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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, 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 ___________
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
- ------------------------------- ------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
1250 N.E. Loop 410, Suite 810, 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
---- ----
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 6, 2001
---------------------------- -----------------------------
Common Stock $0.01 par value 12,387,387
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VENUS EXPLORATION, INC. AND SUBSIDIARY
INDEX
<Table>
<Caption>
PAGE
----
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000 3
(b) Consolidated Statements of Operations for
the three-month periods ended June 30,
2001 and 2000 4
(c) Consolidated Statements of Operations for
the six-month periods ended June 30,
2001 and 2000 5
(d) Consolidated Statements of Cash Flows
for the six-month periods ended
June 30, 2001 and 2000 6
(e) Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 16
PART II. - OTHER INFORMATION
Item 3. - Defaults upon Senior Securities 16
Item 4. - Submission of Matters to a Vote of Security Holders 17
Item 5. - Other Information 18
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits Index 20
</Table>
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
June 30,
2001 December 31,
(Unaudited) 2000
------------ ------------
(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 12 $ 1,086
Trade accounts receivable 798 1,034
Prepaid expenses and other 105 74
------------ ------------
Total current assets 915 2,194
Oil and gas properties and equipment, at cost
under the successful efforts method, net 5,730 4,783
Other property and equipment, net 73 93
Deferred financing costs, at cost less accumulated amortization 20 31
Other assets, at cost less accumulated amortization 20 16
------------ ------------
$ 6,758 $ 7,117
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,039 $ 3,435
Other liabilities 195 464
Current notes payable 1,130 1,130
------------ ------------
Total current liabilities 5,364 5,029
Other long-term liabilities 11 13
------------ ------------
Total liabilities 5,375 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; 12,393,045 and 12,341,065 shares issued,
and 12,366,165 and 12,314,185 outstanding in 2001 and 124 123
2000, respectively
Additional paid-in capital 18,766 18,721
Accumulated deficit (17,467) (16,710)
Less cost of treasury stock (26,880 shares) (40) (40)
Unearned compensation -- (19)
------------ ------------
Total shareholders' equity 1,383 2,075
Commitments and contingencies
------------ ------------
$ 6,758 $ 7,117
============ ============
</Table>
See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
Three Months Ended June 30,
(in thousands except per share
data)
------------------------------
2001 2000
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Oil and gas revenues $ 787 $ 886
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Costs of operations:
Production expense 346 381
Impairment of oil and gas properties 93 --
Exploration expenses, including dry holes 203 162
Depreciation, depletion and amortization 225 170
General and administrative 501 482
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Total expenses 1,368 1,195
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Operating loss (581) (309)
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Other income (expense):
Interest expense (38) (49)
Debt conversion expense -- (174)
Gain on sale of assets -- 12
Interest and other income (expense), net 1 1
------------- -------------
(37) (210)
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Net income (loss) $ (618) $ (519)
============= =============
Earnings (loss) per share,
Basic and diluted $ (.05) $ (.05)
============= =============
Common shares and equivalents outstanding,
Basic and diluted 12,361 11,122
============= =============
</Table>
See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
Six Months Ended June 30,
(in thousands except per share
data)
------------------------------
2001 2000
------------ ------------
Oil and gas revenues $ 1,730 $ 1,820
------------ ------------
Costs of operations:
Production expense 705 712
Exploration expenses, including dry holes 342 451
Impairment of oil and gas properties 93 --
Depreciation, depletion and amortization 399 348
General and administrative 990 999
------------ ------------
Total expenses 2,529 2,510
------------ ------------
Operating loss (799) (690)
------------ ------------
Other income (expense):
Interest expense (93) (50)
Debt conversion expense -- (174)
Gain on sale of assets -- 632
Interest and other income (expense), net 136 8
------------ ------------
43 416
------------ ------------
Income (loss) before extraordinary item (756) (274)
Extraordinary loss on early extinguishment of debt -- 250
------------ ------------
Net income (loss) $ (756) $ (524)
============ ============
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ (.06) $ (0.03)
Extraordinary loss on early extinguishment of debt -- (0.02)
------------ ------------
Earnings (loss) $ (.06) $ (0.05)
============ ============
Common shares and equivalents outstanding:
Basic and diluted 12,351 11,103
============ ============
</Table>
See accompanying notes to consolidated financial statements.
