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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 June 30, 2000
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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
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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 August 1, 2000
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Common Stock $0.01 par value 11,972,573 shares
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VENUS EXPLORATION, INC. AND SUBSIDIARY
INDEX
PAGE
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PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
June 30, 2000 and December 31, 1999
(b) Consolidated Statements of Operations for 4
the three-month periods ended June 30,
2000 and 1999
(c) Consolidated Statements of Operations for 5
the six-month periods ended June 30,
2000 and 1999
(d) Consolidated Statements of Cash Flows 6
for the six-month periods ended
June 30, 2000 and 1999
(e) Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 17
Market Risk
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds 18
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30,
2000 December 31,
(Unaudited) 1999
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(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 1,068 $ 236
Trade accounts receivable 1,188 718
Funds due from escrow agent -- 17,303
Assets held for sale -- 1,236
Prepaid expenses and other 46 90
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Total current assets 2,302 19,583
Oil and gas properties and equipment, at cost
under the successful efforts method, net 4,471 4,301
Other property and equipment, net 98 136
Deferred financing costs, at cost less accumulated amortization 81 20
Other assets, at cost less accumulated amortization -- 424
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$ 6,952 $ 24,464
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,866 $ 1,448
Other liabilities 397 1,139
Current notes payable 1,750 17,919
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Total current liabilities 4,013 20,506
Long-term debt 300 1,750
Other long-term liabilities 16 18
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Total liabilities 4,329 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 $.01; 30,000,000 shares
authorized; 11,949,839 and 11,055,285 shares issued
and outstanding in 2000 and 1999, respectively 119 110
Additional paid-in capital 18,297 17,336
Accumulated deficit (15,718) (15,194)
Accumulated other comprehensive income - net unrealized
appreciation on investment securities -- 69
Unearned compensation (75) (131)
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Total shareholders' equity 2,623 2,190
Commitments and contingencies
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$ 6,952 $ 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 June 30,
(in thousands except per share
data)
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2000 1999
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Oil and gas revenues $ 886 $ 434
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Costs of operations:
Production expense 381 183
Exploration expenses, including dry holes 162 122
Depreciation, depletion and amortization 170 132
General and administrative 482 462
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Total expenses 1,195 899
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Operating loss (309) (465)
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Other income (expense):
Interest expense (49) (115)
Debt conversion expense (174) --
Gain on sale of assets 12 10
Interest and other income (expense), net 1 (5)
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(210) (110)
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Net income (loss) $ (519) $ (575)
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Earnings (loss) per share,
Basic and diluted $ (.05) $ (.05)
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Common shares and equivalents outstanding,
Basic and diluted 11,122 10,982
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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)
Six Months Ended June 30,
(in thousands except per share
data)
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2000 1999
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Oil and gas revenues $ 1,820 $ 819
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Costs of operations:
Production expense 712 413
Exploration expenses, including dry holes 451 361
Depreciation, depletion and amortization 348 273
General and administrative 999 1,069
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Total expenses 2,510 2,116
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Operating loss (690) (1,297)
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Other income (expense):
Interest expense (50) (220)
Debt conversion expense (174) --
Gain on sale of assets 632 804
Interest and other income (expense), net 8 8
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416 592
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Income (loss) before extraordinary item (274) (705)
Extraordinary loss on early extinguishment of debt 250 --
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Net income (loss) $ (524) $ (705)
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Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ (0.03) $ (0.06)
Extraordinary loss on early extinguishment of debt (0.02) --
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Earnings (loss) $ (0.05) $ (0.06)
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Common shares and equivalents outstanding:
Basic and diluted 11,103 10,982
