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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14334
Venus Exploration, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3299127
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209
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(Address of principal executive offices) (Zip code)
(210) 930-4900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 12, 2000
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Common Stock $.01 par value 11,124,548 shares
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VENUS EXPLORATION, INC. AND SUBSIDIARY
INDEX
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
March 31, 2000 and December 31, 1999
(b) Consolidated Statements of Operations for 4
the three-month periods ended March 31,
2000 and 1999
(c) Consolidated Statements of Cash Flows 5
for the three-month periods ended
March 31, 2000 and 1999
(e) Notes to Consolidated Financial Statements 6
Item 2. - Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 20
Market Risk
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds 20
Item 5. - Other Information 21
Item 6. - Exhibits and Reports on Form 8-K 21
Signatures 22
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31,
2000 December 31,
(Unaudited) 1999
------------- -------------
(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 1,324 $ 236
Trade accounts receivable 254 718
Funds due from escrow agent 530 17,303
Assets held for sale -- 1,236
Prepaid expenses and other 62 90
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Total current assets 2,170 19,583
Oil and gas properties and equipment, at cost
under the successful efforts method, net 4,119 4,301
Other property and equipment, net 115 136
Deferred financing costs, at cost less accumulated amortization 23 20
Other assets, at cost less accumulated amortization 50 424
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$ 6,477 $ 24,464
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,841 $ 1,448
Other liabilities 678 1,139
Current notes payable -- 17,919
------------- -------------
Total current liabilities $ 2,519 $ 20,506
Long-term debt 1,750 1,750
Other long-term liabilities 17 18
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Total liabilities 4,286 22,274
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; 11,086,682 and 11,055,285 shares issued
and outstanding in 2000 and 1999, respectively 111 110
Additional paid-in capital 17,383 17,336
Accumulated deficit (15,200) (15,194)
Accumulated other comprehensive income - net unrealized appreciation
on investment securities -- 69
Unearned compensation (103) (131)
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Total shareholders' equity 2,191 2,190
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Commitments and contingencies $ 6,477 $ 24,464
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See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
(in thousands except per share data)
-------------------------------------
2000 1999
--------------- ---------------
Oil and gas revenues $ 934 $ 385
--------------- ---------------
Costs of operations:
Production expense 331 230
Exploration expenses, including dry holes 289 239
Depreciation, depletion and amortization 178 141
General and administrative 517 607
--------------- ---------------
Total expenses 1,315 1,217
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Operating loss (381) (832)
--------------- ---------------
Other income (expense):
Interest expense (1) (105)
Gain on sale of assets 620 794
Interest and other income 7 13
--------------- ---------------
626 702
--------------- ---------------
Income (loss) before income taxes and extraordinary item 245 (130)
Income tax expense -- --
--------------- ---------------
Income (loss) before extraordinary item 245 (130)
Extraordinary loss on early extinguishment of debt 250 --
--------------- ---------------
Net income (loss) $ (5) $ (130)
=============== ===============
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ 0.02 $ (0.01)
Extraordinary loss on early extinguishment of debt (0.02) --
--------------- ---------------
Earnings (loss) $ -- $ (0.01)
=============== ===============
Common shares and equivalents outstanding:
Basic 11,084 10,981
=============== ===============
Diluted 11,975 10,981
=============== ===============
See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31
(in thousands)
----------------- -----------------
2000 1999
----------------- -----------------
Operating Activities:
Net earnings (loss) $ (5) $ (130)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization of oil and gas properties 178 191
Other depreciation and amortization 24 --
Dry hole costs 52 --
Gain on sale of property and equipment (421) (794)
Gain on sale of securities (199) --
Extraordinary loss on early extinguishment of debt 250 --
Compensation expense for stock and stock options 58 54
Interest expense paid with common stock 18 --
Deferred interest expense on EXCO note (72) --
Changes in operating assets and liabilities:
