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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, 2001
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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
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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 May 12, 2001
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Common Stock $.01 par value 12,366,165 shares
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VENUS EXPLORATION, INC. AND SUBSIDIARY
INDEX
PAGE
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PART I. - FINANCIAL INFORMATION 3
Item 1. Financial Statements (Unaudited) 3
(a) Consolidated Balance Sheets as of 3
March 31, 2001 and December 31, 2000
(b) Consolidated Statements of Operations for 4
the three-month periods ended March 31,
2001 and 2000
(c) Consolidated Statements of Cash Flows 5
for the three-month periods ended
March 31, 2001 and 2000
(e) Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 13
Market Risk
PART II. - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31,
2001 December 31,
(Unaudited) 2000
----------- ------------
(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 1,652 $ 1,086
Trade accounts receivable 937 1,034
Prepaid expenses and other 52 74
-------- --------
Total current assets 2,641 2,194
Oil and gas properties and equipment, at cost
under the successful efforts method, net 5,565 4,783
Other property and equipment, net 76 93
Deferred financing costs, at cost less accumulated amortization 7 31
Other assets, at cost less accumulated amortization 24 16
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$ 8,313 $ 7,117
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 5,040 $ 3,435
Other liabilities 285 464
Current notes payable 1,130 1,130
-------- --------
Total current liabilities 6,455 5,029
Other long-term liabilities 12 13
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Total liabilities 6,467 5,042
Shareholders' equity:
Preferred stock; par value of $0.01; 5,000,000 shares
authorized; none issued and outstanding
Common stock; par value of $.01; 50,000,000 shares
authorized; 12,370,076 and 12,341,065 shares issued,
and 12,343,196 and 12,314,185 shares outstanding in 2001
and 2000, respectively 124 123
Additional paid-in capital 18,746 18,721
Accumulated deficit (16,849) (16,710)
Less cost of treasury stock (26,880 shares) (40) (40)
Accumulated other comprehensive loss -- unrealized loss on
derivative instruments (135) --
Unearned compensation -- (19)
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Total shareholders' equity 1,846 2,075
Commitments and contingencies
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$ 8,313 $ 7,117
======== ========
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)
------------------------------------
2001 2000
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Oil and gas revenues $ 944 $ 934
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Costs of operations:
Production expense 359 331
Exploration expenses, including dry holes 139 289
Depreciation, depletion and amortization 174 178
General and administrative 490 517
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Total expenses 1,162 1,315
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Operating loss (218) (381)
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Other income (expense):
Interest expense (54) (1)
Gain on sale of assets -- 620
Interest and other income 134 7
-------- --------
80 626
-------- --------
Income (loss) before income taxes and extraordinary item (138) 245
Income tax expense -- --
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Income (loss) before extraordinary item (138) 245
Extraordinary loss on early extinguishment of debt -- 250
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Net income (loss) $ (138) $ (5)
======== ========
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ (.01) $ 0.02
Extraordinary loss on early extinguishment of debt (0.02)
-------- --------
Earnings (loss) $ (.01) $ --
======== ========
Common shares and equivalents outstanding:
Basic 12,341 11,084
======== ========
Diluted 12,341 11,975
======== ========
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)
-------------------------------
2001 2000
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Operating Activities:
Net earnings (loss) $ (138) $ (5)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, depletion and amortization of oil and gas
properties 174 178
Other depreciation and amortization 243 24
Dry hole costs -- 52
Gain on sale of property and equipment -- (421)
Gain on sale of securities -- (199)
Extraordinary loss on early extinguishment of debt -- 250
Compensation expense for stock and stock options 44 58
Interest expense paid with common stock -- 18
Deferred interest expense on EXCO note -- (72)
Changes in operating assets and liabilities:
Trade accounts receivable 97 464
Prepaid expenses and other 13 28
Trade accounts payable 1,605 393
Other liabilities (513) (389)
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Net cash provided by operating activities 1,525 379
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Investing Activities:
Capital expenditures (957) (94)
Distributions from EXUS -- 250
Proceeds from sale of securities -- 254
Proceeds from sales of property and equipment -- 18,475
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Net cash (used in) provided by investing
activities (957) 18,885
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Financing Activities:
Principal payments on long-term debt and notes payable (1) (17,921)
Deferred financing costs (1) (5)
Prepayment penalty on early extinguishment of debt -- (250)
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Net cash used in financing activities (2) (18,176)
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Increase in cash and equivalents 566 1,088
Cash and equivalents, beginning of period 1,086 236
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Cash and equivalents, end of period $ 1,652 $ 1,324
======== ========
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, 2001 and 2000
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, 2000.
