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, 2002
--------------
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
--------------------------------------------------------
(Address of principal executive offices) (Zip code)
(210) 930-4900
----------------------------------------------------
(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 May 12, 2002
--------------------------- ----------------------------
Common Stock $.01 par value 12,448,730 shares
1
VENUS EXPLORATION, INC. AND SUBSIDIARY
INDEX
<Table>
<Caption>
PAGE
PART I. - FINANCIAL INFORMATION 3
Item 1. Financial Statements (Unaudited) 3
(a) Consolidated Balance Sheets as of 3
March 31, 2002 and December 31, 2001
(b) Consolidated Statements of Operations for 4
the three-month periods ended March 31,
2002 and 2001
(c) Consolidated Statements of Cash Flows 5
for the three-month periods ended
March 31, 2002 and 2001
(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 14
Market Risk
PART II. - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31, December 31,
2002 2001
-------------- --------------
(Unaudited)
(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 133 $ 431
Trade accounts receivable 1,001 1,861
Prepaid expenses and other 70 83
-------------- --------------
Total current assets 1,204 2,375
Oil and gas properties and equipment, at cost
under the successful efforts method, net 6,098 6,686
Other property and equipment, net 135 151
Deferred financing costs, at cost less accumulated amortization 38 147
Other assets, at cost less accumulated amortization 30 33
-------------- --------------
$ 7,505 $ 9,392
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 6,389 $ 8,038
Other liabilities 591 934
Current notes payable 1,785 1,254
-------------- --------------
Total current liabilities 8,765 10,226
Other long-term liabilities 23 28
-------------- --------------
Total liabilities 8,788 10,254
Shareholders' equity (deficit):
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; 12,475,610 and 12,441,375 shares issued,
and 12,448,730 and 12,414,495 shares outstanding in 2002 and
2001, respectively 125 124
Additional paid-in capital 18,839 18,815
Accumulated deficit (20,207) (19,761)
Less cost of treasury stock (26,880 shares) (40) (40)
-------------- --------------
Total shareholders' equity (deficit) (1,283) (862)
Commitments and contingencies
-------------- --------------
$ 7,505 $ 9,392
============== ==============
</Table>
See accompanying notes to consolidated financial statements.
3
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
Three Months Ended March 31,
(in thousands except per share data)
----------------------------------
2002 2001
-------------- --------------
Oil and gas revenues $ 525 $ 838
-------------- --------------
Costs of operations:
Production expense 295 326
Exploration expenses, including dry holes 174 139
Depreciation, depletion and amortization 132 157
General and administrative 493 490
-------------- --------------
Total expenses 1,094 1,112
-------------- --------------
Operating loss (567) (274)
-------------- --------------
Other income (expense):
Interest expense (209) (54)
Interest and other income 6 134
-------------- --------------
(203) 80
-------------- --------------
Loss from continuing operations before income taxes (771) (194)
Income tax expense --
-------------- --------------
Loss from continuing operations (771) (194)
Sale of properties:
Income from operations of properties sold --
(including gain on sale of $302,000 in 2002) 325 56
-------------- --------------
Net loss $ (446) $ (138)
============== ==============
Basic and diluted earnings (loss) per share:
Loss from continuing operations $ (.06) $ (.01)
Income from operations of properties sold .02 .00
-------------- --------------
Net loss $ (.04) $ (.01)
============== ==============
Common shares and equivalents outstanding:
Basic and diluted 12,446 12,341
============== ==============
</Table>
See accompanying notes to consolidated financial statements.
4
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
Three Months Ended March 31
(in thousands)
----------------------------------
2002 2001
-------------- --------------
Operating Activities:
Net loss $ (446) $ (138)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, depletion and amortization of oil and gas
properties 132 174
Other depreciation and amortization 179 243
Gain on sale of property and equipment (302) --
Compensation expense for stock and stock options 24 44
Changes in operating assets and liabilities:
Trade accounts receivable 860 97
Prepaid expenses and other 17 13
Trade accounts payable (510) 1,605
Other liabilities (344) (513)
-------------- --------------
Net cash (used in) provided by operating activities (390) 1,525
-------------- --------------
Investing Activities:
Capital expenditures (150) (957)
Proceeds from sales of property and equipment 909 --
-------------- --------------
Net cash (used in) provided by investing activities 759 (957)
-------------- --------------
Financing Activities:
Net proceeds from issuance of long-term debt and notes payable 1,705
Principal payments on long-term debt and notes payable (2,318) (1)
Deferred financing costs (54) (1)
-------------- --------------
Net cash used in financing activities (667) (2)
-------------- --------------
Increase (decrease) in cash and equivalents (298) 566
Cash and equivalents, beginning of period 431 1,086
-------------- --------------
Cash and equivalents, end of period $ 133 $ 1,652
============== ==============
</Table>
See accompanying notes to consolidated financial statements.