Trade accounts receivable 464 (23)
Prepaid expenses and other 28 --
Trade accounts payable 393 82
Other liabilities (389) (191)
--------------- ---------------
Net cash provided by (used in) operating activities 379 (811)
--------------- ---------------
Investing Activities:
Capital expenditures (94) (100)
Distributions from EXUS 250 --
Proceeds from sale of securities 254 --
Proceeds from sales of property and equipment 18,475 2,586
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Net cash used in investing activities 18,885 2,486
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Financing Activities:
Net proceeds from issuance of long-term debt and notes payable -- 16
Principal payments on long-term debt and notes payable (17,921) (1,746)
Deferred financing costs (5) --
Prepayment penalty on early extinguishment of debt (250) --
--------------- ---------------
Net cash provided by financing activities (18,176) (1,730)
--------------- ---------------
Increase (decrease) in cash and equivalents 1,088 (55)
Cash and equivalents, beginning of period 236 126
--------------- ---------------
Cash and equivalents, end of period $ 1,324 $ 71
=============== ===============
See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31, 2000 and 1999
1. Organization
Venus Exploration, Inc. (the "Company") is a Delaware Corporation primarily
engaged in the business of exploring for, acquiring, developing and operating
on-shore oil and gas properties in the United States. The Company presently has
oil and gas properties and production in eight states.
2. Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated financial statements presented
should be read in connection with the audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of March 31, 2000 and the results of its operations for the three
months ended March 31, 2000 and 1999.
The results of operations for the three month period ended March 31, 2000
are not necessarily indicative of the results to be expected for the full year.
3. Summary of Significant Accounting Policies
For a description of the accounting policies followed by the Company, refer
to the notes to the 1999 consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
4. Investment in EXUS Energy, LLC
On June 30, 1999, EXUS Energy, LLC, (EXUS) a Delaware limited liability
company owned 50% by EXCO Resources, Inc. (EXCO) and 50% by the Company,
completed the acquisition of oil and natural gas properties located in Jackson
Parish, Louisiana. The properties included 17 producing wells on 8,000 acres, of
which about 80% was developed.
The net purchase price was $27.6 million. EXUS funded the purchase with $14
million of equity capital and the balance from its bank credit facility.
Of the initial $14 million of EXUS equity capital, EXCO provided $7 million from
its cash on hand, and Venus provided $7 million from funds borrowed from EXCO
under the terms of an $8 million convertible promissory note. All borrowings
under the note were secured by a first priority lien providing a security
interest in the Company's membership interest in EXUS and in distribution and
income rights in EXUS.
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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.
On December 31, 1999, the Company sold its interest in the EXUS properties
as did EXCO. The gross purchase price for the Company's interest was $18.9
million, and the Company recorded a pre-tax gain of $4.3 million in 1999, and
0.4 million in the quarter ended March 31, 2000, when contingencies related to
part of the properties sold were cleared.
To effect the sale, EXUS distributed the properties to EXCO and the
Company, as the owners of EXUS, in equal portions. EXCO and the Company then
sold their 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. The
delay in the payment was due to concerns about the potential for a Y2K
disruption to the banking system.
On January 6, 2000, the Company used $7.1 million of the net proceeds to
repay the Company's share of the EXUS Energy bank debt under the NationsBank
credit facility, $7 million to repay the convertible note to EXCO Resources,
$250,000 to satisfy a prepayment penalty under the EXCO convertible note, and
$3.7 million to reduce the Company's bank debt. The balance of the Company's
bank debt, $152,000 was paid on March 30, 2000.
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5. Earnings (loss) Per Share
Basic net loss per common share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted income
(loss) per share is computed by assuming the issuance of common shares for all
dilutive potential common shares outstanding.
Income (loss) per share for the three month period ended March 31, 2000 and
1999 are calculated based on 11,084,440 and 10,981,016 weighted average shares
outstanding, respectively. In 1999 the Company reported a net loss; therefore,
diluted earnings per share is not presented. For the three months ended March
31, 2000, basic and diluted earnings per share were calculated as follows.