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, 2001 and the results of its operations for the three months ended
March 31, 2001 and 2000.
The results of operations for the three month period ended March 31, 2001 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
note 4 below and to the notes to the 2000 consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000.
4. New Accounting Pronouncement
Effective January 1, 2001 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 provides guidance on accounting and financial
reporting for derivative instruments and hedging activities. SFAS No. 133
requires the recognition of all derivatives as either assets or liabilities on
the consolidated balance sheet, and the periodic measurement of those
instruments at fair value. The Company has determined that hedge accounting will
not be elected for derivatives existing at January 1, 2001, which consist of
commodity collar agreements covering at least fifty percent (50%) of its monthly
oil and gas production. Future changes in the fair value of those derivatives
will be recorded in income. The adoption of SFAS No. 133 as of January 1, 2001,
resulted in a cumulative-effect-type expense to other comprehensive income of
$334,000 which will be recognized as a reduction of oil and gas revenues over
the remaining five month term of the commodity collar agreements. As of March
31, 2001, the fair value of the commodity collar agreements was a liability of
$51,000. During the first quarter of 2001, the Company recognized a reduction of
oil and gas revenues of $199,000 relating to the transition adjustment and
recorded other income of $115,000 related to the change in the fair value of the
commodity collar agreements.
5. Investment in EXUS Energy, LLC
In the first quarter of 2000, the Company received the distribution from the
sale of the EXUS properties and 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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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.
Income (loss) per share for the three month periods ended March 31, 2001 and
2000 are calculated based on 12,340,617 and 11,084,440 weighted average shares
outstanding, respectively. In the first quarter of 2001 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
--------
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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7. Comprehensive Income
The following are the components of comprehensive income (loss):
Three Months Ended March 31,
(in thousands)
2001 2000
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Net loss $ (138) $ (5)
Unrealized loss on derivative instruments:
Initial loss upon adoption of SFAS No. 133 (334) --
Reclassification adjustment for loss recognized as reduction of oil
and gas income 199 --
Unrealized gains on securities:
Reclassification adjustment for gain included in net loss -- (69)
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$ (273) $ (74)
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8. Notes Payable
Notes payable consists of the following at March 31, 2001 and December 31, 2000:
March 31, 2001 December 31, 2000
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Revolving credit $ 1,130,000 $ 1,130,000
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$ 1,130,000 $ 1,130,000
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Current Credit Facility
On May 5, 2000, the Company entered into a loan agreement with a new lender
establishing a $15,000,000 revolving line of credit subject to a borrowing base
that was redetermined by the lender every six months (April 1 and October 1)
based on oil and gas reserves, which are used as security for the loan. The
interest rate was the lender's base rate plus 1%. The interest rate on December
31, 2000, was 10.5%. At December 31, 2000, the entire balance of the revolving
credit facility was classified as a current liability because the agreement had
a termination date of May 8, 2001, which was within twelve months of the balance
sheet date. Although the Company intends to refinance the outstanding balance,
at this point it does not yet have a commitment from a lender for such
refinancing. In order to provide the Company with additional time to refinance
the existing indebtedness of $1,130,000, the lender has agreed to forbear
exercising its remedies under the Loan Agreement and the corresponding security
documents. That forbearance extends through July 9, 2001, on the condition that
the Company has obtained a commitment from another lender by June 15, 2001, to
refinance the current indebtedness. Pursuant to this forbearance agreement and
amendment, the interest rate has been increased and is now determined as
follows: (i) the lender's base rate plus 3% from May 9, 2001 through June 8,
2001, (ii) the lender's base rate plus 4% from June 9, 2001 through July 9, 2001
and (iii) the lender's base rate plus 6% after July 9, 2001.