5
VENUS EXPLORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31, 2002 and 2001
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, 2001.
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, 2002 and the results of its operations for the three months ended
March 31, 2002 and 2001.
The results of operations for the three month period ended March 31, 2002 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 notes 4 and 8 below and to the notes to the 2001 consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
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. 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. On September 28, 2001, the
Company entered into a new commodity collar agreement and has not elected hedge
accounting for these derivative instruments. As of March 31, 2002, there was no
value or liability associated with this commodity collar agreement.
5. Earnings (loss) Per Share
Basic net loss per common share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted income (loss)
per share is computed by assuming the issuance of common shares for all dilutive
potential common shares outstanding.
Income (loss) per share for the three month periods ended March 31, 2002 and
2001 are calculated based on 12,445,687 and 12,340,617 weighted average shares
outstanding, respectively. In the first quarter of 2002 and 2001 the Company
reported a net loss; therefore, diluted earnings per share is not presented.
6
6. Comprehensive Income
The following are the components of comprehensive income (loss):
<Table>
<Caption>
Three Months Ended March 31,
(in thousands)
2002 2001
-------------- --------------
Net loss $ (446) $ (138)
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
-------------- --------------
$ (446) $ (273)
============== ==============
</Table>
7. Notes Payable
Notes payable consists of the following at March 31, 2002 and December 31, 2001:
<Table>
<Caption>
March 31, 2002 December 31, 2001
----------------- -----------------
Revolving credit $ 645,941 $ 1,254,351
Other note payable to creditor 1,139,215 --
----------------- -----------------
$ 1,785,156 $ 1,254,351
================= =================
</Table>
Current Credit Facility
On July 6, 2001 (the "Loan Closing Date"), we entered into a new Loan Agreement
with a bank that was initially for a two year, $5,000,000 revolving line of
credit. The line of credit is subject to a borrowing base based on oil and gas
reserves to be redetermined by the bank at any time but must be evaluated every
six months. The initial borrowing base under this Loan Agreement was $2,000,000,
with reductions of $50,000 per month during the term of the facility. As of
December 11, 2001, we entered into an amendment of our current credit facility
whereby the interest rate was increased to the Wall Street Journal Prime Rate
plus 200 basis points, and the revolving line of credit and the borrowing base
were each reduced to $1,900,000. In conjunction with a sale of oil and gas
properties that occurred in January, 2002, we entered into another amendment to
the current credit facility whereby the term of the loan agreement was changed
from July 5, 2003 to June 30, 2002, and the revolving line of credit and the
borrowing base were each reduced to $1,850,000. As of March 18, 2002, we entered
into an amendment of our current credit facility whereby the revolving line of
credit was reduced to $938,454 and the borrowing base was reduced to $938,454,
with reductions to such borrowing base of $50,000 per month during the term of
the facility, and an additional reduction of $100,000 to occur on April 2, 2002,
upon the expiration of a letter of credit. As of April 10 and again as of April
30, 2002 we entered into amendments to the loan agreement, the substance of
which was to increase the interest rate of the loan to the Wall Street Journal
Prime Rate plus 225 basis points, reduce the term to May 30, 2002 and require
the guaranty of Venus Exploration, Inc.'s Chairman and CEO.
The facility is secured by all of our oil and gas properties, and contains the
following financial covenants:
(1) Minimum Current Ratio. Commencing on the ninety-first day after the Loan
Closing Date, the Company shall maintain, on a quarterly basis as of the
last day of each fiscal quarter, a ratio of current assets to current
liabilities of 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 Loan 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.
7
(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; restriction on changes in
key management and financial statement reporting requirements. The credit
facility also requires that we hedge at least 25% of our daily oil and gas
production for twelve months.
