or other data. Therefore, these risks may pose more of
a danger to us than they would to a company that focuses primarily on drilling
development wells. Development wells are wells drilled into known producing oil
and gas fields and horizons. We anticipate drilling or participating in the
drilling of five (5) development wells and three (3) exploration wells during
2000. Depending on the success of those wells, we may drill additional wells in
2000. However, even if we drill and complete these wells as producing wells,
they may not produce sufficient net revenues to return a profit after our
drilling, operating and other costs.
The cost of drilling, completing and operating wells is often
uncertain. Our drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors. We try to insure risks typical to companies in
our industry. Some risks just come with the business; others may not be within
the scope of traditional insurance policies. In our case, the following are
examples of the operating hazards against which we cannot or do not insure:
o land title problems
o compliance with governmental requirements
o shortages or delays in the delivery of equipment and services
o unexpected pressure or irregularities in underground formations (other
than those causing a well to flow out of control above or below the
surface of the ground)
o mechanical problems encountered in drilling a well
o the collapse of the well bore, whether due to loss of underground
formation support or failure of the well bore casing
The occurrence of an event that is not covered by our insurance, or not fully
covered by our insurance, could materially harm our financial condition and
results of operations.
Uncertainty of Estimates of Reserves - The reserve data set forth are
only estimates even when referred to as "proved." Petroleum engineers consider
many factors and make assumptions in estimating our oil and gas reserves and
future net cash flows. These estimates utilize assumptions the Securities and
Exchange Commission requires for all public companies, including us. Estimates
by definition are imprecise. Reservoir engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot be measured
exactly and of making assumptions based on the process. Inherent uncertainties
exist in the projection of future rates of production and the timing development
expenditures. The timing of production may be considerably different from the
periods estimated. Assumptions are based on factors such as historical
production from the area as compared with production from other areas, assumed
effects of governmental regulation and assumptions regarding future oil and gas
prices, costs, taxes and capital expenditures. Although we believe that our
reserve estimates are reasonable, you should expect that actual production,
revenues and expenditures relating to our reserves will vary from any estimates,
and these variations may be material.
We base the estimates of future net revenues from our proved reserves and the
present value of those revenues upon assumptions about future production levels.
These assumptions may be wrong. The SEC PV-10 values as reported are based on a
calculated present value of assumed future revenues. Those calculations do not
provide for changes in oil and gas prices or for escalation of expenses and
capital costs. "SEC PV-10" refers to present value calculated using a 10%
discount rate and other conditions required by the Securities and Exchange
Commission. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions and discount rate upon which they are based.
Markets - The availability of a ready market for any oil and gas that
we produce depends upon numerous factors that are beyond our control. These
factors include:
o federal and state regulatory developments and statutory enactments,
o the timing and extent of changes in commodity prices,
10
11
o exploratory and development drilling success,
o the amount of oil and gas available for sale,
o the availability of professional expertise and operating personnel,
o crude oil imports,
o access to adequate capital,
o the availability of adequate pipeline and other transportation facilities,
and
o the marketing of competitive fuels and other matters affecting the
availability of a ready market, such as fluctuating supply and demand
Competition - The oil and gas industry is highly competitive in all of
its phases and in particular in the acquisition of unexplored acreage,
undeveloped acreage and existing production. There are a significant number of
operators engaged in oil and gas property acquisition and development, and
Venus's competitive position depends on its geological, geophysical and
engineering expertise, on its financial resources and on its ability to find, to
acquire and to prove new oil and gas reserves. We encounter strong competition
in acquiring economically desirable properties and in obtaining equipment and
labor to operate and to maintain our properties. That competition is from major
and independent oil and gas companies, many of which possess greater financial
resources and larger staffs than we do. Labor and equipment markets have shown
much volatility recently, and we cannot be certain that they will be available
at the prices we have budgeted.
Financial Reporting Impact of Successful Efforts Method of Accounting -
We use the "successful efforts" method of accounting for our investment in oil
and gas properties. This method of accounting can adversely affect our reported
earnings and thereby the market value of our stock because it can result in us
having to charge to expense many drilling and other costs earlier than might be
the case with "full cost" accounting, which is used by many oil and gas
companies. This charge to expense can result in reduced earnings or larger
losses than might be the case with the full cost accounting method.
Government Laws and Regulations - Our business is subject to extensive
federal rules and regulations. If we fail to comply with these rules and
regulations, we can incur substantial penalties. In general, the regulatory
burden on the oil and gas industry increases our cost of doing business and
decreases our profitability. Because these rules and regulations are frequently
amended or reinterpreted, we cannot predict the future cost or impact of
complying with these laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations. They also impose
other requirements relating to the exploration and production of oil and natural
gas. Many states have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells, and the regulation
of spacing, plugging and abandonment of wells.
Our activities with regard to exploration, development and production of oil and
gas, including the operation of saltwater injection and disposal wells, are
subject to various federal, state and local environmental laws and regulations.
These laws and regulations can increase the costs of planning, designing,
installing and operating oil and gas wells. Various governmental entities can
impose civil and criminal fines and penalties for noncompliance with these
environmental laws and regulations. Some environmental laws can impose joint and
several retroactive liabilities, without regard to fault or the legality of the
original conduct. In addition, a release of oil into water or other areas can
result in us being held responsible for the costs of cleaning up the release.
That liability can be extensive, depending on the nature of the release. Other
environmental regulations impose standards for the treatment, storage and
disposal of both hazardous and nonhazardous solid wastes. We generate hazardous
and nonhazardous solid waste in connection with our routine operations.
Additionally, these environmental laws and regulations require operators like us
to get permits or other governmental authorizations before undertaking routine
industry activities.
Because any violation of environmental statutes could affect a large area and
because our exploration projects are drilled into horizons where little is known
about the conditions we will encounter, we could incur substantial liability
under these environmental statutes. If we incur a large environmental liability,
our costs would increase. Increased costs could reduce the profitability and
value of our properties. Given our dependence on debt financing and the
importance of our lender's valuation of our collateral, any substantial decrease
in the then-current estimates of total value could have detrimental effects on
our operations and business plan.
Large Number of Options, Warrants and Convertible Debt - Under the
terms of the 7% Convertible Notes we could be required to issue up to 869,565
shares of our common stock upon conversion of the full $1 million of
indebtedness. Also, under the terms of those notes, we may issue shares of our
common stock in lieu of cash interest payments. The issuance of common stock
instead of cash is based upon the closing market price of our common stock on
the day before the interest payment date. For example, if the closing market
price was $1.00 per share the day before all future interest payments were due
until maturity, we might issue up to 297,500 additional shares of common stock
if we so elected under all of those notes.
11
12
As of December 31, 1999, there are 1,733,551 shares of our common stock
currently issuable upon exercise of outstanding warrants or vested options.
Warrants totaling 1,044,706 have an expiration date of October 23, 2000. Of
these warrants 544,706 are exercisable at $3 per share and the remaining 500,000
are exercisable at $2 per share. The exercise prices and expiration dates for
all outstanding warrants and options are as follows:
NUMBER OF OPTIONS OR
WARRANTS EXERCISE PRICE EXPIRATION DATE
-------------------- -------------- ---------------
9,194 $1.0000 March 2009
155,264 $1.1191 March 2009
91,888 $1.2310 March 2004
20,000 $1.2500 August 2003
100,000 $1.3125 July 2004
160,000 $1.5000 June 2005
20,000 $1.8750 January 2006
500,000 $2.0000 October 2000
26,000 $2.00 - 2.1250 various times in 2007
and 2008
544,706 $3.0000 October 2000
106,499 $3.29 - 3.7125 various times in 2004
---------- and 2008
TOTAL - 1,733,551
The issuance of any of these shares could be considered dilutive to
then-existing stockholders and could depress our stock price. In addition, the
possibility that so many shares could be issued; i.e., an "overhang effect,"
could further depress the price of our common stock.
Control by Certain Stockholders - As of December 31, 1999, Range
Resources Corporation and the current officers and directors of Venus
Exploration as a group beneficially own fifty-two percent (52%) of the undiluted
voting power of the voting equity. One of our directors is the president of
Range Resources Corporation. Consequently, if our current officers and directors
and Range Resources Corporation act together, those stockholders are in a
position to effectively control the affairs of Venus Exploration, including the
election of all of our directors and the approval or prevention of certain
corporate transactions that require majority stockholder approval.
12
13
The following are signatories to a stockholders agreement among some of our
directors, their affiliates and other stockholders.
Signatories to the Ames Group Signatories to the Blair Group Signatories to the Range Group
----------------------------- ------------------------------ ------------------------------
E.L. Ames, Jr. D.H. Blair Investment Banking Corp. Range Production ILP
Ellen R.Y. Ames Rivkalex Corp. Range Resources, LLC
John Y. Ames Rasalind Davidowitz
Elizabeth A. Jones Parliament Hill Corporation
Eugene L. Ames, III
Stephen J. Ames
George Ames
Robert Oliver
Patrick A. Garcia
Raymond Koger
Gloria Barrett
Venus Oil Company
James W. Gorman
Jere W. McKenny
Pursuant to that agreement, in any election of directors held before May 27,
2000, the parties will vote their shares for the four nominees nominated by a
stockholder group led by the Chairman of the Board and for one nominee of Range
Resources Corporation. This stockholders agreement effectively increases the
control by those stockholders who are a party to it because their 62% of total
outstanding shares of common stock will, by agreement, be voted as a single
block in the election of our board of directors. That virtually ensures that
those stockholders will elect the controlling majority of the board of
directors. If the stockholders agreement was not in place, those stockholders
might not vote for the same candidates. Of course, the percentage of outstanding
shares owned by the group may change if some of those stockholders' shares are
sold, if members of the group acquire additional shares, or if Venus Exploration
issues new shares of common stock.
The stockholders agreement terminates on May 27, 2000, except that the rights
and obligations of any member of the three listed groups to the agreement cease
earlier when that group owns beneficially less than 250,000 shares of our common
stock.
Dependence on Key Personnel - We are dependent upon Eugene L. Ames,
Jr., Chairman of the Board and Chief Executive Officer, and John Y. Ames,
President and Chief Operating Officer. Mr. Eugene L. Ames, Jr. is our executive
with the most extensive contacts and relationships in the oil and gas industry.
John Y. Ames has extensive experience in land management and acquisition. We are
also dependent on Thomas E. Ewing and Bonnie Weise, both of whom are actively
involved in the technical application of the geoscience methods that are the
basis for our exploration activities. Dr. Ewing and Ms. Weise possess valuable
experience and knowledge with regard to oil and gas exploration, and their
technical expertise would be difficult to replace. We have employment agreements
with Messrs. Ames, Jr., and Ewing and Ms. Weise, all of which have
non-competition clauses. We do not carry key-man insurance on any of these
individuals. Our business and operations could be seriously harmed if Mr. Ames,
Jr., Mr. J. Ames, Dr. Ewing or Ms. Weise were to leave Venus Exploration.
Compliance with Nasdaq Listing Requirements. At December 31, 1999, we
had tangible net worth of $2.2 million which is $0.2 million above the minimum
required for a Nasdaq SmallCap Market(SM) listing. Although for 2000 we meet an
alternate test of at least $500,000 of net income in the last fiscal year, if in
2000 our net income is not at least $500,000 or our tangible net worth decreases
below $2 million we may be delisted from the Nasdaq SmallCap Market(SM). There
is no assurance that we will have either sufficient tangible net worth at
December 31, 2000, or, alternatively, sufficient net income for the year ended
December 31, 2000 to maintain our Nasdaq listing.
13
14
From time to time over the past several months our closing bid price has fallen
below the Nasdaq minimum of $1 per share. There is no assurance that the bid
price will stay above the minimum required in accordance with Nasdaq SmallCap
Market(SM) listing requirements.
If Nasdaq did delist us, our common stock would be traded on the OTC Bulletin
Board or the "pink sheets," or not traded at all. Many institutional and other
investors refuse to invest in stocks that are traded at levels below the Nasdaq
SmallCap Market, and that could make our effort to raise capital more difficult.
In addition, the firms that currently make a market for our common stock could
discontinue that role. OTC Bulletin Board and "pink sheet" stocks are often
lightly traded or not traded at all on any given day. Any reduction in liquidity
or active interest on the part of investors in our common stock could hurt our
holders either because of reduced market prices or a lack of a regular, active
trading market for our common stock.
REGULATIONS
General Federal and State Regulation - Our business is subject to
extensive federal rules and regulations. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and gas industry increases our cost of doing business and affects our
profitability. Because such rules and regulations are frequently amended or
reinterpreted, we are unable to predict the future cost or impact of complying
with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural gas.
Many states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells, and the regulation
of spacing, plugging and abandonment of such wells. Many states restrict
production to the market demand for oil and gas. Some states have enacted
statutes prescribing ceiling prices for gas sold within their boundaries.
Also, from time to time regulatory agencies impose price controls and
limitations on production by restricting the rate of flow of oil and gas wells
below natural production capacity in order to conserve supplies of oil and gas.
Environmental Regulation - The exploration, development and production
of oil and gas, including the operation of saltwater injection and disposal
wells, are subject to various federal, state and local environmental laws and
regulations. Such laws and regulations can increase the costs of planning,
designing, installing and operating oil and gas wells. Our domestic activities
are subject to a variety of environmental laws and regulations. A partial list
of those is:
o Oil Pollution Act of 1990,
o Clean Water Act,
o Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"),
o Resource Conservation and Recovery Act ("RCRA"), and
o Clean Air Act.
Civil and criminal fines and penalties may be imposed for non-compliance with
these environmental laws and regulations. Additionally, these laws and
regulations require the acquisition of permits or other governmental
authorizations before undertaking certain activities.
Under the Oil Pollution Act, a release of oil into water or other areas
designated by the statute can result in us being held responsible for the costs
of remediating such a release, damages specified in the Act, and the damage to
natural resources. That liability can be extensive, depending on the nature of
the release.
CERCLA and comparable state statutes, also known as "Superfund" laws, can impose
joint and several retroactive liabilities, without regard to fault or the
legality of the original conduct. In practice, cleanup costs are usually
allocated among various responsible parties. Although CERCLA currently exempts
most petroleum products like crude oil, gas and natural gas liquids from the
definition of "hazardous substance," our operations may involve the use or
handling of other materials that may be classified as hazardous substances under
CERCLA. Of course, we are unsure if the exemption will be preserved in future
amendments of the act.
RCRA and comparable state and local requirements impose standards for the
management, including treatment, storage and disposal, of both hazardous and
non-hazardous solid wastes. We generate hazardous and non-hazardous solid waste
in connection with routine operations. From time to time, proposals have been
made that would reclassify certain oil and gas wastes, including wastes
generated during pipeline, drilling and production operations, as "hazardous
wastes" under RCRA. While state laws vary on this issue, state initiatives to
further regulate oil and gas wastes could have a similar impact.
14
15
SALES AND MAJOR CUSTOMERS
Our production is generally sold at the wellhead to various oil and natural gas
purchasing companies, typically those that are in the areas where the oil or
natural gas is produced. Crude oil and condensate are typically sold at prices
that are based on posted field prices. All of our natural gas is sold on the
spot market. The term "spot market" refers to contracts with a term of six
months or less or contracts that call for a redetermination of sales prices
every six months or more often. We do not believe that the loss of one or more
of its current natural gas spot purchasers would have a material adverse effect
on our business because any individual spot purchaser could be readily replaced
by another spot purchaser who would pay a similar sales price. However, although
we believe that there will be a spot market available, that market is highly
sensitive to changes in current market prices, and a downward trend in spot
market prices can have a significant impact on our cash flow.
Two customers each accounted for approximately 10% or more of consolidated
revenues in 1999. Those are Flying J Oil & Gas, Inc. (19%) and Stephens &
Johnson Operating Company (13%). In 1998, three customers each accounted for
approximately 10% or more of consolidated revenues. Those are Stephens & Johnson
Operating Company (16%), Flying J Oil & Gas, Inc. (13%) and Columbia Energy
Systems Corporation (12%).
OIL AND NATURAL GAS RESERVES
At December 31, 1999, Ryder Scott Company, independent petroleum engineers,
evaluated properties representing 100% of the PV-10 Value of the Company. The
PV-10 Values shown in this Annual Report on Form 10-K are not intended to
represent the current market value of the estimated net Proved Reserves of oil
and natural gas owned by Venus. Prices and costs have been held constant based
on December 31, 1999, prices and costs.
We have not filed any estimate of oil or gas reserve information with any
federal authority or agency other than the U.S. Securities and Exchange
Commission (SEC). The following table summarizes our estimates of our net Proved
Reserves and their PV-10 Value as of December 31, 1999.