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See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
(in thousands)
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2000 1999
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Operating Activities:
Net earnings (loss) $ (524) $ (705)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, depletion and amortization of oil and gas
properties 348 273
Other depreciation and amortization 54 87
Dry hole costs 52 19
Gain on sale of property and equipment (433) (804)
Gain on sale of securities (199) --
Debt conversion expense 167 --
Extraordinary loss on early extinguishment of debt 250 --
Compensation expense for stock and stock options 106 82
Interest expense paid with common stock 52 --
Deferred interest expense on EXCO note (72) --
Changes in operating assets and liabilities:
Trade accounts receivable (470) (154)
Prepaid expenses and other 44 --
Trade accounts payable 418 26
Other liabilities (670) (166)
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Net cash used in operating activities (877) (1,342)
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Investing Activities:
Capital expenditures (623) (233)
Investment in EXUS -- (7,093)
Distributions from EXUS 250 --
Proceeds from sale of securities 304 --
Proceeds from sales of property and equipment 19,023 2,597
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Net cash provided by (used in) investing
activities 18,954 (4,729)
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Financing Activities:
Net proceeds from issuance of long-term debt and notes payable 1,750 8,025
Principal payments on long-term debt and notes payable (18,672) (1,831)
Deferred financing costs (73) (21)
Prepayment penalty on early extinguishment of debt (250) --
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Net cash provided by (used in) financing
activities (17,245) 6,173
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Increase (decrease) in cash and equivalents 832 102
Cash and equivalents, beginning of period 236 126
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Cash and equivalents, end of period $ 1,068 $ 228
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See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months and Six Months Ended June 30, 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 June 30, 2000 and the results of its operations for the three and
six month periods ended June 30, 2000 and 1999.
The results of operations for the three and six month periods ended June
30, 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. Hedging Activities
The Company enters into commodity derivative contracts for non-trading
purposes as a hedging strategy to manage commodity prices associated with oil
and gas sales and to reduce the impact of price fluctuations.
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 May 12, 2000, the Company entered into hedge contracts for 125 barrels
of oil per day for twelve months (or 41,250 barrels) and 500 mmbtu per day for
twelve months (or 165,000 mmbtu). 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. As of June 30, 2000, the estimated fair
value of the Company's positions was a net payable of approximately $210,000
based upon an estimate of what the Company would owe if the contracts were
liquidated.
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5. 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.
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.
6. 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.
Loss per share for the three month period ended June 30, 2000 and 1999 are
calculated based on 11,122,142 and 10,982,365 weighted average shares
outstanding, respectively. Loss per share for the six month period ended June
30, 2000 and 1999 are calculated based on 11,103,291 and 10,981,694 weighted
average shares outstanding, respectively. For both 2000 and 1999 the Company
reported net losses; therefore, diluted earnings per share is not presented.
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7. Long-Term Debt
Long-term debt consists of the following at June 30, 2000 and December
31, 1999:
June 30, 2000 December 31, 1999
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7% Convertible subordinated promissory notes $ 300,000 $ 1,000,000
Subordinated debenture -- 750,000
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$ 300,000 $ 1,750,000
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Notes payable consists of the following at June 30, 2000, and December
31, 1999:
June 30, 2000 December 31, 1999
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Revolving credit $ 1,750,000 $ 3,819,716
EXCO Convertible Note -- 7,000,000
NationsBank, N. A. Credit Facility -- 7,100,000
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$ 1,750,000 $ 17,919,716
=============== ===============
At December 31, 1999, Notes payable were classified as current because
they were required to be repaid from funds due from escrow agent and assets
held for sale, both of which were classified as current assets related to the
sale of the EXUS Properties and were repaid in the first quarter 2000. At June
30, 2000, the entire balance of the revolving credit facility has been
classified as a current liability because the agreement terminates on May 8,
2001, which is within twelve months of the balance sheet date. Although it is
the Company's intent to refinance the outstanding balance, at this point the
Company has not yet obtained a commitment from a lender for such refinancing.
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 interest rate on the Subordinated Notes was 7% per annum, and at the
option of the Company the interest was payable in the Company's common stock.