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
Six Months Ended June 30,
(in thousands)
----------------------------
2001 2000
------------ ------------
Operating Activities:
Net earnings (loss) $ (756) $ (524)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, depletion and amortization of oil and gas
properties 399 348
Other depreciation and amortization 405 54
Impairment, abandoned leases, and dry hole costs 93 52
Gain on sale of property and equipment -- (433)
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 64 106
Interest expense paid with common stock -- 52
Deferred interest expense on EXCO note -- (72)
Changes in operating assets and liabilities:
Trade accounts receivable 236 (470)
Prepaid expenses and other (35) 44
Trade accounts payable 604 418
Other liabilities (602) (670)
------------ ------------
Net cash provided by (used in) operating activities 408 (877)
------------ ------------
Investing Activities:
Capital expenditures (1,455) (623)
Distributions from EXUS -- 250
Proceeds from sale of securities -- 304
Proceeds from sales of property and equipment -- 19,023
------------ ------------
Net cash provided by (used in) investing activities (1,455) 18,954
------------ ------------
Financing Activities:
Net proceeds from issuance of long-term debt and notes payable -- 1,750
Principal payments on long-term debt and notes payable (3) (18,672)
Deferred financing costs (24) (73)
Prepayment penalty on early extinguishment of debt -- (250)
------------ ------------
Net cash provided by (used in) financing activities (27) (17,245)
------------ ------------
Increase (decrease) in cash and equivalents (1,074) 832
Cash and equivalents, beginning of period 1,086 236
------------ ------------
Cash and equivalents, end of period $ 12 $ 1,068
============ ============
</Table>
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, 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 June 30, 2001 and the results of its operations for the three and six month
periods ended June 30, 2001 and 2000.
The results of operations for the three and six month periods ended June 30,
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. Accounting for Derivative Investments and Hedging Activities
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 determined that hedge accounting would
not be elected for derivatives existing at January 1, 2001, which consisted 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
were 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 was recognized as a reduction of oil and gas revenues over the
remaining five month term of the commodity collar agreements. As of June 30,
2001, the fair value of the commodity collar agreements was nil. During the
second quarter of 2001, the Company recognized a reduction of oil and gas
revenues of $135,000 relating to the transition adjustment and recorded other
expense of $1,000 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.
Loss per share for the three months ended June 30, 2001 and 2000 are calculated
based on 12,361,369 and 11,122,142 weighted average shares outstanding,
respectively. Loss per share for the six month periods ended June 30, 2001 and
2000 are calculated based on 12,351,051 and 11,103,291 weighted average shares
outstanding, respectively. In the three months and six months ended June 30,
2001 and June 30, 2000, the company reported net losses; therefore, diluted
earnings per share is not presented.
7. Comprehensive Income
The following are the components of comprehensive income (loss):
<Table>
<Caption>
Three Months Ended June 30,
(in thousands)
2001 2000
------------ ------------
Net loss $ (618) $ (519)
Unrealized loss on derivative instruments:
Reclassification adjustment for loss recognized as reduction of oil
and gas income 135 --
------------ ------------
$ (483) $ (519)
============ ============
</Table>
<Table>
<Caption>
Six Months Ended June 30,
(in thousands)
2001 2000
------------ ------------
Net loss $ (756) $ (524)
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 334 --
Unrealized gains on securities:
Reclassification adjustment for gain included in net loss -- (69)
------------ ------------
$ (756) $ (593)
============ ============
</Table>
8. Notes Payable
Notes payable consists of the following at June 30, 2001 and December 31, 2000:
<Table>
<Caption>
June 30, 2001 December 31, 2000
------------- -----------------
Revolving Credit $ 1,130,000 $ 1,130,000
============ ============
</Table>
Credit Facility
On May 5, 2000, the Company entered into a loan agreement with a 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. 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. On
April 1, 2001, the lender determined the borrowing base to be $1,130,000. The
Company requested additional time, from its lender, to refinance the existing
indebtedness of $1,130,000. In order to accommodate the Company's request, the
lender agreed to forbear exercising its remedies under the existing Loan
Agreement and the corresponding security documents. That forbearance extended
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 was increased and was determined as follows: (i) the lender's base rate
plus 3% from
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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.
On July 6, 2001 (the "Closing Date"), the Company entered into a new Loan
Agreement with its current lender for a two year, $5,000,000 revolving line of
credit subject to a borrowing base to be redetermined by the lender every six
months based on oil and gas reserves, which are used as security for the loan.