As of March 31, 2002, we were not in compliance with certain of our loan
covenants; however, we sought and received waivers for our non-compliance with
those loan covenants. In order for us to achieve compliance with our loan
covenants in the future, we need to raise additional capital and/or obtain
amendment of certain loan covenants.
Other Note Payable
As of March 1, 2002, we entered into a note payable with one of our largest
creditors in replacement of our then existing indebtedness to that creditor.
This note is secured by the personal guaranty by E.L. Ames, Jr., our Chairman
and CEO. The note carries an interest rate of seven percent (7%) and had an
original term of April 30, 2002. We have subsequently entered into an amendment
to the note that has extended the term of the note to June 1, 2002.
8. Sale of Properties
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
issued in August 2001, addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supercedes SFAS No.
121, "Accounting for the Impairment of Long Lived Assets to Be Disposed Of".
However, it retains the fundamental provisions of Statement 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale. The
Company adopted the provisions of SFAS No. 144 beginning January 1, 2002.
During the period ended March 31, 2002, the Company sold oil and gas properties
that meet the definition of a "component of an entity". Accordingly the results
of operations of these properties have been reported in discontinued operations
in the accompanying Consolidated Statements of Operations for the periods ended
March 31, 2002 and 2001, in accordance with SFAS No. 144.
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
9. Accounting for Income Taxes
No provision for income taxes has been recorded for the period ended March 31,
2002 and March 31, 2001 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,
2002, the Company was not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on our
financial condition or results of operations.
11. Liquidity and Capital Resources
At March 31, 2001, the Company had a working capital deficit of $ 7,560,000
compared with working capital deficit of $7,851,000 December 31, 2001, an
increase in working capital of $291,000. Working capital at quarter-end 2002 and
year-end 2001 reflects classifying notes payable of $1,785,156 and $1,254,351,
respectively, as current.
8
Our outstanding bank debt is due May 30, 2002. We are in discussions with
various persons in connection with our efforts to refinance our existing
indebtedness. There is no assurance that our line of credit will be renewed with
either our present lender or an alternative financial institution. Regardless of
whether a refinancing can be arranged, such refinancing is unlikely to be
sufficient to allow us to execute our business plan. Accordingly, to continue
operations, such as drilling additional development and exploration wells, as
well as acquiring additional acreage, we will have to raise capital and/or
liquidate assets. We have engaged a financial advisor to assist us in exploring
all financial alternatives ranging from a recapitalization of the Company to a
merger or sale of the Company or certain of its properties. There can be no
assurances, however, that these events will occur and their timing may be
uncertain.
Notwithstanding the foregoing, we are continually seeking methods and
alternatives of financing in order to provide us with the capital to refinance
our working capital deficit and to improve our financial position. In addition,
we are reviewing our asset base so as to monetize assets that are
underperforming. Further, a portion of our business entails selling working
interest participations in oil and gas projects in order to finance certain
exploration drilling activities.
9
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, 2001. 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, 2001, 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, our business plan includes the acquisition of producing properties.
We presently have oil and gas properties, acreage and production in eight
states. Our emphasis is on oil and gas exploration and development projects and
prospects in Texas, Louisiana, Oklahoma and Utah, with a current primary focus
being in the Expanded Yegua Trend of the Upper Texas Gulf Coast and the Cotton
Valley Trend of East Texas and Western Louisiana. Our management team has been
responsible for the discovery, development and exploitation of relatively
significant reserves of oil and gas for privately held predecessor companies
over the past 30 years.