Three Months
Ended March 31,
2000
(in thousands except
for per share data)
--------------------
Basic earnings per share:
Income before extraordinary item (numerator) $ 245
Weighted average common shares outstanding (denominator) 11,084
--------------------
Earnings per share $ 0.02
====================
Income (loss) (numerator) $ (5)
Weighted average common shares outstanding (denominator) 11,084
--------------------
Earnings per share $ --
====================
Diluted earnings per share:
Income before extraordinary item (numerator) $ 245
Interest paid to convertible note holders 17
--------------------
Income before extraordinary item plus assumed conversions (numerator) $ 262
Weighted average common shares outstanding (denominator) 11,975
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Earnings per share $ 0.02
====================
Income (loss) (numerator) $ (5)
Interest paid to convertible note holders 17
--------------------
Income plus assumed conversions (numerator) $ 12
Weighted average common shares outstanding (denominator) 11,975
--------------------
Earnings per share $ --
====================
Weighted average common shares outstanding 11,084
Effect of dilutive securities:
Conversion of convertible subordinated notes 870
Assumed exercise of dilutive stock options and warrants 36
Less common shares issued to pay interest (15)
--------------------
Weighted average common shares outstanding plus assumed conversions (denominator) 11,975
====================
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6. Long-Term Debt
Long-term debt consists of the following at March 31, 2000 and December 31,
1999:
March 31, 2000 December 31, 1999
------------------ ------------------
7% Convertible subordinated promissory notes $ 1,000,000 $ 1,000,000
Subordinated debenture 750,000 750,000
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$ 1,750,000 $ 1,750,000
================== ==================
Notes payable consists of the following at December 31, 1999 and 1998:
March 31, 2000 December 31, 1999
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Revolving credit $ -- $ 3,819,716
EXCO Convertible Note -- 7,000,000
NationsBank, N. A. Credit Facility -- 7,100,000
------------------ ------------------
$ -- $ 17,919,716
================== ==================
At December 31, 1999, 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. Under the terms of the Subordinated Note agreements, interest
payments under the Subordinated Notes may be paid, at the Company's election,
with its common stock. Under the terms of the Company's new bank loan agreement
(see note 10), the Company is prohibited from paying cash interest during the
term of the bank loan agreement. 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 15,731 shares in payment of the
interest due for the quarter ended December 31, 1999, and in April 2000 the
Company issued 17,963 in payment of the interest due for the quarter ended March
31, 2000.
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,
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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
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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 March 31, 2000, the interest rate was 10%.
On May 12, 2000, the Debenture was repaid in full from proceeds drawn from
the new bank Credit Facility, described in Note 10, Liquidity and Subsequent
Financing.
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%.
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 obtained a new bank credit facility the
terms of which are discussed in Note 10, Liquidity and Subsequent Financing.
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 quarter ended March 31,
2000, the Company recognized an extraordinary loss for the amount of the
prepayment penalty. In addition, the Company recorded a reversal of $70,000 in
accrued imputed interest that will not have to be paid because of the
prepayment.
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 was
due to mature on June 30, 2002. 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
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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.
7. Shareholders' Equity
Effective March 1, 1998 the Company awarded, under its existing incentive
plan, qualified stock options and restricted stock grants that vest over a
three-year period. The qualified stock options were issued to all employees. The
restricted stock grants (100,000 shares) were issued at no charge to two key
employees who are not officers of the Company. The two key employees are
geoscientists who are central to the Company's business of using advanced
geoscience technology to explore for oil and gas reserves. The Company believes
that these grants, issued during the first year it became publicly traded, is an
incentive that aligns the key employees' interest with that of the Company's
shareholders. The Company is recognizing compensation expense of $9,375 per
month for the value of the restricted stock grants over the vesting period.
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. The Company intends to fix the exercise price at the fair
market value on the date of grant. The date of grant will be the date
shareholders approve the grant.