The initial borrowing base under this Loan Agreement is $2,500,000. The
$1,130,000 outstanding under the old line of credit was repaid through advances
under the New Line of Credit. The two-year facility will mature on July 5, 2003.
The Company intends to use the facility for acquisition and development of oil
and gas properties, and for general working capital purposes, including letters
of credit. The reserve-based facility includes an initial borrowing base of $2.5
million, with reductions of $50,000 per month during the term of the facility,
subject to re-determinations of the borrowing base at Venus' request. The
facility will bear interest at the Wall Street Journal Prime Rate plus the
applicable Prime Rate Margin or the Eurodollar Rate (LIBOR) plus the applicable
LIBOR Margin. Credit facility pricing varies from LIBOR + 225 basis points for
less than one-third of the commitment, to LIBOR + 250 basis for one-third to
two-thirds of the commitment, to LIBOR + 275 basis points for greater than
two-thirds of the commitment.
The facility is secured by all of the Company's oil and gas properties, and
contains the following financial covenants:
(1) Minimum Current Ratio. Commencing on the ninety-first day
after the Closing Date, the Company shall maintain, on a
quarterly basis as of the last day of each fiscal quarter, a
current ratio in an amount not less than 1.0 to 1.0. For
purposes of this ratio, current assets include the unused and
available portion of the Line of Credit.
(2) Minimum Net Worth. The Company shall have a net worth of not
less than $1,866,600 on the Closing Date, and thereafter shall
maintain, on a quarterly basis as of the last day of each
fiscal quarter, the minimum net worth requirement that shall
be re-set annually after the end of each year. For purposes of
this covenant, such number shall be adjusted to exclude
non-cash items, including unrealized gains and losses, arising
from the effects, if any, of the mark to market of those
Hedging Obligations which are classified as cash flow hedges
and determined "effective" pursuant to FASB Rule 133, or of
other rules pertaining to other comprehensive income.
(3) Minimum EBITDAX to Interest. The Company shall maintain, on a
quarterly basis as of the last day of each fiscal quarter, a
ratio (on a rolling four quarter basis) of EBITDAX to interest
expense of not less than 2.00 to 1.00 through December 31,
2001, and of not less than 2.50 to 1.00 thereafter. "EBITDAX"
is defined as EBITDA, but adjusted as if the Company were to
use the full cost method of accounting (under which all
exploration expenses are capitalized) to capitalize
exploration and dry hole costs rather than the Company's
successful efforts accounting method of expensing intangible
drilling costs (such as seismic and geological expenses), dry
hole costs and other costs.
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 25% of its oil and gas production for twelve months.
The Company is continually seeking methods and alternatives of financing in
order to provide the Company with capital to augment its capital structure. In
addition, the Company is reviewing its asset base in order to monetize assets
that are under performing. Further, a portion of the Company's business entails
selling working interest participations in oil and gas projects in order to
finance certain exploration drilling activities. As of the Closing Date, the
Company was not in compliance with the minimum net worth requirement and it did
not meet the minimum current ratio. It is management's belief that the sources
of capital described above will enable the Company to meet these covenants in
the future. Future availability of credit will depend on the success of the
Company's development program and its ability to stay in compliance with its
credit facility debt covenants. There can be no assurances however, that these
events will occur, and their timing may be uncertain.
9. Accounting for Income Taxes
No provision for income taxes has been recorded for the period ended June 30,
2001 and June 30, 2000 due to the losses recorded for these periods.
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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 June 30,
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 June 30, 2001, the Company had a working capital deficit of $ 4,449,000
compared with working capital deficit of $2,835,000 at December 31, 2000, a
decrease in working capital of $1,614,000. Working capital at June 30, 2001 and
year-end 2000 reflects classifying notes payable of $1,130,000 as current.