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
In light of the Company's restricted working capital situation (see "Liquidity
and Capital Resources" below), it has presently discontinued its primary
business activities to focus on reducing its deficit. In order to continue
operations, such as drilling additional development and exploration wells or
acquiring additional acreage, the Company must either raise additional capital
and/or liquidate some of its existing assets. While the Company has retained a
financial advisor to assist it in evaluating such opportunities, there can be
no assurance that these events will occur and the timing of these events may be
uncertain.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES - Our discussion and analysis of our
financial condition and results of operation are based upon consolidated
financial statements, which have been prepared in accordance with accounting
principles generally adopted in the United States. The preparation of these
financial statements requires that we make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. We analyze
these estimates, including those related to oil and gas revenues, bad debts, oil
and gas properties, derivative instruments, income taxes and contingencies. We
base these estimates on historical experience and various other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements. We
recognize revenues from the sale of products and services in the period
delivered. We provide an allowance for doubtful accounts for specific
receivables we judge unlikely to be collected. Oil and gas
10
properties are accounted for under the successful efforts method of accounting
and are periodically evaluated for possible impairment. Impairments are recorded
when our management believes that a property's net book value is not recoverable
based on current estimates of expected future cash flows. Our reserve estimates
are prepared by engineers knowledgeable of and following the guidelines for
reserves as established by the SEC. The estimation of reserves requires the
engineers to make a significant number of assumptions based on professional
judgement. Estimated reserves are, therefore, often subject to future revision,
certain of which could be substantial, based on the availability of additional
information, including: reservoir performance, new geological and geophysical
data, additional drilling, technological advancements, price changes and other
economic factors. Changes in oil and natural gas prices can lead to a decision
to start-up or shut-in production, which can lead to revisions to reserve
quantities. Reserve revisions inherently lead to adjustments of depletion rates
that we utilize. We cannot predict the types of reserve revisions that will be
required in future periods. To the extent that we have investments in derivative
instruments, we have analyzed our accounting treatment of them on a case by case
basis and have typically not elected to treat those investments as hedges under
FAS 133.
Liquidity and Capital Resources
(a) Liquidity
At March 31, 2002, the Company had a working capital deficit of $7,560,000
compared with a deficit of $7,851,000 at December 31, 2001, an increase in
working capital of $291,000.
Net cash used in operating activities during the three months ended March 31,
2002, was $390,000, whereas $1,525,000 was provided by operating activities for
the same three-month period in 2001. Net changes in operating assets and
liabilities provided $23,000 of cash from operating activities. During the first
three months of 2002, the Company realized a net loss of $446,000. This compares
with a net loss of $138,000 for the first three months of 2001. The 2002 loss
includes a gain of $302,000 from the sale of oil and gas properties.
During the first three months of 2002 the Company incurred capital expenditures
on oil and gas properties of $150,000 and received proceeds from the sale of oil
and gas properties of $909,000. During the same period in 2001, the Company had
capital expenditures of $957,000.
For the three months ended March 31, 2002, $667,000 was used by financing
activities. This compares with $2,000 used in financing activities for the same
period in 2001.
(b) Capital Resources
The Company's capital expenditure budget is continually reviewed and revised as
necessary, based on perceived opportunities and business conditions. In light of
our current working capital situation, we are discontinuing our drilling and
exploration activities and do not anticipate making any further capital
expenditures, until such time as we have significantly reduced our deficit.
As of March 31, 2002, we were not in compliance with some of the loan covenants
under our current credit facility that is more fully described in Note 7 above.
We sought and received waivers for our non-compliance with those loan covenants.
In order for us to achieve compliance with our loan covenants in the future, we
need to raise additional capital and/or obtain amendment of certain loan
covenants.
Our outstanding bank debt is due May 30, 2002. While we are in discussions with
our lender, there is no assurance that our line of credit will be renewed with
either our present lender or an alternative financial institution. Regardless of
whether a refinancing can be arranged, such refinancing is unlikely to be
sufficient to allow us to execute our business plan. Accordingly, to continue
operations, such as drilling additional development and exploration wells, as
well as acquiring additional acreage, we will have to raise capital and/or
liquidate assets. We have engaged a financial advisor to assist us in exploring
all financial alternatives ranging from a recapitalization of the Company to a
merger or sale of the Company or certain of its properties. There can be no
assurances, however, that these events will occur, and their timing may be
uncertain.
11
Notwithstanding the foregoing, we are continually seeking methods and
alternatives of financing in order to provide us with the capital to refinance
our working capital deficit and to improve our financial position. In addition,
we are reviewing our asset base so as to monetize assets that are
underperforming. Further, a portion of our business entails selling working
interest participations in oil and gas projects in order to finance certain
exploration drilling activities.
Results of Operations
(a) Production
Revenues were lower during 2002 due to decreased oil and natural gas prices and
decreased equivalent unit volumes. As shown in the information below (which
includes production from properties sold during the period), oil volumes
decreased by 4%, and natural gas volumes decreased by 16%.