8. Accounting for Income Taxes
No provision for income taxes has been recorded for the period ended March
31, 2000, due to net operating losses in prior periods, for which a valuation
allowance was fully provided. No provision for income taxes was recorded for the
period ended March 31, 1999 due to the loss recorded for that period.
9. Commitments and Contingencies
The Company is not involved in any claims or legal proceedings.
10. 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.
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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 May 5, 2000, the Company entered into a loan
agreement with a bank establishing a $15,000,000 revolving line of credit
subject to a borrowing base determined every six months (April 1 and October 1)
by the bank based on the Company's oil and gas reserves which are used as
security for the loan. The interest rate is the bank's base rate plus 1%. The
interest rate on May 5, 2000, was 10%.
The initial borrowing base is $2.45 million and it will decline at the rate of
$50,000 per month beginning June 1, 2000 and continue until the next borrowing
base redetermination on October 1, 2000. 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.
A facility fee of 1% of the initial borrowing base was paid at closing. A 0.5%
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 is also required to pay a $5,000 engineering fee for the initial
borrowing base determination and for each subsequent redetermination. The
facility is secured by all of the Company's oil and gas proved properties, and
contains 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 credit facility requires that the Company hedge at least 50% of its oil and
gas production for twelve months. On May 12, 2000, the Company entered into
hedge contracts for 125 barrels of oil per day for twelve months and 500 mmbtu
per day for twelve months. The hedge term is June 2000 through May 2001. The oil
hedge is a costless collar with a floor of $24.00 per barrel and a cap of $27.50
per barrel. The natural gas hedge is a costless collar with a floor of $2.90 per
mmbtu and a cap of $3.65 per mmbtu. The reference price for oil is the New York
Merchantile Exchange West Texas Intermediate future contract. For natural gas
the index price is the Houston Ship Channel index for large packages as quoted
by Inside Ferc.
Although the Company believes that the new credit facility is sufficient to fund
its business plan for 2000, future availability of credit will depend on the
success of the Company's development program and its ability to stay in
compliance with credit facility debt covenants.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes thereto included
elsewhere and with Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999. Certain statements contained herein are
"Forward Looking Statements" and are thus prospective. As discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, such
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements.
Overview
The Company applies advanced geoscience technology to the exploration for
and exploitation of undiscovered onshore oil and gas reserves in the United
States. In addition, the Company's business plan includes the acquisition of
producing properties. The Company presently has oil and gas properties, acreage
and production in eight states. The Company's emphasis is on oil and gas
exploration and development projects and prospects in Texas, Louisiana, Oklahoma
and Utah, with a 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. The 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.
The Company'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 - The Company conducts 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. The Company uses
advanced geoscience technology to conduct these programs. The Company
participates in high-risk exploration because it provides 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, the Company attempts to maintain an inventory of many
exploratory prospect leads from which drilling prospects are confirmed and
generated. The Company has used this strategy successfully in the past. The
Company typically attempts to reduce its 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 it. 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 the
Company specifically, the Company reduced exploration activity and continues 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
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growth. The other two important components of the Company's growth plans are
exploitation of existing oil and gas fields and acquisition of producing
properties with enhanced potential.
The 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. The Company has an
inventory of many exploration Prospects and Prospect Leads, and the Company is
reactivating exploratory drilling projects so that when, and if, industry
drilling budgets are restored for exploration, the Company will have drilling
projects available in which to offer participation to industry co-venturers. The
primary geoscience technologies the Company uses 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.