The Company is continually seeking methods and alternatives of financing in
order to provide the Company with capital to augment its capital structure. In
addition, the Company is reviewing its asset base in order to monetize assets
that are under performing. Further, a portion of the Company's business entails
selling working interest participations in oil and gas projects in order to
finance certain exploration drilling activities. It is management's belief that
these sources of capital along with the Company's newly created 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 its 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 we consider 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 assembling drilling projects so
that the Company will have drilling projects available to drill either for its
own account or in which to offer participation to industry co-venturers (or
both). The drilling projects which have been assembled are comprised of both
exploratory projects with the objective of discovering new oil and gas fields
and field development projects where existing oil and gas reservoirs believed by
Company's technical staff to contain undeveloped oil and gas reserves and
reacquiring development drilling opportunity. A total of approximately 18,955
gross acres, or approximately 14,341 net acres, of oil and gas leases have been
acquired on these projects.
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, which was completed on May 19,
2001. The initial production rate was 2.900 million cubic feet of gas per day
(MMCF) and 525 barrels of condensate per day flowing through 16/64 inch choke
with 3,367 psi flowing tubing pressure. On July 18, 2001, the Company commenced
drilling the fifth well in this field, the Maness #1 and it is targeted for
completion in multiple productive reservoirs. During 2001, the Company plans on
drilling two more wells in this field, with four wells targeted to be drilled in
2002. The Company has a 15% Working Interest in this field.
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.
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Liquidity and Capital Resources
(a) Liquidity
At June 30, 2001, we had a working capital deficit of $4,449,000 compared with a
deficit of $2,835,000 at December 31, 2000, a decrease in working capital of
$1,614,000.
Net cash provided by operating activities during the six month period ended June
30, 2001, was $408,000, whereas $877,000 was used in operating activities for
the same period in 2000. Net changes in operating assets and liabilities
accounted for $203,000 of the cash flow provided by operating activities. During
the six-month period ended June 30, 2001, the Company realized a net loss of
$756,000. This compares with a net loss of $524,000 for the same period in 2000.
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 no gain reflected in the 2001 loss.
During the first six months of 2001 the Company incurred capital expenditures of
$1,455,000. During the same period in 2000 the Company had 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.
For the six month ended June 30, 2001, $27,000 was used in financing activities.
This compares with $17.2 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.
Credit Facility
On May 5, 2000, the Company entered into a loan agreement with a 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. 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. On
April 1, 2001, the lender determined the borrowing base to be $1,130,000. The
Company requested additional time, from its lender, to refinance the existing
indebtedness of $1,130,000. In order to accommodate the Company's request, the
lender agreed to forbear exercising its remedies under the existing Loan
Agreement and the corresponding security documents. That forbearance extended
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 was increased and was 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.
On July 6, 2001, the Company entered into a new Loan Agreement with its current
lender for a two year, $5,000,000 revolving line of credit subject to a
borrowing base to be redetermined by the lender every six months based on oil
and gas reserves, which are used as security for the loan. The initial borrowing
base under this Loan Agreement is $2,500,000. The $1,130,000 outstanding under
the old line of credit was repaid through advances under the New Line of Credit.
The two-year facility will mature on July 5, 2003. The Company intends to use
the facility for acquisition and development of oil and gas properties, and for
general working capital purposes, including letters of credit. The reserve-based
facility includes an initial borrowing base of $2.5 million, with reductions of
$50,000 per month during the term of the facility, subject to re-determinations
of the borrowing base at Venus' request. The facility will bear interest at the
Wall Street Journal Prime Rate plus the applicable Prime Rate Margin or the
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Eurodollar Rate (LIBOR) plus the applicable LIBOR Margin. Credit facility
pricing varies from LIBOR + 225 basis points for less than one-third of the
commitment, to LIBOR + 250 basis for one-third to two-thirds of the commitment,
to LIBOR + 275 basis points for greater than two-thirds of the commitment.
The facility is secured by all of the Company's oil and gas properties, and
contains the following financial covenants:
(1) Minimum Current Ratio. Commencing on the ninety-first day
after the closing date, the Company shall maintain, on a
quarterly basis as of the last day of each fiscal quarter, a
current ratio in an amount not less than 1.0 to 1.0. For
purposes of this ratio, current assets include the unused and
available portion of the Line of Credit.
(2) Minimum Net Worth. The Company shall have a net worth of not
less than $1,866,600 on the closing date, and thereafter shall
maintain, on a quarterly basis as of the last day of each
fiscal quarter, the minimum net worth requirement which shall
be re-set annually after the end of each year. For purposes of
this covenant, such number shall be adjusted to exclude
non-cash items, including unrealized gains and losses, arising
from the effects, if any, of the mark to market of those
Hedging Obligations which are classified as cash flow hedges
and determined "effective" pursuant to FASB Rule 133, or of
other rules pertaining to other comprehensive income.