<Table>
<Caption>
Three Months Ended March 31,
----------------------------------------------------------------------
2002 2001
----------------------------------- -------------------------------
Sales Average Sales Average
Volume Prices Volume Prices
-------------- ---------------- ----------- ----------------
Gas (MCF) 64,933 $ 2.90 77,374 $ 7.88
Oil (BBLS) 18,513 $ 19.77 19,295 $ 27.61
</Table>
Average daily production of oil was 206 barrels for the three month period ended
March 31, 2002, and 214 for the same period in 2001. Average daily production of
natural gas was 721 mcf for the three month period ended March 31, 2002, and 860
for the same period in 2001 Under terms set forth under the Company's existing
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. On
September 28, 2001, the Company entered into commodity collar agreements for 112
barrels of oil per day for six months with a floor price of $22.20 per barrel
and a ceiling of $24.50. The contracted volumes represent approximately 50% of
estimated oil production for the six month period beginning in November 2001 and
ending April 2002. Since the Company's oil production is approximately the same
in proportion as gas is to its overall production, the Company is satisfying its
obligation to hedge 25% of its overall production by hedging 50% of its oil
production. Transaction gains and losses are determined monthly and are included
in oil and gas revenues in the period the hedged production is sold. We have
determined that hedge accounting will not be elected for our derivative
positions existing at March 31, 2002. Future changes in the fair value of those
derivatives will be recorded in income. We entered into this costless collar
with Enron North America Corp ("Enron"). Since we have a receivable from Enron
in the amount of $18,209, we have elected to record a provision for bad debt in
the same amount. In order to enter into this costless collar we had to give
Enron a letter of credit ("L/C") in the amount of $100,000 with them as the
beneficiary of the L/C. The L/C expired on April 1, 2002, and we and our current
lender do not intend to renew the L/C.
(b) Three Months Ended March 31, 2002 and 2001
The Company reported a net loss of $446,000 for the quarter ended March 31,
2002, compared to a net loss of $138,000 in the same quarter in 2001. The 2002
loss reflects a gain on the sale of assets of $302,000 as compared to no such
gain on the sale of assets in the same period in 2001. The increase in the loss
is the result of a decrease in oil and gas revenues of $390,000 and decreases in
production expense of $60,000 and in depreciation, depletion and amortization of
$42,000. These were offset by increases in exploration expense of $34,000,
general and administrative of 4,000 and interest expense of $154,000. Interest
and other income also decreased $129,000 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 decreased by $390,000 as compared to the same period in
2001 (before the effects of SFAS No. 144 whose implementation required that
revenue of $28,000 and $106,000 in 2002 and 2001, respectively, be reported as
part of Income from operations of properties sold - see note 8 to the
consolidated financial statements). In 2001 revenues were reduced by hedging
losses of $199,000. The decreases were caused by a decrease in prices ($469,000)
and a decrease in production ($120,000). As stated above, the decrease in
production was partially due to the sale in 2002 of certain leases.
12
Production expense decreased by $60,000 as compared to the same period in 2001
(also before the effects of SFAS No. 144 which resulted in $4,000 and $33,000,
respectively, in 2002 and 2001 being reported as part of Income from operations
of property sold) Approximately 92% of the increase is due to lower severance
taxes as a result of decreased prices and a lower average severance tax rate.
The balance of the decrease is due to a decrease in workover costs. Production
expense averaged $1.70 per Mcfe during the three month period ended March 31,
2002, compared to $1.86 per Mcfe for the same period in 2001.
Exploration expense increased by a net of $34,000. In 2002 the Company recorded
dry hole cost of $16,000 related to a dry hole. These was also an increase of
exploration activity during the three month period ended March 31, 2002.
Depreciation, depletion and amortization (DDA) decreased by net $42,000. The DDA
rate was $0.75 per Mcfe for the three months ended March 31, 2002, compared to
$0.90 per Mcfe for the same period in 2001. The decreased rate per Mcfe
accounted for approximately $27,000 of the decrease and the decrease in volume
accounted for approximately $15,000 of the decrease.
General and administrative expense increased by $4,000 in the three month period
ended March 31, 2002, as compared to the same period in 2001.
Interest expense increased by $154,000, from $54,000 in 2001 to $209,000 in
2002. Approximately $136,000 of the increase was caused by an increase of loan
cost amortization. The average outstanding balance in 2002 was $1.3 million as
compared to an average outstanding balance of $1.1 million in 2001.
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 adopted SFAS No. 141 on July 1, 2001. We believe the adoption of SFAS
No. 141 did not 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 adopted SFAS No. 142
on January 1, 2002. We believe the adoption of SFAS No. 142 did not 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.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
issued in August 2001, addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supercedes SFAS No.