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. Consequently, the Company's in-house technical capability is an
important ingredient in its 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, the Company also
uses 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 the Company or fields discovered by others but
that the Company believes are not fully developed. The Company is conducting
active exploitation and development activities in 7 different fields in Texas,
Oklahoma and Utah. The Company's working interest in those fields varies in size
from 2.5% to 100%, and the Company operates in 4 of the 7 active fields. During
1999, due to the significant decline in oil and natural gas prices during 1998
and shortage of capital available to the Company, the Company emphasized
acquiring and expanding reserves in existing oil and gas fields rather than
exploring for new reserves in unestablished areas. In November 1999 the Company
successfully restimulated its #1 Westbury Farms well in the Constitution Field,
Jefferson County, Texas. As a result of this successful restimulation, proved
reserves in the field increased by 2.9 Bcfe. The Company commenced drilling its
second development well in the Constitution Field, the #1 Apache Unit operated
by the Company, which is projected to be drilled to a total depth of 15,000'.
The estimated cost for the Company's 15% working interest in the well is
$555,000 for a completed well, and the estimated time to reach total depth is
sixty five days.
ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES OF SELECTED PROPERTIES - The
Company continues to seek strategic producing property acquisitions that offer
near-term production enhancement potential and longer-term development drilling
potential. These opportunities on properties the Company acquires can be
investigated through the application of advanced technology by the Company's
technical team. The Company also seeks to accomplish strategic acquisitions of
producing assets with development and exploratory potential through strategic
alliances with other oil and gas companies. The Company may also sell
non-strategic properties as a part of its effort to concentrate on its focus
areas. An example of the Company's execution of its acquisition strategy is the
Company's acquisition on June 30, 1999 of oil and natural gas producing
properties in Jackson Parish, Louisiana. This acquisition was a result of leads
generated by the Company's technical team. Through an alliance with another oil
and gas company, the Company was able to acquire a 50% interest in the
properties at virtually no cash outlay to the Company. Six months later, on
December 31, 1999, the Company sold its interest in the properties for an after
tax gain of approximately $4 million.
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Liquidity and Capital Resources
(a) Liquidity
At March 31, 2000, the Company had a working capital deficit of $349,000
compared with a deficit of $923,000 at December 31, 1999, an increase in working
capital of $574,000. This increase in working capital is primarily due to
proceeds from the sale of assets.
Net cash provided by operating activities during the three months ended
March 31, 2000, was $379,000, whereas $811,000 was used in operating activities
for the same three-month period in 1999. Net changes in operating assets and
liabilities accounted for $496,000 of the cash flow provided by operating
activities. During the first three months of 2000, the Company realized a net
loss of $5,000. This compares with a net loss of $130,000 for the first three
months of 1999. The 2000 loss reflects a gain of $620,000 ($442,000 after
including related early extinguishment of debt cost and reversal of imputed
interest) from the sale of long-term assets as compared to a gain of $794,000
reflected in the 1999 loss.
During the first three months of 2000 the Company incurred capital
expenditures on oil and gas properties of $94,000 and received proceeds from its
equity investment in EXUS of $250,000 and proceeds from the sale of securities,
property and equipment of $18.7 million. During the same period in 1999, the
Company had capital expenditures of $100,000 and received proceeds from the sale
of property and equipment of $2.6 million.
For the three months ended March 31, 2000, $18.2 million was used in
financing activities. This compares with $1.7 million used in financing
activities for the same period in 1999.
(b) Capital Resources
The Company's capital expenditure budget is continually reviewed and
revised as necessary, based on perceived opportunities and business conditions.
Capital expenditures for 2000 are budgeted at 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. The Company's 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, the Company
may drill additional wells during 2000 at an estimated cost of $0.8 million.
On May 5, 2000, the Company entered into a loan agreement establishing a
$15,000,000 revolving line of credit subject to a borrowing base determined
every six months (April 1 and October 1) by the bank based on the Company's oil
and gas reserves which are used as security for the loan. The interest rate is
the bank's based rate plus 1%. The interest rate on May 5, 2000, was 10%.
The initial borrowing base is $2.45 million and it will decline at the rate of
$50,000 per month beginning June 1, 2000 and continue until the next borrowing
base redetermination on October 1, 2000. The Company may request interim
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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.