(3) Minimum EBITDAX to Interest. The Company shall maintain, on a
quarterly basis as of the last day of each fiscal quarter, a
ratio (on a rolling four quarter basis) of EBITDAX to interest
expense of not less than 2.00 to 1.00 through December 31,
2001, and of not less than 2.50 to 1.00 thereafter. "EBITDAX"
is defined as EBITDA, but adjusted as if the Company were to
use the full cost method of accounting (under which all
exploration expenses are capitalized) to capitalize
exploration and dry hole costs rather than the Company's
successful efforts accounting method of expensing intangible
drilling costs (such as seismic and geological expenses), dry
hole costs and other costs.
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 25% of its oil and gas production for twelve months.
The Company is continually seeking methods and alternatives of financing in
order to provide the Company with capital to augment its growth. In addition,
the Company is reviewing its asset base in order to monetize assets that are
under performing. Further, a portion of the Company's business entails selling
working interest participations in oil and gas projects in order to finance
certain exploration drilling activities. As of the closing date, the Company was
not in compliance with the minimum net worth requirement and it did not meet the
minimum current ratio. It is management's belief that the sources of capital
described above will enable the Company to meet these covenants in the future.
Future availability of credit will depend on the success of the Company's
development program and its ability to stay in compliance with its credit
facility debt covenants. There can be no assurances however, that these events
will occur and their timing may be uncertain.
(c) Results of Operations
Revenues have been lower during 2001 due to decreased equivalent unit volumes
and the effect of the hedge. During the first six months of 2001, the amount
recorded for the cost of the hedge was $334,000. During the same period in 2000
it was $26,000. As shown below, oil volumes decreased by 22% while natural gas
volumes increased slightly during the six-month period ended June 30. Oil
volumes decreased 15% and gas volumes increased 9% for the three month period
ended June 30.
<Table>
<Caption>
2001 2000
--------------------------- ---------------------------
Sales Average Sales Average
Volume Prices Volume Prices
------------ ------------ ------------ ------------
Six Months Ended June 30,
Gas (MCF) 160,989 $ 6.23 161,478 $ 3.00
Oil (BBLS) 40,159 $ 26.42 51,477 $ 25.95
Three Months Ended June 30,
Gas (MCF) 83,614 $ 4.70 76,542 $ 3.33
Oil (BBLS) 20,864 $ 25.33 24,555 $ 25.72
</Table>
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Average daily production of oil was 229 barrels for the three-month period ended
June 30, 2001, and 270 for the same period in 2000. Average daily production of
natural gas was 919 mcf for the three month period ended June 30, 2001, and 841
for the same period in 2000. 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 then existing bank credit
facility. These hedges expired on May 31, 2001. Under terms set forth under the
Company's new Loan Agreement, the Company is required to enter into hedges in
amounts that represent 25% of the estimated production for periods up to twelve
months. The Company anticipates entering into costless collar contracts for oil
and gas in amounts consistent with the requirement of its new Loan Agreement on
or before August 31, 2001.
Three Months Ended June 30, 2001 and 2000
The Company reported a net loss of $618,000 for the quarter ended June 30, 2001,
compared to a net loss of $519,000 in the same quarter in 2000. 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 and gas revenues decreased by $99,000, exploration expense
increased $41,000, depreciation, depletion, and amortization increased $55,000
and general and administrative expense increased $19,000. Also an impairment
expense of $93,000 for oil and gas properties was recorded in 2001, and none was
recorded in the same period of 2000. These were partially offset by a decrease
in interest expense of $11,000 and a decrease in production expense of $35,000.
Oil and gas revenues decreased by $99,000 as compared to the same period in
2000. Loss on hedging transactions accounted for $109,000 decrease, increase in
unit prices accounted for $82,000 increase, and a decrease in production
accounted for a $72,000 decrease. Gas production increased 7,000 mcf, but oil
production decreased 3,700 bbls.
Production expense decreased by $35,000 as compared to the same period in 2000.
Approximately 31% of the decrease is due to lower severance taxes as a result of
decreased revenue. The balance of the decrease is due to decreased operating
cost due to lower volumes produced during the year 2001 period and a decrease in
workover costs (stimulations, adding perforations and recompletions). Production
expense averaged $1.66 per mcfe during the three month period ended June 30,
2001, compared to $1.70 per mcfe for the same period in 2000. Although we plan
further workover operations in the third and fourth quarter, we expect per unit
costs to start declining.