PROVED RESERVES
(AS OF DECEMBER 31, 1999)
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ----------
Oil and Condensate (Mbbls) 761.72 372.88 1,134.60
Natural Gas (Bcf) 2.15 2.18 4.33
Combined Equivalent BCF (Bcfe) 6.72 4.42 11.14
PV-10 Value (in thousands) $7,552.37 $3,867.90 $11,420.27
15
16
PROVED RESERVES BY STATE
(AS OF DECEMBER 31, 1999)
- -----------------------------------------------------------------------------------------------------
TOTAL GAS PERCENT OF PV-10 PERCENT
GROSS OIL GAS EQUIV. TOTAL VALUE OF PV-10
STATE WELLS (MBBL) (BCF) (BCFE) (BCFE) ($1,000) VALUE
- --------- ----- ------ ----- --------- ---------- -------- --------
Texas 97 366 3.86 6.06 54.4% 6,345 55.6%
Utah 7 493 .08 3.04 27.3% 3,324 29.1%
Oklahoma 116 252 .38 1.89 17.0% 1,578 13.8%
Other (1) 13 24 .01 0.15 1.3% 173 1.5%
--- ----- ----- ----- ----- ------ -----
TOTAL 233 1,135 4.33 11.14 100.0% 11,420 100.0%
=== ===== ===== ===== ===== ====== =====
(1) Other states are Michigan, Alabama, Louisiana, Kansas and California. All of
the Company's Proved Reserves are in the United States.
The foregoing table represents an increase in value but a decrease in amount of
Proved Reserves as compared with December 31, 1998. The increase in reserve
value is primarily due to the increase in oil and natural gas prices at year-end
1999 as compared to year-end 1998. The decrease in amount of reserves is
primarily due to the sale of properties during 1999 with approximately 3.9 bcfe
of Proved Reserves and 1999 production of 0.8 bcfe. These were partially offset
by an increase in reserves on existing properties. See Note 13 of Notes to
Consolidated Financial Statements (Supplementary Oil and Gas Disclosures) for
further information.
The reserve data presented in the Annual Report on Form 10-K are present
estimates only. In general, estimates of economically recoverable oil and gas
reserves and of the future net revenues there from are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and gas prices and future operating costs, all
of which may vary considerably from actual results. All reserves are evaluated
based on the assumption that all reported data are stated at standard
temperature and pressure. If that assumption proves to be incorrect, there can
be a substantial effect on estimated gas reserves. All such estimates are to
some degree speculative, and classifications of reserves are only attempts to
define the degree of speculation involved. For these reasons, estimates of the
economically recoverable oil and gas reserves attributable to any particular
group of properties, classifications of such reserves based on risk of recovery,
and estimates of the future net revenues expected there from prepared by
different engineers or by the same engineers at different times may vary
substantially. The Company, therefore, emphasizes that the actual production,
revenues, severance and excise taxes, development and operating expenditures
with respect to its reserves will likely vary from such estimates, and such
variances could be material.
Estimates with respect to Proved Reserves that may be developed and produced in
the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations in the initially estimated
reserves, and those variations may be substantial.
In accordance with applicable requirements of the SEC, the estimated discounted
future net revenues from estimated Proved Reserves are based on prices and costs
as of the date of the estimate unless such prices or costs are contractually
determined at such date. Actual future prices and costs may be materially higher
or lower. Actual future net revenues also will be affected by factors such as
actual production, supply and demand for oil and natural gas, curtailments or
increases in consumption by natural gas purchasers, changes in governmental
regulations or taxation and the impact of inflation on costs.
16
17
DRILLING ACTIVITY
The Company drilled or participated in 4 Development Wells and 1 Exploratory
Well during the three-year period ended December 31, 1999. The following table
sets forth the Company's drilling activity over the last 3 years.
DEVELOPMENT WELLS
- ----------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
--------------------------------- ---------------------------------
YEAR PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- ---- ---------- ----- ----- ---------- ----- -----
1997 5.00 -- 5.00 2.90 -- 2.90
1998 4.00 1.00 5.00 1.44 1.00 2.44
1999 3.00 1.00 4.00 .11 .07 0.18
----- ----- ----- ----- ----- -----
Totals 12.00 2.00 14.00 4.45 1.07 5.52
===== ===== ===== ===== ===== =====
EXPLORATORY WELLS
- -----------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
------------------------------- --------------------------------
YEAR PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- ---- ---------- ---- ----- ---------- ---- -----
1997 3.00 1.00 4.00 2.00 .30 2.30
1998 1.00 2.00 3.00 .26 .87 1.13
1999 1.00 -- 1.00 .07 -- 0.07
---- ---- ---- ---- ---- ----
Totals 5.00 3.00 8.00 2.33 1.17 3.50
==== ==== ==== ==== ==== ====
PRODUCTIVE WELLS
AS OF DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
---------------------------------- ----------------------------------
YEAR OIL GAS TOTAL OIL GAS TOTAL
- ---------------- ------ ------ ------ ------ ------ ------
Texas 59.00 38.00 97.00 3.84 6.34 10.18
Oklahoma 99.00 17.00 116.00 8.00 .89 8.89
Utah 3.00 4.00 7.00 1.00 1.44 2.44
Other (1) 11.00 2.00 13.00 2.71 .07 2.78
------ ------ ------ ------ ------ ------
Totals 172.00 61.00 233.00 15.55 8.74 24.29
====== ====== ====== ====== ====== ======
(1) Other states are Michigan, Alabama, Louisiana, Kansas and California.
17
18
ACREAGE
The following table sets forth the Developed and Undeveloped Acreage of the
Company as of December 31, 1999:
DEVELOPED AND UNDEVELOPED ACREAGE
- ------------------------------------------------------------------------------
GROSS ACRES NET ACRES
------------------------- ------------------------
STATE DEVELOPED UNDEVELOPED DEVELOPED UNDEVELOPED
- ---------- --------- ----------- --------- -----------
Oklahoma 13,695 179 573 163
Texas 5,843 13,161 1,061 2,649
Utah 4,943 -- 1,536 --
Louisiana 820 1,476 40 364
Alabama 400 -- 136 --
California 400 -- 26 --
Michigan 80 880 40 400
Kansas 240 -- 108 --
------ ------ ----- -----
Totals 26,421 15,696 3,520 3,576
====== ====== ===== =====
PRODUCTION
The following table summarizes the net oil and gas production, weighted average
sales prices and average production (lifting) costs per unit of production for
the Company for the periods indicated:
UNITS OF PRODUCTION AVERAGE SALES PRICE AVERAGE
------------------- ------------------- -------------
OIL GAS OIL GAS LIFTING COST*
------ ----- ----- ----- -------------
YEAR (MBLS) (BCF) $/BBL $/MCF $/MCFE
- ---- ------ ----- ----- ----- ------
1997 81 .410 17.72 2.44 1.08
1998 119 .572 12.84 2.15 1.25
1999 84 .316 17.54 2.23 1.25
* Includes severance taxes and ad valorem taxes.
NOTE: ALL OF THE COMPANY'S PRODUCTION IS IN THE UNITED STATES.
During the first quarter 1999, the Company sold its West Virginia properties and
two producing Texas wells. Production for 1998 attributable to the properties
sold totaled 1,566 barrels of oil and 177,830 Mcf of gas. Not reflected in the
table above is Venus's share of production attributable to its equity interest
in EXUS Energy, which for 1999 totaled 544,200 Mcf at an average price of $2.86
per Mcf and average lifting cost of $0.39 per Mcf. Venus acquired its interest
in EXUS Energy on June 30, 1999, and sold it on December 31, 1999.
PRODUCTS AND MARKETS
We currently produce oil and natural gas as our principal products. We do not
refine or process the oil or natural gas that we produce. We sell the oil we
produce under short-term contracts at market prices for the areas in which the
producing properties are located, generally at FOB field prices posted by the
principal purchaser of oil in the area. We sell the natural gas produced from
our properties under short-term contracts to entities that have pipelines in the
vicinity of the production or that will build short gathering lines to such
properties. In some instances, we own the gathering line. Typically, the
contracts for natural gas sales are for terms less than six months. We are not
obligated to provide a fixed and determinable quantity of oil or natural gas
under any existing contract or agreement.
18
19
REGULATION AND ENVIRONMENTAL MATTERS
See "-Risk Factors - Regulations" for a discussion of various laws and
regulations that affect the Company and its business.
EMPLOYEES
As of March 15, 2000, the Company had 12 employees.
EXECUTIVE OFFICERS OF VENUS EXPLORATION, INC.
At March 15, 2000, the executive officers of the Company were Eugene L. Ames,
Jr., John Y. Ames, and Patrick A. Garcia.
Eugene L. Ames, Jr., age 66, became Chairman, Chief Executive Officer and a
director of the Company in 1997. He has been in the oil and gas business since
1954 and has been associated with New Venus and its predecessor entities since
1962 and chief executive officer of those predecessor entities since 1991. Ames
received a B.S. degree in Geology from the University of Texas at Austin in
1955. He served as Chairman of the Independent Petroleum Association of America
from 1991 to 1993 and currently serves as a member of the policy committee of
the American Petroleum Institute, and chairman of the Texas Oil and Gas
Association.
John Y. Ames, age 44, became President, Chief Operating Officer and a director
of the Company in 1997. He is a graduate of the University of Texas at Austin
with a BBA degree in Petroleum Land Management. He had eight years of experience
in the energy business before becoming associated with New Venus and its
predecessor entities as a Vice President in 1984. He became Executive Vice
President of those predecessor entities in 1995 and President and Chief
Operating Officer in 1996. He is the son of Eugene L. Ames, Jr.
Patrick A. Garcia, age 43, became Treasurer of the Company in 1997 and was
appointed as Chief Financial Officer in June of 1997. He held similar positions
with the Venus predecessor entities since 1980. He is a graduate of Texas A&M
University with a BBA degree in Accounting. He worked with Peat, Marwick,
Mitchell & Company (now KPMG LLP) for three years before becoming associated
with New Venus and its predecessor entities in 1980.
DEFINITIONS OF CERTAIN OIL AND GAS TERMS
The terms defined in this section are used throughout this Annual Report on Form
10-K.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas and related compounds at standard
conditions.
Bcfe. Equivalent of one billion cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. One British thermal unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit at standard conditions.
Completion. The installation of permanent equipment for the production of oil or
gas, or, in the case of a dry hole, the reporting of abandonment to the
appropriate authority.
Developed Acreage. The number of acres that are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled or to be drilled within the proved area of an
oil or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry Hole or Dry Well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as a producing oil or gas
well.
19
20
Exploitation. The process whereby the value of a property is attempted to be
increased by working over existing wells, by making new completions in existing
wells and by conducting other similar operations intended to increase production
from existing wells in a developed area.
Exploratory Well. A well drilled to find and to produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir
beyond the currently expected limits of the known reservoir. These wells involve
a high degree of risk, given the unknown nature of the horizons being tested.
Gross Acres or Gross Wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Mbbl. One thousand barrels of crude oil or other liquid hydrocarbons.
Mmbtu. One million Btu's.
Mcf. One thousand cubic feet of natural gas and related compounds at standard
conditions.
Mcfe. The equivalent of one thousand cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mmcfe. The equivalent of one million cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net Acres or Net Wells. The sum of the fractional Working Interests owned in
Gross Acres or Gross Wells.
Production Cost. Also referred to as lifting cost, the cost of operation and
maintenance of wells, related equipment and facilities that are expensed as
incurred as a part of the cost of oil and gas produced; e.g., labor to operate
the wells and facilities, repair and maintenance expenses, materials and
supplies consumed, taxes and insurance on property, and severance taxes.
PV-10 Value, or Present Value of Estimated Future Net Revenues. The present
value of estimated future net revenues as of a specified date, after deducting
estimated production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. The estimated future net
revenues are discounted at an annual rate of 10% to determine their "present
value." The present value is shown to indicate the effect of time on the value
of the revenue stream.
Productive Well. A well that is producing oil or gas or that is capable of
production.
Prospect. An area that has been interpreted to be prospective for commercial
hydrocarbon accumulation based on seismic evaluations; leases may or may not
have been acquired in the area of the Prospect.
Prospect Lead. An area that preliminary evaluations suggest may be prospective
for commercial hydrocarbon accumulation; usually no seismic studies will have
been conducted on such an area, nor will have any leases been acquired in it.
Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
Proved Reserves. The estimated quantities of crude oil, natural gas and natural
gas liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved Undeveloped Reserves, or PUD. Proved Reserves that are under undeveloped
spacing units that are so close and so related to developed spacing units that
they may be assumed with confidence to become commercially productive when
drilled.
Royalty Interest. An interest in an oil and gas property entitling the owner to
a share of the oil and gas produced, free of costs of production.
20
21
Seismic Data. Geophysical information collected by transmitting sound waves into
the earth from a transmitter, or source, and measuring, with appropriate
receivers, the time of the sound waves' arrival and their intensity when they
are reflected or refracted back to the surface.
2-D seismic data is collected along a surface line of sources and receivers,
giving a section representing a slice through the earth.
3-D seismic data is collected by distributing sources and receivers over an
area, yielding a volume of information representing the 3-dimensional section of
earth beneath the area being studied. The improved imaging of 3-D data makes it
the preferred advanced technological method of attempting to determine the
location, extent and properties of hydrocarbon accumulations.
Undeveloped Acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains Proved Reserves.
Working Interest, or WI. The cost-bearing operating interest that gives the
owner the right to drill, to produce and to conduct operating activities on the
property and to share a proportionate part of production.
ITEM 2. PROPERTIES
TITLE TO PROPERTIES
Over 99% of our properties are Working Interests derived from oil and gas leases
on property owned by third parties. None of our properties are mineral or fee
interests. We usually perform title research before acquiring leases or
interests in leases, and we believe that we have satisfactory title to our
producing properties. The degree of research varies depending on the value
initially assessed to the property, whether the property is producing at the
time of acquisition, and other factors. The properties are usually subject to
the rights of lessors to be paid a Royalty Interest out of production. They are
also often subject to overriding royalties and other burdens, none of which we
believe to be a material burden on the value of our interest. Substantially all
of our properties are and will continue to be subject to liens and mortgages to
secure borrowings under our credit facility.
Substantially all of the properties that we own are subject to exploration or
development agreements with third parties. The exploration and development
agreements are subject to "Area of Mutual Interest," or "AMI," provisions that
give the third party participants certain limited rights of first refusal on
interests acquired within the AMI. If the third party elects not to acquire such
interest, in a majority of cases we have the right to acquire the third party's
proportionate part of the interest. Once interests are acquired, the parties to
the agreements usually also have an election before a well is drilled. If a
party elects not to drill, we usually have the right to acquire certain
interests from the non-drilling party, but depending upon the size of the
interest and the cost of the proposed well, we may or may not elect to acquire
that interest. In the exploration and development projects in which we place the
most value, a third party election not to drill could leave little value to our
interest unless we could find another third party to assume the non-drilling
party's interest.
In May 1997, our executive and operating offices were relocated to San Antonio,
Texas, where we occupy premises of approximately 12,570 useable square feet
pursuant to a lease that expires on December 31, 2002. We also lease an office
in Houston, Texas. The Houston office address is 363 W. Sam Houston Parkway
East, Suite 490, Houston, Texas 77060. That lease terminates on August 26, 2001.
We no longer have employees in Houston and we have subleased this office space.
Our annual rental expense is approximately $235,000. The lease of the San
Antonio office space provides for increased rents at stated amounts and
intervals and an adjustment for variations in utility costs.
See "Item 1 - BUSINESS" for additional information concerning the Company's oil
and gas properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Stockholders of the Company was held on December 31, 1999,
for the following purposes:
21
22
o To elect eight (8) directors to serve until the next Annual Meeting of
Stockholders
o To ratify the appointment of KPMG LLP as the Company's independent
certified public accountants for the fiscal year ending December 31,
1999
o To ratify the possible issuance, upon conversion of a Convertible
Promissory Note issued to EXCO Resources, Inc., of up to 10,133,333
shares of common stock.
All the matters were approved by the vote of the stockholders of the Company,
and the results are tabulated below:
ABSTAIN OR
FOR AGAINST WITHHELD
--------- ------- ----------
(1) Election of Directors 7,451,682 841 None
E.L. Ames, Jr. 7,451,682 841 None
John Y. Ames 7,451,682 841 None
J.C. Anderson 7,451,682 841 None
Martin A. Bell 7,451,682 841 None
James W. Gorman 7,451,682 841 None
Michael E. Little 7,451,682 841 None
Jere W. McKenny 7,451,682 841 None
John H. Pinkerton 7,451,682 841 None
(2) Ratification of KPMG 7,451,682 841 None
(3) Ratification of possible issuance
of common stock 7,451,682 841 None
22
23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Stock Market(TM)
under the symbol "VENX." The following table sets forth the range of high and
low closing bid prices for each quarterly period during the two most recent
fiscal years as reported by the NASDAQ SmallCap Stock Market(TM). All SmallCap
quotations represent inter-dealer quotations, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
HIGH LOW
-------- --------
1999
First Quarter $ 1.7500 $ .8125
Second Quarter 1.8750 .7500
Third Quarter 1.8750 1.1875
Fourth Quarter 1.4375 .9375
1998
First Quarter $ 3.8750 $ 3.2500
Second Quarter 4.0000 3.0000
Third Quarter 3.8750 3.2500
Fourth Quarter 3.0000 1.2500
On March 28, 2000, the closing bid price for the Company's Common Stock was
$1.031 per share.