121, "Accounting for the Impairment of Long Lived Assets to Be Disposed Of".
However, it retains the fundamental provisions of Statement 121 for (a)
recognition and measurement of the impairment of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. The Company adopted the provisions of SFAS No. 144 on
January 1, 2002. We believe the adoption of SFAS No. 144 did not have a material
impact on the Company's financial statements other than presentation of the
operations of properties disposed of.
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-
13
looking statements. Although we believe that our 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, our ability to
procure a replacement credit facility, the timing and extent of changes in
commodity prices for oil and gas, our need to develop and replace reserves,
environmental risk, the substantial capital expenditures required to fund our
operations, drilling and operating risks, risks related to exploration and
development, uncertainties about the estimates of reserves, competition,
government regulation and our ability to implement our 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, 2001.
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, 2001 and reference is made to the information
contained there. Our current credit facility requires us to hedge approximately
twenty five percent (25%) of our daily oil and gas production for a period of
one year. On September 28, 2001, we entered into commodity collar agreements for
112 barrels of oil per day for the six month period from November 1, 2001 though
April 30, 2002. The hedging arrangements have the effect of locking in the
effective prices we receive for the volumes hedged. For these volumes our
exposure to a significant decline in product prices is significantly reduced;
however, they also limit the benefit we might have received if prices increased
above the cap. For every $1 the NYMEX average for a month is above the $24.50
per barrel ceiling, our net income would decrease by approximately $3,360 for
the month. While these transactions have no carrying value, their fair value,
represented by the estimated amount that would be required to terminate them,
was a gain of approximately $48,000, however, since the contract is with Enron,
we have elected not to record any gain due to the doubtful nature of the
contract. We have determined that hedge accounting will not be elected for our
derivative positions existing at March 31, 2002.
While we are required to enter into hedges under the terms of our current credit
facility, our use of these contracts has the intended impact of reducing the
volatility of our oil and gas revenues. Should the price of a commodity decline,
the revenue received from the sale of the product tends to decline to a
corresponding extent. The decline in revenue is then partially offset based on
the amount of production hedged and the hedge price.
Changes in product prices can also have a significant effect on the value of our
oil and gas properties for purposes of determining whether an impairment
write-down must be recorded. Although impairment write-downs do not affect cash
flow, they do reduce our tangible net worth, which in turn affects our ability
to meet the tangible net worth requirements under our existing credit facility.
Our earnings are also affected by changes in interest rates because our bank
debt ($645,941 at March 31, 2002) is subject to a floating prime rate plus
2.25%. We plan to use significant levels of bank debt now and in the future to
fund our capital expenditures and working capital needs. Fluctuations in these
rates directly impact our interest expense. For every 1% change in the interest
rate charged by the lender, our monthly net income would change inversely by
approximately $540 based on the level of indebtedness in place on May 13,
2002; e.g., a 1% interest rate increase would decrease monthly net income by
approximately $540.
Historically, except when required by a lender, we have not used financial
instruments such as futures contracts or interest rate swaps to mitigate the
effect of changes in commodity prices or interest rates. All of our market risk
sensitive instruments were entered into for purposes other than trading.
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PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
15
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment to Loan Agreement and to Note dated as of January 29, 2002,
by and between the Company and Hibernia National Bank.
10.2 Promissory Note dated as of March 1, 2002, executed by the Company in
favor of an existing creditor.
10.3 Waiver and Amendment dated as of March 18, 2002, by and between the
Company and Hibernia National Bank.
(b) Reports on Form 8-K
Form 8-K dated January 9, 2002.
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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 15, 2002 BY: /s/ E. L. AMES, JR.
--------------------------
E. L. Ames, Jr.
(Chief Executive Officer)
Dated: May 15, 2002 BY: /s/ P. MARK STARK
--------------------------
P. Mark Stark
(Principal Financial Officer)
17
EXHIBIT INDEX
Exhibit No. Description
10.1 Amendment to Loan Agreement and to Note dated as of January 29, 2002,
by and between the Company and Hibernia National Bank.
10.2 Promissory Note dated as of March 1, 2002, executed by the Company in
favor of an existing creditor.
10.3 Waiver and Amendment dated as of March 18, 2002, by and between the
Company and Hibernia National Bank.
18