During 1999 the Company paid interest for the quarters ended June 30, 1999, and
September 30, 1999, with an aggregate of 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 the Company
subsequently issued 43,257 shares in payment of the interest due for the
quarters ended March 31, 2000 and June 30, 2000.
The Subordinated Notes were to mature in 2004, and the noteholders had the
option to convert the debt into 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. On June 30, 2000, five of the six noteholders
agreed to convert their original principal amount of their debt holdings,
$700,000, into an aggregate of 799,997 shares of the Company's common stock
pursuant to an offer by the Company to induce conversion. The Company offered
the noteholders the opportunity, until June 30, 2000, to convert the
Subordinated Notes at a conversion rate of $0.875 per share. The lower
conversion price of $0.875 per share resulted in 191,303 additional shares
being issued that would not have been issued under the original conversion
price of $1.15 per share. During the quarter ended June 30, 2000, the Company
recorded $167,000 in non-cash debt conversion expense related to the fair value
of the 191,303 additional shares issued. The Company also incurred $7,000 of
legal cost related to the debt conversion.
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 have been issued in the same manner. As a result, the
transfers of such securities are restricted.
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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. On May 12, 2000, the
Debenture was repaid in full from proceeds drawn from the new bank Credit
Facility. Interest was payable monthly, in cash, at a rate equal to Frost
National Bank prime rate plus 1%. On May 12, 2000, the interest rate was 10%.
Revolving Credit
On May 5, 2000, the Company entered into a loan agreement with a new 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 June 30,
2000, was 10.5%. At June 30, 2000, the entire balance of the revolving credit
facility has been classified as a current liability because the agreement
terminates on May 8, 2001, which is within twelve months of the balance sheet
date. Although it is the Company's intent to refinance the outstanding balance,
at this point the Company has not yet obtained a commitment from a lender for
such refinancing.
The initial borrowing base was $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. The outstanding balance on August 8, 2000,
was $750,000.
A facility fee of 1% of the initial borrowing base was paid at 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 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 properties, and
contains usual and standard covenants such as: debt and lien restrictions;
dividend and distribution prohibitions; prohibits cash payments to other
debtholders; liquidity, leverage, net worth and debt service coverage ratios;
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.
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
approximately $70,000 in accrued imputed interest that will not have to be paid
because of the prepayment.
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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. 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.
8. 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, are
incentives that align 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.
During 1999 the Company granted 257,457 options and there were 34,611
options expired or surrendered. 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.
9. Accounting for Income Taxes
No provision for income taxes has been recorded for the period ended June
30, 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 June 30, 1999 due to the loss recorded for that period.
10. Commitments and Contingencies
The Company is not involved in any claims or legal proceedings.
11. 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. The bank debt discussed above in Note
7 matures on May 8, 2001. It is the Company's intent to refinance it, however,
there is no assurance the Company will be able to do so.
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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 our 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 our 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
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
eight states. Our 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. Our 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 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. We participate 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, 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 we originate. 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 we believe to have extraordinary merit during this period of
low availability of exploration capital. In order to add a greater degree of
certainty to our growth, 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.
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. 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. 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, 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.
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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 we discovered 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 shortage of capital
available to us, 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 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.
We recently drilled a development well, the #1 Apache Gas Unit, to a total
depth of 14,910 feet, encountered three zones which appear to be productive of
gas and condensate. Evaluation of electric logs in that well indicated that two
primary objective zones in the Middle Yegua Formation at 14,229 feet and 13,912
feet are expected to be commercially productive and will be produced after
testing of the deeper third zone at 14,545 feet. The deeper zone could possibly
be commercially productive with formation stimulation or sand fracture
treatment. Formation stimulation and testing of the first zone to be tested,
the 14,545 foot zone, should be completed in approximately 60 days.