Exploration expense increased by $41,000 due to increased exploration activity
during the quarter as compared to the same quarter in the prior year.
Depreciation, depletion and amortization (DDA) increased by $55,000. A decrease
of approximately $11,000 is due to lower volumes, and an increase of $66,000 is
due to a higher DDA rate. Depreciation, depletion and amortization averaged
$1.08 per mcfe in 2001 as compared to $0.76 per mcfe for the same period in
2000.
Interest expense decreased by $11,000, from $49,000 in 2000 to $38,000 in 2001.
The decrease is due to lower outstanding interest bearing balances. The average
outstanding balance in 2000 was $1.7 million as compared to an average
outstanding balance of $1.1 million in the current period.
Six Months Ended June 30, 2001 and 2000
The Company reported a net loss of $756,000 for the six month period ended June
30, 2001, compared to a net loss of $524,000 in the same period in 2000. 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 2000 loss is a non-cash charge of $250,000
for early extinguishments of debt. Oil and gas revenues decreased by $90,000,
depreciation, depletion, and amortization increased $51,000, and interest
expense
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increased $43,000. Also an impairment expense for oil and gas properties of
$93,000 was recorded in 2001 and there was no impairment expense for the same
period in 2000. These were partially offset with a decrease in exploration
expense of $109,000, a decrease of general and administrative expense of $9,000
and an increase in other income of $128,000 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. Also there was a gain on sale of
assets in 2000 of $632,000 and none in 2001.
Oil and gas revenues decreased by $90,000 as compared to the same period in
2000. An increase in product prices created an increase of approximated
$516,000, but a decrease in production accounted for a decrease of $298,000 and
losses on hedging transactions in 2001 were $308,000 more than 2000.
Production expense decreased by $7,000 as compared to the same period in 2000.
The decrease was a combination of a decrease in workover costs of $29,000, an
increase of other production costs of $6,000 and an increase of severance taxes
of $16,000 which are a result of increased prices. Of the increase in other
production cost of $6,000, a decrease in volume accounted for a decrease of
$74,000 and an increase in unit cost accounted for an increase of $80,000.
Production expense averaged $1.75 per mcfe during the six month period ended
June 30, 2001, compared to $1.51 per mcfe for the same period in 2000. Although
we plan further workover operations in the third and fourth quarter, we expect
per unit costs to start declining.
Exploration expense decreased by $109,000. In the prior period we recorded dry
hole expense of $41,000 and approximately $131,000 in employee severance cost.
Depreciation, depletion and amortization increased by $51,000. Approximately
$50,000 is a decrease due to lower volumes, and $101,000 is an increase due to a
higher DDA rate. Depreciation, depletion and amortization averaged $0.99 per
mcfe in 2001 as compared to $0.74 per mcfe for the same period in 2000.
Interest expense increased by $40,000, from $50,000 in 2000 to $93,000 in 2001.
Most of the increase is due to the reversal of $72,000 in 2000 in accrued
imputed interest that did not have to be paid because of the prepayment of the
related debt. The amortization of loan costs were $22,000 more in 2001 than
2000. The average outstanding balance in 2000 was $1.9 million as compared to an
average outstanding balance of $1.1 million in the current period.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," issued in June 2001, establishes accounting and reporting
standards for business combinations. This statement eliminates the pooling
- -of-interests method of accounting for business combinations and requires all
business combinations to be accounted for using the purchase method. The Company
will adopt SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 is not
expected to have a material impact on the Company's financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets," issued in June, 2001,
establishes accounting and reporting standards for acquired goodwill and other
intangible assets. This statement addresses how goodwill and other intangible
assets that are acquired or have already been recognized in the financial
statements should be accounted for. Under this statement goodwill and certain
other intangible assets will no longer be amortized, but will be required to be
reviewed periodically for impairment of value. The Company will adopt SFAS No.
142 on January 1, 2002. The adoption of SFAS No. 142 is not expected to have a
material impact on the Company's financial statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations," issued in June
2001, significantly changes the method of accruing for costs associated with the
retirement of fixed assets (e.g. oil and gas production facilities, etc.) for
which an entity is legally obligated to incur. The Company will evaluate the
impact and timing of implementing SFAS No. 143. Implementation of this standard
is required no later than January 1, 2003, with earlier adoption encouraged.