The Company had 987 stockholders of record as of March 28, 2000, (includes
nominee holders such as banks and brokerage firms that hold shares for
beneficial owners). The Company has not paid dividends in recent periods and has
no present intention to resume payment of dividends. It presently intends to
reinvest its net revenues in its ongoing business.
The Company entered into a Second Amended and Restated Loan Agreement dated
December 19, 1997. Under that credit agreement, the Company is not permitted to
declare or to pay any dividend on any of its shares or to make any distribution
to its stockholders. Effective March 30, 2000, the December 19, 1997 credit
agreement terminated when the Company repaid the balance outstanding. However,
the Company is in the process of entering into a new credit agreement with
another lender and that agreement will likely also prohibit the payment of
dividends or other distributions to shareholders.
During 1999, the Company issued $1,000,000 original principal amount of notes in
a private placement. The notes are convertible into the Company's common stock
and interest on the notes is payable, at the Company's election, in cash or
shares of the Company's common stock. The Company issued an aggregate of 37,107
shares of common stock in payment of the interest due on the Notes due or
accrued during 1999 (including 15,683 shares issued in January 2000 for interest
due for the quarter ended December 31, 1999). These shares were issued in lieu
of cash interest payments accrued of $44,471 through December 31, 1999. The
shares were issued pursuant to Sections 3(a)(9) and 4(2) of the Securities Act
of 1933.
23
24
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the period indicated selected historical
financial data for the Company. The selected historical financial data as of and
for each of the years in the five-year period ended December 31, 1999, have been
derived from our audited historical financial statements. We acquired or
divested significant producing oil and gas properties in all the periods
presented especially in 1999. Those acquisitions affect the comparability of the
historical financial and operating data for the periods presented. The
information below should be read in conjunction with Item 7 - "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Historical Financial Statements of the Company and the notes thereto
included elsewhere in this Annual Report on Form 10-K, including the reference
to reverse acquisition accounting treatment given to the 1997 Acquisition.
SELECTED FINANCIAL DATA
AS OF AND FOR THE FIVE-YEAR PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
- ------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- -------- -------
Total revenues $ 2,184 $ 2,805 $ 2,476 $ 543 $ 798
Dividends paid -- -- -- 35 72
Income (loss) before extraordinary items 1,010 (8,324) (4,168) (2,007) (696)
Net income (loss) 1,010 (8,670) (4,168) (2,007) (696)
Per common share:
Net income (loss) -- Basic 0.09 (0.87) (0.57) (0.60) (1.00)
Net income (loss) -- Diluted 0.09 (0.87) (0.57) (0.60) (1.00)
Long term debt 1,750 -- 2,005 -- --
Other long-term liabilities 18 23 27 -- --
Convertible redeemable preference shares -- -- -- 4,955 --
Total assets 24,465 8,136 12,931 4,343 3,031
(1) The Company's predecessor was a privately held S Corporation. Dividends
paid in 1995 and 1996 were paid by the S Corporation.
Fiscal 1997 includes revenues, beginning in May 1997, from properties acquired
in the May 1997 acquisition transaction. Fiscal 1998 revenues include twelve
months of such revenues. Fiscal 1999 includes pre-tax gains on the sale of
properties of $4.8 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K (particularly this Item 7) contains statements
that are considered "forward-looking statements," as defined in the Private
Securities Litigation Reform Act of 1995. As discussed in Item 1 - "BUSINESS"
under "-Forward-Looking Statements" and "-Risk Factors," actual results may
differ materially from those contemplated by those forward-looking statements.
GENERAL
In May 1997, we went through a major transformation as a result of an
acquisition transaction. Legally, Xplor Corporation acquired the assets of New
Venus. However, accounting principles require that this transaction be treated
as a reverse acquisition of the Company by New Venus. After the transaction, the
Company's name was changed from Xplor Corporation to Venus Exploration, Inc.
Under the reverse acquisition accounting principles, the results of operations
and financial information for prior years shown in this report are those of the
predecessor Venus entities, not Xplor Corporation. Moreover, operational data
shown herein for periods prior to May 21, 1997; e.g., production information,
reflect the operations of New Venus and its predecessors. Accordingly,
comparison of information in this report with prior Xplor Corporation corporate
reports previously filed under the Securities Exchange Act of 1934 is not an
appropriate performance measure.
24
25
In 1999 we participated in drilling 5 wells. One of the 5 wells was Exploratory,
and the other 4 were Development Wells. Two of the wells were completed as oil
wells, 2 as gas wells, and 1 was a dry hole. In 2000, we anticipate drilling or
participating in the drilling of five (5) development wells and three (3)
exploration wells. Depending on the success of those wells, we may drill
additional wells in 2000.
Proved Reserves as of December 31, 1999, totaled 11.1 Bcfe a decrease of 2 Bcfe
from the 13.1 Bcfe we reported at year-end 1998, a 15% decrease. The decrease is
due to our selling non-core oil and gas producing properties during the first
quarter of 1999. These properties had Proved Reserves of 3.9 Bcfe at December
31, 1998. Production for 1999 totaled .8 Bcfe. The 4.7 Bcfe of reserve decrease
due to selling properties and 1999 production was offset by 2.8 Bcfe of net new
reserves added through discoveries, extensions and revisions of reserves on our
existing properties. In 1999, average daily net production decreased to 2,250
Mcfe/day from 3,521 Mcfe/day in 1998, a 36% decrease. Approximately 37% of the
decrease, or 462 Mcfe/day, is due to the sale of properties during the first
quarter of 1999. The balance of the decrease is due to a decline in production
on existing wells. Most of the reserve additions discussed above occurred during
the later part of the year and are undeveloped reserves, so there was little
contribution by these added reserves toward 1999 production. As of December 31,
1999, approximately 39% of our reserves are natural gas reserves. As of December
31, 1998, approximately 68% (55% after adjusting for the property divestiture
during the first quarter 1999) of our reserves were natural gas reserves.
During the six month period we owned the Jackson Parish properties we reported
our investment in EXUS under the equity method of accounting. Under the equity
method we report our net investment in EXUS on the consolidated balance sheet
(our share of EXUS assets are netted with our share of EXUS liabilities). Our
share of the net earnings of EXUS is reported in other income (expense) in the
statement of operations. Accordingly, our production, operating revenues and
expenses do not reflect the activities of EXUS.
On June 30, 1999, we acquired an interest in oil and gas producing properties in
Jackson Parish, Louisiana. The total purchase price was $27.6 million; however
in order to finance the acquisition at no cash outlay to us, we gave up 50% of
the acquisition to another company that agreed to arrange 100% of the cash
required to close the acquisition. To facilitate the financing of the
acquisition with our 50% co-venturer the properties were acquired by a limited
liability company which we owned 50%. On December 31, 1999, we sold our interest
in the properties and we realized a pre-tax gain on the sale of $4.3 million and
we expect to report another $0.4 million in the first quarter of 2000 when
contingencies related to part of the properties sold were cleared. We expect to
record an extraordinary loss of $250,000 related to a penalty on the prepayment
of the amount we borrowed from EXCO to acquire the properties. In addition, we
will record a reversal of $70,000 in accrued imputed interest that will not have
to be paid because of the prepayment. This acquisition was a product of our
strategy under which our explorationists, working in their focus areas, identify
acquisition candidates with exploitation potential. Then, management utilizes
its contacts with larger companies to tender unsolicited offers to purchase the
properties so identified.
During 1999, due to the significant decline in oil and natural gas prices during
1998 and our shortage of capital, we emphasized acquiring and expanding reserves
in existing oil and gas fields rather than exploring for new reserves in
unestablished areas. In November 1999 we successfully restimulated our #1
Westbury Farms well in the Constitution Field, Jefferson County, Texas. As a
result of this successful restimulation, our proved reserves in the field
increased by 2.9 Bcfe.
The 2000 budget provides for capital expenditures of approximately $1.7 million
for projects that include the drilling and completion of 5 development wells,
drilling 3 exploratory wells, a 3-D seismic acquisition for an exploration
project, and acreage acquisition. Our share of the 3 exploration wells and the
3-D seismic totals $250,000. The actual timing of the drilling of the wells is
dependent upon many unpredictable factors and the availability of capital,
which could postpone expenditures because there are no contractual commitments
to incur any of the budgeted costs. In addition, depending on the level of
success of the development wells and exploitation wells, we may drill
additional wells during 2000 at an estimated cost to us of $0.8 million.
Our general and administrative expense increased significantly from 1996 to 1998
due primarily to two factors; i.e., significantly expanded exploration
activities and various corporate restructurings during 1996 and 1997 with the
increased cost continuing into 1998. The corporate restructurings included (i)
the incorporation of a United Kingdom public limited company, (ii) the
repatriation of the United Kingdom company, (iii) the Xplor - Lomak - New Venus
transaction in 1997, and (iv) legal and accounting costs related to first-year
SEC filing costs. All contributed to the significant increase in the Company's
general and administrative costs. General and administrative expense decreased
by approximately $0.9 million, or 28%, in 1999 as compared to 1998 as a result
of various cost reduction measures implemented in late 1998 and throughout 1999.
25
26
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999, COMPARED WITH YEAR ENDED DECEMBER 31, 1998
We reported after tax net income of $1.0 million for 1999 versus a net loss of
$8.7 million for 1998. In 1999, we reported $4.8 million pre-tax gains on the
sale of oil and gas properties. Oil and gas production was 821 Mmcfe in 1999
compared to 1,285 Mmcfe in 1998, a decrease of 36%. Approximately 37% of this
decrease is due to the sale of properties during the first quarter of 1999. The
balance of the decrease is due to a decline in production on existing wells.
Average oil prices increased from $12.84 per barrel in 1998 to $17.54 in 1999, a
37% increase. Average natural gas prices increase from $2.15 per Mcf to $2.23, a
4% increase. As a result of the decrease in production, oil and gas revenue
decreased by $0.6 million to $2.2 million in 1999 from $2.8 million in 1998.
Oil and gas production costs in 1999 were $1,025,947 ($1.25 per Mcfe) compared
with $1,609,733 in 1998 ($1.25 per Mcfe). The decrease in total production
expense is due primarily to the decrease in reported sales volume as a result of
the sale of properties and declining production on existing wells.
1999 production or lifting cost as a percentage of oil and gas sales, decreased
to 47%, compared with 57% in 1998. This decrease is almost entirely due to
higher oil and gas prices since lifting cost per mcfe was virtually unchanged
between the two periods as mentioned in the immediately preceding paragraph.
During the first quarter 1999, we sold our West Virginia properties and two
producing Texas wells. Production for 1999 attributable to the properties sold
totaled 18,313 Mcf of gas. Production for 1998 attributable to the properties
sold totaled 1,566 barrels of oil and 177,830 Mcf of gas. Revenues less
operating expenses of the properties sold totaled $37,047 in 1999 and $213,784
in 1998.
During 1999, we recorded impairment expense of $0.5 million as compared to $2.8
million recorded in 1998. Approximately 45% of the 1999 impairment is the result
of an unexpected decline in value of one of our operated properties. The balance
is due to a decline in the values of non-operated properties. The impairment in
1998 is primarily the result of the effect of significantly lower natural gas
and crude oil prices in 1998. We review for impairment whenever circumstances
indicate that the carrying value of an asset may not be recoverable. Such
reviews were done for both 1999 and 1998. We follow SFAS No. 121 and recognize
an impairment when the net future cash flow that is expected to be generated by
a long-lived asset is less than the net carrying value of the asset. This
comparison is performed on a field by field basis. If the net carrying value is
greater, an impairment write down is recorded in the amount of the difference
between the net carrying value and fair value. Fair value is based on estimated
future cash flows to be generated discounted at 10%. Future cash flows for both
the impairment test and for determining the amount of the write down are
estimated using only proved reserves and our estimate of future product prices.
Our current future price assumption is based on New York Mercantile Exchange
("Nymex") futures pricing of crude oil and natural gas contracts for the periods
that we consider have meaningful trading volumes. By conducting the comparison
on a field by field basis we may record an impairment even though the total
estimated value of all our properties is greater than their total net carrying
value.
Exploration expense, including geological, geophysical and seismic data
acquisition and analysis and dry hole expenses of $664,581 in 1999 decreased by
$596,976 from $1,261,557 in 1998. The decrease is due mainly to dry hole costs
of $530,358 recorded in 1998 attributable to a well drilled in West Texas and
reduced exploration activity.
Depreciation, depletion, and amortization (DDA) expense of $663,236 ($0.81 per
Mcfe) in 1999 decreased by $1,111,763 from $1,774,999 ($1.38 per Mcfe) in 1998.
Approximately 58% of the decrease is due to the decrease in sales volume, and
the balance of the decrease (42%) is attributable to lower DDA rates. The lower
DDA rates for 1999 are due to higher estimated proved reserves as a result of
using higher prices in estimating proved reserves and lower net carrying value
of our oil and gas properties as a result of prior year impairments.
During 1999, general and administrative expense of $2,291,017 decreased $883,139
from $3,174,156 in 1998. This decrease was primarily due to various cost
reduction measures implemented in late 1998 and throughout 1999. These cost
reduction measures were primarily related to reductions in the number of
employees. The 1998 amount also includes cost of severance packages for former
employees.
26
27
Interest expense was $895,602 in 1999, compared to $568,085 in 1998. The
$327,517 increase is primarily due to interest on the EXCO convertible
promissory note, which we used to finance our 50% share of the EXUS Energy
properties. During 1999 we recorded interest expense of $429,333 related to the
EXCO note. Offsetting this increase was the reduction in our bank facility as a
result of the sale of the West Virginia properties and the H.E. White wells. We
applied approximately $1.7 million of the sales proceeds to our outstanding bank
debt. Interest expense includes amortization of deferred financing cost of
$29,202 in 1999 and $103,260 in 1998. The average daily balances of
interest-bearing debt was $8.3 million in 1999, compared to $4.8 million in
1998.
YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997
We reported a net loss of $8.7 million for 1998 versus a net loss of $4.2
million for 1997. Due to low oil prices, the Company reported impairment losses
of $2.8 million in 1998 compared to $1.1 million in 1997. Low oil prices also
resulted in higher depreciation, depletion and amortization expense and
negatively impacted revenues. In 1998, we reported an extraordinary loss of
$345,905 due to the early extinguishment of debt.
Oil and gas production was 1,285 Mmcfe in 1998 compared to 896 Mmcfe in 1997, an
increase of 43%. This increase is due to new wells brought into production
during 1997 and 1998 and a full year of production from the wells acquired in
the May 1997 Acquisition. Average oil prices declined from $17.72 per barrel in
1997 to $12.84 in 1998, a 28% decrease. Average natural gas prices declined from
$2.44 per Mcf to $2.15, a 12% decrease. Despite the decrease in average product
prices, oil and gas revenue increased by $0.3 million to $2.8 million in 1998
from $2.5 million in 1997, primarily due to new wells drilled and brought into
production and the 1997 Acquisition.
Oil and gas production costs in 1998 were $1,609,733 ($1.25 per Mcfe) compared
with $963,822 in 1997 ($1.08 per Mcfe). The increase in total production expense
is due primarily to the increase in reported sales volume. In addition,
approximately 54% of 1998 production costs are attributable to older,
non-operated wells that were acquired in the business combination on May 21,
1997. As a group, these wells are the highest production cost wells ($1.55 per
Mcfe in 1998 and $1.45 per Mcfe in 1997), and 1997 reflects only seven months of
production while 1998 reflects twelve months from these wells. Workover
operations on three operated properties also contributed to the increase in
cost. "Workover operations" are those well operations that are undertaken to
improve or to re-establish production in wells that stopped producing or in
wells that we do not believe are producing at optimum rates. Workover operations
that we conducted during 1998 included:
o Recompleting a well in subsurface formations that had not previously been
producing oil or gas but that appeared to be capable of doing so,
o Injecting substances into formations that were currently producing in an
effort to increase production levels from those formations, and
o Repairing or replacing equipment in the well itself.
1998 production or lifting cost as a percentage of oil and gas sales, increased
to 57%, compared with 39% in 1997. Approximately 40% of the increase is due to
lower oil and gas prices. The balance of the decrease is due to a higher
proportion of production coming from the older, non-operated wells and workover
operations, both mentioned above.