A facility fee of 1% of the initial borrowing base was paid at closing. A 0.5%
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 is also be required to pay a $5,000 engineering fee for the initial
borrowing base determination and for each subsequent redetermination. The
facility is secured by all of the Company's oil and gas properties, and contains
the following financial covenants:
(1) Consolidated tangible new worth cannot be less than 85% of consolidated
tangible net worth reported as of December 31, 1999, plus the sum of 70% of
the Company's positive quarterly net income, and plus 100% of any increase
in shareholder's equity from the sale of stock in the Company subsequent to
December 31, 1999.
(2) Pay or incur, or otherwise become obligated to pay general and
administrative expenses which exceed $350,000 during any quarter beginning
September 30, 2000. Non-cash charges to general and administrative expense
are excluded.
(3) Maintain a current ratio of at least 1:1, with initial calculation of such
ratio to be made as of June 30, 2000. For purposes of computing the
current ratio, current maturities under the credit facility are excluded.
(4) Maintain a debt service coverage ratio of at least 1.2:1.0 with the initial
calculation of such ratio to be made as of September 30, 2000. Debt
service coverage ratio is defined as the ratio from dividing earnings
before interest, taxes, depreciation, depletion and amortization, and other
non-cash charges (EBITDA) for any quarter by debt service for such quarter.
The facility contains other usual and standard covenants such as: debt and lien
restrictions; dividend and distribution prohibitions; and financial statement
reporting requirements. The credit facility also requires that the Company hedge
at least 50% of its oil and gas production for twelve months. Although the
Company believes that the new credit facility is sufficient to fund its business
plan for 2000, future availability of credit will depend on the success of the
Company's development program and its ability to stay in compliance with credit
facility debt covenants.
(c) Results of Operations
Revenues were higher during 2000 due to increased oil and natural gas
prices and increased equivalent unit volumes. As shown below, oil volumes
increased by 27% while natural gas volumes decreased by 3%. The decrease in
natural gas volumes was mainly due to the sale of natural gas producing wells
during the prior period. The period ended March 31, 1999, includes 15,800 mcf of
natural gas production from properties that was sold during that period.
Excluding those volumes from the prior period results indicates an 18% increase
in natural gas production in the current period as compared to the same period
in 1999. The increase is mainly due to the successful restimulation of the #1
Westbury Farms (discussed above under "Overview") offset by normal depletion of
existing production.
Three Months Ended March 31,
------------------------------------------------------------------
2000 1999
------------------------------ ------------------------------
Sales Average Sales Average
Volume Prices Volume Prices
------------ ------------ ------------ ------------
Gas (MCF) 84,936 $ 2.71 87,862 $ 1.74
Oil (BBLS) 26,922 $ 26.16 21,160 $ 10.90
Average daily production of oil was 296 barrels for the three month period
ended March 31, 2000, and 235 for the same period in 1999. Average daily
production of natural gas was 933 mcf for the three month period ended March 31,
2000, and 976 for the same period in 1999. There were no price hedges in place
during the three months ended March 31, 2000 and 1999. On May 12, 2000, the
Company entered into hedge contracts for 125 barrels of oil per day for twelve
months and 500 mmbtu per day for twelve months. The hedged volumes represent
approximately 42% of oil production and 54% of natural gas production during the
quarter ended March 31, 2000. The Company entered into the hedge contracts to
comply with the terms of its new bank credit facility which requires that the
Company hedge at least 50% of its estimated production over the next twelve
months (from the date of the agreement). The hedge term is June 2000 through May
2001. The oil hedge is a costless collar with a floor of $24.00 per barrel and a
cap of $27.50 per barrel. If the
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average NYMEX price is less than $24.00 for any month, the Company receives the
difference between $24.00 and the average NYMEX price for that particular month.