The initial borrowing base was $2.45 million, and it declined at the rate of
$50,000 per month beginning June 1, 2000. At September 30, 2000, the borrowing
base was $2.25 million. On October 1, 2000, the lender redetermined the
borrowing base to be $2.2 million, and it declined at the rate of $50,000 per
month beginning November 1, 2000 and continued to decline at that rate until the
next borrowing base redetermination on April 1, 2001, at which time, the lender
determined the borrowing base to be $1,130,000. Changes in the borrowing base
were 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. As of April 2, 2001, there was no
additional availability under the credit facility.
At March 31, 2001, the Company was in default under its financial covenants;
however, the lender has agreed to forbear pursuit of its remedies in connection
with each covenant default until July 9, 2001, as described above.
The Company believes that it will be able to refinance its credit facility at
levels that are sufficient to fund the Company's business plan for 2001.
However, 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. In the
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event the current credit facility is not refinanced, the Company believes that
it will be successful in obtaining alternative sources of debt or equity
financing.
9. Accounting for Income Taxes
No provision for income taxes has been recorded for the period ended March 31,
2001 and March 31, 2000 due to the losses recorded for these periods.
10. Commitments and Contingencies
From time to time, the Company is involved in litigation relating to claims
arising out of our operations in the normal course of business. As of March 31,
2001, the Company was not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on the our
financial condition or results of operations.
11. Liquidity and Capital Resources
At March 31, 2001, the Company had a working capital deficit of $ 3,814,000
compared with working capital deficit of $2,835,000 December 31, 2000, a
decrease in working capital of $979,000. Working capital at quarter-end 2001 and
year-end 2000 reflects classifying notes payable of $1,130,000 as current.
Although the Company believes that it will be able to obtain a new credit
facility and to refinance the matured debt held by the Company's current lender
and that a new credit facility will be sufficient to fund its business plan for
2001, future availability of credit will depend on the success of the Company's
development program and its ability to stay in compliance with future 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, 2000. 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, 2000, 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 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 Western 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 the Company will have drilling projects available in
which to offer participation to industry co-venturers.
EXPLOITATION AND DEVELOPMENT OF PRODUCING FIELDS -- On December 20, 2000, the
Company spudded the Paggi #1, which was completed in February 2001. The initial
production rate was 3.700 million cubic feet of gas per day (MMCF) and 475
barrels of condensate per day flowing through 22/64 inch choke with 1,986 #psi
flowing tubing pressure. On February 26, 2001, the Company commenced drilling
the fourth well in this field, the Kolander #1, and it is targeted for
completion in multiple productive reservoirs. The well is in the process of
being completed. During 2001, the Company plans on drilling three more wells in
this field, with four wells targeted to be drilled in 2002.
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.
Liquidity and Capital Resources
(a) Liquidity
At March 31, 2001, the Company had a working capital deficit of $3,814,000
compared with a deficit of $2,835,000 at December 31, 2000, a decrease in
working capital of $979,000.
Net cash provided by operating activities during the three months ended March
31, 2001, was $1,525,000, whereas $379,000 was provided by operating activities
for the same three-month period in 2000. Net changes in operating assets and
liabilities accounted for $1,202,000 of the cash flow provided by operating
activities. During the first
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three months of 2001, the Company realized a net loss of $138,000. This compares
with a net loss of $5,000 for the first three months of 2000. 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.
During the first three months of 2001 the Company incurred capital expenditures
on oil and gas properties of $957,000. During the same period in 2000, the
Company had capital expenditures of $94,000 and received proceeds from the sale
of property and equipment of $250,000.
For the three months ended March 31, 2001, $2,000 was used in financing
activities. This compares with $18.2 million used in financing activities for
the same period in 2000.