During 1998, we recorded impairment expense of $2.8 million as compared to $1.1
million recorded in 1997. The impairment in 1998 is the result of the effect of
significantly lower natural gas and crude oil prices. We review for impairment
whenever circumstances indicate that the carrying value of an asset may not be
recoverable. Such reviews were done for both 1998 and 1997. We follow SFAS No.
121 and recognize an impairment when the net future cash flow that is expected
to be generated by a long lived asset is less than the net carrying value of the
asset. This comparison is performed on a field by field basis. If the net
carrying value is greater, an impairment write down is recorded in the amount of
the difference between the net carrying value and fair value. Fair value is
based on estimated future cash flows to be generated discounted at 10%. Future
cash flows for both the impairment test and for determining the amount of the
write down are estimated using only proved reserves and our estimate of future
product prices. Our price assumption for the year end 1998 test was based on
weighing future price scenarios over a range we believed was reasonable for
estimating the fair values of our properties.
Exploration expense, including geological, geophysical and seismic data
acquisition and analysis and dry hole expenses, was $1,261,557 in 1998, compared
to $504,983 in 1997. The increase is due mainly to dry hole costs of $530,358
attributable to a well drilled in West Texas.
27
28
Depreciation, depletion and amortization expense of $1,774,999 in 1998 increased
by $696,057 from $1,078,942 in 1997. Approximately 67% of the increase is due to
the increase in sales volume, and the balance of the increase is attributable to
the decline in reserves on many individual properties as a result of the low
prices at the end of the period that were used to compute remaining reserves.
During 1998, general and administrative expense of $3,174,156 increased $250,392
from $2,923,764 in 1997. This increase was primarily due to a significant
decrease in overhead reimbursement from a joint venture that we manage. The
reason for that decrease is that effective February 1, 1998, a joint venture
participant withdrew from the venture. That participant had paid $15,000 per
month in overhead reimbursement fees to us for the entire year of 1997 and
through January 31, 1998. In addition, rent expense increased due to the
increase, in late 1997, in the amount of square footage that we rent. The 1998
amount also includes $161,198 of non-cash compensation expense related to stock
options granted to directors in lieu of fees and restricted stock granted two
key employees.
Our 1998 interest and other income of $32,502 decreased by $45,156 from 1997 due
primarily to significantly lower cash available for interest bearing investment.
Interest expense was $568,085 in 1998, compared to $203,213 in 1997. The
$364,872 increase is primarily due to increased borrowings. Interest expense
includes amortization of deferred financing cost of $103,260 in 1998 and $81,535
in 1997. The average daily balances of interest-bearing debt was $4,831,341 in
1998, compared to $1,030,000 in 1997.
ACCOUNTING POLICIES
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
The Statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at fair value and that changes in fair value be recognized
currently in earnings, unless specific hedge accounting criteria are met. In
June 1999, the FASB issued Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement 133, which delays the required adoption of FAS 133 to fiscal 2001. The
timing of adoption of FAS 133 and effect on the Company's financial position or
results of operations have not yet been determined.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had a working capital deficit of $922,899 compared with
working capital deficit of $6,624,472 at December 31, 1998, an increase in
working capital of $5,701,573. Working capital at year-end 1999 and year end
1998 reflect classifying notes payable of $17,919,716 in 1999 and $5,540,000 in
1998 as current. In 1999 we classified the notes as current because they are
required to be repaid from funds due from escrow agent and assets held for sale,
both of which have been classified as current assets and relate to the sale of
the EXUS Properties. The entire balance of notes payable was repaid during the
first quarter 2000. We classified the long-term debt in 1998 because we were not
in compliance with two financial covenants.
On April 12, 2000, the Company obtained a commitment from a new lender for a one
year, $15 million secured revolving line of credit. We expect to close the
facility within 30 days. Under the terms of the commitment, the new credit
facility will provide the Company with an initial borrowing base of $2.5
million. The borrowing base will decline at the rate of $50,000 per month
beginning May 1, 2000 and continue until the next borrowing base redetermination
on October 1, 2000. Borrowing base redeterminations will be performed at least
semi-annually as of April 1 and October 1. The Company may request interim
redeterminations. Changes in the borrowing base are solely at the discretion of
the lender based on the lender's then current engineering standards and are
subject to the lender's credit approval process. Mandatory prepayment is
required to the extent outstanding amounts under the credit facility exceed the
borrowing base. Outstanding balances under the facility will bear interest at
the lender's prime rate plus 1%. A facility fee of 1% of the initial borrowing
base is due on or before closing. A 3/4% facility fee will be due on all
incremental increases in the borrowing base, and a 3/8% per annum fee is due on
the unused portion of the borrowing base. The Company will also be required to
pay a $5,000 engineering fee for the initial borrowing base determination and
for each subsequent redetermination. The facility will be secured by all of the
Company's oil and gas properties and will contain usual and standard covenants
such as: debt and lien restrictions; dividend and distribution prohibitions;
liquidity, leverage, net worth and debt service coverage ratios; and financial
statement reporting requirements. The new credit facility will require us to
28
29
hedge at least 50% of our oil and gas production for twelve months. We expect
to have the hedge in place during the second quarter 2000.
We believe that the higher prices we are receiving for our products, our recent
successful restimulation of a well we operate in the Constitution Field in
Jefferson County, Texas, and the Development Wells we plan to drill, will
contribute significantly to our ability to fund our operations. We also believe
that the $2.5 million borrowing base under the credit facility we expect to
close during April 2000 will provide us with the capital to drill Development
Wells in the Constitution Field and four other fields. To the extent we are
successful in our development drilling activities, our borrowing base should
increase, and that should fund additional Development Wells in the more
promising fields.
Our 2000 budget also includes participating in three exploratory wells; however,
we have relatively little cost exposure. The first exploratory well, drilled
during March 2000, was a dry hole. We expect to record $30,000 in dry hole cost
during the first quarter 2000 related to this well.
During the first quarter 2000 we sold an asset classified as other assets on our
financial statements for $253,000. We expect to record a gain of approximately
$198,000 during the first quarter 2000 related to the sale of the asset.
On March 30, 2000, we received a $250,000 liquidating cash distribution from
EXUS, $152,000 of which was used to repay the Wells Fargo credit facility. The
distribution will have no impact on earnings. During the second quarter 2000 we
expect to receive approximately $0.5 million in post closing settlement proceeds
related to the sale of the EXUS properties.
DEBT FACILITIES
7% Convertible Subordinated Promissory Notes
In the second quarter of 1999 the Company completed the private placement to six
investors (including one director of the Company and one person who was later
appointed a director of the Company) of six unsecured convertible subordinated
promissory notes (the "Subordinated Notes") totaling $1,000,000. The net
proceeds to the Company were $975,000 after legal fees associated with the
transaction. The Company used the proceeds to fund working capital. The
Company's obligations to the noteholders are unsecured and subordinated to the
rights of the Company's bank and other lenders unless those lenders agree
otherwise. Interest payments under the Subordinated Notes may be paid, at the
Company's election, with its common stock. The convertibility feature may be
invoked by the noteholders at any time and by the Company under circumstances
described below.
The Subordinated Notes bear interest at a rate of 7% per annum, or 10% in the
event of default. If interest is paid in common stock, the number of shares to
be issued is determined by dividing the interest payment due by the market price
of one share of the Company's common stock on the last trading day preceding the
interest payment date. Interest is payable quarterly beginning on June 30, 1999.
During 1999 the Company paid interest for the quarters ended June 30, 1999, and
September 30, 1999, with 21,424 shares of the Company's common stock. In January
2000 the Company issued 15,683 shares in payment of the interest due for the
quarter ended December 31, 1999.
The Subordinated Notes mature in 2004, at which time the entire unpaid principal
is due and payable. The noteholders can convert the debt to the Company's common
stock at any time, at a conversion rate of $1.15 per share, the market value of
the common stock on the date the terms were agreed to. The conversion price will
be adjusted proportionately in cases where the number of the outstanding shares
of common stock is changed on a pro rata basis; e.g., stock dividends and stock
splits. In addition, the conversion price will be reduced if the Company issues
common stock, or securities convertible into common stock, at a price lower that
the $1.15 conversion price, as adjusted. In such a case, the conversion price
will be reduced to the conversion price of the convertible security or the price
of the common stock sold.
If the Company issues other subordinated notes or other similar securities with
superior terms to the new noteholders, the holders of the Subordinated Notes
also have the right to receive replacement notes that include those superior
terms, at least with regard to a higher stated interest rate, a higher premium
upon early redemption by the Company, a lower per-share conversion price, or a
longer period before the Company can cause a mandatory redemption.
The Company has a conditional option of converting the outstanding balance of
each Subordinated Note to shares of its common stock. That option does not
mature until thirty-six months after the original issuance of the Subordinated
Notes, and the condition to the Company's option to convert is that the closing
market price for the shares of the Company's
29
30
common stock must have exceeded $3.60 per share for at least 25 out of the
preceding 30 trading days. The conversion is based on the same $1.15 price per
share.
The Subordinated Notes allow the Company to redeem them for cash and the payment
of a redemption premium. That right begins on the second anniversary of the
original issuance. The redemption premium begins at 18% and decreases 1% per
month after that, and there is a credit against the premium for all accrued
interest on the Subordinated Notes to the date of the redemption. The Company
also has a preferential right to buy the notes if the holders decide to sell
them.
If an event of default occurs, the noteholders may demand immediate repayment of
the principal amount and any accrued but unpaid interest. They will also have
all other rights generally allowed by contract and applicable law. Events of
default include, among other conditions, a default under other indebtedness or
securities.
The Subordinated Notes were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. Common
stock issued on conversion or in lieu of cash interest payments under the
Subordinated Notes has been and will be issued in the same manner. As a result,
the transfers of such securities are restricted.
Concurrently with the execution of the Subordinated Notes, the Company entered
into a registration rights agreement with each noteholder that gives that
noteholder the option to register for resale under the Securities Act of 1933
any of their shares of the Company's common stock on a registration statement
otherwise being filed by the Company for sales on its own behalf. The Company
also agreed not to grant any new registration rights to third parties if those
rights would adversely impact the rights of the holders.
Subordinated Debenture
During October 1999, the chief executive officer of the Company advanced the
Company $750,000 in the exchange for a Subordinated Debenture (the "Debenture")
issued by the Company. The net proceeds to the Company were approximately
$730,000 after legal and other costs associated with the transaction. The
Company used the proceeds to fund working capital. The Company's obligation to
the debenture holder is unsecured and subordinated to the rights of the
Company's bank and other lenders (except for the subordinated note holders who
have equal priority) unless those lenders agree otherwise. Interest is payable
monthly, in cash, at a rate equal to Frost National Bank prime rate plus 1%. On
December 31, 1999, the interest rate was 9.5%.
If an event of default occurs, the Debenture holder may demand immediate
repayment of the principal amount and any accrued but unpaid interest. The
Debenture holder will also have all other rights generally allowed by contract
and applicable law. Events of default include, among other conditions, a default
under other indebtedness or securities.
The Debenture matures in 2004, at which time all the unpaid principal is due and
payable. The Company is obligated to redeem the Debenture if it raises enough
cash to do so by selling equity securities. The Company has the right, at its
option to redeem the debenture for cash beginning on the original issue date.
The Subordinated Debenture was issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. As a
result, the transfer of such security is restricted.
Wells Fargo Facility
In 1997, we entered into a loan agreement establishing a $20,000,000 revolving
line of credit. In December 1997 this agreement was restated and amended to
increase the credit facility to $50,000,000 subject to borrowing base determined
every six months (April 1 and October 1) by the bank based on our oil and gas
reserves that were used as security for the loan. On August 19, 1998 the credit
facility was amended resulting in the interest on related borrowings becoming
the bank's prime lending rate plus 1%. The interest rate at December 31, 1999
and 1998 was 9.50% and 8.75%.
As of December 31, 1999, the borrowing base was $3,870,000 and $3,819,716 was
outstanding resulting in an unused borrowing base of $50,284. On January 6,
2000, as part of the cash settlement from the sale our interest in the EXUS
Properties, $3,716,000 was used to reduce the outstanding balance under the
credit facility, resulting in a outstanding loan balance of $152,000 as of
January 6, 2000. At the same time the bank lowered the borrowing base to
$152,000. On March 30, 2000, the outstanding balance under the credit facility
was repaid. As discussed above we have obtained a commitment from a new lender
for a debt facility with an initial borrowing base of $2.5 million.
30
31
EXCO Convertible Note
On June 30, 1999, we borrowed $7 million from EXCO under the terms of an $8
million convertible promissory note (the "EXCO Note") due July 1, 2004. We drew
$7 million under the EXCO Note to fund our capital contribution to EXUS, and the
entire amount was repaid on January 6, 2000, from proceeds from the escrow
account created on December 31, 1999, when the EXUS Energy properties were sold.
There was no conversion of any part of the EXCO Note into common shares prior to
its termination, and interest during the actual outstanding term of the EXCO
Note was 10%.
The EXCO Note contained a prepayment penalty provision of 3.57% of the principal
prepaid for any prepayment occurring on or prior to July 1, 2000. On January 6,
2000, we paid a $250,000 prepayment penalty when we prepaid the entire $7
million outstanding balance. In the first quarter of 2000 we will recognize an
extraordinary loss for the amount of the prepayment. In addition, the Company
will record a reversal of $70,000 in accrued imputed interest that will not have
to be paid because of the prepayment. The EXCO Note contained other customary
terms, and these terms are summarized on Form 8-K dated June 30, 1999.
NationsBank, N. A. Credit Facility
In connection with EXUS' acquisition of the properties in Jackson Parish,
Louisiana, on June 30, 1999, EXUS entered into a credit facility with
NationsBank, N. A. as administrative agent and lender. The credit facility,
which was due to mature on June 30, 2002, provided for borrowings up to $50
million, subject to borrowing base limitations. The borrowing base at December
31, 1999, totaled $19.5 million, of which $14.2 million was outstanding. On
December 31, 1999, EXUS distributed the credit facility and EXUS' oil and gas
properties to Venus and EXCO so that Venus and EXCO could sell the properties on
December 31, 1999. Venus' share of the outstanding balance at December 31, 1999,
totaled $7.1 million, and the entire balance was repaid on January 6, 2000, from
proceeds from the escrow account created on December 31, 1999, when the oil and
gas properties were sold.
The credit facility provided that if the aggregate outstanding indebtedness of
EXUS was less than 75% of the borrowing base, then advances would bear interest
at 1.5% over LIBOR. If the borrowing base usage equaled or exceeded 75%, then
advances would bear interest at 1.75% over LIBOR.
Commencing on September 25, 1999 and continuing each month thereafter until
maturity, the credit facility required mandatory payments equal to 50% of net
revenues (as defined in the credit facility) for the immediately preceding
calendar month. Each such payment was applied first to accrued but unpaid
interest and then to principal. The EXCO Note contained other customary terms
and these terms are summarized on Form 8-K dated June 30, 1999.
Stratum Facility
During the fourth quarter 1998, we acquired Stratum's rights and interests in
Venus Development, a wholly owned subsidiary of Venus Exploration, Venus
Development's Term Loan, and Venus Development's oil and gas properties in
exchange for 1,100,000 shares of the Company's common stock. Accordingly, the
Stratum Facility has been terminated. The acquisition of Stratum's interest
includes the overriding royalties that it had originally acquired pursuant to
the agreement and certain warrants Stratum held to acquire Venus Exploration,
Inc. shares held by certain of its shareholders. We recorded, in the fourth
quarter of 1998, a non-cash loss of $345,905 due to the early extinguishment of
debt as a result of writing off deferred financing costs related to this loan.
HEDGING ACTIVITIES
On certain properties, we used commodity derivative contracts to protect and to
ensure cash flow levels. Those properties were limited to those that were owned
by Venus Development and that were subject to the financing facility provided by
Stratum. Under the terms of the exchange of Venus shares for the Stratum note
and other agreements, all commodity derivative contracts were terminated, and
there were no quantities hedged as of December 31, 1999 and December 31, 1998.
As discussed under Liquidity and Capital Resources, we are in the process of
obtaining a new credit facility which will require us to hedge approximately
one-half of our production for a period of one year. We expect to have the hedge
in place during the second quarter 2000.
31
32
IMPACT OF YEAR 2000
The "Year 2000 problem" arises because many computer systems and programs were
designed to handle only a two-digit year, not a four-digit year. We were
concerned that when the year 2000 began, these computers would have interpreted
"00" as the year 1900 (e.g., 1998 is seen as "98") and either stop processing
date-related computations, or will process them incorrectly.