If the average NYMEX price is greater than $27.50 for any month, the Company
pays the difference between $27.50 and the average NYMEX price for that
particular month. The natural gas hedge is a costless collar with a floor of
$2.90 per mmbtu and a cap of $3.65 per mmbtu. If the indexed price of natural
gas is less than $2.90 per mmbtu for any month, the Company receives the
difference between $2.90 and the indexed price for that particular month. If the
indexed price of natural gas is greater than $3.65 per mmbtu for any month, the
Company pays the difference between $3.65 and the indexed price for that
particular month. The reference price for natural gas is the Houston Ship
Channel index for large packages as quoted by Inside Ferc.
Three Months Ended March 31, 2000 and 1999
The Company reported a net loss of $5,000 for the quarter ended March 31,
2000, compared to a net loss of $130,000 in the same quarter in 1999. The 2000
loss reflects a gain on the sale of assets of $620,000 as compared to a gain on
the sale of assets of $794,000 in the same period in 1999. The decrease in the
loss is due to an increase in oil and gas revenues of $549,000, and decreases in
general and administrative expense of $90,000 and interest expense of $104,000.
These were offset by increases in production expense ($101,000), exploration
expense ($50,000), depreciation, depletion, and amortization (DDA) ($37,000),
and an extraordinary loss ($250,000) as a result of early extinguishment of
debt.
Oil and gas revenues increased by $549,000 as compared to the same period
in 1999. Approximately 90% of this increase is due to the significant increase
in product prices, and the balance is due to higher production during the
current period.
Production expense increased by $101,000 as compared to the same period in
1999. Approximately 45% of the increase is due to higher severance taxes as a
result of increased prices and a higher average severance tax rate.
Approximately 25% of the increase is due to an increase in workover costs
primarily in the Company's wells in Utah where the Company is a non-operator.
The operator has been successfully restimulating as well as recompleting wells
in the field. Approximately 30% of the increase is the result of higher oil
volumes. Production expense average $1.34 per mcfe during the three month period
ended March 31, 2000, compared to $1.07 per mcfe for the same period in 1999.
This increase is due to the higher workover cost and severance taxes discussed
above.
Exploration expense increased by a net of $50,000. In 2000 the Company
recorded dry hole cost of $54,000 related to an exploratory dry hole and
approximately $131,000 in employee severance cost. These were offset by reduced
exploration activity during the three month period ended March 31, 2000, as
compared to the same period in 1999.
Depreciation, depletion and amortization increased by $37,000.
Approximately 62% of the increase is due to higher volumes and the balance of
the increase is due to a higher DDA rate for the three months ended March 31,
2000, of $0.72 per mcfe as compared to $0.66 per mcfe for the same period in
1999.
General and administrative expense decreased by $90,000 as a result of a
33% reduction in office personnel during 1999.
Interest expense decreased by $104,000, from $105,000 in 1999 to $1,000 in
2000. Most of the decrease is due to the reversal of $72,000 in accrued imputed
interest that will not have to be paid because of the prepayment of
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the related debt. In addition, as a result of the sale of the Company's interest
in the EXUS properties discussed in Note 4 to the accompanying financial
statements, the Company's interest bearing debt was significantly lower during
the three month period ended March 31, 2000 as compared to the same period in
1999. The average outstanding balance in 1999 was $4.4 million as compared to an
average outstanding balance of $2.1 million in the current period.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards of accounting
and reporting for derivative instruments and for hedging activities. It requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and measures these instruments at fair value.