Ryder Scott & Company, independent engineering consultants, in its
estimate of our reserves at December 31, 1999, estimated that the Constitution
Field Project, operated by us, may have six proved undeveloped drill sites with
11 pay zones on the project's 4,946 gross acres (4,538 net). We own a 15%
working interest in the project and expect to drill at least one additional
well in the Constitution Field during the year 2000. The first well we drilled
in the field, the #1 Westbury Farms, is currently producing gross 3 million
cubic feet of gas per day and 450 barrels condensate per day. Constitution
Field is located approximately 15 miles west of the Vidor-Ames Field (125
billion cubic foot of gas equivalent reserves) discovered by our exploration
team in the early 1990's.
On August 3, 2000, we started drilling the #1 Flinn well in the East White
Point Field Area, San Patricio County, Texas. The well will be drilled to a
depth of 5,600' to develop bypassed Frio pay. We acquired this proved field
during the second quarter. If successful, we believe a total of eight wells may
ultimately be drilled in our 340 acre lease block, and we may acquire
additional leases. We are the operator and currently own a 25% working
interest. Average 100% well cost is approximately $332,000.
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.
Liquidity and Capital Resources
(a) Liquidity
At June 30, 2000, we had a working capital deficit of $1,711,000 compared
with a deficit of $923,000 at December 31, 1999, a decrease in working capital
of $788,000. Of this decrease, $1,750,000 is due to classifying our bank debt
as a current liability because the note matures in May 2001, which is less than
twelve months from June 30, 2000. Our intention is, on or before maturity, to
renew the credit facility or replace it with a new facility.
Net cash used in operating activities during the six month period ended
June 30, 2000, was $877,000, whereas $1,342,000 was used in operating
activities for the same period in 1999. Net changes in operating assets and
liabilities accounted for $678,000 of the cash flow used in operating
activities. During the six-month period ended
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June 30, 2000, the Company realized a net loss of $524,000. This compares with
a net loss of $705,000 for the same period in 1999. The 2000 loss reflects a
gain of $632,000 ($454,000 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 $804,000 reflected in the 1999 loss.
During the first six months of 2000 the Company incurred capital
expenditures of $623,000 and received proceeds from its equity investment in
EXUS of $250,000 and proceeds from the sale of securities, property and
equipment of $19 million. During the same period in 1999, the Company had
capital expenditures of $233,000 and received proceeds from the sale of
property and equipment of $2.6 million.
For the six month ended June 30, 2000, $17.2 million was used in financing
activities. This compares with $6.2 million provided by 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 the last six months of 2000 are budgeted at
approximately $2 million for projects that include the drilling and completion
of 5 development wells, drilling 1 exploratory wells, a 3-D seismic acquisition
for an exploration project, and acreage acquisition. 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.
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 base rate plus 1%. The interest rate on July 31, 2000, was 10.5%.
The initial borrowing base was $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.As of August 8, 2000, the
Company had aggregate borrowings under the credit facility of $750,000. 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 properties, and
contains the following financial covenants:
(1) Consolidated tangible net 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) The Company will not pay or incur, or otherwise become obligated to
pay general and administrative expenses which exceed $350,000 during
any quarter beginning with the quarter ended September 30, 2000.
Non-cash charges to general and administrative expense are excluded.
(3) The Company will 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) The Company will 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.
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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 have been 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 increased by 2% during the six month
period ended June 30, and 27% and 8%, respectively, for the three month period.
The period ended June 30, 1999, includes 15,800 mcf of natural gas production
from properties that were sold during the first quarter of 1999. Excluding
those volumes from the prior period results indicates a 13% 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.
2000 1999
----------------------- -----------------------
Sales Average Sales Average
Volume Prices Volume Prices
--------- --------- --------- ---------
Six Months Ended June 30,
Gas (MCF) 161,478 $ 3.00 158,994 $ 1.81
Oil (BBLS) 51,477 $ 25.95 40,429 $ 13.09
Three Months Ended June 30,
Gas (MCF) 76,542 $ 3.33 71,133 $ 1.88
Oil (BBLS) 24,555 $ 25.72 19,266 $ 15.50
Average daily production of oil was 270 barrels for the three month period
ended June 30, 2000, and 212 for the same period in 1999. Average daily
production of natural gas was 841 mcf for the three month period ended June 30,
2000, and 782 for the same period in 1999. There were no price hedges in place
during the three months ended June 30, 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 50% of estimated production for the twelve month period ended May
2001. The Company entered into the hedge contracts to comply with the terms of
its new bank credit facility. 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 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.