During 1998 and 1999 we developed and implemented a plan to determine whether
our computers were Year 2000 compliant. We also surveyed our major vendors,
purchasers of products, customers and service providers, to assist in an
assessment of whether they expected to be Year 2000 compliant.
To date we have not experienced any material failures of our systems or those of
third parties with whom we conduct business. Although there is still a
possibility that in the coming months, certain systems could experience failures
due to the Year 2000 problem, we do not believe that any such failure would
materially affect our operations.
We expensed, as incurred, all costs related to the assessment and remediation of
the Year 2000 problem. These costs were funded through operating cash flow and
were not material to our consolidated financial condition or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk due to fluctuations in the price of natural gas
and crude oil, as well as changes in interest rates.
Natural gas and crude oil prices fluctuate widely in response to changing market
forces, which are beyond our control. Substantially all of our revenue is from
the sale of natural gas and crude oil, so these fluctuations can have a
significant effect on our revenue. During the second quarter 2000 we expect to
hedge approximately 50% of our oil and natural gas production pursuant to the
requirements of a new credit facility we expect to close during the same
quarter. Gains and losses from the hedge should be generally offset by price
changes in the underlying commodity. Accordingly, we do not believe that such a
use of a derivative instrument exposes us to material risk; however, it will
limit the amount of benefit we could receive from future increases in product
prices.
Changes in product prices can also have a significant effect on the value of our
oil and gas properties for purposes of determining whether an impairment
write-down must be recorded. Although impairment write-downs do not affect cash
flow, they do reduce our tangible net worth, which in turn affects our ability
to meet the tangible net worth requirement under the new credit facility and
Nasdaq market listing requirements.
Our earnings are also affected by changes in interest rates because our bank
debt ($3,819,716 at December 31, 1999) is subject to a floating prime rate plus
1%. Although we significantly reduced our bank debt after year-end, we plan to
use bank debt in the future to fund development wells. Fluctuations in these
rates directly impact our interest expense.
Historically, except when required by a lender, we have not used financial
instruments such as futures contracts or interest rate swaps to mitigate the
effect of changes in commodity prices or interest rates. We had no existing
contracts at December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following Part IV.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth under the captions
"Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Executive Officers" of our proxy statement for our 2000 Annual
Meeting of Shareholders (the "Proxy Statement"), which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference. The Proxy Statement is expected to be filed prior to April
29, 2000.
32
33
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption "Executive
Compensation" of Venus's Proxy Statement, which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" of Venus's Proxy
Statement, which will be filed with the Commission pursuant to Regulation 14A
under the Exchange Act and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions "Executive
Compensation" - Director Compensation and Certain Relationships and Related
Party Transactions" of Venus's Proxy Statement, which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1 to this Annual Report on Form
10-K.
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the information is not required under the
related instructions or is inapplicable or because the information is included
in the Financial Statements or related Notes.
3. EXHIBITS
3.1(1) Articles of Incorporation of Venus Exploration, Inc.
3.2(1) Bylaws of Venus Exploration, Inc., as amended
4.1(2) Warrant to purchase Common Stock issued to Kinder Investments, L.P.
4.1(1) Warrant to purchase Common Stock issued to Martin A. Bell
4.2(1) Form of Warrant to purchase Common Stock issued as partial
consideration in acquisition of the assets of The New Venus
Exploration, Inc., and from Lomak Production I L.P., and Lomak
Resources LLC.
4.3(8) Form of 7% Convertible Subordinated Notes
4.4(8) Form of Registration Rights Agreement between Venus Exploration, Inc.
and various holders of 7% Convertible Subordinated Notes
4.5(9) Ames Subordinated Note*
4.6(8) Form of Salary Reduction Stock Option Agreement*
9.1(1) Voting Trust Agreement dated effective March 31, 1997, among E. L.
Ames, Jr., et al.
33
34
10.1(3) Registrant's 1985 Incentive Stock Option Plan*
10.2(2) Registrant's 1995 Incentive Stock Option Plan*
10.3(5) 1997 Incentive Plan*
10.4(1) Second Amended and Restated Loan Agreement dated December 19, 1997,
between Venus Exploration, Inc., and Wells Fargo Bank (Texas) N.A.
10.5(4) First Amendment to Second Amended and Restated Loan Agreement dated
May 19, 1998 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A.
10.6(6) Second Amendment to Second Amended and Restated Loan Agreement dated
July 8, 1998 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A.
10.7(6) Third Amendment to Second Amended and Restated Loan Agreement dated
August 18, 1998 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A.
10.8(13) Fourth Amendment to Second Amended and Restated Loan Agreement dated
December 3, 1998 by and between Venus Exploration, Inc. and Wells
Fargo Bank (Texas), N.A.
10.9(13) Fifth Amendment to Second Amended and Restated Loan Agreement dated
January 16, 1999 by and between Venus Exploration, Inc. and Wells
Fargo Bank (Texas), N.A.
10.10(7) Sixth Amendment to second Amended and Restated Loan Agreement dated
March 15, 1999 between Venus Exploration, Inc. and Wells Fargo Bank
(Texas), N.A.
10.11(8) Seventh Amendment to Second Amended and Restated Loan Agreement dated
June 30, 1999 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A.
10.12(9) Eight Amendment to Second Amended and Restated Loan Agreement
effective September 30, 1999 by and between Venus Exploration, Inc.
and Wells Fargo Bank (Texas), N.A.
10.13 Ninth Amendment to Second Amended and Restated Loan Agreement
effective December 31, 1999 by and between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A.
10.14(11) Letter Agreement dated February 4, 1999, between Venus Exploration,
Inc., and Petroleum Development Corporation
10.15(11) Amendment to Letter Agreement dated February 11, 1999, between Venus
Exploration, Inc., and Petroleum Development Corporation
10.16(12) Asset Purchase Agreement among Venus Exploration, Inc. and Allegheny
Interests, Inc., et al., dated January 26, 1999
10.17(8) Subordination Agreement dated June 30, 1999, between Wells Fargo Bank
(Texas), N.A. and EXCO Resources, Inc.
10.18(8) Intercreditor and Subordination Agreement dated June 30, 1999, between
NationsBank, N.A. and Wells Fargo Bank (Texas), N.A.
10.19(2) Note and Warrant Agreement with Kinder Investments, L.P.
10.20(9) Executive Employment Agreement dated July 1, 1999, for E.L. Ames, Jr.*
10.21(10) Settlement Agreement dated November 19, 1998 between Stratum Group,
L.P. and Venus Exploration, Inc.
34
35
10.22(10) Registration Rights Agreement dated November 30, 1998 between Venus
Exploration, Inc. and Stratum Group, L.P.
10.23(15) Purchase and Sale Agreement between Apache Corporation as seller, and
Venus Exploration, Inc., buyer, dated May 13, 1999
10.24(15) Credit Agreement among EXUS Energy, LLC, as borrower, NationsBank,
N.A., as administrative agent, and financial institutions listed on
Schedule I, dated June 30, 1999
10.25(15) Limited Liability Company Agreement of EXUS Energy, LLC, dated June
30, 1999
10.26(15) Convertible Promissory Note made by Venus Exploration, Inc. in favor
of EXCO Resources, Inc., dated June 30, 1999
10.27(15) Pledge Agreement made by Venus Exploration, Inc. for the benefit of
EXCO Resources, Inc., dated June 30, 1999
10.28(15) Registration Rights Agreement between EXCO Resources, Inc. and Venus
Exploration, Inc., dated June 30, 1999
10.29(15) Agreement Among Members between EXCO Resources Inc., dated June 30,
1999
10.30(14) Purchase and Sale Agreement between Venus Exploration, Inc. as seller,
and Anadarko Petroleum Corporation., buyer, dated December 17, 1999
10.31 Amendment to Purchase and Sale Agreement dated December 17, 1999,
between Venus Exploration, Inc. as seller, and Anadarko Petroleum
Corporation., buyer, dated December 31, 1999
21.(1) List of Subsidiaries
23.1 Consent of KPMG LLP regarding incorporation by reference.
23.2 Consent of Ryder Scott Company regarding incorporation by reference.
27.1 Financial Data Schedule
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by
reference.
(3) Filed as an exhibit to Form S-4 (File No. 33-1903) declared effective
January 8, 1986, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, and incorporated herein by reference.
(5) Filed as an appendix to the Company's Proxy Statement for a Special
Meeting of Stockholders (in lieu of its Annual Meeting) held on
October 27, 1997, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, and incorporated herein by
reference.
35
36
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, and incorporated herein by
reference.
(10) Filed as an exhibit to the Company's Registration Statement to Form
S-3 (file no. 333-73457) with the Commission on March 5, 1999, and
incorporated herein by reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K dated
February 12, 1999, as amended, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 27, 1999, and incorporated herein by reference.
(13) Filed as an exhibit to the Company's original Annual Report on Form
10-K for the year ended December 31, 1998, and incorporated herein by
reference.
(14) Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 31, 1999, and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Current Report on Form 8-K dated
June 30, 1999, and incorporated herein by reference.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated December 31,
1999, reporting information pursuant to Item 2, Item 5 and Item 7
(including pro forma financial data reflecting the sale of the Jackson
Parish properties).
(c) Exhibits.
See the list of exhibits filed as part of this Form 10-K listed under
sub-item (a)3 above.
(d) No financial statement schedules are required to be filed herewith. See
sub-item (a)2 above.
36
37
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of San Antonio,
Texas, on the 12th day of April, 2000.
VENUS EXPLORATION, INC.
By: /s/ EUGENE L. AMES, JR.
-----------------------
Eugene L. Ames, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
April 12, 2000
/s/ EUGENE L. AMES, JR.
-------------------------------------
Eugene L. Ames, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
April 12, 2000
/s/ JOHN Y. AMES
-------------------------------------
John Y. Ames
President, Director and Chief
Operating Officer
April 12, 2000
/s/ J. C. ANDERSON
-------------------------------------
J. C. Anderson
Director
April 12, 2000
/s/ MARTIN A. BELL
-------------------------------------
Martin A. Bell
Director
April 12, 2000
/s/ JAMES W. GORMAN
-------------------------------------
James W. Gorman
Director
April 12, 2000
/s/ MICHAEL E. LITTLE
-------------------------------------
Michael E. Little
Director
April 12, 2000
/s/ JERE W. MCKENNY
-------------------------------------
Jere W. McKenny
Director
April 12, 2000
/s/ JOHN H. PINKERTON
-------------------------------------
John H. Pinkerton
Director
April 12, 2000
/s/ PATRICK A GARCIA
-------------------------------------
Patrick A. Garcia
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
37
38
================================================================================
INDEX TO EXHIBITS
EXHIBIT
NO. ITEM
- ------- ----
3.1(1) Articles of Incorporation of Venus Exploration, Inc.
3.2(1) Bylaws of Venus Exploration, Inc., as amended
4.1(2) Warrant to purchase Common Stock issued to Kinder Investments, L.P.
4.1(1) Warrant to purchase Common Stock issued to Martin A. Bell
4.2(1) Form of Warrant to purchase Common Stock issued as partial
consideration in acquisition of the assets of The New Venus
Exploration, Inc., and from Lomak Production I L.P., and Lomak
Resources LLC.
4.3(8) Form of 7% Convertible Subordinated Notes
4.4(8) Form of Registration Rights Agreement between Venus Exploration, Inc.
and various holders of 7% Convertible Subordinated Notes
4.5(9) Ames Subordinated Note
4.6(8) Form of Salary Reduction Stock Option Agreement
9.1(1) Voting Trust Agreement dated effective March 31, 1997, among E. L.
Ames, Jr., et al.
10.1(3) Registrant's 1985 Incentive Stock Option Plan
10.2(2) Registrant's 1995 Incentive Stock Option Plan
10.3(5) 1997 Incentive Plan
10.4(1) Second Amended and Restated Loan Agreement dated December 19, 1997,
between Venus Exploration, Inc., and Wells Fargo Bank (Texas) N.A.
10.5(4) First Amendment to Second Amended and Restated Loan Agreement dated
May 19, 1998 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A.
10.6(6) Second Amendment to Second Amended and Restated Loan Agreement dated
July 8, 1998 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A.
10.7(6) Third Amendment to Second Amended and Restated Loan Agreement dated
August 18, 1998 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A.
10.8(13) Fourth Amendment to Second Amended and Restated Loan Agreement dated
December 3, 1998 by and between Venus Exploration, Inc. and Wells
Fargo Bank (Texas), N.A.
10.9(13) Fifth Amendment to Second Amended and Restated Loan Agreement dated
January 16, 1999 by and between Venus Exploration, Inc. and Wells
Fargo Bank (Texas), N.A.
10.10(7) Sixth Amendment to second Amended and Restated Loan Agreement dated
March 15, 1999 between Venus Exploration, Inc. and Wells Fargo Bank
(Texas), N.A.
10.11(8) Seventh Amendment to Second Amended and Restated Loan Agreement dated
June 30, 1999 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A.
38
39
10.12(9) Eight Amendment to Second Amended and Restated Loan Agreement
effective September 30, 1999 by and between Venus Exploration, Inc.
and Wells Fargo Bank (Texas), N.A.
10.13 Ninth Amendment to Second Amended and Restated Loan Agreement
effective December 31, 1999 by and between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A.
10.14(11) Letter Agreement dated February 4, 1999, between Venus Exploration,
Inc., and Petroleum Development Corporation
10.15(11) Amendment to Letter Agreement dated February 11, 1999, between Venus
Exploration, Inc., and Petroleum Development Corporation
10.16(12) Asset Purchase Agreement among Venus Exploration, Inc. and Allegheny
Interests, Inc., et al., dated January 26, 1999
10.17(8) Subordination Agreement dated June 30, 1999, between Wells Fargo Bank
(Texas), N.A. and EXCO Resources, Inc.
10.18(8) Intercreditor and Subordination Agreement dated June 30, 1999, between
NationsBank, N.A. and Wells Fargo Bank (Texas), N.A.
10.19(2) Note and Warrant Agreement with Kinder Investments, L.P.
10.20(9) Executive Employment Agreement dated July 1, 1999, for E.L. Ames, Jr.
10.21(10) Settlement Agreement dated November 19, 1998 between Stratum Group,
L.P. and Venus Exploration, Inc.
10.22(10) Registration Rights Agreement dated November 30, 1998 between Venus
Exploration, Inc. and Stratum Group, L.P.
10.23(15) Purchase and Sale Agreement between Apache Corporation as seller, and
Venus Exploration, Inc., buyer, dated May 13, 1999
10.24(15) Credit Agreement among EXUS Energy, LLC, as borrower, NationsBank,
N.A., as administrative agent, and financial institutions listed on
Schedule I, dated June 30, 1999
10.25(15) Limited Liability Company Agreement of EXUS Energy, LLC, dated June
30, 1999
10.26(15) Convertible Promissory Note made by Venus Exploration, Inc. in favor
of EXCO Resources, Inc., dated June 30, 1999
10.27(15) Pledge Agreement made by Venus Exploration, Inc. for the benefit of
EXCO Resources, Inc., dated June 30, 1999
10.28(15) Registration Rights Agreement between EXCO Resources, Inc. and Venus
Exploration, Inc., dated June 30, 1999
10.29(15) Agreement Among Members between EXCO Resources Inc., dated June 30,
1999
10.30(14) Purchase and Sale Agreement between Venus Exploration, Inc. as seller,
and Anadarko Petroleum Corporation., buyer, dated December 17, 1999
10.31 Amendment to Purchase and Sale Agreement dated December 17, 1999,
between Venus Exploration, Inc. as seller, and Anadarko Petroleum
Corporation., buyer, dated December 31, 1999
21.(1) List of Subsidiaries
39
40
23.1 Consent of KPMG LLP regarding incorporation by reference.
23.2 Consent of Ryder Scott Company regarding incorporation by reference.
27.1 Financial Data Schedule
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by
reference.
(3) Filed as an exhibit to Form S-4 (File No. 33-1903) declared effective
January 8, 1986, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, and incorporated herein by reference.
(5) Filed as an appendix to the Company's Proxy Statement for a Special
Meeting of Stockholders (in lieu of its Annual Meeting) held on
October 27, 1997, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998, and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, and incorporated herein by
reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, and incorporated herein by
reference.
(10) Filed as an exhibit to the Company's Registration Statement to Form
S-3 (file no. 333-73457) with the Commission on March 5, 1999, and
incorporated herein by reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K dated
February 12, 1999, as amended, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 27, 1999, and incorporated herein by reference.
(13) Filed as an exhibit to the Company's original Annual Report on Form
10-K for the year ended December 31, 1998, and incorporated herein by
reference.
(14) Filed as an exhibit to the Company's Current Report on Form 8-K dated
December 31, 1999, and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Current Report on Form 8-K dated
June 30, 1999, and incorporated herein by reference.