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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 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 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 then existing bank credit facility.
These hedges expired on May 31, 2001. Under terms set forth under the Company's
new Loan Agreement, the Company is required to enter into hedges in amounts that
represent 25% of the estimated production for periods up to twelve months. The
Company anticipates entering into costless collar contracts for oil and gas in
amounts consistent with its requirement through the new Loan Agreement on or
before August 31, 2001.
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.
The lender and the Company entered into a forbearance agreement and amendment to
the revolving credit facility pursuant to which the lender had agreed to forbear
from exercising its remedies thereunder until June 15, 2001, which date was
further extended to July 9, 2001, as the Company obtained a commitment from
another creditworthy lender to advance the entire amount due to the present
lender on or before July 9, 2001. On July 6, 2001, the Company entered into a
new Loan Agreement with its current lender under the basic terms and conditions
outlined above, in the section titled "Credit Facility," and the $1,130,000
outstanding under the old line of credit was repaid through advances under the
New Line of Credit. The two-year facility will mature on July 5, 2003.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of our Stockholders was held on June 5, 2001, for the
following purposes:
o To elect eight (8) directors to serve until the next Annual
Meeting of Stockholders
o To ratify the appointment of KPMG LLP as our independent
certified public accountants for the fiscal year ended
December 31, 2001
All the matters were approved by the vote of our stockholders, and the results
are tabulated below:
<Table>
<Caption>
FOR AGAINST ABSTAIN OR WITHHELD
--- ------- -------------------
(1) Election of Directors
E.L. Ames, Jr. 10,142,376 3,387 None
John Y. Ames 10,142,376 3,387 None
J.C. Anderson 10,142,376 3,387 None
Martin A. Bell 10,142,376 3,387 None
James W. Gorman 10,142,042 3,722 None
Michael E. Little 10,142,403 3,360 None
Jere W. McKenny 10,142,403 3,360 None
John H. Pinkerton 10,142,422 3,341 None
(2) Ratification of KPMG LLP as auditors 10,137,593 8,112 60
</Table>
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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. On June 14, 2001, the Company received a
letter from Nasdaq closing this issue on the basis that the Company's minimum
bid price had stayed above $1.00 for at least ten consecutive trading days.
On May 29, 2001, Nasdaq sent the Company a letter stating that it is not in
compliance with The Nasdaq SmallCap Market listing requirements because the
Company's net tangible assets were below the $2 million minimum. The Company
also did not comply with Nasdaq's newly proposed continued listing standard of
$2.5 million in stockholders' equity. On June 13, 2001, the Company submitted to
Nasdaq its specific plan to achieve and sustain compliance with The Nasdaq
SmallCap Market listing requirements. On August 8, 2001, Nasdaq sent the Company
a letter stating that Nasdaq was denying the Company's request for continued
listing submitted in June. The Company has requested a hearing to appeal
Nasdaq's determination to deny the Company's request for continued listing on
The Nasdaq SmallCap Market. Pending the hearing, the Company's securities will
remain listed on the SmallCap Market. A hearing date has not yet been scheduled.
Management has taken steps to implement a plan that it believes will allow the
Company to maintain its listing on The Nasdaq SmallCap Market. However, if the
Company is unsuccessful in maintaining its listing on the SmallCap Market, it
expects that its securities will be eligible for quotation on the
Over-the-Counter Bulletin Board ("OTCBB"), a regulated quotation service that
displays real-time quotes, last sale prices and volume information in
over-the-counter equity securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Forbearance Agreement and Second Amendment to Loan Agreement
Dated May 5, 2001, By and Between Venus Exploration, Inc. and
Bank One, Texas, N.A.
(b) Reports on Form 8-K.
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: August 14, 2001 BY: /s/ JOHN Y. AMES
---------------------------------------
John Y. Ames
(President and Chief Operating Officer)
Dated: August 14, 2001 BY: /s/ P. MARK STARK
---------------------------------------
P. Mark Stark
(Principal Financial Officer)
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EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Forbearance Agreement and Second Amendment to Loan Agreement
Dated May 5, 2001, by and Between Venus Exploration, Inc. and
Bank One, Texas, N.A.
</Table>
20