(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 2001 are budgeted at approximately $6.2 million for projects
that include drilling and completion of 5 development wells, drilling of 3
exploratory wells, 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 acquisition is estimated to be $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 2001 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 facility contains financial and other usual and standard covenants such as:
debt and lien restrictions, dividend and distribution prohibitions, and
financial statement reporting requirements. At March 31, 2001 the Company was in
default under its financial covenants; however, the lender has agreed to forbear
pursuit of its remedies in connection with each covenant default until July 9,
2001, as in the paragraph below.
The Company's current credit facility expired on May 8, 2001. The Company
intends to refinance the outstanding balance under its credit facility. At this
point it does not yet have a commitment from a lender for such refinancing. In
order to provide the Company with additional time to refinance the existing
indebtedness of $1,130,000, the lender has agreed to forbear exercising its
remedies under the Loan Agreement and the corresponding security documents. That
forbearance extends through July 9, 2001, on the condition that the Company has
obtained a commitment from another lender by June 15, 2001, to refinance the
current indebtedness. Pursuant to this forbearance agreement and amendment, the
interest rate has been increased and is now determined as follows: (i) the
lender's base rate plus 3% from May 9, 2001 through June 8, 2001, (ii) the
lender's base rate plus 4% from June 9, 2001 through July 9, 2001 and (iii) the
lender's base rate plus 6% after July 9, 2001.
(c) Results of Operations
Revenues were higher during 2001 due to increased oil and natural gas prices
despite decreased equivalent unit volumes. As shown below, oil volumes decreased
by 28%, and natural gas volumes decreased by 9%.
Three Months Ended March 31,
------------------------------------------------------------
2001 2000
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Sales Average Sales Average
Volume Prices Volume Prices
--------- --------- --------- ---------
Gas (MCF) 77,374 $ 7.88 84,936 $ 2.71
Oil (BBLS) 19,295 $ 27.61 26,922 $ 26.16
Average daily production of oil was 214 barrels for the three month period ended
March 31, 2001, and 296 for the same period in 2000. Average daily production of
natural gas was 860 mcf for the three month period ended March 31, 2001, and 933
for the same period in 2000. There were no price hedges in place during the
three months ended March 31, 2000. On May 12, 2000, the Company entered into
hedge contracts for 125 barrels of oil per day for
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twelve months and 500 MMBtu per day for twelve months. The hedged volumes
represent approximately 58% of oil production and 58% of natural gas production
during the quarter ended March 31, 2001. The Company entered into the hedge
contracts to comply with the terms of its bank credit facility which requires
that the Company hedge at least 50% of its estimated production. 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.
Three Months Ended March 31, 2001 and 2000
The Company reported a net loss of $138,000 for the quarter ended March 31,
2001, compared to a net loss of $5,000 in the same quarter in 2000. The 2000
loss reflects a gain on the sale of assets of $620,000 as compared to no such
gain on the sale of assets in the same period in 2001. The increase in the loss
is in spite of an increase in oil and gas revenues of $10,000 and decreases in
general and administrative expense of $27,000, exploration expense of $150,000
and depreciation, depletion and amortization ($4,000). These were offset by
increases in production expense ($28,000), and interest expense of ($53,000).
Interest and other income also increased $127,000 primarily because of the
recognition of income caused by adjusting the derivative liability account to
fair value as of March 31, 2001, pursuant to SFAS No. 133.
Oil and gas revenues increased by $10,000 as compared to the same period in
2000. All of this increase is due to the significant increase in product prices,
because production decreased during the current period.
Production expense increased by $28,000 as compared to the same period in 2000.
Approximately 89% of the increase is due to higher severance taxes as a result
of increased prices and a higher average severance tax rate. The balance of the
increase is due to a decrease in workover costs and an increase in cost per
Mcfe. Production expense averaged $1.86 per Mcfe during the three month period
ended March 31, 2001, compared to $1.34 per Mcfe for the same period in 2000.
Exploration expense decreased by a net of $150,000. 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, 2001.
Depreciation, depletion and amortization (DDA) decreased by net $4,000. The DDA
rate was $0.90 per Mcfe for the three months ended March 31, 2001, compared to
$0.72 per Mcfe for the same period in 2000. The increased rate per Mcfe
accounted for approximately $35,000 increase and the decrease in volume
accounted for approximately $39,000 decrease.