40
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VENUS EXPLORATION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for
each of the years in the three-year period
ended December 31, 1999 F-4
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive
Income for each of the years in the three-year period
ended December 31, 1999 F-5
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31, 1999 F-6
Notes to Consolidated Financial Statements F-7
F-1
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Venus Exploration, Inc.:
We have audited the accompanying consolidated balance sheets of Venus
Exploration, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity (deficit)
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Venus Exploration,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
April 12, 2000
San Antonio, Texas
F-2
43
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and equivalents $ 235,673 $ 125,832
Trade accounts receivable 717,964 414,695
Funds due from escrow agent 17,303,582 --
Assets held for sale 1,236,030 --
Prepaid expenses and other 90,177 77,299
------------ ------------
Total current assets 19,583,426 617,826
Oil and gas properties and equipment, at cost
under the successful efforts method, net 4,300,876 7,138,690
Other property and equipment, net 136,274 238,598
Deferred financing costs, at cost less accumulated amortization 20,380 19,226
Other assets, at cost less accumulated amortization 423,750 121,574
------------ ------------
$ 24,464,706 $ 8,135,914
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,447,920 $ 1,268,743
Other liabilities 1,138,689 433,555
Current notes payable 17,919,716 5,540,000
------------ ------------
Total current liabilities 20,506,325 7,242,298
Long-term debt 1,750,000 --
Other long-term liabilities 18,131 22,591
------------ ------------
Total liabilities 22,274,456 7,264,889
Shareholders' equity:
Preferred stock; par value of $0.01; 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock; par value of $.01; 30,000,000 shares
authorized; 11,055,285 and 10,971,325 shares issued
and outstanding in 1999 and 1998, respectively 110,553 109,713
Additional paid-in capital 17,336,593 17,209,042
Accumulated deficit (15,194,396) (16,203,980)
Accumulated other comprehensive income - net unrealized
appreciation on investment securities 68,750 --
Unearned compensation (131,250) (243,750)
------------ ------------
Total shareholders' equity 2,190,250 871,025
Commitments and contingencies
------------ ------------
$ 24,464,706 $ 8,135,914
============ ============
See accompanying notes to consolidated financial statements.
F-3
44
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Oil and gas revenues $ 2,183,681 $ 2,804,749 $ 2,476,040
------------ ------------ ------------
Costs of operations:
Production expense 1,025,947 1,609,733 963,822
Exploration expenses, including dry holes 664,581 1,261,557 504,983
Impairment of oil and gas properties 544,740 2,803,152 1,051,617
Depreciation, depletion and amortization 663,236 1,774,999 1,078,942
General and administrative 2,291,017 3,174,156 2,923,764
------------ ------------ ------------
Total expenses 5,189,521 10,623,597 6,523,128
------------ ------------ ------------
Operating loss (3,005,840) (7,818,848) (4,047,088)
------------ ------------ ------------
Other income (expense):
Interest expense (895,602) (568,085) (203,213)
Equity in net earnings from EXUS Energy, LLC 444,968 -- --
Gain on sale of assets 4,762,170 30,007 4,920
Interest and other income 33,888 32,502 77,658
------------ ------------ ------------
4,345,424 (505,576) (120,635)
------------ ------------ ------------
Net income (loss) before income taxes and extraordinary item 1,339,584 (8,324,424) (4,167,723)
Income tax expense 330,000 -- --
------------ ------------ ------------
Income (loss) before extraordinary item 1,009,584 (8,324,424) (4,167,723)
Extraordinary loss on early extinguishment of debt -- 345,905 --
------------ ------------ ------------
Net income (loss) $ 1,009,584 $ (8,670,329) $ (4,167,723)
============ ============ ============
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ 0.09 $ (0.84) $ (0.57)
Extraordinary loss on early extinguishment of debt -- $ (0.03) --
============ ============ ============
Earnings (loss) $ 0.09 $ (0.87) $ (0.57)
============ ============ ============
Common shares and equivalents outstanding:
Basic 11,011,218 9,934,251 7,270,357
Diluted 11,579,723 9,934,251 7,270,357
See accompanying notes to consolidated financial statements.
F-4
45
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE
INCOME
Accumu-
lated
other
Additional Retained Compre-
Issued Common Paid-in earnings hensive Unearned
shares Stock capital (deficit) Income Compensation Total
----------- ------------ ------------- ------------ ------------ ------------ ------------
Balances, December
31, 1996 3,322,121 $ 33,221 $ 1,301,949 $ (3,365,928) $ -- $ -- $ (2,030,758)
Net loss -- -- -- (4,167,723) -- -- (4,167,723)
Conversion of
preference
shares 2,041,674 20,417 4,934,583 -- -- -- 4,955,000
Compensation costs
for stock
options -- -- 252,002 -- -- -- 252,002
Stock options
exercised 298,678 2,987 58,083 -- -- -- 61,070
Acquisition of Xplor
and Lomak 4,074,342 40,743 8,463,572 -- -- -- 8,504,315
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances, December
31, 1997 9,736,815 97,368 15,010,189 (7,533,651) -- -- 7,573,906
Net loss -- -- -- (8,670,329) -- -- (8,670,329)
Stock issued:
Stratum settlement 1,100,000 11,000 1,756,500 -- -- -- 1,767,500
Compensation
cost for stock
and stock options 134,510 1,345 442,353 -- -- (337,500) 106,198
Earned compensation -- -- -- -- -- 93,750 93,750
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances, December
31, 1998 10,971,325 109,713 17,209,042 (16,203,980) -- (243,750) 871,025
Net income -- -- -- 1,009,584 -- -- 1,009,584
Net unrealized
change in
investment
securities -- -- -- -- 68,750 -- 68,750
------------
Comprehensive
income -- -- -- -- -- -- 1,078,334
Compensation cost
for stock and
stock options 62,536 626 100,644 -- -- -- 101,270
Interest paid with
common stock 21,424 214 26,907 -- -- -- 27,121
Earned compensation -- -- -- -- -- 112,500 112,500
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances, December
31, 1999 11,055,285 $ 110,553 $ 17,336,593 $(15,194,396) $ 68,750 $ (131,250) $ 2,190,250
============ ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-5
46
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Operating Activities:
Net earnings (loss) $ 1,009,584 $(8,670,329) $(4,167,723)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion and amortization of oil
and gas properties 663,236 1,774,999 1,078,942
Other depreciation and amortization 147,388 263,985 241,198
Impairments, abandoned leases, and dry 593,470 3,350,260 1,113,335
hole costs
Gain on sale of property and equipment (4,762,170) (30,007) (4,920)
Equity in net earnings of EXUS (444,968) -- --
Loss on early extinguishment of debt -- 345,905
Compensation expense for stock and stock options 213,770 161,198 252,002
Interest expense paid with common stock 27,121 -- --
Deferred interest expense on EXCO note 71,556 -- --
Changes in operating assets and liabilities:
Trade accounts receivable (303,269) 1,853,803 (1,181,821)
Prepaid expenses and other (12,878) 27,668 (71,277)
Trade accounts payable 179,177 (1,793,957) 1,564,483
Advances from interest owners -- (17,862) (327,039)
Other liabilities 633,577 206,777 226,778
----------- ----------- -----------
Net cash used in operating activities (1,984,406) (2,527,560) (1,276,042)
----------- ----------- -----------
Investing Activities:
Capital expenditures (584,815) (3,271,352) (4,394,687)
Cash acquired in business combination -- -- 2,920,630
Investment in EXUS (7,450,806) -- --
Distributions from EXUS 493,839 -- --
Proceeds from sales of property and equipment 2,641,129 160,733 97,908
----------- ----------- -----------
Net cash used in investing activities (4,900,653) (3,110,619) (1,376,149)
----------- ----------- -----------
Financing Activities:
Net proceeds from issuance of long-term debt
and notes payable 9,063,495 7,492,202 2,277,824
Principal payments on long-term debt and notes (2,038,239) (2,355,832) (272,495)
payable
Deferred financing costs (30,356) (76,045) (35,689)
Proceeds from issuance of stock -- 21,250 --
Proceeds from options exercised -- -- 61,070
----------- ----------- -----------
Net cash provided by financing activities 6,994,900 5,081,575 2,030,710
----------- ----------- -----------
Increase (decrease) in cash and equivalents 109,841 (556,604) (621,481)
Cash and equivalents, beginning of year 125,832 682,436 1,303,917
----------- ----------- -----------
Cash and equivalents, end of year $ 235,673 $ 125,832 $ 682,436
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
47
VENUS EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) ORGANIZATION AND BUSINESS COMBINATION
Venus Exploration, Inc. (the Company) is primarily engaged in the business
of exploring for, acquiring, developing and operating onshore oil and gas
properties in the United States. The Company presently has oil and gas
properties, acreage and production in eight states.
On May 21, 1997, the Company completed a reverse acquisition. The Company
is deemed to have acquired all of the assets and liabilities of Xplor
Corporation ("Xplor"), a Delaware corporation, in exchange for the issuance
to the Xplor shareholders of 2,037,171 shares of the Company's common stock
and of warrants and options to purchase 926,000 additional shares of the
Company's common stock. Simultaneously, the Company is deemed to have
acquired oil and gas properties of two wholly-owned affiliates of Lomak
Petroleum, Inc., (together, "Lomak") in exchange for 2,037,171 shares of
the Company's common stock and of warrants to purchase another 272,353
shares of the Company's common stock. Lomak also acquired 97,008 shares of
the common stock in a third party transaction. The outcome of these
transactions (collectively, the "Acquisition"), is that (i) the former
stockholders of the Company owned 58% of the survivor's outstanding stock,
and thus voting control; (ii) Lomak acquired 22%; and (iii) the Xplor
shareholders owned 20%.
For financial reporting purposes, the transactions described above have
been accounted for as a reverse acquisition whereby New Venus is deemed to
be the acquirer. Accordingly, the historical consolidated financial
statements of the Company and predecessor entities are presented as the
historical consolidated financial statements of the Company and the assets
acquired and liabilities assumed from Xplor and Lomak have been recorded at
fair value as of the date of the combination as required under purchase
accounting. The consolidated financial statements reflect the operations
solely of Venus Exploration, Inc. for the periods prior to May 21, 1997,
whereas such financial statements reflect the operations of the combined
entities for the period subsequent to May 21, 1997.
The effect of the combination transactions was primarily the recording of
the assets and liabilities of Xplor and Lomak at their fair values. The
combined amounts for Lomak and Xplor were as follows:
(IN THOUSANDS)
Cash $ 2,880
Oil and gas properties 5,613
Trade accounts receivable and other 303
Equity securities and investments 151
Trade accounts payable and other liabilities 443
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the financial statements
of Venus Exploration, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(b) Cash and Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased and money market
accounts to be cash equivalents.
F-7
48
(c) Oil and Gas Properties
The Company uses the successful efforts method of accounting for its
oil and gas operations. Under this method, the costs of unproved leases
and exploratory wells are initially capitalized pending the results of
exploration efforts. The costs of unproved properties are assessed
periodically for impairment, on a field-by-field basis, and a loss is
recognized to the extent, if any, that the cost of a property has been
impaired. Exploration expenses, including geological and geophysical
costs, delay rentals, and dry hole costs are charged to expense as
incurred. Exploratory drilling costs are initially capitalized, but are
charged to expense if and when the well is determined to be
unsuccessful.
As unproved properties are determined to be productive, the property
acquisition costs and related exploratory drilling costs of successful
wells are transferred to proved properties. Development costs of proved
properties, including producing wells and related facilities and any
development dry holes, are capitalized. Depletion of the costs of
proved properties are provided by the unit-of-production method based
upon estimates of proved oil and gas reserves on a field-by-field
basis.
Capitalized costs of proved properties are periodically reviewed for
impairment on a field-by-field basis, and, if necessary, an impairment
provision is recognized to reduce the net carrying amount of such
properties to their estimated fair values generally determined on a
discounted cash flow basis. In determining if an impairment is
necessary, the Company estimates future cash flows based on proved
reserves and its estimate of future commodity prices. The Company's
current future price assumption is based on New York Mercantile
Exchange ("NYMEX") futures pricing of crude oil and natural gas
contracts.
(d) Other Property and Equipment
Depreciation and amortization of transportation equipment and office
furniture, fixtures, equipment, and leasehold improvements are computed
using the straight-line method over the respective estimated useful
lives. Maintenance, repairs and renewals are charged to operations,
except that renewals which extend the life of the property are
capitalized.
(e) Income Taxes
The Company follows the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the estimated future tax effects of temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax laws or rates is recognized in
income in the period that includes the enactment date.
(f) Revenue Recognition
The Company records revenue following the entitlement method of
accounting for gas imbalances. As of December 31, 1999 and 1998, there
were no significant imbalances. Three customers accounted for
approximately 19%, 13% and 8% of total consolidated revenues for the
year ended December 31, 1999. Three customers accounted for
approximately 16%, 13% and 12% of total consolidated revenues for the
year ended December 31, 1998. Three customers accounted for
approximately 22%, 10% and 10% of total consolidated revenues for the
year ended December 31, 1997.
(g) Deferred Financing Costs
Deferred financing costs consist of costs associated with obtaining the
Company's debt agreements, as discussed in Note 5, which are amortized
over the expected term of the related borrowings.
F-8
49
(h) Other Assets
Other assets include the Company's remaining investment in EXUS Energy
LLC ("EXUS"), a certificate of deposit and an investment in an
available for sale security. Unrealized losses for available for sale
securities are excluded from earnings and are reported as a separate
component of comprehensive income until realized.
(i) Hedging Transactions
The Company has entered into commodity derivative contracts for
non-trading purposes as a hedging strategy to manage commodity prices
associated with certain oil and gas sales and to reduce the impact of
price fluctuations. The Company primarily used price swaps for
production on properties pledged under its loan agreement.
The Company utilizes the hedge or deferral method of accounting for
commodity derivative financial instruments whereby gains and losses on
these hedging instruments are recognized and recorded as revenues on
the statement of operations when the related natural gas or oil has
been produced, purchased or delivered. As a result, gains and losses on
commodity financial instruments are generally offset by similar changes
in the realized prices of natural gas and crude oil. To qualify as
hedging instruments, these instruments must be highly correlated to
anticipated future sales such that the Company's exposure to the risks
of commodity price changes is reduced. While commodity financial
instruments are intended to reduce the Company's exposure to declines
in the market price of natural gas and crude oil, the commodity
financial instruments may also limit the Company's gain from increases
in the market price of natural gas and crude oil.
On December 2, 1996, the Company entered into a financial swap, as
required under one of the loan agreements discussed in Note 6, whereby
the counterparty agreed to pay the Company the difference between the
floating price and the fixed price for certain volumes of production in
future months (commencing with January 1997 production) if the floating
price was below the negotiated fixed price of $2.0497 per mmbtu for
natural gas or $19.045 per barrel for oil, respectively. If the
floating price exceeded the fixed price for natural gas or oil, the
Company was required to remit the difference to the counterparty. As
discussed in Note 6, the financial swap was terminated during the
fourth quarter, 1998.
(j) Stock-Based Compensation
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, allows companies to adopt a fair value based
method of accounting for stock-based employee compensation plans or to
continue to use the intrinsic-value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has elected to
continue to account for stock-based compensation under the
intrinsic-value method under the provisions of APB Opinion No. 25 and
related interpretations. Under this method, compensation expense is
recognized for stock options when the exercise price of the options is
less than the current market value of the underlying stock on the date
of grant.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-9
50
(l) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines, and penalties are recorded when it is probable that
a liability has been incurred and that the related amount can be
reasonably estimated.
(m) Fair Values of Financial Instruments
The Company's financial instruments consist primarily of short-term
trade receivables or payables or issued debt instruments with floating
interest rates for which management believes fair value approximates
carrying value.
(n) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash
investments and trade receivables. The Company places its temporary
cash investments in U.S. Government securities and in other high
quality financial instruments. The Company's customer base consists
primarily of independent oil and natural gas producers and purchasers
of oil and gas products.
(o) Earnings (loss) per share
The Company follows Statement of Financial Accounting Standards ("FAS")
No. 128, "Earnings Per Share" under which basic net earnings (loss) per
common share is computed by dividing net loss by the weighted average
number of common shares outstanding. Diluted earnings (loss) per share
is computed by assuming the issuance of common shares for all dilutive
potential common shares outstanding.
In 1997 and 1998 the Company reported net losses therefore diluted
earnings per share not presented. In 1999 basic and diluted earnings
per share were calculated as follows.
1999
------------
Basic earnings per share:
Net income available to common shareholders (numerator) $ 1,009,584
Weighted average common shares outstanding (denominator) 11,011,218
------------
Earnings per share $ 0.09
============
Diluted earnings per share:
Net income available to common shareholders $ 1,009,584
Interest paid to convertible note holders 44,771
------------
Net income available to common shareholders plus assumed conversions (numerator) $ 1,054,355
============
Weighted average common shares outstanding 11,011,218
Effect of dilutive securities:
Conversion of convertible subordinated notes 556,163
Assumed exercise of dilutive stock options and warrants 19,694
Less common shares issued to pay interest (7,352)
------------
Weighted average common shares outstanding plus assumed conversions (denominator) 11,579,723
============
Diluted earnings per share $ 0.09
============
(p) New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No 133, Accounting for Derivative Instruments and Hedging
Activities (FAS 133). The Statement establishes accounting and
reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an
F-10
51
asset or liability measured at fair value and that changes in fair
value be recognized currently in earnings, unless specific hedge
accounting criteria are met. In June 1999, the FASB issued Statement
No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement 133, which delays the
required adoption of FAS 133 to fiscal 2001. The timing of adoption of
FAS 133 and effect on the Company's financial position or results of
operations have not yet been determined.
(3) ACQUISITIONS AND DISPOSITIONS
On June 30, 1999, EXUS, owned 50% by the Company and 50% by EXCO Resources,
Inc. (EXCO), completed the acquisition of certain oil and natural gas
producing properties located in Jackson Parish, Louisiana (the EXUS
Properties). The purchase price, after closing adjustments, was $27.6
million. EXUS funded the acquisition with $14 million drawn under a new
bank credit facility it established, and $14 million of EXUS equity capital
which consisted of $7 million cash contribution each by the Company and
EXCO. The Company's capital was funded by a $7 million convertible
promissory note in favor of EXCO dated June 30, 1999.
On December 31, 1999 the Company sold its entire 50% share of the EXUS
Properties. To effect the sale, EXUS distributed the EXUS Properties to
Venus and EXCO, and Venus and EXCO then sold their undivided interest on
December 31, 1999, resulting in a pre-tax gain of $4.7 million to the
Company, of which $4.3 million was recorded in 1999 and the remaining $0.4
million will be recorded in the first quarter 2000 when contingencies
related to part of the properties sold were cleared. The Company recorded
approximately $445,000 in equity in net earnings from EXUS during the six
months it owned the investment. In addition, the Company reported
approximately $360,000 in currently due interest related to the EXCO note
and $72,000 in deferred interest.
(4) OIL AND GAS PROPERTIES
Oil and gas properties consist of the following at December 31, 1999 and
1998:
1999 1998
------------ -----------
Proved properties $ 8,058,806 $ 10,390,206
Unproved properties 267,298 484,877
------------ ------------
8,326,104 10,875,083
Less accumulated depreciation, depletion and amortization (4,025,228) (3,736,393)
------------ ------------
$ 4,300,876 $ 7,138,690
============ ============
The impairment of oil and gas properties recognized in 1999 and 1998
includes a write-down of proved properties of approximately $544,740 and
$2,803,152, respectively. Impairment is recognized only if the carrying
amount of a property is greater than its expected future cash flows based
on proved reserves and estimated future commodity prices. The amount of the
impairment is based on the estimated fair value of the property.
F-11
52
(5) OTHER PROPERTY AND EQUIPMENT
Other property and equipment consists of the following at December 31, 1999
and 1998:
1999 1998
--------- ---------
Transportation equipment $ 6,293 $ 6,293
Furniture, fixtures and office equipment 521,631 521,631
Geophysical interpretation system 118,516 118,516
--------- ---------
646,440 646,440
Less accumulated depreciation, depletion and amortization (510,166) (407,842)
--------- ---------
$ 136,274 $ 238,598
========= =========
(6) LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of the following at December 31, 1999 and 1998:
1999 1998
--------- ---------
7% Convertible subordinated promissory notes $1,000,000 $ --
Subordinated debenture 750,000 --
---------- ----------
$1,750,000 $ --
========== ==========
Notes payable consists of the following at December 31, 1999 and 1998:
1999 1998
----------- -----------
Revolving credit $ 3,819,716 $ 5,540,000
EXCO Convertible Note 7,000,000
NationsBank, N. A. Credit Facility 7,100,000 --
----------- -----------
$17,919,716 $ 5,540,000
=========== ===========
Notes payable have been classified as current because they are required to
be repaid from funds due from escrow agent and assets held for sale, both
of which have been classified as current assets and relate to the sale of
the EXUS Properties. The entire balance of notes payable was repaid during
the first quarter 2000.
7% Convertible Subordinated Promissory Notes
In the second quarter of 1999 the Company completed the private placement
to six investors (including one director of the Company and one person who
was later appointed a director of the Company) of six unsecured convertible
subordinated promissory notes (the "Subordinated Notes") totaling
$1,000,000. The net proceeds to the Company were $975,000 after legal fees
associated with the transaction. The Company used the proceeds to fund
working capital. The Company's obligations to the noteholders are unsecured
and subordinated to the rights of the Company's bank and other lenders
unless those lenders agree otherwise. Interest payments under the
Subordinated Notes may be paid, at the Company's election, with its common
stock. The convertibility feature may be invoked by the noteholders at any
time and by the Company under circumstances described below.
The Subordinated Notes bear interest at a rate of 7% per annum, or 10% in
the event of default. If interest is paid in common stock, the number of
shares to be issued is determined by dividing the interest payment due by
the market price of one share of the Company's common stock on the last
trading day preceding the interest payment date. Interest is payable
quarterly beginning on June 30, 1999. During 1999 the Company paid interest
for the quarters ended June 30, 1999, and September 30, 1999, with 21,424
shares of the Company's common stock. In January 2000 the Company issued
15,683 shares in payment of the interest due for the quarter ended December
31, 1999.
F-12
53
The Subordinated Notes mature in 2004, at which time all of the unpaid
principal is due and payable. The noteholders can convert the debt to the
Company's common stock at any time, at a conversion rate of $1.15 per
share, the market value of the common stock on the date the terms were
agreed to. The conversion price will be adjusted proportionately in cases
where the number of the outstanding shares of common stock is changed on a
pro rata basis; e.g., stock dividends and stock splits. In addition, the
conversion price will be reduced if the Company issues common stock, or
securities convertible into common stock, at a price lower that the $1.15
conversion price, as adjusted. In such a case the conversion price will be
reduced to the conversion price of the convertible security or the price of
the common stock sold.
If the Company issues other subordinated notes or other similar securities
with superior terms to the new noteholders, the holders of the Subordinated
Notes also have the right to receive replacement notes that include those
superior terms, at least with regard to a higher stated interest rate, a
higher premium upon early redemption by the Company, a lower per-share
conversion price, or a longer period before the Company can cause a
mandatory redemption.
The Company has a conditional option of converting the outstanding balance
of each Subordinated Note to shares of its common stock. That option does
not mature until thirty-six months after the original issuance of the
Subordinated Notes, and the condition to the Company's option to convert is
that the closing market price for the shares of the Company's common stock
must have exceeded $3.60 per share for at least 25 out of the preceding 30
trading days. The conversion is based on the same $1.15 price per share.
The Subordinated Notes allow the Company to redeem them for cash and the
payment of a redemption premium. That right begins on the second
anniversary of the original issuance. The redemption premium begins at 18%
and decreases 1% per month after that, and there is a credit against the
premium for all accrued interest on the Subordinated Notes to the date of
the redemption. The Company also has a preferential right to buy the notes
if the holders decide to sell them.
If an event of default occurs, the noteholders may demand immediate
repayment of the principal amount and any accrued but unpaid interest. They
will also have all other rights generally allowed by contract and
applicable law. Events of default include, among other conditions, a
default under other indebtedness or securities.
The Subordinated Notes were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. Common
stock issued on conversion or in lieu of cash interest payments under the
Subordinated Notes has been and will be issued in the same manner. As a
result, the transfers of such securities are restricted.
Concurrently with the execution of the Subordinated Notes, the Company
entered into a registration rights agreement with each noteholder that
gives that noteholder the option to register for resale under the
Securities Act of 1933 any of their shares of the Company's common stock on
a registration statement otherwise being filed by the Company for sales on
its own behalf. The Company also agreed not to grant any new registration
rights to third parties if those rights would adversely impact the rights
of the holders.
Subordinated Debenture
During October 1999, the chief executive officer of the Company advanced
the Company $750,000 in exchange for a Subordinated Debenture (the
"Debenture") issued by the Company. The net proceeds to the Company were
approximately $730,000 after legal and other costs associated with the
transaction. The Company used the proceeds to fund working capital. The
Company's obligation to the debenture holder is unsecured and subordinated
to the rights of the Company's bank and other lenders (except for the
subordinated note holders who have equal priority) unless those lenders
agree otherwise. Interest is payable monthly, in cash, at a rate equal to
Frost National Bank prime rate plus 1%. On December 31, 1999, the interest
rate was 9.5%.
If an event of default occurs, the Debenture holder may demand immediate
repayment of the principal amount and any accrued but unpaid interest. The
Debenture holder will also have all other rights generally allowed by
F-13
54
contract and applicable law. Events of default include, among other
conditions, a default under other indebtedness or securities.
The Debenture matures in 2004, at which time all the unpaid principal is
due and payable. The Company is obligated to redeem the Debenture if it
raises enough cash to do so by selling equity securities. The Subordinated
Debenture was issued in a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. As a result, the
transfers of such securities are restricted.
Revolving Credit
In 1997, the Company entered into a loan agreement establishing a
$20,000,000 revolving line of credit. In December 1997 this agreement was
restated and amended to increase the credit facility to $50,000,000 subject
to borrowing base determined by the bank based on the Company's oil and gas
reserves which are used as security for the loan. On August 19, 1998 the
credit facility was amended resulting in the interest on related borrowings
becoming the bank's prime lending rate plus 1%. The interest rate at
December 31, 1999 and 1998 was 9.50% and 8.75%, respectively.
As of December 31, 1999, the borrowing base was $3,870,000 and $3,819,716
was outstanding resulting in an unused borrowing base of $50,284. On
January 6, 2000, as part of the cash settlement from the sale of the
Company's interest in the EXUS Properties, $3,716,000 was used to reduce
the outstanding balance under the credit facility, resulting in a
outstanding loan balance of $152,000 as of January 6, 2000. At the same
time the bank lowered the borrowing base to $152,000. On March 30, 2000,
the outstanding balance under the credit facility was repaid. The Company
is in the process of obtaining a new bank credit facility the terms of
which are discussed in Note 13, Subsequent Events.
EXCO Convertible Note
On June 30, 1999, the Company borrowed $7 million from EXCO under the terms
of an $8 million convertible promissory note (the "EXCO Note") due July 1,
2004. The Company drew $7 million under the EXCO Note to fund its capital
contribution to EXUS and the entire amount was repaid on January 6, 2000,
from proceeds from the escrow account created on December 31, 1999, when
the EXUS Energy properties were sold. There was no conversion of any part
of the EXCO Note into common shares before its termination, and interest
during the actual term outstanding was 10%.
The EXCO Note contained a prepayment penalty provision of 3.57% of the
principal prepaid for any prepayment occurring on or before July 1, 2000.
On January 6, 2000, the Company paid a $250,000 prepayment penalty when it
prepaid the entire $7 million outstanding balance. During the first quarter
of 2000 the Company will recognize an extraordinary loss for the amount of
the prepayment penalty. In addition, the Company will record a reversal of
$70,000 in accrued imputed interest that will not have to be paid because
of the prepayment. The EXCO Note contained other customary terms and these
terms are summarized on Form 8-K dated June 30, 1999.
NationsBank, N. A. Credit Facility
In connection with EXUS' acquisition of the properties in Jackson Parish,
Louisiana, on June 30, 1999, EXUS entered into a credit facility with
NationsBank, N. A. as administrative agent and lender. The credit facility,
which was due to mature on June 30, 2002, provided for borrowings up to $50
million, subject to borrowing base limitations. The borrowing base at
December 31, 1999 totaled $19.5 million, of which $14.2 million was
outstanding. On December 31, 1999 EXUS distributed the credit facility and
EXUS' oil and gas properties to Venus and EXCO so that Venus and EXCO could
sell the properties on December 31, 1999. Venus' share of the outstanding
balance under the credit facility at December 31, 1999, totaled $7.1
million and the entire balance was repaid on January 6, 2000, from proceeds
from the escrow account created on December 31, 1999, when the oil and gas
properties were sold.
F-14
55
The credit facility provided that if the aggregate outstanding indebtedness
of EXUS was less than 75% of the borrowing base, then advances would bear
interest at 1.5% over LIBOR. If the borrowing base usage equaled or
exceeded 75%, then advances would bear interest at 1.75% over LIBOR.
Commencing on September 25, 1999 and continuing each month thereafter until
maturity, the credit facility required mandatory payments equal to 50% of
net revenues (as defined in the credit facility) for the immediately
preceding calendar month. Each such payment was applied first to accrued
but unpaid interest and then to principal. The credit facility contained
other customary terms and these terms are summarized on Form 8-K dated June
30, 1999.
Subsidiary Term Loan
In October 1996, Venus Development, Inc. (Development) entered into a term
loan and security agreement with a lender to finance the acquisition and
development of oil and gas properties. Under the agreement, Development was
required to assign an overriding royalty interest equal to five percent of
the Company's net revenue interest in the secured properties. The lender
had the right to convert the value of its overriding royalty interests into
equity interests of Venus Energy PLC, subject to certain limitations.
Development also granted warrants to the lender to purchase equity
interests in Venus Energy PLC, subject to certain limitations.
During the fourth quarter of 1998, the Company issued 1,100,000 shares of
the Company's common stock in full payment of the $1,505,329 outstanding
under the term loan. The Company also acquired the lender's rights and
interests in Development, Development's oil and gas properties, and the
overriding royalty interests described above. The Company recorded a
$345,905 extraordinary loss on the early extinguishment of debt for the
write-off of deferred loan costs.
(7) INCOME TAXES
No provision for federal income taxes has been recorded in the accompanying
financial statements for the years ended December 31, 1998 and 1997 due to
the losses recorded by the Company. For the year ended December 31, 1999,
no provision has been recorded due to the availability of net operating
loss carryforwards. The tax provision for the year ended December 31, 1999,
consists solely of state income taxes due to the sale of oil and gas
properties.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
1999 1998
----------- -----------
Deferred tax assets:
Oil and gas and other property and
equipment, principally due to differences
in depreciation, depletion, and amortization $ 648,000 $ 838,000
Stock and stock option expense recorded for
financial reporting purposes -- 35,000
Net operating loss carryforwards 3,401,000 3,879,000
Depletion carryforwards 96,000 97,000
Other 28,000 38,000
----------- -----------
Total gross deferred tax assets 4,173,000 4,887,000
Less valuation allowance (4,173,000) (4,887,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The valuation allowance for deferred tax assets as of January 1, 1999 and
1998 was $4,887,000 and $1,697,000, respectively. The net change in the
total valuation allowance for the years ended December 31, 1999 and 1998
was a decrease of $714,000 and an increase of $3,190,000, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent
F-15
56
upon the generation of future taxable income during the periods in which
those temporary differences become deductible. The net deferred tax asset
at December 31, 1999 and 1998 has been offset entirely by a valuation
allowance due to the uncertainty of the ultimate realization of such
benefits.
As of December 31, 1999, the Company had an estimated net operating loss
carryforward for U.S. federal income tax purposes of approximately
$9,200,000 which is available to offset future taxable income, if any,
through 2013. The utilization of the Company's net operating loss
carryforwards may be limited as a result of the transactions referred to in
note 1.
(8) SHAREHOLDERS' EQUITY
The New Venus Exploration, Inc. ("New Venus") was formed to be the
successor entity to certain oil and gas exploration, development, and
production operations of Venus Energy PLC as described below.
All share and per share information related to shares issued to effect the
original organization transactions described herein (the "convertible
shares") have been restated to present their equivalent number of shares of
the Company's common stock.
Venus Exploration, Inc. ("Old Venus") was incorporated in the state of
Texas on May 16, 1996 as a wholly-owned subsidiary of Venus Energy PLC.
Venus Energy PLC raised $4,955,000 from the sale of 247,750 convertible
redeemable preference shares through a private offering to new investors.
Venus Energy PLC contributed substantially all of the proceeds of the
private offering to Old Venus.
As described in Note 1, in a series of related transactions in 1997, the
shareholders of Venus Energy PLC, became the shareholders of New Venus, and
New Venus succeeded to the assets of Old Venus. The shareholders of Venus
Energy PLC exchanged their shares for the outstanding shares of New Venus,
and the assets and liabilities of Old Venus were transferred to the New
Venus. In conjunction with the Acquisition described below the 247,750
convertible redeemable preference shares were converted into 2,041,674
common shares.
As described in Note 1, on May 21, 1997 the Company completed a reverse
acquisition. The Company is deemed to have acquired all of the assets and
liabilities of Xplor Corporation ("Xplor"), a Delaware corporation, in
exchange for the issuance to the Xplor shareholders of 2,037,171 shares of
the Company's common stock and of warrants and options to purchase 926,000
additional shares of the Company's common stock. Simultaneously, the
Company is deemed to have acquired oil and gas properties of two
wholly-owned affiliates of Lomak Petroleum, Inc., (together, "Lomak") in
exchange for 2,037,171 shares of the Company's common stock and of warrants
to purchase another 272,353 shares of the Company's common stock. Lomak
also acquired 97,008 shares of the common stock in a third party
transaction. The outcome of these transactions (collectively, the
"Acquisition"), is that (I) the former stockholders of the Company owned
58% of the survivor's outstanding stock, and thus voting control; (ii)
Lomak acquired 22%; and (iii) the Xplor shareholders owned 20%.
The following table list warrants outstanding at December 31, 1999 and
1998.
Warrants Outstanding
---------------------------------------------------------
Exercise Number of
Expiration Date Price Warrants
---------------- -------- ---------
June 1, 2005 $ 1.50 50,000
October 23, 2000 $ 2.00 500,000
October 23, 2000 $ 3.00 544,706
---------
1,094,706
=========
F-16
57
(9) RELATED PARTY TRANSACTIONS
Certain officers and shareholders of the Company have working interests in
certain properties operated by the Company. In addition, they participate
with the Company in developing certain properties. Management believes
these transactions are conducted on a basis similar to transactions with
third parties.
The Company receives $2,500 per month from Venus Oil Company, which is
owned by certain shareholders of the Company, for overhead reimbursement of
certain administrative costs. At December 31, 1999, Venus Oil Company owed
the Company $39,387 while at December 31, 1998, the Company owed Venus Oil
Company $1,805. The amount due from Venus Oil Company at December 31, 1999,
was paid during January 2000.
(10) STOCK OPTIONS
The Company has adopted an incentive plan that authorizes the grant of
awards to employees, consultants, contractors and non-employee directors.
The awards to employees, consultants and contractors can be in the form of
options, stock appreciation rights, stock or cash. The awards to
non-employee directors are limited to grants for shares of the Company's
common stock. The Company issued 62,536 shares of the Company's common
stock in 1999 to non-employee directors. The plan is administered by the
compensation committee of the Company's board of directors.
In 1998, the Company issued 100,000 shares of restricted stock to two
employees for services provided. The stock vests over three years. The
Company recorded the transaction at fair market value of the stock on the
date of the transaction, $337,500, and is amortizing the cost straight-line
over the vesting period.
The number of shares of the Company's common stock that is subject to the
incentive plan is 10% of the Company's outstanding shares up to a maximum
of 1,500,000 shares, less the number of shares that were subject to
previous plans of the Company and that are not assumed by the current
incentive plan. As of December 31, 1999, the Company had reserved 938,892
shares out of the 1,105,529 shares available for the incentive plan.
F-17
58
The Company granted 257,457 options and there were 34,611 options expired
or surrendered in 1999. The options granted in 1999 were issued under a
salary reduction plan and vested each pay period that the effected
employees did not receive their full salary. All options granted in 1999
vested by December 31, 1999. The stock options granted in 1999 funded the
salary reduction plan from March 1, 1999, through August 1, 1999. The
salary reduction plan ended on March 31, 2000. On March 1, 2000, the
Compensation Committee granted approximately 358,000 stock options, subject
to shareholder approval, to fund the salary reduction plan from August 1,
1999, through March 31, 2000. Shareholder approval is required because the
issuance of the 358,000 stock options would bring the total stock options
issued under the plan over the maximum number allowed under the incentive
plan.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
Options outstanding,
beginning of period 519,000 $2.534 390,000 $1.782 262,678 $0.389
Expired (20,000) $3.290 -- -- -- --
Surrendered (14,611) $2.639 (79,000) $1.500 -- --
Granted 257,457 $1.155 218,000 $3.486 -- --
Assumed from Xplor -- -- -- -- 426,000 $1.770
Exercised -- -- (10,000) $2.125 (298,678) $0.204
------- ------- --------
Options outstanding,
end of period 741,846 $2.045 519,000 $2.534 390,000 $1.782
======= ======= ========
Options exercisable,
end of period 638,846 $1.693 344,500 $1.756 350,415 $1.814
======= ======= ========
The following summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------- ---------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Options Contractual Average Options Average
Exercise Outstanding Life Exercise Outstanding Exercise
Prices at Year End (Years) Price at Year End Price
---------------------- -------------- ------------- ------------ -------------- ---------------
$1.00 - $1.49 376,346 6.42 $ 1.202 376,346 $ 1.202
$1.50 - $1.99 130,000 5.51 $ 1.558 130,000 $ 1.558
$2.00 - $2.99 32,000 7.71 $ 2.078 32,000 $ 2.078
$3.00 - $3.71 203,500 5.68 $ 3.478 100,500 $ 3.425
F-18
59
The Company applies APB No. 25 in accounting for its stock option plan,
accordingly, the only compensation cost recognized for its stock options in
the financial statements is the estimated value of stock options issued to
consultants related to an arrangement whereby certain consultants reduced
their fees in exchange for the stock options. This arrangement is similar
to and is over the same term as the employee salary reduction plan
discussed above. Had the Company determined compensation cost based upon
the fair value at the date of grant for its stock options under SFAS No.
123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
1999 1998
------------- --------------
Net income (loss):
As Reported $ 1,009,584 $ (8,670,329)
Pro forma 684,438 (8,781,919)
Earnings (loss) per share, basic and diluted:
As Reported $ 0.09 $ (0.87)
Pro forma 0.06 (0.88)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
1999 1998
----------- -----------
Expected option life (years) 4-9 4-9
Risk-free interest rate 4.80% 4.44%-5.03%
Volatility 73.49% 72.85%
Dividend yield None None
No options were granted during 1997.
(11) EMPLOYEE BENEFIT PLAN
The Company has a Profit Sharing 401(k) Plan (the Plan). Benefits under the
Plan are based on the participants vested interests in the value of their
respective accounts at the time the benefits become payable as a result of
retirement, separation from service, or other events. Eligible participants
include all Company employees who have reached age 21 and have completed
three months of service with the Company. Employees may elect to contribute
a portion of their base compensation to the Plan. The Company may make
matching contributions on behalf of the participants based on actual
participant contributions. Employer contributions are discretionary. The
Company made contributions to the Plan of $4,613, $12,764, and $7,734 for
1999, 1998, and 1997, respectively.
(12) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain automobiles under noncancelable
operating leases. The following is a schedule of future minimum lease
payments under noncancelable operating leases with initial or remaining
lease terms in excess of one year as of December 31, 1999:
YEARS ENDING DECEMBER 31,
2000 $ 299,152
2001 280,246
2002 262,505
---------
Total future minimum lease payments $ 841,903
=========
Rental expense under operating leases was $278,856, $335,860, and $201,057
for the years ended December 31, 1999, 1998, and 1997, respectively.
Effective July 1, 1999, the Company entered into a noncancelable
F-19
60
sublease agreement whereby it has subleased excess office space to a third
party. The sublease expires on August 26, 2001, the same date the Company's
primary lease expires on the same office space. Under the sublease
agreement, for 2000 and 2001 the Company expects to receive $18,000 and
$12,000, respectively.
(13) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(a) Costs Incurred in Oil and Gas Property Acquisition, Exploration and
Development Activities
1999 1998 1997
-------- ---------- ----------
Property acquisition costs:
Proved $179,107 $ 189,053 $5,640,955
Unproved -- 130,686 224,650
Exploration costs 584,210 1,791,454 1,340,081
Development costs 421,555 2,589,804 2,612,224
The proved property acquisition costs for 1997 includes the properties
acquired from Lomak and Xplor.
(b) Results of Operations for Oil and Gas Producing Properties
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Oil and gas revenues $ 2,183,681 $ 2,804,749 $ 2,476,040
Production expenses (1,025,947) (1,609,733) (963,822)
Exploration expenses, including dry holes (664,581) (1,261,557) (504,983)
Impairment of oil and gas properties (544,740) (2,803,152) (1,051,617)
Depreciation, depletion and amortization (663,236) (1,774,999) (1,078,942)
----------- ----------- -----------
(714,823) (4,644,692) (1,123,324)
Operating loss
Income tax expense -- -- --
----------- ----------- -----------
Results of operations from producing activities $ (714,823) $(4,644,692) $(1,123,324)
=========== =========== ===========
F-20
61
(c) Reserve Quantity Information
The following table presents the Company's estimate of its proved oil
and gas reserves, all of which are located in the United States. The
Company emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available. The
estimates have been prepared by independent petroleum reservoir
engineers, in conjunction with the Company's internal petroleum
reservoir engineers.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- --------------------
Oil Gas Oil Gas Oil Gas
(mbbl) (mmcf) (mbbl) (mmcf) (mbbl) (mmcf)
------ ------ ------ ------ ------ ------
PROVED RESERVES:
Beginning of the year 708 8,869 977 6,491 225 1,460
Revisions of previous
estimates 291 (1,834) (154) 483 (9) (159)
Extensions, discoveries and
additions 222 1,557 4 2,467 251 1,838
Property acquisitions -- -- -- -- 591 3,762
Property divestitures (2) (3,944) -- -- -- --
Production (84) (316) (119) (572) (81) (410)
------ ------ ---- ------ ---- ------
End of year 1,135 4,332 708 8,869 977 6,491
====== ====== ==== ====== ==== ======
PROVED DEVELOPED
RESERVES:
Beginning of the year 468 6,174 634 5,337 107 523
====== ====== ==== ====== ==== ======
End of year 762 2,151 468 6,174 634 5,337
====== ====== ==== ====== ==== ======
(d) Standardized Measure of Discounted Future Net Cash Flows
The Company's standardized measures of discounted future net cash flows
and changes therein as of December 31, 1999, 1998 and 1997 are provided
based on present values of future net revenues from proved oil and gas
reserves estimated by independent petroleum engineers in conjunction
with the Company's internal petroleum reservoir engineers in accordance
with guidelines established by the Securities and Exchange Commission.
These estimates were computed by applying appropriate current oil and
natural gas prices to estimated future production of proved oil and gas
reserves over the economic lives of the reserves and assuming
continuation of existing economic conditions. Year ended 1999
calculations were made utilizing prices for oil and natural gas that
existed at December 31, 1999 of $24.97 per barrel and $2.36 per Mcf,
respectively. Income taxes are computed by applying the statutory
federal income tax rate to the net cash inflows relating to proved oil
and gas reserves less the tax bases of the properties involved and
giving effect to net operating loss carryforwards, tax credits and
allowances relating to such properties. The reserve volumes provided by
the independent petroleum engineers are estimates only and should not
be construed as exact quantities. These reserves may or may not be
recovered and may increase or decrease as result of future operations
of the Company and changes in market conditions.
F-21
62
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
------------------------------------------
1999 1998 1997
-------- -------- --------
Future cash flow $ 38,106 $ 24,477 $ 33,097
Future development costs (5,065) (2,051) (2,840)
Future production costs (13,159) (7,405) (11,421)
-------- -------- --------
Future net cash flows before income taxes 19,882 15,021 18,836
10% annual discount (8,462) (6,883) (7,439)
Discounted income taxes * * *
-------- -------- --------
Standardized measure of discounted future net cash
flows $ 11,420 $ 8,138 $ 11,397
======== ======== ========
(*) No income tax expense has been reflected as the Company had operating
loss carryforwards from oil and gas operations and sufficient tax
basis in oil and gas properties to offset the future net cash flows
before income taxes.
(e) Principal Sources of Changes in the Standardized Measure of Discounted
Future Net Cash Flows
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
------------------------------------------
1999 1998 1997
-------- -------- --------
Standardized measure of discounted future net cash
flows, beginning of year $ 8,138 $ 11,397 $ 2,952
Revisions of previous quantity estimates (81) (2,719) (649)
Net changes in prices and production costs and other 3,391 (4,220) (800)
Changes in estimated future development costs (90) 1,585 314
Development costs incurred during period that reduced
future development costs 113 524 494
Sales of reserves in place (2,752) -- --
Purchases -- -- 6,115
Extensions and discoveries 3,100 1,580 4,188
Sales of oil and gas produced during the period, net
of production costs (1,213) (1,149) (1,512)
Accretion of discount 814 1,140 295
-------- -------- --------
Standardized measure of discounted future net cash
flows, end of year $ 11,420 $ 8,138 $ 11,397
======== ======== ========
F-22
63
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 1999 and 1998 (in thousands, except
per share data) are as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
1999
Oil and gas revenues $ 385 $ 434 $ 644 $ 721 $ 2,184
Operating profit (loss) (832) (465) (436) (1,273) (3,006)
Net income (loss) (130) (575) (795) 2,510 1,010
Earnings (loss) per share:
Basic (0.01) (0.05) (0.07) 0.23 0.09
Diluted (0.01) (0.05) (0.07) 0.21 0.09
1998
Oil and gas revenues $ 941 $ 723 $ 659 $ 482 $ 2,805
Operating profit (loss) (1,397) (2,616) (917) (2,889) (7,819)
Net income (loss) (1,466) (2,742) (1,098) (3,364) (8,670)
Earnings (loss) per share -
basic and diluted (0.15) (0.28) (0.11) (0.33) (0.87)
The fourth quarters of 1999 and 1998 include adjustments to reflect the
impairment of oil and gas properties of approximately $544,740 and
$888,000, respectively. The sum of the quarterly earnings per share will
not necessarily equal earnings per share for the entire year.
(15) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid $392,295, $464,825, and $203,213 for interest in 1999,
1998 and 1997, respectively. The Company assigned overriding royalty
interests to a lender totaling $30,605 and $88,718 for 1998 and 1997,
respectively. In addition, the Company received in 1998 overriding royalty
interests valued at $96,737 and stock warrants valued at $20,000. In
connection with the Acquisition, the convertible redeemable preference
shares outstanding at December 31, 1996 were converted in 1997 to 2,041,674
common shares. In 1997 the Company issued 4,074,342 shares of common stock
to acquire the assets and liabilities of Xplor and Lomak totaling
$8,504,315. In 1998, the Company issued 1,100,000 shares of Common Stock in
exchange for outstanding long-term debt of the Company totaling $1,605,632.
On December 31, 1999, EXUS distributed properties with a cost basis of
$13,813,161 and notes payable of $7,100,000 to the Company.
(16) LIQUIDITY AND SUBSEQUENT FINANCING
The Company's assets are predominately real property rights and
intellectual information that it developed regarding those properties and
other geographical areas that the Company is studying for exploration and
development. The market for these types of properties fluctuates and can be
very small. Therefore, the Company's assets can be very illiquid and not
easily converted to cash. Even if a sale can be arranged, the price may be
significantly less than what the Company believes the properties are worth.
That lack of liquidity can have materially adverse effects on the Company's
strategic plans, normal operations and credit facilities.
The cash flow generated by current operations is only sufficient to fund
general and administrative expenses. The Company relies on bank and other
financing to implement its business plan. On April 12, 2000, the Company
obtained a commitment from a new lender for a one year, $15 million secured
revolving line of credit. Under the terms of the commitment, the new credit
facility will provide the Company with an initial borrowing base of $2.5
million. The borrowing base will decline at the rate of $50,000 per month
beginning May 1, 2000 and continue until the next borrowing base
redetermination on October 1, 2000. Borrowing base redeterminations will be
performed at least semi-annually as of April 1 and October 1. The Company
may request interim redeterminations. Changes in the borrowing base are
solely at the discretion of the lender based on the lender's then current
engineering standards and are subject to the lender's credit approval
process. Mandatory prepayment is required to the extent outstanding amounts
under the credit facility exceed the borrowing base. Outstanding balances
under the facility will bear interest at the lender's prime rate
F-23
64
plus 1%. A facility fee of 1% of the initial borrowing base is due on or
before closing. A 3/4% facility fee will be due on all incremental
increases in the borrowing base, and a 3/8% per annum fee is due on the
unused portion of the borrowing base. The Company will also be required to
pay a $5,000 engineering fee for the initial borrowing base determination
and for each subsequent redetermination. The facility will be secured by
all of the Company's oil and gas properties, and will contain usual and
standard covenants such as: debt and lien restrictions; dividend and
distribution prohibitions; liquidity, leverage, net worth and debt service
coverage ratios; and financial statement reporting requirements. The new
credit facility will require the Company to hedge at least 50% of its oil
and gas production for twelve months. Although the Company believes that
its new credit facility is sufficient to fund its business plan for 2000,
future availability of credit will depend on the success of its development
program and the Company's ability to stay in compliance with its credit
facility debt covenants.
F-24