For the three month period ended June 30, 2000, the effect of the hedge
was to lower the average price by $0.62 per barrel for oil and $0.14 per mcf
for natural gas. As of June 30, 2000, the estimated fair value of our hedge
positions was a net payable of approximately $210,000 based upon an estimate of
what we would owe if the contracts were liquidated.
Three Months Ended June 30, 2000 and 1999
The Company reported a net loss of $519,000 for the quarter ended June 30,
2000, compared to a net loss of $575,000 in the same quarter in 1999. The 2000
loss reflects debt conversion expense of $174,000 related to the conversion of
$700,000 of Subordinated Notes into our common stock, of which $167,000 is a
non-cash charge. Oil
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and gas revenues increased by $452,000 and interest expense decreased by
$66,000. These improvements were partially offset by increases in production
expense of $198,000, exploration expense of $40,000, depreciation, depletion
and amortization of $38,000, and general and administrative expense of $20,000.
Oil and gas revenues increased by $452,000 as compared to the same period
in 1999. Approximately 83% of this increase is due to the significant increase
in product prices, and the balance is due to higher production during the
current period. The higher production is due to the successful restimulation of
the #1 Westbury Farms well in the Constitution Field, Jefferson County, Texas,
and other reworking and recompletions of existing wells since the recovery of
product prices.
Production expense increased by $198,000 as compared to the same period in
1999. Approximately 36% of the increase is due to higher severance taxes as a
result of increased prices and volumes, and 7% out of the 36% was due to a
refund of severance taxes received during the 1999 period. The balance of the
increase is due to increased operating cost due to higher volumes produced
during the year 2000 period and an increase in workover costs (stimulations,
adding perforations and recompletions), which has resulted in the increased
production discussed above. Production expense averaged $1.70 per mcfe during
the three month period ended June 30, 2000, compared to $0.98 per mcfe for the
same period in 1999. This increase is due to the higher workover cost and
severance taxes discussed above. Although we plan further workover operations
in the third and fourth quarter, we expect per unit costs to start declining.
Exploration expense increased by $40,000 due to increased exploration
activity during the quarter as compared to the same quarter in the prior year.
Depreciation, depletion and amortization increased by $38,000.
Approximately 74% of the increase is due to higher volumes, and the balance of
the increase is due to a higher DDA rate. Depreciation, depletion and
amortization averaged $0.76 per mcfe in 2000 as compared to $0.71 per mcfe for
the same period in 1999.
General and administrative expense increased by $20,000 due to temporary
salary reductions that were implemented on March 1, 1999, which were reinstated
effective March 31, 2000, as discussed in Note 8 in the accompanying unaudited
financial statements.
Interest expense decreased by $66,000, from $115,000 in 1999 to $49,000 in
2000. The decrease is due to lower outstanding interest bearing balances. As
discussed in Note 5 to the accompanying unaudited financial statements, most of
the funds we received on the sale of the EXUS properties was used to repay
debt. The average outstanding balance in 1999 was $4.2 million as compared to
an average outstanding balance of $1.7 million in the current period.
Six Months Ended June 30, 2000 and 1999
The Company reported a net loss of $524,000 for the six month period ended
June 30, 2000, compared to a net loss of $705,000 in the same period in 1999.
The 2000 loss reflects debt conversion expense of $174,000 related to the
conversion of $700,000 of Subordinated Notes into our common stock, of which
$167,000 is a non-cash charge. Also included in the year loss is a non-cash
charge of $250,000 for early extinguishments of debt. Oil and gas revenues
increased by $1,001,000, interest expense decreased by $170,000, and general
and administrative expense decreased by $70,000. These improvements were
partially offset by increases in production expense of $299,000, exploration
expense of $90,000, depreciation, depletion and amortization of $75,000, and
lower gain on sale of assets of $172,000.