General and administrative expense decreased by $27,000 as a result of a
reduction in office personnel during 2000.
Interest expense increased by $53,000, from $1,000 in 2000 to $54,000 in 2001.
Most of the increase is due to the reversal of $72,000 in accrued imputed
interest that did not have to be paid because of the prepayment of the related
debt. The average outstanding balance in 2000 was $2.1 million as compared to an
average outstanding balance of $1.1 million in the current period.
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 Company's
ability to procure a replacement credit facility, the timing and extent of
changes in commodity prices for oil and gas, the need to develop and replace
reserves, environmental risk, the
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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, 2000.
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, 2000 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 3. DEFAULTS UPON SENIOR SECURITIES
Pursuant to the terms of the Company's revolving credit facility, payment of the
entire outstanding principal balance of $1,130,000, together with any accrued
and unpaid interest, was due to the Company's lender on or before May 8, 2001.
To date, the Company has not made such payment to its lender and, accordingly,
the Company is presently in default in the payment of such indebtedness. The
Company is also in default of certain financial covenants contained in the
revolving credit facility.
The Company intends to refinance the outstanding balance of the revolving credit
facility and is actively seeking a commitment from a lender for such
refinancing. In order to provide the Company with additional time to refinance
the existing indebtedness, the lender and the Company have entered into a
forbearance agreement and amendment to the revolving credit facility pursuant to
which the lender has agreed to forbear from exercising its remedies thereunder
until June 15, 2001, which date will be further extended to July 9, 2001 if
prior to June 15 the Company can obtain a commitment from another creditworthy
lender to advance the entire amount due to the present lender on or before July
9, 2001. Pursuant to this forbearance agreement and amendment, the interest rate
has been increased and is now determined as follows: (i) the lender's base rate
plus 3% from May 9, 2001 through June 8, 2001, (ii) the lender's base rate plus
4% from June 9, 2001 through July 9, 2001 and (iii) the lender's base rate plus
6% after July 9, 2001. The lender has also charged the Company a 1% forbearance
fee of $11,300, which amount shall be terminated and forgiven by the lender if
the Company's obligations to lender are paid in full on or before July 9, 2001.
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ITEM 5. OTHER INFORMATION
On April 20, 2001, Nasdaq sent the Company a letter stating that its minimum bid
price had not been at least $1.00 over the preceding 30 consecutive trading days
as required under Marketplace Rule 4310(c)(4). Failure to comply with this rule
constitutes grounds for delisting; however, the rule provides an automatic 90
day period for the Company's bid price to exceed $1.00 for at least 10
consecutive trading days, at which time, Nasdaq's staff would determine if we
were in compliance with the rule. The rule also sets out an appellate process
which includes a hearing. The Company intends to request a hearing in order to
appeal the matter.
Effective September 18, 2000, the Executive Committee of the Board of Directors
approved a plan for the repurchase of up to 300,000 of the Company's shares of
common stock. With the consent and approval of the Company's bank, the Company
had the authority to purchase $100,000 worth of the Company's stock in open
market transactions at prices related to the independent market for common
stock, all in accordance with the terms and provisions of Rule 10b-18 ("Rule
10b-18") under the Securities and Exchange Act of 1934, as amended. As
originally adopted, the repurchase plan shall terminate on the earlier of the
purchase of the 300,000 shares or December 31, 2000. On January 18, 2001, the
Executive Committee of the Board of Directors reapproved the plan such that the
plan would terminate on the earlier of the purchase of 300,000 shares or June
15, 2001 subject to the approval of the Company's lender. The Company's lender
approved the plan in part, limiting our aggregate purchases of stock to
$100,000. Further, the lender's approval of the plan terminated on May 5, 2001.
There were no stock repurchases in the first quarter of 2001 or since.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
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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: May 18, 2001 BY: /s/ E. L. AMES, JR.
--------------------------------
E. L. Ames, Jr.
(Chief Executive Officer)
Dated: May 18, 2001 BY: /s/ P. MARK STARK
--------------------------------
P. Mark Stark
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
None.
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