This statement is effective for the Company's fiscal year beginning January 1,
2001. The Company is currently reviewing the effects this Statement will have on
the financial statements in relation to the Company's hedging position.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The information contained in this Form 10-Q includes certain forward-looking
statements. When used in this document, such words as "expect", "believes",
"potential", and similar expressions are intended to identify forward-looking
statements. Although the Company believes that its expectations are based on
reasonable assumptions, it is important to note that actual results could differ
materially from those projected by such forward-looking statements. Important
factors that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, the timing and
extent of changes in commodity prices for oil and gas, the need to develop and
replace reserves, environmental risk, the substantial capital expenditures
required to fund its operations, drilling and operating risks, risks related to
exploration and development, uncertainties about the estimates of reserves,
competition, government regulation and the ability of the Company to implement
its business strategy and to raise the necessary capital for such
implementation. Also see "FORWARD-LOOKING STATEMENTS" under "Item 1. BUSINESS"
of the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding the Company's quantitative and qualitative
disclosures about market risk is contained in "Item 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT THE MARKET RISK" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 and reference is made to the
information contained there. On May 12, 2000 the Company entered into commodity
hedge contracts for 125 barrels of oil per day (approximately 11,250 barrels per
quarter) for 12 months and 500 mmbtu per day (approximately 45,000 mmbtu per
quarter) for 12 months, which is approximately at least 50% of estimated
production from existing wells for the 12 month period June 2000 through May
2001, and it represents approximately 46% of production for the three month
period ended March 31, 2000. The hedging arrangements have the effect of locking
in the effective prices the Company receives for the volumes hedged. For these
volumes the Company's exposure to a significant decline in product prices is
significantly reduced; however, they also limit the benefit the Company might
have received if prices increased above the cap. For every $1 the NYMEX average
for a month is above the $27.50 per barrel cap, the Company's net income would
decrease by approximately $4,000 for the month. For every $0.10 per mmbtu the
indexed price of natural gas is above $3.65 per mmbtu for a month, Company's net
income would decrease by approximately $2,000 for the month.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On May 5, 2000, the Company entered into a loan agreement with a bank.
Under that loan 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. Under the terms of the Company's Subordinated Note
agreements, interest payments under the Subordinated Notes may be paid, at
the Company's election, in cash or with the Company's common stock. Under
the terms of the Company's new bank loan agreement (see Note 10 to the
accompanying financial statements), the Company is prohibited from paying
cash interest to the Subordinated Noteholders during the term of the bank
loan agreement.
(c) 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. In April 2000, the
Company issued 17,963 shares of common stock for interest accrued during
the quarter ended March 31, 2000. These shares were issued in lieu of cash
interest payments accrued of $17,402. The shares were issued pursuant to
Sections 3(a)(9) and 4(2) of the Securities Act of 1933. As discussed in
Note 10 to the accompanying unaudited financial statements, on May 5, 2000,
the Company entered into a loan agreement with a bank. Under the terms of
the agreement, the
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Company is prohibited from paying cash interest on the notes for the term
of the loan agreement.
Item 5. OTHER INFORMATION
The proxy statement for the 1999 annual meeting stated that stockholders'
proposals for matters to be presented at the 2000 Annual Meeting of
Stockholders must be received by Venus Exploration at its principal
executive offices on or before January 15, 2000, to be eligible for
inclusion in its proxy statement and proxy relating to that meeting. That
was based on the anticipated date for the 2000 annual meeting being in June
2000. Management has now rescheduled that meeting for mid-December 2000.
Therefore, proposals of stockholders intended to be presented at the 2000
Annual Meeting of Stockholders, in accordance with Rule 14a-8 of the proxy
rules of the Securities and Exchange Commission, must be received by Venus
Exploration at its principal executive offices on or before June 16, 2000,
to be eligible for inclusion in its proxy statement and proxy relating to
that meeting. At the 2000 annual meeting, management proxies will have
discretionary authority to vote on stockholder proposals that are not
submitted for inclusion in the proxy statement unless received by Venus
Exploration before June 16, 2000, after which date such proposals will be
considered untimely.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement dated May 5, 2000, between Bank One, Texas, N.A. and
Venus Exploration, Inc.
27.1 Financial Data Schedule
(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).
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENUS EXPLORATION, INC.
Dated: May 22, 2000 BY: /s/ EUGENE L. AMES, JR.
----------------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)
Dated: May 22, 2000 BY: /s/ PATRICK A. GARCIA
----------------------------------------
Patrick A. Garcia
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- -------- -----------
10.1 Loan Agreement dated May 5, 2000, between Bank One, Texas,
N.A. and Venus Exploration, Inc.
27.1 Financial Data Schedule