Oil and gas revenues increased by $1,001,000 as compared to the same
period in 1999. Approximately 85% of this increase is due to the significant
increase in product prices, and the balance is due to higher production during
the current period. The higher production is due to the successful
restimulation of the #1 Westbury Farms well in the Constitution Field,
Jefferson County, Texas, and other reworking and recompletions of existing
wells since the recovery of product prices.
Production expense increased by $299,000 as compared to the same period in
1999. Approximately 39% of the increase is due to higher severance taxes as a
result of increased prices, 5% out of the 39% was due to a refund of severance
taxes received during the 1999 period. The balance of the increase is due to
higher volumes produced during the current period and an increase in workover
costs (stimulations, adding perforations and recompletions),
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which has resulted in the increased production discussed above. Production
expense average $1.51 per mcfe during the six month period ended June 30, 2000,
compared to $1.03 per mcfe for the same period in 1999. This increase is due to
the higher workover cost and severance taxes discussed above. Although we plan
further workover operations in the third and fourth quarter, we expect per unit
costs to start declining.
Exploration expense increased by $90,000. In the current period we
recorded dry hole expense of $41,000 and approximately $131,000 in employee
severance cost. Other exploration costs were lower during the six month period
as compared to the same period in the prior year.
Depreciation, depletion and amortization increased by $75,000.
Approximately 68% of the increase is due to higher volumes, and the balance of
the increase is due to a higher DDA rate. Depreciation, depletion and
amortization averaged $0.74 per mcfe in 2000 as compared to $0.68 per mcfe for
the same period in 1999.
General and administrative expense decreased by $70,000 as a result of a
33% reduction in office personnel during 1999. These reductions were partially
offset by reinstatement of temporary salary reductions. As discussed in Note 8
in the accompanying unaudited financial statements, the temporary salary
reductions were implemented effective March 1, 1999, and ended on March 31,
2000.
Interest expense decreased by $170,000, from $220,000 in 1999 to $50,000
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 the
related debt. In addition, as a result of the sale of the Company's interest in
the EXUS properties discussed in Note 5 to the accompanying unaudited financial
statements, our interest bearing debt was significantly lower during the six
month period ended June 30, 2000 as compared to the same period in 1999. The
average outstanding balance in 1999 was $4.3 million as compared to an average
outstanding balance of $1.9 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.
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 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
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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 7%
Subordinated Note agreements described in (b) below, interest
payments under the 7% 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 7 to the
accompanying unaudited financial statements), the Company is
prohibited from paying cash interest to the Subordinated Noteholders
during the term of the bank loan agreement.
(b) 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.
During the quarter ended June 30, 2000, the Company issued 25,294
shares of common stock for interest accrued through June 30, 2000.
These shares were issued in lieu of cash interest payments accrued of
$17,500. Also, during the quarter ended June 30, 2000, the Company
issued 799,997 shares of common stock pursuant to the conversion of
$700,000 of the $1,000,000 original principal amount of notes into
common stock. This conversion is discussed in more detail in Note 7
to the accompanying unaudited financial statements. The shares were
issued pursuant to Sections 3(a)(9) and 4(2) of the Securities Act of
1933.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated June 30, 2000,
reporting information pursuant to Item 5 and Item 7, related to debt
converted into the Company's common stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENUS EXPLORATION, INC.
Dated August 10, 2000 BY: /s/ JOHN Y. AMES
------------------------------
John Y. Ames
(Chief Operating Officer)
Dated August 10, 2000 BY: /s/ PATRICK A. GARCIA
------------------------------
Patrick A. Garcia
(Principal Accounting Officer)
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INDEX TO EXHIBIT
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule