1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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
VENUS EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3299127
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1250 N.E. Loop 410, Suite 1000, San Antonio, TX 78209
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (210) 930-4900
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, $0.01 par value
(Title of Class)
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant (all directors, officers and holders of five percent or more
of the Common Stock of the Company are presumed to be affiliates), computed by
reference to the closing bid price of such stock on March 18, 1998, was
approximately $14,160,511. As of March 18, 1998, the Registrant had outstanding
9,736,815 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report on Form 10-K will
be included in the Registrant's definitive Proxy Statement for its 1998 Annual
Shareholder Meeting. It is expected that the Proxy Statement will be filed with
the Commission not later than April 30, 1998, and the Proxy Statement is
incorporated into Part III by reference.
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TABLE OF CONTENTS
PART I..................................................................................................... -1-
Item 1. BUSINESS................................................................................. -1-
Background............................................................................... -1-
1997 Business Combination and Property Acquisition....................................... -1-
Business Strategy........................................................................ -2-
Exploration.......................................................................... -2-
Exploitation and Development of Producing Fields..................................... -2-
Acquisitions, Strategic Alliances & Divestitures of Selected Properties.............. -3-
Recent Developments (since December 31, 1997)............................................ -3-
Forward-Looking Statements............................................................... -4-
Risk Factors............................................................................. -4-
Capital Expenditures and Availability of Financing................................... -4-
Competition.......................................................................... -4-
Acquisition Risks.................................................................... -5-
Drilling Risks....................................................................... -5-
Markets ............................................................................ -5-
Volatility of Prices................................................................. -5-
Estimation of Reserves............................................................... -5-
Replacement of Reserves.............................................................. -5-
Regulation of Production............................................................. -6-
Environmental Regulation............................................................. -6-
Other Government Regulations......................................................... -7-
Business Risks and Insurance......................................................... -7-
Dependence on Key Personnel.......................................................... -7-
Sales and Major Customers................................................................ -7-
Oil and Natural Gas Reserves............................................................. -8-
Drilling Activity........................................................................ -9-
Acreage ................................................................................ -11-
Production............................................................................... -11-
Products and Markets..................................................................... -12-
Regulation and Environmental Matters..................................................... -12-
Employees................................................................................ -12-
Executive Officers of Venus Exploration, Inc............................................. -12-
Definitions of Certain Oil and Gas Terms................................................. -13-
Item 2. PROPERTIES............................................................................... -16-
Title to Properties...................................................................... -16-
Item 3. LEGAL PROCEEDINGS........................................................................ -16-
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................... -17-
Part II .................................................................................................. -18-
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................ -18-
Item 6. SELECTED FINANCIAL DATA.................................................................. -19-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................................... -19-
General ................................................................................ -20-
Results of Operations.................................................................... -21-
Year Ended December 31, 1997, Compared with Year Ended December 31, 1996............. -21-
Year Ended December 31, 1996, Compared with Year Ended December 31, 1995............. -22-
Accounting Policies...................................................................... -23-
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Liquidity and Capital Resources.......................................................... -24-
Liquidity............................................................................ -24-
Capital Resources.................................................................... -24-
Stratum Facility..................................................................... -25-
Hedging Activities................................................................... -25-
Wells Fargo Facility................................................................. -25-
Inflation................................................................................ -26-
Impact of Year 2000...................................................................... -26-
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................... -27-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................. -27-
Item 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................................................. -27-
PART III .................................................................................................. -27-
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................... -27-
Item 11. EXECUTIVE COMPENSATION................................................................... -27-
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... -27-
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... -28-
PART IV .................................................................................................. -28-
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES................................................. -28-
1. Financial Statements............................................................... -28-
2. Financial Statement Schedules...................................................... -28-
3. Exhibits........................................................................... -28-
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PART I
ITEM 1. BUSINESS
This Report on Form 10-K contains statements that are considered
"forward-looking statements," as defined in the Private Securities Litigation
Reform Act of 1995 and as described under "-Forward-Looking Statements" in this
Item 1 -"BUSINESS." Actual results may differ materially from those contemplated
by the forward-looking statements herein.
Certain oil and gas terms and abbreviations are defined in this Item 1 under
"-BUSINESS" - Definitions of Certain Oil and Gas Terms."
BACKGROUND
Venus Exploration, Inc. (collectively with its consolidated subsidiaries, unless
the context otherwise requires, "Venus" or the "Company") is engaged primarily
in the application of advanced geoscience technology to the exploration for
undiscovered onshore oil and gas reserves in the United States. The Company also
is actively involved in exploitation and/or development of existing oil and gas
fields and is actively seeking acquisitions of producing properties. The Company
presently has oil and gas properties, acreage and production in ten states.
Since the May 21, 1997 transactions discussed below, the Company's emphasis has
been on oil and gas exploration and development projects and prospects in Texas,
Oklahoma and Kansas. The Company was incorporated in the State of Delaware in
September 1985. The management of Venus has been involved as a privately held
independent oil and gas operator in the development and exploitation of several
large oil and gas fields.
The predecessor to Venus started in May 1996, and its primary assets were an
inventory of exploration Prospects and Prospect Leads and undeveloped producing
oil and gas fields with very little oil and gas production. In 1997, average
daily net production increased to 2,450 Mcfe/day from 565 Mcfe/day in 1996, a
333% increase. The total Proved Reserves increased from 2.8 Bcfe at year end
1996 to 12.4 Bcfe in 1997, or 343%, as a result of the reverse merger
transaction described below and as a result of the 1997 drilling program.
Approximately 52.5 % of the Company's reserves are natural gas reserves. Venus
operates 81% of its Net Wells.
1997 BUSINESS COMBINATION AND PROPERTY ACQUISITION
On May 21, 1997, the Company (then known as "Xplor Corporation") acquired
substantially all of the assets and liabilities of The New Venus Exploration,
Inc., a privately-held Texas corporation ("New Venus"), in exchange for
5,626,473 shares of the Company's Common Stock, par value $0.01 per share (the
"Common Stock"), and warrants to purchase an additional 272,353 shares of Common
Stock exercisable at $3.00 per share until October 23, 2000 ("Acquisition
Warrants"). Simultaneously, the Company acquired certain oil and gas properties
from Lomak Petroleum, Inc. ("Lomak") in exchange for 2,037,171 shares of the
Company's Common Stock and Acquisition Warrants to purchase an additional
272,353 shares of Common Stock. At the same time, Lomak acquired from an
existing stockholder of the Company 97,008 shares of Common Stock. These
transactions were completed in accordance with the Property Acquisition
Agreement dated April 29, 1997, and related agreements (collectively, the
"Acquisition Agreement"). As a result of these transactions (collectively, the
"Acquisition"), the former stockholders of New Venus acquired, as of the
effective date of the Acquisition, 58% of the Company's outstanding Common
Stock, and Lomak acquired 22%, while the preexisting stockholders of the Company
then owned 20% of the Common Stock.
The Acquisition Agreement provided, among other things, that the Board of
Directors of the Company be composed of four directors nominated by New Venus,
one director nominated by Lomak and two continuing directors of the Company. At
the consummation of the Acquisition, a stockholders agreement (the "Stockholders
Agreement") was entered into among certain former stockholders of New Venus
(collectively, the "Ames Group," which owns beneficially 3,721,600 shares of the
Company's Common Stock), certain major shareholders of the Company (collectively
the "Blair Group," which owns beneficially 1,066,512 shares) and Lomak. The
Stockholders Agreement provided that at the 1997 election of directors of the
Company, the Ames Group, the Blair Group and Lomak would vote their shares of
the
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Company for the four nominees designated by the Ames Group, the two nominees
designated by the Blair Group, and the one nominee designated by Lomak. The
Blair Group's right to designate two nominees is reduced to the right to
designate one nominee effective with the 1998 Annual Meeting of Stockholders of
the Company and ceases altogether effective with the 1999 Annual Meeting of
Stockholders. The Stockholders Agreement also provides for certain rights of
first refusal and rights of participation between the Ames Group and Lomak in
the event of a proposed sale of shares by either. The Stockholders Agreement has
a term of three years, but it terminates earlier as to any party in the event
that such party's beneficial ownership of the Company's Common Stock falls below
250,000 shares.
For accounting purposes, the Acquisition was treated as a reverse acquisition
with New Venus being deemed to have acquired the assets of Xplor Corporation and
the Lomak entities. Therefore, unless otherwise stated all accounting and other
operating data for periods before May 21, 1997, in this Annual Report on Form
10-K are data of New Venus and its predecessors, none of which had previously
been publicly reported. Information after that date reflects the operations of
the combined entities and acquired properties.
BUSINESS STRATEGY
As a result of the Acquisition, the Company adopted the growth strategy
previously practiced by the privately-held New Venus. Venus is now actively
pursuing an aggressive growth strategy of (i) exploration for oil and gas
reserves, (ii) exploitation and development drilling in existing oil and gas
fields, and (iii) strategic acquisition of producing properties with upside
potential. During 1997 and the first quarter of 1998, Venus participated in the
drilling of 5 Gross (2.3 Net) Exploratory Wells, of which 4 Gross (2 Net) Wells
were completed as producers and 1 Gross (0.3 Net) Well was a dry hole. The
Company also participated in the drilling of 10 Gross (6 Net) Development Wells.
As of March 25, 1998, eight Gross (5 Net) of those wells have been completed as
producers and two Gross (1 Net) Wells were awaiting final completion.
EXPLORATION - Exploration for oil and gas reserves and the generation of
drilling prospects in areas identified through the application of advanced
geoscience technology by the Company's exploration team provide the Company with
exposure to opportunities for the discovery of new oil and gas reserves and
rapid growth in asset values. Because of the inherent uncertainty and high
financial risk associated with the outcome of individual drilling prospects, the
Company attempts to maintain an inventory of many exploratory Prospect Leads
from which drilling prospects are confirmed and generated. This strategy has
been used successfully in the past by the Company's management.
The Company's exploration team currently concentrates on two primary
geographical focus areas; the south Midland Basin in West Texas and the Yegua
Trend of the Texas and Louisiana Gulf Coast. Other focus areas are under
consideration. An inventory of more than 40 Prospects and Prospect Leads is
currently being worked. The Company utilizes 2-D Seismic and 3-D Seismic data in
combination with advanced geological concepts to evaluate these Prospects and
Prospect Leads. The Company's in-house technical capability is an important
ingredient in the Company's current and continuing ability to conduct
comprehensive exploration programs and to continue to generate exploratory
prospects with merit.
EXPLOITATION AND DEVELOPMENT OF PRODUCING FIELDS - In addition to exploring for
new oil and gas reserves in previously undiscovered fields, the Company also
utilizes advanced geoscience technology to exploit and to develop oil and gas
reserves in currently producing fields. The fields being exploited or developed
consist of fields discovered by the Company or fields discovered by others but
that the Company believes are not fully developed. Venus is conducting active
exploitation and development activities in eleven different fields in Texas,
Oklahoma and Kansas. The Company's working interest in the fields being
developed varies in size from 2.5% to 100%, and Venus operates nine of the
eleven active fields.
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ACQUISITIONS, STRATEGIC ALLIANCES & DIVESTITURES OF SELECTED PROPERTIES - Venus
will continue to seek strategic producing property acquisitions that offer
near-term production and longer-term development and exploration opportunities
that can be investigated through the application of advanced technology by the
Company's exploration team. The Company also seeks to accomplish strategic
acquisitions of producing assets with development and exploratory potential
through strategic alliances with other oil and gas companies. Venus may also
sell non-strategic properties as a part of its effort to concentrate on its
focus areas.
RECENT DEVELOPMENTS (SINCE DECEMBER 31, 1997) -
Preliminary results from drilling activities in the first quarter of 1998 are
shown below. All of the six wells described below are also included in drilling
summary given in the first paragraph of the "-Business Strategy" immediately
above. Caution should be taken when considering these results because they are
not supported by production histories. Test results typically exceed, often by
large amounts, production output once a well has produced for some period of
time. In addition, test results often exceed state-mandated field allowables for
production.
(i) Culley #2 Well. Allen Field, Seminole County, Oklahoma. The
Company owns a 100% Working Interest in this well, which was a
discovery well in a new pay zone of the second Wilcox
formation between the depths of 4139 and 4142 feet subsurface.
The well's initial production test produced 297 Bbls in 23.5
hours.
(ii) Westbury Farms #1 Well. Constitution Field, Jefferson County,
Texas. The Company owns a 15% Working Interest in this well,
which was completed in a sand formation at a depth of
approximately 14,000 feet subsurface. The well's initial
production test produced 2050 Mcf/day and 357 Bbls of
condensate on a 15/64" choke with a flowing tubing pressure of
2289 psig.
(iii) Smith #3 Well. Fashing Field, Atascosa County, Texas. The
Company owns an 84.2% Working Interest in this well, which was
completed in the Edwards "A" Limestone at a depth between
10,654 and 10,725 feet subsurface. The well's initial
production test produced 440 Mcf/day and 13.8 Bbls on a 20/64"
choke with a flowing tubing pressure of 290 psig.
(iv) Duson #1 Well. Hutchins-Kubela (Frio) Field, Wharton County,
Texas. The Company owns a 22.15% Working Interest in this
well, which was plugged back from the Yegua formation and was
completed in the Frio sandstone at a depth between 4888 and
4891 feet subsurface. The well's initial production test
produced 658 Mcf/day on a 9/64" choke with a flowing tubing
pressure of 1761 psig.
(v) Simonson #25-1 Well. Wildcat, Seward County, Kansas. The
Company owns a 50% Working Interest in this well, which was
unsuccessfully completed in the Arbuckle formation. Current
plans are to attempt another completion in another formation.
(vi) Brown #26-1 Well. Wildcat, Seward County, Kansas. The Company
owns a 50% Working Interest in this well, which was
unsuccessfully completed in the Osage formation. Current plans
are to attempt another completion in another formation.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Those statements are contained under this Item
1 "-Business," under Item 7 "-Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this Form 10-K. The
forward-looking statements are identified by language that speaks of future
events; e.g., words such as "may," "could," "believe," "expect," "intend,"
"anticipate," "estimate," "continue," "projected," "future," "will," "seek," and
"plan". The forward-looking statements address such matters as geological
estimates of oil and gas reserves, exploratory and development drilling plans
and schedules, capital expenditures, availability of capital resources,
financial projections, present values of future production, financing
assumptions and other statements that are not historical facts. Although
statements involving those matters are based on information available at the
time this Annual Report on Form 10-K was prepared and although Venus believes
that its statements are based on reasonable assumptions, it can give no
assurance that its goals will be achieved or that the level of production or
financial return expected can be achieved. Some of the important factors that
could cause actual results to differ materially from those predicted in the
forward-looking statements include (i) state and federal regulatory developments
and statutory changes, (ii) the timing and extent of changes in commodity prices
and markets, (iii) the timing and extent of success in acquiring leasehold
interests and in discovering, developing or acquiring oil and gas reserves, (iv)
the conditions of the capital and equity markets during the periods covered by
the forward-looking statements, (v) reliance on estimates of reserves, (vi)
drilling results, and (vii) other matters beyond the control of the Company;
e.g., the risk factors listed below.
RISK FACTORS
CAPITAL EXPENDITURES AND AVAILABILITY OF FINANCING - The implementation of
Venus's business strategy will require substantial new capital on a continuing
basis. Expected cash flow from existing properties will be insufficient to fund
the projects planned by the Company. Venus plans to address its long-term
liquidity and capital needs through bank financing, the issuance of debt and
equity securities, when market conditions permit, and through the use of
non-recourse production-based financing. Venus also continues to examine
alternative sources of long-term capital; e.g., the sale of net profits
interest, sales of non-strategic properties, prospects and technical
information, and joint venture financing. The amount and timing of Venus's
future capital requirements, if any, will depend upon a number of factors,
including drilling costs, transportation costs, equipment costs, marketing
expenses, staffing levels and competitive conditions, many, if not all, of which
are beyond Venus's control. Availability of these sources of capital and,
therefore, the Company's ability to execute its business plan will depend upon a
number of factors, many of which are beyond the control of the Company. Failure
to obtain such financing could materially and adversely affect Venus's growth,
cash flow and earnings.
COMPETITION - The oil and gas industry is highly competitive in all of its
phases and in particular in the acquisition of unexplored acreage, undeveloped
acreage and existing production. There are a large number of operators engaged
in oil and gas property acquisition and development, and Venus's competitive
position depends on its geological, geophyisical and engineering expertise, on
its financial resources and on its ability to find, to acquire and to prove new
oil and gas reserves. The Company encounters strong competition in acquiring
economically desirable properties and in obtaining equipment and labor to
operate and to maintain its properties. That competition is from major and
independent oil and gas companies, many of which possess greater financial
resources and larger staffs than Venus. Labor and equipment markets have shown
much volatility recently, and no assurance can be given as to their availability
at the prices budgeted by Venus.
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ACQUISITION RISKS - Venus intends to acquire producing oil and natural gas
properties. Any such acquisition will be on the basis of an evaluation of the
value of recoverable reserves associated with that property. Venus intends to
use reasonable efforts to assess the value of potential acquisitions, but it may
not have all the relevant facts because it is often not feasible to review in
detail every oil and gas lease or aspect of an acquisition. Furthermore, even a
detailed review may miss important facts; e.g., mechanical integrity of
equipment and environmental liability that is not obvious from a surface
inspection. For these and other reasons, there can be no assurance that oil and
natural gas properties acquired by Venus will be successfully integrated into
its operations or will achieve desired or projected profitability objectives.
DRILLING RISKS - Venus's drilling plans involve numerous risks; e.g., unexpected
costs and conditions attributable to overpressure in formations, equipment
failures and accidents, weather conditions, shortages or delays in obtaining
equipment and labor shortages. Some wells are dry holes and will return nothing
on the capital invested in those wells. Some wells are completed, but they do
not produce enough to repay the investment in pre-drilling, drilling and/or
operating expenses. Regardless of these factors and others or the success of a
well, Venus will incur the expenses attributable to those risks, and that may
affect its ability to work on other properties. There can be no assurance of
success or profitability of future drilling activities.
MARKETS - The availability of a ready market for any oil and gas produced by the
Company and the opportunities to find and to develop new oil and gas reserves
depends upon numerous factors beyond its control, the exact effect of which
cannot be accurately predicted. These factors include federal and state
regulatory developments and statutory enactments, the timing and extent of
changes in commodity prices, exploratory and development drilling success, the
amount of oil and gas available for sale, availability of professional expertise
and operating personnel, crude oil imports, access to adequate capital, the
availability of adequate pipeline and other transportation facilities, the
marketing of competitive fuels and other matters affecting the availability of a
ready market such as fluctuating supply and demand.
VOLATILITY OF PRICES - Venus's revenues, profitability and future rate of
growth, if any, are substantially dependent upon the prevailing prices for oil
and gas. Historically, the prices for oil and gas have been highly volatile.
This volatility is based on factors largely beyond the control of the Company.
For example, prices are affected by weather, actions of foreign and domestic
governments, international cartels and domestic and world economic conditions.
Any substantial or extended decline in prices like those experienced in the
first three months of 1998 would have a material adverse effect on Venus's
financial conditions and results of operations.
ESTIMATION OF RESERVES - The reserve data presented in this Annual Report on
Form 10-K are present estimates only. In general, estimates of reserves and the
future net revenues from those reserves are based on a number of variable
factors and subjective assumptions, such as historical production from the
properties, the assumed effects of government regulation of future production,
and assumptions about future oil and gas prices and future operating costs.
Future projections based on such factors and assumptions may, and likely will,
vary considerably from actual results.
REPLACEMENT OF RESERVES - The volume of production from oil and gas properties
usually declines as they are produced and the reserves are depleted. The decline
rates depend on reservoir characteristics and vary from steep decline curves to
the relatively slow declines of some properties such as the Company's gas
reserves in West Virginia. Unless Venus finds new reserves through its
exploration and development activities or it acquires properties containing
Proved Reserves, or both, the Proved Reserves of the Company will decline as
reserves are produced. Venus's future natural gas and oil production is,
therefore, highly dependent upon its level of success in finding or acquiring
additional reserves. To the extent that the Company is unsuccessful in replacing
depleted reserves and otherwise enlarging them, the Company's revenues will
decline over time.
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REGULATION OF PRODUCTION - Production of any oil and gas discovered or acquired
by the Company is affected to some degree by state and federal laws and
regulations. Many states have statutory provisions regulating the production and
sale of oil and gas, including provisions regarding deliverability. Other states
require drilling bonds, various permits related to drilling operations, and
operational reports. Such statutes, and the regulations promulgated in
connection therewith, are generally intended to prevent waste and to protect the
correlative rights of owners in a common reservoir to produce oil and gas from
that reservoir. Certain state regulatory authorities also regulate the amount of
oil and gas produced by assigning allowable rates of production to each well or
proration unit, and those allowable rates may increase or decrease in accordance
with supply and demand.
ENVIRONMENTAL REGULATION - The federal government and various state and local
governments have adopted laws and regulations regarding the control of
contamination of the environment. These laws and regulations are often changed,
and the scope of coverage enlarged. The current laws and regulations may require
the acquisition of a permit before drilling commences, may prohibit drilling
activities on certain lands lying within wilderness areas or where pollution
arises, and may impose substantial liabilities for pollution resulting from
drilling operations. Environmental regulations may cover many other areas of
Venus's operations. Violation of environmental legislation and regulations may
result in the imposition of fines and, in certain circumstances, the entry of an
order for the abatement of the conditions or suspension of the activities giving
rise to the violation. In certain cases, strict liability may be imposed by some
of those laws, rules and regulations; i.e., liability without regard to
negligence or fault. To date the Company has not been required to spend or to
invest material sums for environmental compliance.
Venus's operations could result in liability for personal injuries, property
damage, oil spills, discharge of hazardous substances, remediation and clean-up
costs and other environmental damages. Venus could also be liable for
environmental damages and assessments caused by previous owners. Any of these
could be substantial liabilities that could have a material adverse effect on
Venus's financial condition and results of operations. Venus maintains insurance
coverage for its operations, including limited coverage for sudden environmental
damages, but it does not believe that insurance coverage for environmental
damages that occur over time is available at a reasonable cost. Also, there are
significant gaps in the environmental insurance coverage that the Company does
have, and the Company could incur substantial uninsured costs related to the
applicable environmental laws and regulations.
Venus's activities are subject to the regulations promulgated by the
Environmental Protection Agency ("EPA") under, among others, the Oil Pollution
Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the Comprehensive
Environmental Response, Compensation and Liability Act and its amendments
("CERCLA" and "Superfund"), and the Clean Air Act and its amendments ("CAA").
Those activities are also potentially subject to state and local regulation.
Legislation is often proposed in the U.S. Congress to reclassify certain oil and
gas production wastes as "hazardous wastes," which reclassification would make
exploration and production wastes subject to much more stringent handling,
disposal and clean-up requirements. State initiatives to further regulate the
disposal of oil and gas wastes and naturally occurring radioactive materials are
also pending in certain states, including Texas, and these various initiatives
could have a similar impact on the Company.
CERCLA and the Superfund regulations impose liability, without regard to fault
or the legality of the original conduct, on certain classes of persons that are
considered to have contributed to the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the disposal
site or the site where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances found at the site. Persons
who are or were responsible for releases of hazardous substances found at the
site and persons who are or were responsible for releases of hazardous
substances under CERCLA may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources. It is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment. The Company is able to control directly
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the operation of only those wells with respect to which it acts as operator.
Notwithstanding the Company's lack of control over wells operated by others for
the benefit of the Company or others, the failure of the third-party operator to
comply with applicable environmental regulations may, in certain circumstances,
be attributed to the Company. The Company has no material commitments for
capital expenditures to comply with existing environmental requirements.
OTHER GOVERNMENT REGULATIONS - The oil and gas industry is subject to extensive
federal and state regulation governing the conduct of operations once production
is established. Matters that are subject to federal or state control include
permits to drill, the location of wells and limitations on production for
conservation purposes. Moreover, the Company's operations may be affected from
time to time in varying degrees by changes in federal and state laws and
regulations. The regulations specifically mentioned and these generally
described can increase Venus's cost of doing business and may affect the
Company's profitability. Because such rules and regulations are frequently
enacted, amended, expanded and reinterpreted, Venus is unable to predict the
future cost or effect of complying with such laws and regulations.
BUSINESS RISKS AND INSURANCE - The oil and gas business carries a number of
operating risks, and the exploration component of Venus's business has a
disproportionate share of such risks. Some of those risks are fire, explosions,
well blow-outs, pipe and pipeline failures, casing collapses, toxic gases,
over-pressured formations and potential environmental damages that may arise
from oil spills, gas leaks, pipe ruptures and discharges of toxic gases. Any of
these events could result in substantial losses to Venus. It maintains insurance
against some of these matters but not all of them. Furthermore, there is no
assurance that the insurance carried against the covered items will be
sufficient to cover all costs associated the covered event. The occurrence of a
loss due to lack of or insufficient coverage could have a materially adverse
effect on Venus and its financial condition. Furthermore, there is no assurance
that the insurance currently maintained will continue to be available at all or
at a price that Venus feels is reasonable.
DEPENDENCE ON KEY PERSONNEL - Venus is substantially dependent upon the services
of its Chairman and Chief Executive Officer and of its President. Venus is also
dependent upon the technical team for a large part of its business. The loss of
the services of that team or either one of the key management employees could
have a material adverse effect on Venus and its success.
SALES AND MAJOR CUSTOMERS
Venus's production is generally sold at the wellhead to various oil and natural
gas purchasing companies, typically those that are in the areas where the oil or
natural gas is produced. Crude oil and condensate are typically sold at prices
that are based on posted field prices. Natural gas is generally sold month to
month on the spot market. For example, in the month of December 1997, about 100%
of natural gas production from wells operated by Venus was sold at the wellhead
at spot market prices. The term "spot market" refers to contracts with a term of
six months or less or contracts that call for a redetermination of sales prices
every six months or more often. The Company believes that the loss of one or
more of its current natural gas spot purchasers should not have a material
adverse effect on the Company's business because any individual spot purchaser
could be readily replaced by another spot purchaser who would pay a similar
sales price. However, although the Company believes that there will be a spot
market available, that market is highly sensitive to changes in current market
prices, and a downward trend in spot market prices can have a significant impact
on the Company's cash flow.
Three customers each accounted for approximately 10% or more of consolidated
revenues in 1997. Those are Dow Hydrocarbons & Resources, Inc. (22%), Stephens &
Johnson Operating Company (10%) and Flying J Oil & Gas,Inc. (10%). In 1996 three
customers accounted for approximately 10% or more of consolidated revenues.
Those are Stephens & Johnson Operating Company (31%), Scurlock Permian
Corporation (17%), and Lantern Petroleum Corporation (10%).
-7-
11
OIL AND NATURAL GAS RESERVES
At December 31, 1997, third-party independent petroleum engineers evaluated
properties representing approximately 88% of PV-10 Value, and Venus's in-house
engineers evaluated the remaining reserves. The PV-10 Values shown in this
Annual Report on Form 10-K are not intended to represent the current market
value of the estimated net Proved Reserves of oil and natural gas owned by
Venus. Neither prices nor costs have been escalated in the reserve estimates,
but prices do include the effects of hedging contracts in place at that date.
The Company has not filed any estimate of oil or gas reserve information with
any federal authority or agency other than the SEC. The following table
summarizes the estimates of the Company's net Proved Reserves as of December 31,
1997.
- --------------------------------------------------------------------------------------------------
PROVED RESERVES
(AS OF DECEMBER 31, 1997)
- --------------------------------------------------------------------------------------------------
PDP PDNP PUD TOTAL
- --------------------------------------------------------------------------------------------------
Oil and Condensate (Mbbls) 459.00 213.00 305.00 977.00
- --------------------------------------------------------------------------------------------------
Natural Gas (Bcf) 4.11 1.58 0.80 6.49
- --------------------------------------------------------------------------------------------------
Combined Equivalent BCF (Bcfe) 6.90 2.90 2.60 12.40
- --------------------------------------------------------------------------------------------------
PV-10 Value (in thousands) $6,604 $3,193 $1,600 $11,397
- --------------------------------------------------------------------------------------------------
PROVED RESERVES BY STATE
- ------------------------------------------------------------------------------------------------
STATE GROSS OIL GAS TOTAL GAS PERCENT OF PV-10 PERCENT
WELLS (MBBL) (BCF) EQUIV. (BCFE) TOTAL (BCFE) VALUE OF PV-10
($1,000) VALUE
- ------------------------------------------------------------------------------------------------
Texas 61 238 4.07 5.50 44.49% 5,766 50.6%
- ------------------------------------------------------------------------------------------------
Oklahoma 95 381 0.37 2.66 21.51% 2,536 13.3%
- ------------------------------------------------------------------------------------------------
Kansas 3 20 0.02 0.14 1.51% 187 22.2%
- ------------------------------------------------------------------------------------------------
Other(1) 19 336 0.41 2.42 19.60% 1,396 1.6%
- ------------------------------------------------------------------------------------------------
West Virginia 57 2 1.63 1.64 13.26% 1,512 12.3%
- ------------------------------------------------------------------------------------------------
TOTAL 235 977 6.50 12.36 100% 11,397 100%
- ------------------------------------------------------------------------------------------------
(1) Other states are Michigan, Alabama, Utah, Louisiana, Colorado and California.
The foregoing table represents an increase in value and an increase in amount of
reserves as compared with December 31, 1996. See Note 12 of Notes to
Consolidated Financial Statements (Supplementary Oil and Gas Disclosures) for
further information.
-8-
12
The reserve data set forth herein present estimates only. In general, estimates
of economically recoverable oil and gas reserves and of the future net revenues
therefrom are based upon a number of variable factors and assumptions, such as
historical production from the subject properties, the assumed effects of
regulation by governmental agencies and assumptions concerning future oil and
gas prices and future operating costs, all of which may vary considerably from
actual results. All reserves are evaluated based on the assumption that all
reported data are stated at standard temperature and pressure. If that
assumption proves to be incorrect, there can be a substantial effect on
estimated gas reserves. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net revenues expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially.
The Company, therefore, emphasizes that the actual production, revenues,
severance and excise taxes, development and operating expenditures with respect
to its reserves will likely vary from such estimates, and such variances could
be material.
Estimates with respect to Proved Reserves that may be developed and produced in
the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations in the initially estimated
reserves, and those variations may be substantial.
In accordance with applicable requirements of the SEC, the estimated discounted
future net revenues from estimated Proved Reserves are based on prices and costs
as of the date of the estimate unless such prices or costs are contractually
determined at such date. Actual future prices and costs may be materially higher
or lower. Actual future net revenues also will be affected by factors such as
actual production, supply and demand for oil and natural gas, curtailments or
increases in consumption by natural gas purchasers, changes in governmental
regulations or taxation and the impact of inflation on costs.
DRILLING ACTIVITY
The Company drilled 9 Development Wells and 10 Exploratory Wells during the
three years ended December 31, 1997. The following table sets forth the
Company's drilling activity over the last 3 years.
- ------------------------------------------------------------------------------------------------
DEVELOPMENT WELLS
- ------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- ------------------------------------------------------------------------------------------------
YEAR PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- ------------------------------------------------------------------------------------------------
1995 2.00 -- 2.00 0.20 -- 0.20
- ------------------------------------------------------------------------------------------------
1996 2.00 -- 2.00 0.40 -- 0.40
- ------------------------------------------------------------------------------------------------
1997 5.00 -- 5.00 2.90 -- 2.90
- ------------------------------------------------------------------------------------------------
TOTALS 9.00 -- 9.00 3.50 -- 3.50
- ------------------------------------------------------------------------------------------------
-9-
13
- ------------------------------------------------------------------------------------------------
EXPLORATORY WELLS
- ------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- ------------------------------------------------------------------------------------------------
YEAR PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- ------------------------------------------------------------------------------------------------
1995 1.00 3.00 4.00 0.01 0.13 0.14
- ------------------------------------------------------------------------------------------------
1996 2.00 0.00 2.00 0.10 0.00 0.10
- ------------------------------------------------------------------------------------------------
1997 3.00 1.00 4.00 2.00 0.30 2.30
- ------------------------------------------------------------------------------------------------
TOTALS 6.00 4.00 10.00 2.11 0.43 2.54
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS
(AS OF DECEMBER 31, 1997)
- ------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- ------------------------------------------------------------------------------------------------
STATE OIL GAS TOTAL OIL GAS TOTAL
- ------------------------------------------------------------------------------------------------
Texas 9.00 38.00 47.00 2.39 5.81 8.20
- ------------------------------------------------------------------------------------------------
Oklahoma 81.00 17.00 98.00 9.02 0.59 9.61
- ------------------------------------------------------------------------------------------------
Kansas 1.00 0.00 1.00 0.50 0.00 0.50
- ------------------------------------------------------------------------------------------------
West Virginia 0.00 61.00 61.00 0.00 57.09 57.09
- ------------------------------------------------------------------------------------------------
Other(1) 14.00 6.00 20.00 3.13 1.06 4.19
- ------------------------------------------------------------------------------------------------
TOTALS 105.00 122.00 227.00 15.04 64.55 79.59
- ------------------------------------------------------------------------------------------------
(1) Other states are Michigan, Alabama, Utah, Louisiana, Colorado and California.
On December 31, 1997, three wells were being drilled. As of March 18,
1998, two of those wells were producing, and the third well was shut-in and
waiting on a gas pipeline connection to be constructed before production could
continue.
-10-
14
ACREAGE
The following table sets forth the Developed and Undeveloped Acreage of the
Company as of December 31, 1997:
- ------------------------------------------------------------------------------------------------
DEVELOPED AND UNDEVELOPED ACREAGE
- ------------------------------------------------------------------------------------------------
GROSS ACRES NET ACRES
- ------------------------------------------------------------------------------------------------
STATE DEVELOPED UNDEVELOPED DEVELOPED UNDEVELOPED
- ------------------------------------------------------------------------------------------------
Oklahoma 13,655 219 432 187
- ------------------------------------------------------------------------------------------------
Texas 8031 15,380 1324 2764
- ------------------------------------------------------------------------------------------------
Utah 4943 0 1536 0
- ------------------------------------------------------------------------------------------------
West Virginia 2239 0 2042 0
- ------------------------------------------------------------------------------------------------
Louisiana 820 580 40 290
- ------------------------------------------------------------------------------------------------
Colorado 478 0 478 0
- ------------------------------------------------------------------------------------------------
Alabama 400 0 136 0
- ------------------------------------------------------------------------------------------------
California 400 0 26 0
- ------------------------------------------------------------------------------------------------
Kansas 240 1840 120 880
- ------------------------------------------------------------------------------------------------
Michigan 240 0 108 0
- ------------------------------------------------------------------------------------------------
TOTALS 31,446 18,019 6,234 4,121
- ------------------------------------------------------------------------------------------------
PRODUCTION
The following table summarizes the net oil and gas production, weighted average
sales prices and average production (lifting) costs per unit of production for
the Company for the periods indicated:
- -------------------------------------------------------------------------------------------
UNITS OF PRODUCTION AVERAGE SALES PRICE
- -------------------------------------------------------------------------------------------
DECEMBER 31, OIL GAS OIL GAS AVERAGE LIFTING COST
- -------------------------------------------------------------------------------------------
(Mbls) (Bcf) $/Bbl $/Mcf $/Mcfe
- -------------------------------------------------------------------------------------------
1995 34 0.176 16.17 1.43 1.27
- -------------------------------------------------------------------------------------------
1996 23 0.069 18.80 2.55 1.39
- -------------------------------------------------------------------------------------------
1997 81 0.410 17.72 2.44 1.08
- -------------------------------------------------------------------------------------------
-11-
15
PRODUCTS AND MARKETS
Oil and natural gas are the principal products currently produced by Venus.
Venus does not refine or process the oil or natural gas that it produces. Venus
sells the oil it produces under short-term contracts at market prices for the
areas in which the producing properties are located, generally at FOB field
prices posted by the principal purchaser of oil in the area. Venus sells the
natural gas produced from its properties under short-term contracts to entities
that have pipelines in the vicinity of the production or that will build short
gathering lines to such properties. In some instances, Venus will own the
gathering line. Typically, the contracts for natural gas sales are for terms
less than six months. Venus Development, Inc., a wholly-owned subsidiary of the
Company, uses financial hedging instruments to manage its exposure to
fluctuations in commodity prices.
REGULATION AND ENVIRONMENTAL MATTERS
See "-Risk Factors -Regulation of Production," "-Environmental Regulation" and
"-Other Governmental Regulations" for a discussion of various laws and
regulations that affect the Company and its business.
EMPLOYEES
As of March 18, 1998, the Company had 26 employees. In the middle of 1997 the
Company outsourced accounting functions to professional oil and gas accounting
services firms and well tending to professional contractors.
EXECUTIVE OFFICERS OF VENUS EXPLORATION, INC.
At March 1, 1998, the executive officers of the Company were Eugene L. Ames,
Jr., John Y. Ames, James E. Gayle, Eugene L. Ames III, and Patrick A. Garcia.
Eugene L. Ames, Jr., age 64, became Chairman, Chief Executive Officer and a
director of the Company following the Acquisition. He has been in the oil and
gas business since 1954 and has been associated with New Venus and its
predecessor entities since 1962 and chief executive officer of those predecessor
entities since 1991. Ames received a B.S. degree in Geology from the University
of Texas at Austin in 1955. He served as Chairman of the Independent Petroleum
Association of America from 1991 to 1993 and currently serves as a member of the
management committee of the American Petroleum Institute.
John Y. Ames, age 42, became President, Chief Operating Officer and a director
of the Company following the Acquisition. He is a graduate of the University of
Texas at Austin with a BBA degree in Petroleum Land Management. He had eight
years of experience in the energy business before becoming associated with New
Venus and its predecessor entities as a Vice President in 1984. He became
Executive Vice President of those predecessor entities in 1995 and President and
Chief Operating Officer in 1996.
James E. Gayle, age 48, Executive Vice President, was elected as a director and
as chief executive officer of XPLOR Corporation in June 1994, Chairman effective
July 1994 and President effective September 1994. He manages the Company's
Houston office. Since 1979, he has been Chairman, President and sole stockholder
of HGX Energy Corporation which provides market and contract consulting services
to independent oil and gas exploration and production companies, natural gas
pipeline companies and local distribution companies. Prior to Mr. Gayle's
election as an officer and director of the Company, HGX was acting as a
consultant to the Company since October 1993.
-12-
16
Eugene L. Ames, III, age 38, became Vice President-Exploration following the
Acquisition. He held similar positions with the Venus predecessor entities since
1991. He is a graduate of Trinity University with BS degrees in both Geology and
Business Administration. He has 12 years of experience in operations and
petroleum exploration.
Patrick A. Garcia, age 41, became Treasurer of the Company following the
Acquisition and was appointed as Chief Financial Officer in June of 1997. He
held similar positions with the Venus predecessor entities since 1980. He is a
graduate of Texas A&M University with a BBA degree in Accounting. He worked with
Peat, Marwick, Mitchell & Company for 3 years before becoming associated with
New Venus and its predecessor entities in 1980.
DEFINITIONS OF CERTAIN OIL AND GAS TERMS
The terms defined in this section are used throughout this Annual Report on Form
10-K.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas and related compounds at standard
conditions.
Bcfe. Equivalent of one billion cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. One British thermal unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit at standard conditions.
Completion. The installation of permanent equipment for the production of oil or
gas, or, in the case of a dry hole, the reporting of abandonment to the
appropriate authority.
Developed Acreage. The number of acres that are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled or to be drilled within the proved area of an
oil or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry Hole or Dry Well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as a producing oil or gas
well.
Exploitation. The process whereby the value of a property is attempted to be
increased by working over existing wells, by making new completions in existing
wells and by conducting other similar operations intended to increase production
from existing wells in a developed area.
Exploratory Well. A well drilled to find and to produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir
beyond the currently
-13-
17
expected limits of the known reservoir. These wells involve a high degree of
risk, given the unknown nature of the horizons being tested.
Gross Acres or Gross Wells. The total acres or wells, as the case may be, in
which a working interest is owned.
LIBOR. A rate per annum at which deposits in U.S. Dollars in immediately
available and freely transferable funds would be offered in the London Interbank
Eurodollar market.
Mbbl. One thousand barrels of crude oil or other liquid hydrocarbons.
Mmbtu. One million Btu's.
Mcf. One thousand cubic feet of natural gas and related compounds at standard
conditions.
Mcfe. The equivalent of one thousand cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mmcfe. The equivalent of one million cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net Acres or Net Wells. The sum of the fractional Working Interests owned in
Gross Acres or Gross Wells.
Production Cost. Also referred to as lifting cost, the cost of operation and
maintenance of wells, related equipment and facilities that are expensed as
incurred as a part of the cost of oil and gas produced; e.g., labor to operate
the wells and facilities, repair and maintenance expenses, materials and
supplies consumed, taxes and insurance on property, and severance taxes.
PV-10 Value, or Present Value of Estimated Future Net Revenues. The present
value of estimated future net revenues as of a specified date, after deducting
estimated production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. The estimated future net
revenues are discounted at an annual rate of 10% to determine their "present
value." The present value is shown to indicate the effect of time on the value
of the revenue stream and should not be construed as being the fair market value
of the properties. Estimates have been made using constant oil and natural gas
prices and operating costs at the specified date.
Productive Well. A well that is producing oil or gas or that is capable of
production.
Prospect. An area that has been interpreted to be prospective for commercial
hydrocarbon accumulation based on seismic evaluations; leases may or may not
have been acquired in the area of the Prospect.
Prospect Lead. An area that preliminary evaluations suggest may be prospective
for commercial hydrocarbon accumulation; usually no seismic studies will have
been conducted on such an area, nor will have any leases been acquired in it.
-14-
18
Proved Developed Producing Reserves, or PDP. Proved Reserves to be produced by
existing wells from completion intervals open to production.
Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
Proved Developed Non-Producing Reserves, or PDNP. Proved Reserves to be produced
from existing wells but that are now behind the casing or at minor depths below
the bottom of the hole. The cost of opening up such reserves are expected to be
relatively minor.
Proved Reserves. The estimated quantities of crude oil, natural gas and natural
gas liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved Undeveloped Reserves, or PUD. Proved Reserves that are under undeveloped
spacing units that are so close and so related to developed spacing units that
they may be assumed with confidence to become commercially productive when
drilled.
Royalty Interest. An interest in an oil and gas property entitling the owner to
a share of the oil and gas produced, free of costs of production.
Seismic Data. Geophysical information collected by transmitting sound waves into
the earth from a transmitter, or source, and measuring, with appropriate
receivers, the time of the sound waves' arrival and their intensity when they
are reflected or refracted back to the surface.
2-D seismic data is collected along a surface line of sources and receivers,
giving a section representing a slice through the earth.
3-D seismic data is collected by distributing sources and receivers over an
area, yielding a volume of information representing the 3-dimensional section of
earth beneath the area being studied. The improved imaging of 3-D data makes it
the preferred advanced technological method of attempting to determine the
location, extent and properties of hydrocarbon accumulations.
Undeveloped Acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains Proved Reserves.
Working Interest, or WI. The cost-bearing operating interest that gives the
owner the right to drill, to produce and to conduct operating activities on the
property and to share a proportionate part of production.
-15-
19
ITEM 2. PROPERTIES
TITLE TO PROPERTIES
Substantially all of Venus's properties are Working Interests derived from oil
and gas leases on property owned by third parties. Very little of its property
is mineral or fee ownership. Venus usually performs title research before
acquiring leases or interests in leases, and it believes that it has
satisfactory title to its producing properties. The degree of research varies
depending on the value initially assessed to the property, whether the property
is producing at the time of acquisition, and other factors. The properties are
usually subject to the rights of lessors to be paid a Royalty Interest out of
production. They are also often subject to overriding royalties and other
burdens, none of which the Company believes to be a material burden on the value
of the Company's interest. Substantially all of the Company's properties are and
will continue to be subject to liens and mortgages to secure borrowings under
its credit facilities.
Substantially all of the properties owned by Venus are subject to exploration or
development agreements with third parties. The exploration and development
agreements are subject to "Area of Mutual Interest," or "AMI," provisions that
give the third party participants certain limited rights of first refusal on
interests acquired within the AMI. If the third party elects not to acquire such
interest, Venus usually will have the right to acquire the third party's
proportionate part of the interest. Once interests are acquired, the parties to
the agreements usually also have an election before a well is drilled. If a
party elects not to drill, Venus usually has the right to acquire certain
interests from the non-drilling party, but depending upon the size of the
interest and the cost of the proposed well, Venus may or may not elect to
acquire that interest. In several of the exploration and development projects in
which Venus is involved, the election not to participate or not to drill by a
third party owner of a large part of the project could materially affect the
value of Venus's interest in that project.
In May of 1997, the Company's executive and operating offices were relocated to
San Antonio, Texas, where it occupies premises of approximately 12,570 useable
square feet pursuant to a lease that expires on December 31, 2002. It also
maintains an office in Houston, Texas. The Houston office was formerly the
Company's principal executive office, and its address is 16800 Greenspoint Park
Drive, Suite 300 South, Houston, Texas 77060. That lease terminates on July 31,
1998. The Company's annual rental expense is approximately $257,000. The lease
of the San Antonio office space provides for increased rents at stated amounts
and intervals and an adjustment for variations in utility costs.
See "Item 1 - BUSINESS" for additional information concerning the Company's oil
and gas properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party in a number of lawsuits arising in the ordinary course of
business. In the opinion of management, final judgments or settlements, if any,
that may be awarded or entered into in connection with any one or more of these
suits would not have a material adverse effect on the Company's financial
position or results of operations.
-16-
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders (in lieu of the Annual Meeting) of the Company
was held on October 28, 1997, for the following purposes:
(i) To elect seven directors to serve until the next Annual Meeting
of Stockholders;
(ii) To ratify the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company to serve for the fiscal year
ending December 31, 1997;
(iii) To approve an amendment to the Certificate of Incorporation to
increase the number of authorized shares of Common Stock to
30,000,000 shares and to increase the number of authorized
shares of Preferred Stock to 5,000,000 shares; and
(iv) To approve the 1997 Incentive Plan.
All the matters were approved by the vote of the stockholders of the Company,
and the results are tabulated below:
- ----------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------
(i) Election of Directors
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
E.L. Ames, Jr. 6,711,334 2,227 0
- ----------------------------------------------------------------------------------------
John Y. Ames 6,713,562 0 0
- ----------------------------------------------------------------------------------------
Martin A. Bell 6,713,562 0 0
- ----------------------------------------------------------------------------------------
J. Morton Davis 6,713,562 0 0
- ----------------------------------------------------------------------------------------
James W. Gorman 6,711,710 1,852 0
- ----------------------------------------------------------------------------------------
Jere W. McKenny 6,711,710 1,852 0
- ----------------------------------------------------------------------------------------
John H. Pinkerton 6,711,710 1,852 0
- ----------------------------------------------------------------------------------------
(ii) Ratification of KPMG 6,708,975 2,352 2,234
- ----------------------------------------------------------------------------------------
(iii) Amendment to Certificate 6,702,438 8,198 2,925
- ----------------------------------------------------------------------------------------
(iv) 1997 Incentive Plan 6,700,706 11,814 1,040
- ----------------------------------------------------------------------------------------
-17-
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Stock Market(TM)
under the symbol "VENX." The following table sets forth the range of high and
low closing bid prices for each quarterly period during the two most recent
fiscal years as reported by the NASDAQ SmallCap Stock Market(TM). All SmallCap
quotations represent inter-dealer quotations, without retail mark-up, mark-down
or commission and may not represent actual transactions.
----------------------------------------------
1997(1) HIGH LOW
----------------------------------------------
First Quarter $6 1/4 $2 1/8
----------------------------------------------
Second Quarter 5 1/2 3 7/8
----------------------------------------------
Third Quarter 5 5/8 3
----------------------------------------------
Fourth Quarter 5 3 1/2
----------------------------------------------
1996(1) HIGH LOW
----------------------------------------------
First Quarter $2 1/4 $1 5/8
----------------------------------------------
Second Quarter 3 3/8 1 7/8
----------------------------------------------
Third Quarter 3 2 1/8
----------------------------------------------
Fourth Quarter 2 7/8 1 3/4
----------------------------------------------
(1) Stock prices shown for dates prior to
May 21, 1997, are attributable to Xplor
Corporation (NASDAQ SmallCap Stock
Market(TM):XPLR), and its financial
history is not contained in this Annual
Report on Form 10-K. Therefore,
comparisons of the stock price history
with other historical financial data
shown herein for the period before May
21, 1997, would be misleading.
On March 18, 1998, the closing bid price for the Company's Common Stock was
$3 5/8 per share.
The Company had 922 stockholders of record as of March 18, 1998. The Company has
not paid dividends since January 1991 and has no present intention to resume
payment of dividends. It presently intends to reinvest its net revenues in its
ongoing business.
The Company entered into a Second Amended and Restated Loan Agreement dated
December 19, 1997. Under the loan agreement, the Company is not permitted to
declare or to pay any dividend on any of its shares or to make any distribution
to its stockholders.
-18-
22
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the period indicated selected historical
financial data for the Company. The selected historical financial data as of and
for each of the years in the four-year period ended December 31, 1997, have been
derived from the audited historical financial statements of the Company. The
Company acquired significant producing oil and gas properties in all the periods
presented. Selected data as of and for the year ended December 31, 1993, has
been derived from unaudited financial statements of the Company, but in the
opinion of management, such statements contain all adjustments necessary for the
fair presentation in accordance with generally accepted accounting principles.
Those acquisitions affect the comparability of the historical financial and
operating data for the periods presented. The information below should be read
in conjunction with Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Historical Financial Statements of
the Company and the notes thereto included elsewhere in this Annual Report on
Form 10-K, including the reference to reverse acquisition accounting treatment
given to the Acquisition.
- --------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
AS OF AND FOR THE FIVE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
(UNAUDITED)
- --------------------------------------------------------------------------------------------------
Total revenues $2,476 $543 $798 $841 $1,149
- --------------------------------------------------------------------------------------------------
Dividends paid -- 35 72 20 --
- --------------------------------------------------------------------------------------------------
Net income (loss) (4,168) (2,007) (696) 337 (848)
- --------------------------------------------------------------------------------------------------
Net income (loss) per common
share (.57) (.60) (1) (1) (1)
- --------------------------------------------------------------------------------------------------
Long term debt 2,005 -- -- 72 206
- --------------------------------------------------------------------------------------------------
Other long-term liabilities 27 -- -- -- --
- --------------------------------------------------------------------------------------------------
Convertible redeemable -- 4,955,000 -- -- --
preference shares
- --------------------------------------------------------------------------------------------------
Total assets 12,862 4,343 3,031 5,939 6,169
- --------------------------------------------------------------------------------------------------
(1) The Company's predecessor was a privately-held S Corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K (particularly this Item 7) contains statements
that are considered "forward-looking statements," as defined in the Private
Securities Litigation Reform Act of 1995. As discussed in Item 1 - "BUSINESS"
under "-Forward-Looking Statements" and "-Risk Factors," actual results may
differ materially from those contemplated by those forward-looking statements.
-19-
23
GENERAL
In 1997, the Company went through a major transformation as a result of the
Acquisition discussed in Item 1 "BUSINESS" above. Legally, Xplor Corporation
acquired the assets of New Venus. However, accounting principles require that
this transaction be treated as a reverse acquisition of the Company by New
Venus. After the transaction, the Company's name was changed from Xplor
Corporation to Venus Exploration, Inc. Under the reverse acquisition accounting
principles, the results of operations and financial information for prior years
shown in this report are those of the predecessor Venus entities, not Xplor
Corporation. Moreover, operational data shown herein for periods prior to May
21, 1997; e.g., production information, reflect the operations of New Venus and
its predecessors. Accordingly, comparison of information in this report with
prior Xplor Corporation corporate reports previously filed under the Security
Exchange Act of 1934 is not an appropriate performance measure.
The oil and gas reserves added by the Acquisition, plus the completion of new
wells drilled in the Company's 1997 drilling program, increased Venus' Proved
oil and gas Reserves, net of 1997 production and revisions of previous
estimates, by over 300% from 2.8 Bcfe on December 31, 1996, to 12.4 Bcfe on
December 31, 1997.
In 1997, the production obtained and the revisions of previous estimates of
reserves that were incurred together resulted in a reduction of reserves of
approximately 1 Bcfe, so the gross increase in Proved Reserves was 10.6 Bcfe. Of
that gross increase in Proved Reserves, 69%, or 7.3 Bcfe, is attributable to the
Acquisition transaction, and 31%, or 3.3 Bcfe, to the Company's 1997 exploration
and development program. Of the 3.3 Bcfe Proved Reserves increase from the
drilling and exploration programs in 1997, 29.8%, or 1 Bcfe, was comprised of
Proved Undeveloped Reserves in the Constitution Field, Jefferson County, Texas,
and 24.4%, or 0.8 Bcfe, was comprised of Proved Developed and Proved Undeveloped
Reserves in the Allen Field, Seminole County, Oklahoma. The balance of the
Company's Proved Reserve growth was through extensions, discoveries and
additions in other fields, including the Shanghai Field, Wharton County, Texas,
and the Vidor - South Field, Orange County, Texas.
The Company's 1997 drilling program resulted in the drilling of 15 wells during
1997 and the first quarter of 1998. Five of the 15 wells drilled were
Exploratory Wells, and 10 were Development Wells. Twelve of the 15 wells have
been completed as oil and gas wells, one well was completed as a non-commercial
oil well, and as of March 20, 1998, two wells were in the process of being
completed. Six of the 15 wells drilled by the 1997 drilling program were
producing revenue in December 1997; as of the end of March 1998, 10 are expected
to be producing revenue.
Management's business plan for its 1998 program provides for capital
expenditures of approximately $7 million for exploration and development
drilling and land and 3-D seismic acquisition. Approximately $1 million of this
amount ($7 million) is expected to be financed under the Stratum Facility
described below, leaving approximately $6 million to be financed by other
sources of corporate finance as discussed below. The number of wells proposed to
be drilled under management's 1998 program is 9 Exploratory and 11 Development
Wells. The cost of 3-D Seismic acquisition included in the 1998 plan is
estimated at $750,000. The Company may elect to reduce its interests, through
sales, farmouts or other transactions, in certain wells or seismic projects or
to include those wells or projects in a joint venture with industry
participants, in which event the Company's capital investment and upside
potential would be lower. The actual timing of the drilling of the wells is
dependent upon may unpredictable factors, and in all likelihood the 1998
drilling program will not be completed until 1999.
The number of wells that were drilled in 1997 and that are currently being
operated required a large increase in Venus's operations, accounting and
administrative staff. However, Venus believes that the current staff levels can
manage the new wells in the 1998 drilling program at a lower marginal cost than
experienced in 1997.
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The Company's general and administrative expense increased significantly from
1995 to 1997. This increase is due primarily to two factors; i.e., significantly
expanded exploration activities and various corporate restructurings during 1996
and 1997. The corporate restructurings included (i) the incorporation of a
United Kingdom public limited company, (ii) the repatriation of the United
Kingdom company, and (iii) the Acquisition. All contributed to the significant
increase in both 1996 and 1997 of the Company's general and administrative
costs.
Venus uses the successful efforts method of accounting of its oil and gas
activities. It capitalizes the costs to acquire mineral interests in oil and gas
properties, to drill and to equip Exploratory Wells that result in Proved
Reserves, and to drill and to equip Development Wells. It expenses the costs to
drill Exploratory Wells that do not result in Proved Reserves, costs of
geological, geophysical and seismic data and analysis, and the costs of carrying
and retaining unproved properties. Capitalized costs of producing oil and gas
properties, after considering estimated abandonment costs and estimated salvage
values, are depreciated and depleted using the unit-of-production method.
Unproved oil and gas properties that are individually significant are
periodically reviewed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance.
The Acquisition and the corporate restructuring in 1996 affected the reported
financial results in various ways. The historical financial statements of the
Company are that of a predecessor entity for all of 1995 and the first six
months of 1996. On July 1, 1996, that predecessor entity transferred most but
not all of its interest in the oil and gas properties to another predecessor
entity of the Company. Comparisons of revenues and expenses between 1997 and
1996 are affected by the inclusion in the first half of 1996 of the revenues and
expenses attributable to oil and gas properties and other assets and liabilities
that were, for accounting purposes, deemed distributed on July 1, 1996.
Likewise, comparisons of 1996 results with 1995 results are affected because
1995 contains 12 months of activity attributable to the assets and liabilities
deemed distributed as of July 1, 1996, while 1996 contains six months of
activity.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996 -
The Company experienced a net loss of $4.2 million for 1997 versus a net loss of
$2.0 million for 1996. The Company reported impairment losses in 1997 and 1996
of $1.1 million and $1 million, respectively. General and administrative cost
increased by $1,549,223, or over 100%.
Oil and gas production was 896 Mmcfe in 1997 compared to 207 Mmcfe in 1996, an
increase of over 300%. Of the 689 Mmcfe increase, approximately 285 Mmcfe was
due to successful drilling activities. The remainder, 404 Mmcfe, was due to
production from the properties acquired from Xplor and Lomak. Average oil prices
declined from $18.80 per barrel in 1996 to $17.72 in 1997, a 6% decrease.
Average natural gas prices declined from $2.55 per Mcf to $2.44, a 4% decrease.
Despite the decrease in average product prices, oil and gas revenue of $2.5
million for 1997 increased by $2.0 million over 1996 revenue of $0.5 million,
primarily due to successful drilling and the Acquisition.
Oil and gas production costs in 1997 were $963,822 ($1.08 per Mcfe) compared
with $286,030 in 1996 ($1.38 per Mcfe). This decrease is due mainly to the lower
operating cost of new properties acquired through successful drilling and the
Acquisition. The 1997 production or lifting cost as a percentage of oil and gas
sales decreased to 39%, compared with 53% in 1996.
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During 1997 the Company booked impairment expense of $1.1 million as compared to
the $1.0 million recorded in 1996. The impairment expenses for both 1997 and
1996 relate primarily to the cost, initially capitalized, of acquiring and
drilling Exploratory and Development Wells that were completed but that failed
to establish enough reserve value to justify their carrying value. In such cases
an impairment is recognized to reduce the capitalized cost to the estimated fair
market value of each well, which valuation is on a field by field basis. Costs
of Exploratory Wells that are not completed, but are plugged and abandoned, are
charged directly to dry hole expense.
The exploration expense, including geological, geophysical and seismic data
acquisition and analysis and dry hole expenses, was $504,983 in 1997, compared
to $116,905 in 1996. The increase is due mainly to the Company's drilling of one
Exploratory Well dry hole during the year and increased activity in exploration
joint ventures operated by the Company that resulted in an increase in
geological and geophysical costs.
During 1997, general and administrative expense of $2,923,764 increased
$1,549,223 from $1,374,541 in 1996. This increase was primarily due to the
significant increase in exploration activity and the Acquisition. The 1997
exploration activities led to the creation of 12 new employee positions and the
increased use of third-party engineering services and other professional
consultants. The 1997 amount also includes $252,002 of non-cash compensation
expense related to stock options granted to directors and costs in connection
with the corporate restructuring.
The Company's 1997 interest income of $77,658 increased by $22,230 over 1996 due
primarily to interest received from the investment of cash acquired in the
Acquisition.
Interest expense was $203,213 in 1997, compared to $10,331 in 1996. The $192,882
increase is primarily due to increased borrowings by Venus Development, Inc.
Approximately $81,535 of the interest expense reported by Venus Development,
Inc., represents amortization of deferred financing cost, not a current or
future cash expense. The average balances of interest-bearing debt was
$1,030,000 in 1997, compared to $70,000 in 1996.
YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995 -
The Company reported a net loss of $2.0 million for 1996 versus a net loss of
$0.7 million for 1995. The Company reported impairment expense of $1 million in
1996 and none in 1995. General and administrative expense increased by $0.63
million.
Oil and gas production was 207 Mmcfe in 1996 compared to 380 Mmcfe in 1995, a
decrease of over 45%. Accordingly, revenues decreased from $0.8 million for 1995
to $0.5 million in 1996, a decrease of $0.3 million, or 38%. Production in 1995
and related revenues include revenue from properties that were sold in early
1996 as well as from properties that were deemed distributed to shareholders
effective July 1, 1996. As a result, these properties reported twelve months
production and related revenue in 1995 but only six months in 1996. The decline
in revenue was lower than the decline in production because of the increase in
average prices. Average oil prices increased from $16.17 per barrel in 1995 to
$18.80 in 1996, a 16% increase. Average natural gas prices increased from $1.43
per Mcf in 1995 to $2.55 in 1996, a 78% increase. The 1996 depletion rate of 14%
as a percentage of sales is comparable to 1995's rate of 16%.
Oil and gas production costs in 1996 were $286,030 ($1.38 per Mcfe) compared
with $479,950 in 1995 ($1.26 per Mcfe). The decrease in total cost was due to
the properties retained by the predecessor entity and properties sold in early
1996. The costs for 1995 include 12 months of operations for these wells, while
1996 reflects operations for six months for the wells retained by the
predecessor entity and one to three months operations for the properties sold
during the first half of 1996. Production cost per Mcfe increased due mainly to
costs incurred on the Company's Oklahoma wells to
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improve production and operating efficiencies. The 1996 lifting cost of oil and
gas sales of 53% relative to sales decreased by 13% from the prior year's cost
of 61% relative to sales. Increased average product prices contributed to the
decrease in cost as a percent of sales.
Exploration (including geological, geophysical and seismic data and analysis and
dry hole costs) expense was $116,905 in 1996 compared to $532,222 in 1995, a
$415,317 decrease from 1995. The amount for 1995 includes dry hole costs of
$264,000. There was no dry hole expense in 1996. The most significant component
of the balance of the remaining $151,000 decrease is the result of the Company
selling part of its participation in an exploration joint venture to a new
participant. This reduced the Company's share of the allocated geological,
geophysical, seismic and other venture expenses.
During 1996, general and administrative expense of $1,374,541 increased $628,698
from $745,843 in 1995. This increase was primarily due to an increase in
overhead to support increased exploration activity and overhead costs related to
corporate restructuring that resulted in an increased use of consultants, such
as attorneys, accountants and engineers. The general and administrative expense
for 1996 also includes $283,430 of compensation expense related to stock options
granted new non-employee directors.
The Company's 1996 interest income of $55,428 decreased by $17,510 over 1995
because for twelve months in 1995, but only six months in 1996, the Company had
notes receivable from certain shareholders. These notes, which totaled $480,685
at December 31, 1995, were retained by the predecessor entity and for accounting
purposes treated as distributed to shareholders on July 1, 1996. As a result,
interest income for 1996 reflects six months of interest from these notes while
1995 reflects twelve months.
Interest and other expenses were $10,331 in 1996, compared to $27,041 in 1995.
The $16,710 decrease was primarily due to a $17,051 worthless inventory write
down. Interest expense in 1996 was $341 higher than in 1995. The average
balances of interest-bearing debt were $70,000 in 1996, compared to $131,000 in
1995. The interest-bearing debt outstanding in 1996 consisted of bank debt that
was subject to a much higher interest rate than the interest-bearing debt
outstanding during 1995, which consisted of notes payable to former
shareholders.
ACCOUNTING POLICIES
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying of comprehensive income and its components. This statement
requires a separate statement to report the components of comprehensive income
for each period reported. The provisions of this statement are effective for
fiscal years beginning after December 15, 1997. Management believes that the
Company currently does not have items that would require presentation in a
separate statement of comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" ("SFAS 131"), which establishes standards
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services and
major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997. The Company is currently evaluating
the impact that SFAS 131 will have on its financial statement disclosures.
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LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
At December 31, 1997, the Company had a working capital deficit of $768,939
compared with working capital of $700,275 at December 31, 1996, a decrease of
$1,469,214. The ratio of current assets to current liabilities at December 31,
1997, was .80 to 1 compared with 1.5 to 1 at December 31, 1996.
Net cash used in operating activities during 1997 was $1,276,042, whereas
$406,433 was used during 1996. Cash and equivalents decreased by $621,481
principally due to capital expenditures related to exploration and development
and the cost of administrative services required to support the increased
exploration activities and corporate restructurings. The increase of $1,478,229
in accounts receivable was primarily the result of the timing of revenue
receipts and joint interest receivables. The increase in current liabilities of
$2,406,027 is attributable to the increased level of drilling conducted by the
Company in 1997 and higher revenue payables to nonoperating interest owners as a
result of the increasing number of operated properties.
CAPITAL RESOURCES
To fund its business activities, Venus had previously relied on bank financing,
cash flow from operations, sales of properties and joint ventures with industry
participants. In 1996, the decision was made to sell equity interests and to use
limited recourse financing under a credit facility with Stratum Group Energy
Partners, LP. In 1997, a more conventional line of credit facility was set up
with Wells Fargo Bank (Texas), N.A. In the future, Venus intends to finance its
drilling plans and other operations with cash flow from operations, borrowings
from the two credit facilities, sales of non-strategic properties, and public
and private equity sales.
The prices paid to Venus and other producers in the first three months of 1998
have been considerably below the average price received in 1997. That diminished
revenue could have a material effect on the number of wells drilled by the
Company in 1998. Cash flow from existing properties will not fund management's
1998 drilling plan; therefore, the number of wells drilled by the Company will
depend on a number of external factors, the most important of which is the
availability to the Company of debt and equity capital in public and private
capital markets. In addition, if Venus is unable to generate sufficient cash
flow from operations to service its debt, it may be required to refinance all or
some of its debt, to sell certain assets or to obtain additional debt or equity
financing. There is no assurance that any such additional funding will be
available. Any major property acquisitions are also dependent upon receiving
adequate financing to fund the purchase; therefore, any such transaction will be
subject to the same factors.
While Venus regularly evaluates and discusses possible acquisitions, it has no
present agreements or commitments with regard to any specific such acquisition.
Any acquisition outside of current exploration and development programs would
require additional financing and would be dependent upon financing options
available at that time.
Venus has been successful in the highly capital-intensive oil and gas
exploration business. The capital resources and liquidity needed to run the
business over the last several years have been provided in large part from two
main sources: Cash sales of properties that were the result of Venus's past
exploratory successes and debt and equity financing. There is no assurance that
such sources of capital will be available in the future.
The successes of 1996 and 1997 provide a cash flow stream that is dependent upon
the various factors that generally affect the domestic oil and gas markets;
e.g., price, government regulation and normal oil and gas operational events. Of
course, the current trend of lower oil and gas prices has a negative effect on
cash flow from current production, the lines of credit that are supported by
reserve value, and the availability of the new capital resources needed to
explore and develop the extensive portfolio of projects and prospects that Venus
has under study. Increases in the lines of credit are directly dependent upon
continued successes in drilling productive wells and the prices paid for oil and
natural gas
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production at any given time. Indirectly, those continued successes would help
in any efforts to raise additional capital resources.
STRATUM FACILITY
Effective October 8, 1996, Venus entered into a credit facility (the "Stratum
Facility") with Stratum Energy Group Partners, L.P. ("Stratum"). The Stratum
Facility provides a term loan with a maximum limit of $20 million. The line of
credit limit varies with the value of the borrowing base, which is based on the
value of the properties subject to the underlying deed of trust. The lender's
only recourse is against Venus Development, Inc. ("Venus Development"), a
wholly-owned subsidiary of Venus Exploration, Inc., and the properties securing
the Stratum Facility. The final drawdown can be made no later than October 8,
1998, and its maximum term is 7 years. The right of Venus Development to draw on
the line of credit is subject to numerous collateral tests. The interest rate
charged on outstanding advances is floating prime plus 1%. Prepayment is not
allowed until the earlier of (i) when the full line has been drawn down, or (ii)
October 8, 1999.
As a part of the Stratum Facility, Stratum was granted an overriding royalty
interest equal to 5% of Venus Development's net revenue interest in the
properties subject to the Stratum deed of trust. Stratum can convert its
overriding royalty interest into Venus Common Stock at $3/share, with the
present value of the overriding royalty interest being determined based on a 15%
discount rate. Stratum also has certain restricted warrants that become
exercisable after Venus conducts its next public offering, and the price per
share pursuant to those warrants is 125% of the public offering price. The
conversion rights and the warrants are exercisable only against a pool of Venus
Exploration Common Stock (the "Conversion Share Pool") that are owned by the
shareholders of the former Venus entity that was a party to the Acquisition.
(The Conversion Share Pool contains 589,882 shares of Venus Exploration common
stock, and those shares are held in an escrow account maintained by the Frost
National Bank.) In the event that Stratum exercises its conversion rights or
warrants, no new shares of the Company's Common Stock would be issued to satisfy
those rights or warrants.
HEDGING ACTIVITIES
On certain properties, Venus uses commodity derivative contracts to protect and
to ensure cash flow levels. Those properties currently are limited to those that
are owned by Venus Development and that are subject to the financing facility
provided by Stratum. The Stratum Facility requires that those hedges be used, in
part, because it is arranged in such a way that the lender has no recourse
against the assets of the parent that are not owned by Venus Development. On
December 2, 1996, Venus Development entered into a financial swap, whereby the
counterparty agrees to pay Venus Development the difference between the floating
price and the fixed price for certain volumes of production in future months
(commencing with January 1997 production) if the floating price falls below the
negotiated fixed price of $2.0497 per mmbtu for natural gas or $19.045 per
barrel for oil, respectively. Should the floating price exceed the fixed price
for natural gas or oil, the Company is required to remit the difference to the
counterparty. As of December 31, 1997, quantities hedged are 81,996 Mmbtu's of
natural gas and 28,656 barrels of oil. This financial swap agreement expires
December 31, 2001. As of December 31, 1997, the estimated fair value of the
Company's swap positions was a net receivable of approximately $34,000 based
upon an estimate of what the Company would receive if the contracts were
liquidated. The net effect of Venus's commodity derivative contracts reduced oil
and gas revenues by $41,604 and $1,719 in the years ended December 31, 1997 and
1996. There were no hedges in place in 1995.
WELLS FARGO FACILITY
Effective December 19, 1997, the Company entered into a revolving line of credit
facility (the "Wells Fargo Facility") with Wells Fargo Bank (Texas), N.A.
("Wells Fargo"). The Wells Fargo Facility is a $50 million revolving line of
credit subject to a borrowing base supported by the value of the mortgaged oil
and gas reserves on which Wells Fargo has a first lien. Those reserves include
substantially all of the assets of the Company other than those that are owned
by Venus Development. Draws may be made as either prime rate advances or LIBOR
advances. The borrowing base as of March 18, 1998, was $5,250,000, of which
$2,053,270 had been drawn at that date. The Facility terminates on June 30,
2000.
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Prime rate advances accrue interest at the floating "Prime Rate" quoted by Wells
Fargo. LIBOR advances accrue interest at LIBOR plus 1.75%. The LIBOR rate also
is increased to cover any bank reserve costs, and if there is any increase in
the administration costs of the LIBOR advances due to changes in the law, Wells
Fargo can assess additional charges to cover those additional costs. The
advances received by Venus as of December 31, 1997, and as of March 18, 1998,
were prime rate advances, and the interest rate was 8,5% per annum on both such
dates. Fees payable by Venus under the agreement include a borrowing base
determination fee ($2,500 for each regular redetermination), a facility fee
(3/8% of any increase in the borrowing base), and a commitment fee (a quarterly
payment based on a charge of 3/8% per annum on the average unused borrowing base
for each day during the preceding calendar quarter).
Negative restrictions imposed upon Venus by the Wells Fargo agreement include
Venus's agreement to: not declare a dividend; not enter into any hedging
agreement covering more than 90% of Venus's projected monthly production or for
periods beyond the current calendar year; not amend the Stratum agreements; not
advance Venus Development more than $20,000 per year; not allow gas balancing,
take-or-pay contracts or other similar situations to exist to the extent that
Venus would not be entitled to receive the full value of delivered production;
not merge or consolidate with anyone else unless Venus is the survivor; not
change its control or management; and not allow other liens to be placed on
Venus's properties.
In order to use the Wells Fargo Facility, Venus must maintain Wells Fargo's
first lien on the properties subject to the deed of trust and other usual
covenants. Venus must maintain a 1:1 ratio of (a) the sum of all of its current
assets and the unused amount of the borrowing base, to (b) all of its accounts
payable and other current liabilities. At December 31, 1997, the Company was not
in compliance with the tangible net worth requirement. The Company obtained a
waiver from the lender as of December 31, 1997 which included a reduction in
tangible net worth requirement to $7,500,000. However, because of uncertainty
regarding the Company's ability to remain in compliance with this covenant
through the first quarter of 1998, the outstanding balance has been classified
as a current liability in the December 31, 1997 financial statements.
INFLATION
Although many of Venus's expenses and items of income may be affected by
inflation, inflationary costs have not had a significant effect on its results
of operations. However, the tightness in the drilling rig market is a concern
and may lead to inflationary effects in the near future.
IMPACT OF YEAR 2000
Concern over the year 2000 arises because many computer microprocessors have
been designed, and application software has been written, using two digits,
rather than four, to define the applicable year. Any of Venus's microprocessors
or application software that are time-sensitive may recognize a date of "00" as
the year 1900, rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations; e.g., a temporary
inability to operate machinery, to process transactions, to send invoices, or to
otherwise engage in normal business activities. Venus has conducted a review of
its computer systems to identify any such problems, and it has not identified
any problems that will require the expenditure of material amounts to address.
Venus has developed a plan to conduct tests throughout 1998 to evaluate the
situation.
The Company has received written representations from the accounting firms that
manage the Company's accounting and payroll about any year 2000 risks, and based
on those representations Venus believes that there is no problem with those
firms' computer systems in that regard. Venus has business relations with many
other companies, including various purchasers of production. It has not checked
with those entities, but it believes that even if those entities have any year
2000 problems, those problems will not have a material adverse impact on the
Company's business or finances. However, until that time, Venus cannot give any
assurances regarding the year 2000 effect.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following Part IV.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 3, 1997, the Company replaced Arthur Andersen LLP ("AA") with
KPMG Peat Marwick LLP as the Company's independent accountant at the
recommendation of the Board of Directors of the Company.
AA's reports on the financial statements of the Company for the past two years
have not contained an adverse opinion or a disclaimer of uncertainty, audit
scope or accounting principles. During the two most recent fiscal years and the
interim period since the end of the Company's fiscal 1996, there have not been
any disagreements with AA on any matter of accounting principles or practices,
financial statements or disclosure, or auditing or scope of procedure, which
disagreement(s), if not resolved to the satisfaction of AA, would have caused it
to make reference to the subject matter of the disagreement(s) in connection
with its report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth under the captions
"Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Executive Officers" of Venus's proxy statement for its 1998
Annual Meeting of Shareholders (the "Proxy Statement"), which will be filed with
the Commission pursuant to Regulation 14A under the Exchange Act and is
incorporated herein by reference. The Proxy Statement is expected to be filed
prior to April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption "Executive
Compensation" of Venus's Proxy Statement, which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" of Venus's Proxy
Statement, which will be filed with the Commission pursuant to Regulation 14A
under the Exchange Act and is incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions "Executive
Compensation -- Director Compensation and Certain Relationships and Related
Party Transactions" of Venus's Proxy Statement, which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1 to this Annual Report on
Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the information is not required under
the related instructions or is inapplicable or because the information
is included in the Financial Statements or related Notes.
3. EXHIBITS
2.1* Property Acquisition Agreement dated April 29, 1997, among
Xplor Corporation, The New Venus Exploration, Inc., Lomak
Production I L.P., and Lomak Resources LLC.
2.2* Agreement and Plan of Merger dated June 3, 1997, between
Venus Exploration, Inc., and Xplor Corporation.
2.3* Certificate of Ownership and Merger of Venus Exploration,
Inc., into Xplor Corporation dated June 3, 1997 (including the
change of name of Xplor Corporation to Venus Exploration,
Inc.).
3.1 Articles of Incorporation of Venus Exploration, Inc.
3.2 Bylaws of Venus Exploration, Inc., as amended
4.1" Warrant to purchase Common Stock issued to Kinder
Investments, L.P.
4.1 Warrant to purchase Common Stock issued to Martin A. Bell
4.2 Form of Warrant to purchase Common Stock issued as partial
consideration in acquisition of the assets of The New Venus
Exploration, Inc., and from Lomak Production I L.P., and Lomak
Resources LLC.
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9. Voting Trust Agreement dated effective March 31, 1997, among
E. L. Ames, Jr., et al.
10.1 Registrant's 1985 Incentive Stock Option Plan(1)
10.1+ Term Loan and Security Master Agreement dated October 8, 1996,
between Venus Development, Inc., and Stratum Group Energy
Partners, L.P.
10.7" Registrant's 1995 Stock Option Plan
10.8" Note and Warrant Agreement with Kinder Investments, L.P.
10.9[ ] 1997 Incentive Plan
10.10 Second Amended and Restated Loan Agreement dated December 19,
1997, between Venus Exploration, Inc., and Wells Fargo Bank
(Texas) N.A.
10.11 Executive Employment Agreement dated June 1, 1996, for E.L.
Ames, Jr.
16.1* Letter from Arthur Andersen LLP regarding change in
certifying account dated June 5, 1997
21. List of Subsidiaries
23.1 Letter from KPMG Peat Marwick LLP regarding incorporation by
reference into S-8.
23.2 Consent from Williamson Petroleum Consultants, Inc., regarding
incorporation by reference.
27.1 Financial Data Schedule
* Filed as an exhibit to the Company's Current Report on Form
8-K dated May 21, 1997, and incorporated herein by reference.
+ Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference.
" Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1995, and incorporated
herein by reference.
[ ] Filed as an appendix to the Company's Proxy Statement for a
Special Meeting of Stockholders (in lieu of its Annual
Meeting) held on October 27, 1997, and incorporated herein
by reference.
(1) Filed on Form 4 (File No. 33-1903) declared effective January
8, 1986, and incorporated herein by reference.
-29-
33
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of San Antonio,
Texas, on the 30th day of March, 1998.
VENUS EXPLORATION, INC.
By: /s/ EUGENE L. AMES, JR.
-----------------------------------
Eugene L. Ames, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
March 30, 1998
/s/ EUGENE L. AMES, JR.
-----------------------------------
Eugene L. Ames, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
March 30, 1998
/s/ JOHN Y. AMES
-----------------------------------
John Y. Ames
President, Director and Chief
Operating Officer
March 27, 1998
/s/ MARTIN A. BELL
-----------------------------------
Martin A. Bell
Director
March 27, 1998
/s/ J. MORTON DAVIS
-----------------------------------
J. Morton Davis
Director
-30-
34
March 27, 1998
/s/ JAMES W. GORMAN
-----------------------------------
James W. Gorman
Director
March 30, 1998
/s/ JERE W. MCKENNY
-----------------------------------
Jere W. McKenny
Director
March 27, 1998
/s/ JOHN H. PINKERTON
-----------------------------------
John H. Pinkerton
Director
March 30, 1998
/s/ PATRICK A GARCIA
-----------------------------------
Patrick A. Garcia
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
-31-
35
================================================================================
INDEX TO EXHIBITS
Exhibit No. Item
- ----------- ----
2.1* Property Acquisition Agreement dated April 29, 1997, among
Xplor Corporation, The New Venus Exploration, Inc., Lomak
Production I L.P., and Lomak Resources LLC.
2.2* Agreement and Plan of Merger dated June 3, 1997, between
Venus Exploration, Inc., and Xplor Corporation.
2.3* Certificate of Ownership and Merger of Venus Exploration,
Inc., into Xplor Corporation dated June 3, 1997 (including the
change of name of Xplor Corporation to Venus Exploration,
Inc.).
3.1 Articles of Incorporation of Venus Exploration, Inc.
3.2 Bylaws of Venus Exploration, Inc., as amended
4.1" Warrant to purchase Common Stock issued to Kinder Investments,
L.P.
4.1 Warrant to purchase Common Stock issued to Martin A. Bell
4.2 Form of Warrant to purchase Common Stock issued as partial
consideration in acquisition of the assets of The New Venus
Exploration, Inc., and from Lomak Production I L.P., and Lomak
Resources LLC.
9. Voting Trust Agreement dated effective March 31, 1997, among
E. L. Ames, Jr., et al.
10.1 Registrant's 1985 Incentive Stock Option Plan
10.1+ Term Loan and Security Master Agreement dated October 8, 1996,
between Venus Development, Inc., and Stratum Group Energy
Partners, L.P.
10.7" Registrant's 1995 Stock Option Plan
10.8" Note and Warrant Agreement with Kinder Investments, L.P.
36
10.9[ ] 1997 Incentive Plan
10.10 Second Amended and Restated Loan Agreement dated December 19,
1997, between Venus Exploration, Inc., and Wells Fargo Bank
(Texas) N.A.
10.11 Executive Employment Agreement dated June 1, 1996, for E.L.
Ames, Jr.
16.1* Letter from Arthur Andersen LLP regarding change in certifying
account dated June 5, 1997
21. List of Subsidiaries
23.1 Letter from KPMG Peat Marwick LLP regarding incorporation by
reference into S-8.
23.2 Consent from Williamson Petroleum Consultants, Inc., regarding
incorporation by reference.
27.1 Financial Data Schedule
* Filed as an exhibit to the Company's Current Report on Form
8-K dated May 21, 1997, and incorporated herein by reference.
+ Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference.
" Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein
by reference.
[ ] Filed as an appendix to the Company's Proxy Statement for a
Special Meeting of Stockholders (in lieu of its Annual Meeting)
held on October 27, 1997, and incorporated herein by reference.
37
Item 8. Financial Statements and Supplementary Data
VENUS EXPLORATION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for
each of the years in the three-year period
ended December 31, 1997 F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for each of the years in the three-year period
ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
38
Independent Auditors' Report
The Board of Directors and Shareholders of
Venus Exploration, Inc.:
We have audited the accompanying consolidated balance sheets of Venus
Exploration, Inc. and subsidiaries and predecessor entities, as described in
note 7 to the consolidated financial statements, as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Venus Exploration,
Inc. and subsidiaries and predecessor entities, as described in note 7 to the
financial statements, as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
San Antonio, Texas
March 26, 1998
F-2
39
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
-----------------------------
1997 1996
-----------------------------
ASSETS
Current assets:
Cash and equivalents $ 682,436 1,303,917
Trade accounts receivable 2,268,498 790,269
Prepaid expenses and other 104,967 24,902
------------- ------------
Total current assets 3,055,901 2,119,088
------------- ------------
Oil and gas properties and equipment, at cost
under the successful efforts method, net 9,100,955 1,679,697
Other property and equipment, net 273,392 102,733
Deferred financing costs, at cost less
accumulated amortization 377,187 336,366
Other assets, at cost less accumulated amortization 123,164 105,171
------------- ------------
$ 12,930,599 4,343,055
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable 3,080,200 1,073,912
Advances from interest owners 17,862 344,901
Other liabilities 226,778 -
Revolving credit agreement 500,000 -
------------- ------------
Total current liabilities 3,824,840 1,418,813
Long-term debt 1,505,329 -
Other long-term liabilities 26,524 -
------------- ------------
Total liabilities 5,356,693 1,418,813
------------- ------------
Convertible redeemable preference shares; nominal
value of $0.077; 247,750 shares issued and
outstanding in 1996 - 4,955,000
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; 30,000,000 shares
authorized; 9,736,815 and 3,322,121 shares issued
and outstanding in 1997 and 1996, respectively 97,368 33,221
Additional paid-in capital 15,010,189 1,301,949
Retained earnings (deficit) (7,533,651) (3,365,928)
------------- ------------
Total shareholders' equity (deficit) 7,573,906 (2,030,758)
------------- ------------
Commitments and contingencies
$ 12,930,599 4,343,055
============= ============
See accompanying notes to consolidated financial statements.
F-3
40
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31,
---------------------------------------------
1997 1996 1995
---------------------------------------------
Oil and gas revenues $ 2,476,040 543,233 798,233
----------- ----------- -----------
Costs of operations:
Production expense 963,822 286,030 479,950
Exploration expenses, including dry holes 504,983 116,905 532,222
Impairment of oil and gas properties 1,051,617 981,178 --
Depreciation, depletion and amortization 1,078,942 76,286 122,659
General and administrative 2,923,764 1,374,541 745,843
----------- ----------- -----------
Total expenses 6,523,128 2,834,940 1,880,674
----------- ----------- -----------
Operating profit (loss) (4,047,088) (2,291,707) (1,082,441)
----------- ----------- -----------
Other income (expense):
Interest expense (203,213) (10,331) (27,041)
Gain on sale of assets 4,920 239,792 340,170
Interest and other income 77,658 55,428 72,938
----------- ----------- -----------
(120,635) 284,889 386,067
----------- ----------- -----------
Net loss $(4,167,723) (2,006,818) (696,374)
=========== =========== ===========
Earnings (loss) per share:
Basic $ (0.57) (0.60)
=========== ===========
Diluted $ (0.57) (0.60)
=========== ===========
Common shares and equivalents outstanding:
Basic 7,270,357 3,322,121
=========== ===========
Diluted 7,270,357 3,322,121
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
41
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
Common Stock
---------------------------------------
Venus Venus Total
Oil Exploration, Additional Retained shareholders'
Issued Company Inc. paid-in earnings equity
shares amounts amounts capital (deficit) (deficit)
---------- ------------- ------------ ---------- ---------- -------------
Balances, December 31, 1994 3,215 $ 3,215 -- -- 3,006,232 3,009,447
Net loss -- -- -- -- (696,374) (696,374)
Cash distribution -- -- -- -- (72,000) (72,000)
---------- ------- ------ ---------- ---------- ----------
Balances, December 31, 1995 3,215 3,215 -- -- 2,237,858 2,241,073
Net loss -- -- -- -- (2,006,818) (2,006,818)
Cash distribution -- -- -- -- (35,220) (35,220)
Distributions of assets not
transferred to Venus Energy PLC
and purchase price of properties
transferred (3,215) (3,215) -- -- (3,561,748) (3,564,963)
Stock issued by Venus
Energy PLC 3,322,121 -- 33,221 993,519 -- 1,026,740
Compensation costs for stock
options -- -- -- 283,430 -- 283,430
Warrants to acquire shares
issued under financing
arrangements -- -- -- 25,000 -- 25,000
---------- ------- ------ ---------- ---------- ----------
Balances, December 31, 1996 3,322,121 -- 33,221 1,301,949 (3,365,928) (2,030,758)
Net loss -- -- -- -- (4,167,723) (4,167,723)
Conversion of preference shares 2,041,674 -- 20,417 4,934,583 -- 4,955,000
Compensation costs for stock options -- -- -- 252,002 -- 252,002
Stock options exercised 298,678 -- 2,987 58,083 -- 61,070
Acquisition of Xplor and Lomak 4,074,342 -- 40,743 8,463,572 -- 8,504,315
---------- ------- ------ ---------- ---------- ----------
Balances, December 31, 1997 9,736,815 $ -- 97,368 15,010,189 (7,533,651) 7,573,906
========== ======= ====== ========== ========== ==========
F-5
See accompanying notes to consolidated financial statements.
42
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Years Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ---------- ----------
Operating Activities:
Net earnings (loss) $(4,167,723) (2,006,818) (696,374)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization
of oil and gas properties 1,078,942 76,286 122,659
Other depreciation and amortization 241,198 59,635 54,860
Impairments, abandoned leases, and
dry hole costs 1,113,335 981,178 243,811
Gain on sales of property and
equipment (4,920) (124,369) (340,170)
Loss (gain) on investment transactions -- (115,423) --
Compensation expense for stock options 252,002 283,430 --
Changes in operating assets and liabilities:
Trade accounts receivable (1,181,821) (332,691) 648,131
Prepaid expenses and other (71,277) 68,138 (337,090)
Trade accounts payable 1,564,483 516,708 (2,174,407)
Advances from interest owners (327,039) 187,493 (277,435)
Other liabilities 226,778
----------- ---------- -----------
Net cash used in
operating activities (1,276,042) (406,433) (2,756,015)
----------- ---------- -----------
Investing Activities:
Capital expenditures (4,394,687) (2,401,351) (403,772)
Cash acquired in business combination 2,920,630 -- --
Net proceeds on sale of investment securities -- 165,423 6,850
Proceeds from sales of property and equipment 97,908 331,620 471,739
----------- ---------- ----------
Net cash provided by (used in)
investing activities (1,376,149) (1,904,308) 74,817
----------- ---------- ----------
Financing Activities:
Net proceeds from issuance of long-term debt
and revolving credit agreement 2,277,824 150,000 --
Principal payments on long-term debt (272,495) (150,000) (122,331)
Distributions -- (2,650,908) (72,000)
Deferred financing costs (35,689) (289,267) --
Proceeds from issuance of stock -- 5,981,740 --
Proceeds from options exercised 61,070 -- --
----------- ---------- ----------
Net cash provided by (used in)
financing activities 2,030,710 3,041,565 (194,331)
----------- ---------- ----------
Increase (decrease) in cash and equivalents (621,481) 730,824 (2,875,529)
Cash and equivalents, beginning of year 1,303,917 573,093 3,448,622
----------- ---------- ----------
Cash and equivalents, end of year $ 682,436 1,303,917 573,093
=========== ========== ==========
F-6
See accompanying notes to consolidated financial statements.
43
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) ORGANIZATION AND BUSINESS COMBINATION
Venus Exploration, Inc. (the Company) is 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, acreage and production in ten states.
On May 21, 1997, Venus Exploration, Inc. (the Company), then known as Xplor
Corporation ("Xplor"), acquired substantially all of the assets and
liabilities of The New Venus Exploration, Inc. ("New Venus"), a Texas
corporation, in exchange for 5,626,473 shares of the Company's previously
authorized and unissued shares of common stock and warrants to purchase
272,353 additional shares of common stock. Simultaneously, the Company
acquired certain oil and gas properties of two wholly-owned affiliates of
Lomak Petroleum, Inc. (together, "Lomak") in exchange for 2,037,171 shares
of the Company's previously authorized and unissued shares of common stock
and warrants to purchase 272,353 additional shares of common stock. At the
same time, Lomak acquired from existing stockholders of the Company 97,008
shares of common stock. As a result of these transactions (collectively,
the "Acquisition") the former stockholders of New Venus acquired, as of the
effective date of the Acquisition, 58% of the Company's outstanding stock
and thus voting control, and Lomak acquired 22%, while the preexisting
stockholders of the Company owned 20%. On June 4, 1997 Xplor changed its
name to Venus Exploration, Inc.
For financial reporting purposes, the transactions described above have
been accounted for as a reverse acquisition whereby New Venus is deemed to
be the acquirer. Accordingly, the historical consolidated financial
statements of the Company and predecessor entities are presented as the
historical consolidated financial statements of the Company and the assets
acquired and liabilities assumed from Xplor and Lomak have been recorded at
fair value as of the date of the combination as required under purchase
accounting. The consolidated financial statements reflect the operations
solely of the Company for the periods prior to May 21, 1997, whereas such
financial statements reflect the operations of the combined entities for
the period subsequent to May 21, 1997.
(Continued)
F-7
44
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND BUSINESS COMBINATION, CONTINUED
The effect of the combination transactions was primarily the recording of
the assets and liabilities of Xplor and Lomak at their fair value. The
combined amounts for Lomak and Xplor were as follows:
(in thousands)
--------------
Cash $ 2,880
Oil and gas properties 5,613
Trade accounts receivable and other 303
Equity securities and investments 151
Trade accounts payable and other liabilities 443
Selected results of operations (in thousands, except per share data) on a
pro forma basis as if the Acquisition had occurred on January 1, 1996 are
as follows:
(Unaudited)
Years ended December 31,
-------------------------
1997 1996
---------- ---------
Revenues $ 3,347 3,039
========= =========
Net income (loss) $ (4,133) (1,736)
========= =========
Net earnings (loss) per share
(basic and diluted) $ (0.43) (0.18)
========= =========
Number of shares used in calculation 9,717 9,701
========= =========
The above pro forma financial information does not necessarily reflect
the results of operations that would have occurred had New Venus, Xplor
and Lomak constituted a single entity during such periods.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the financial statements
of Venus Exploration, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(Continued)
F-8
45
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(b) Cash and Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased and money market
accounts to be cash equivalents.
(c) Oil and Gas Properties
The Company uses the successful efforts method of accounting for its oil
and gas operations. Under this method, the costs of unproved leases and
exploratory wells are initially capitalized pending the results of
exploration efforts. The costs of unproved properties are assessed
periodically for impairment, on a field-by-field basis, and a loss is
recognized to the extent, if any, that the cost of a property has been
impaired.
Exploration expenses, including geological and geophysical costs, delay
rentals, and dry hole costs are charged to expense as incurred.
Exploratory drilling costs are initially capitalized, but are charged to
expense if and when the well is determined to be unsuccessful.
As unproved properties are determined to be productive, the property
acquisition costs and related exploratory drilling costs of successful
wells are transferred to proved properties. Development costs of proved
properties, including producing wells and related facilities and any
development dry holes, are capitalized. Depreciation, depletion, and
amortization of the costs of proved properties are provided by the
unit-of-production method based upon estimates of proved oil and gas
reserves on a field-by-field basis.
Capitalized costs of proved properties are periodically reviewed for
impairment on a field-by-field basis, and, if necessary, an impairment
provision is recognized to reduce the net carrying amount of such
properties to their estimated fair values.
(d) Other Property and Equipment
Depreciation and amortization of transportation equipment and office
furniture, fixtures, equipment, and leasehold improvements are computed
using the straight-line method over the respective estimated useful
lives. Maintenance, repairs and renewals are charged to operations,
except that renewals which extend the life of the property are
capitalized.
(Continued)
F-9
46
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) Income Taxes
The Company follows the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax effects of temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax laws or rates is recognized in income in the period that includes
the enactment date.
New Venus' predecessor, Venus Oil Company, elected Subchapter S
Corporation status for U.S. federal income tax purposes. Under the
Subchapter S provisions, the stockholders of Venus Oil Company are
liable for any U.S. federal income taxes related to taxable income of
Venus Oil Company. Accordingly, no U.S. federal income taxes related to
the operations of Venus Oil Company are reflected in the accompanying
consolidated financial statements.
(f) Revenue Recognition
The Company records revenue following the entitlement method of
accounting for gas imbalances. As of December 31, 1997 and 1996, there
were no significant imbalances. Three customers accounted for
approximately 22%, 10% and 10% of total consolidated revenues for the
year ended December 31, 1997. Three customers accounted for
approximately 31%, 17% and 10% of total consolidated revenues for the
year ended December 31, 1996. Two customers accounted for approximately
15% each of total revenues for the year ended December 31, 1995.
(g) Deferred Financing Costs
Deferred financing costs at December 31, 1997 and 1996 consist of costs
associated with obtaining the Company's debt agreements (see note 5)
which are amortized over the expected term of the related borrowings.
(h) Other Assets
Other assets include organizational costs which are amortized over five
years, a certificate of deposit and investment in equity securities.
(Continued)
F-10
47
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(i) Hedging Transactions
The Company enters into commodity derivative contracts for non-trading
purposes as a hedging strategy to manage commodity prices associated
with certain oil and gas sales and to reduce the impact of price
fluctuations. The Company primarily uses price swaps for production on
properties pledged under the loan agreement discussed in note 5.
The Company utilizes the hedge or deferral method of accounting for
commodity derivative financial instruments whereby gains and losses on
these hedging instruments are recognized and recorded as revenues on the
statement of operations when the related natural gas or oil has been
produced, purchased or delivered. As a result, gains and losses on
commodity financial instruments are generally offset by similar changes
in the realized prices of natural gas and crude oil. To qualify as
hedging instruments, these instruments must be highly correlated to
anticipated future sales such that the Company's exposure to the risks
of commodity price changes is reduced. While commodity financial
instruments are intended to reduce the Company's exposure to declines in
the market price of natural gas and crude oil, the commodity financial
instruments may also limit the Company's gain from increases in the
market price of natural gas and crude oil.
On December 2, 1996, the Company entered into a financial swap, as
required under one of the loan agreements discussed in note 5, whereby
the counterparty agrees to pay the Company the difference between the
floating price and the fixed price for certain volumes of production in
future months (commencing with January 1997 production) should the
floating price fall below the negotiated fixed price of $2.0497 per
mmbtu for natural gas or $19.045 per barrel for oil, respectively.
Should the floating price exceed the fixed price for natural gas or oil,
the Company is required to remit the difference to the counterparty. As
of December 31, 1997 quantities hedged are 81,996 mmbtu's of natural gas
and 28,656 barrels of oil. This financial swap agreement expires
December 31, 2001. As of December 31, 1997, the estimated fair value of
the Company's swap positions was a net receivable of approximately
$34,000 based upon an estimate of what the Company would receive if the
contracts were liquidated.
The Company had no such hedging transactions in 1995.
(Continued)
F-11
48
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(j) Stock-Based Compensation
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, allows companies to adopt a fair value based
method of accounting for stock-based employee compensation plans or to
continue to use the intrinsic-value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has elected to
account for stock-based compensation under the intrinsic-value method
under the provisions of APB Opinion No. 25 and related interpretations.
Under this method, compensation expense is recognized for stock options
when the exercise price of the options is less than the value attributed
to the stock on the date of grant.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(l) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines, and penalties are recorded when it is probable that a
liability has been incurred and that the related amount can be
reasonably estimated.
(m) Fair Values of Financial Instruments
The Company's financial instruments consist primarily of short-term
trade receivables or payables or issued debt instruments with floating
interest rates for which management believes fair value approximates
carrying value. Also see note 2(i).
(n) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash
investments and trade receivables. The Company places its temporary cash
investments in U.S. Government securities and in other high quality
financial instruments. The Company's customer base consists primarily of
independent oil and natural gas producers and purchasers of oil and gas
products.
(Continued)
F-12
49
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(o) Earnings (loss) per share
Basic net earnings (loss) per common share is computed by dividing net
loss by the weighted average number of common shares outstanding.
Diluted earnings (loss) per share is computed by assuming the issuance
of common shares for all dilutive potential common shares outstanding.
In 1997, the Company adopted Statement of Financial Accounting Standards
("FAS") No. 128, "Earnings Per Share" which changed the calculation and
financial statement presentation of earnings per share. Prior year
earnings per share amounts have been restated.
The 3,322,121 shares of common stock issued in 1996 by Venus Energy PLC
to capitalize Venus Exploration, Inc. have been treated as outstanding
for all of 1996 for purposes of calculating earnings per share. Earnings
per share amounts for 1995 have not been presented because the
predecessor company is a privately-held subchapter S Corporation.
(p) Reclassifications
Certain amounts for prior periods have been reclassified in the
consolidated financial statements to conform to the current
presentation.
(3) OIL AND GAS PROPERTIES
Oil and gas properties consist of the following at December 31, 1997 and
1996:
1997 1996
---- ----
Proved properties $ 10,207,906 2,274,830
Unproved property 871,151 300,110
------------- -----------
11,079,057 2,574,940
Less accumulated depreciation,
depletion, and amortization (1,978,102) (895,243)
------------- -----------
$ 9,100,955 1,679,697
============= ===========
Included in proved properties is the Company's interest in the 1990 Special
Credit Drilling Partnership, Ltd. ("SCDP"). As managing general partner, the
Company receives fees from SCDP for management services, overhead, and the
transportation and marketing of production.
(Continued)
F-13
50
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) OIL AND GAS PROPERTIES, CONTINUED
The impairment of oil and gas properties recognized in 1997 and 1996
includes a write-down of unproved properties of approximately $0 and
$254,000, respectively, and write-downs of proved properties of
approximately $1,052,000 and $727,000, respectively. Impairment is
recognized only if the carrying amount of a property is greater than its
expected future cash flows. The amount of the impairment is based on the
estimated fair value of the property.
(4) OTHER PROPERTY AND EQUIPMENT
Other property and equipment consists of the following at December 31,
1997 and 1996:
1997 1996
---- ----
Transportation equipment $ 72,573 91,422
Furniture, fixtures and office equipment 452,236 343,378
Geophysical interpretation system 118,516 -
Office leasehold improvements - 36,225
----------- -----------
643,325 471,025
Less accumulated depreciation and
amortization (369,933) (368,292)
----------- -----------
$ 273,392 102,733
=========== ===========
(5) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997:
Revolving credit due on June 30, 2000 $ 500,000
(classified as a current liability)
Subsidiary term loan due October 8, 2005 1,505,329
-----------
$ 2,005,329
===========
Revolving Credit
In 1997, the Company entered into a loan agreement establishing a
$20,000,000 revolving line of credit. In December 1997 this agreement
was restated and amended to increase the credit facility to $50,000,000
subject to borrowing base determined every six months (April 1 and
October 1) by the bank based on the Company's oil and gas reserves which
are used as security for the loan. Interest on related borrowings is
based on either of two methods at the option of the Company: the bank's
prime lending rate or LIBOR plus 1.75%. For balances outstanding at
December 31, 1997 the Company chose the bank's prime lending rate (8.5%
at December 31, 1997).
(Continued)
F-14
51
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated financial statements
(5) LONG-TERM DEBT
Revolving Credit, continued
A commitment fee of 3/8 of one percent of the undrawn balance is payable
quarterly. Interest is payable monthly and principal payments are required
only when the balance outstanding exceeds or is projected to exceed, prior
to the next borrowing base redetermination date, the borrowing base. Under
the terms of the restated and amended loan agreement, the initial borrowing
base is $2,500,000, and it increases to $5,250,000 upon the Company
obtaining and submitting to the bank certain documents related to a portion
of the properties securing the loan. As of December 31, 1997, the borrowing
base was $2,500,000 and the amount drawn by the Company was $500,000
resulting in an unused borrowing base of $2,000,000.
Under the terms of the credit facility, the Company is required to maintain
specified levels of current ratio and tangible net worth. Among other
matters, the credit facility contains covenants which limit the incurrence
of additional indebtedness and restrict payments of dividends. At December
31, 1997, the Company was not in compliance with the tangible net worth
requirement. The Company obtained a waiver from the lender as of December
31, 1997 which included a reduction in tangible net worth requirement to
$7,500,000. However, because of uncertainty regarding the Company's ability
to remain in compliance with this covenant through the first quarter of
1998, the outstanding balance has been classified as a current liability in
the accompanying financial statements.
During 1996, the Company entered into a line of credit agreement with a
bank under which the Company could borrow up to $325,000. Interest on
amounts borrowed under the line of credit agreement was based on the bank's
prime rate. During 1996, the Company borrowed and repaid $150,000 under the
line of credit agreement.
The line of credit agreement was terminated in October 1996.
Subsidiary Term Loan
In October 1996, Venus Development, Inc. (Development) entered into a term
loan and security agreement with a lender to finance the acquisition and
development of oil and gas properties. Under the agreement, Development
could have borrowed up to approximately $2.6 million to finance the
development of specified oil and gas properties. Such borrowings are
subject to limitations based on the value of the proved reserves of the
properties. The borrowings for the specified properties are to be repaid
over a period not to exceed five years from the date of closing of the
agreement.
(Continued)
F-15
52
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) LONG-TERM DEBT, CONTINUED
Subsidiary Term Loan, continued
In addition, Development may borrow up to approximately $17.4 million to
finance the acquisition and development of new properties, subject to
limitations based on the value of Development's proved reserves
attributable to properties Development has agreed to include as security
for such loan. In addition, all of Development's outstanding capital stock
is pledged as additional security for the borrowings. Development's net
assets, excluding the term loan, totaled approximately $1,569,000 at
December 31, 1997. Borrowings for the acquisition and development of new
properties must be drawn within two years from the date of closing of the
agreement and must be repaid within seven years from the date of the first
drawdown. Development is required to pay a drawdown fee to the lender of
one percent of each drawdown under the agreement. Borrowings under the
agreement bear interest at the prime rate (8.5% at December 31, 1997) plus
one percent. As of December 31, 1997, Development had borrowed $1,505,329
under the agreement. Based on the value of the proved reserves of the
secured properties, approximately $174,000 was available under the
agreement at December 31, 1997 to finance the development of the specified
secured properties.
Payments on borrowings under the agreement are based on 85 or 90 percent of
the net revenue, as defined in the agreement, from the secured properties,
depending on the value of the proved reserves of the secured properties
relative to the outstanding loan balance.
Under the agreement, Development is required to assign an overriding
royalty interest equal to five percent of the Company's net revenue
interest in the secured properties. The lender had the right to convert the
value of its overriding royalty interests into equity interests of Venus
Energy PLC, subject to certain limitations. Development also granted
warrants to the lender to purchase equity interests in Venus Energy PLC,
subject to certain limitations. The estimated fair values of the royalty
interests assigned as of December 31, 1997 and 1996 of $88,718 and $57,500,
respectively, and the estimated fair value of the warrants issued as of
December 31, 1996 of $25,000 have been recorded as deferred financing costs
and are amortized as additional interest over the term of the agreement.
At December 31, 1996, under the terms of the agreement, the lender had
warrants and certain conversion rights with respect to these overriding
royalty interests as described above. During 1997 the agreements creating
these warrants and conversion rights were amended such that all of lender's
conversion rights and warrants are exercisable against a pool of shares
owned by certain of the Company's shareholders. Neither the Company nor
Development has any obligations as of December 31, 1997, with respect to
the lender's conversion rights or warrants.
(Continued)
F-16
53
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) LONG-TERM DEBT, CONTINUED
Subsidiary Term Loan, continued
The lender shall have the right to purchase at competitive market prices
all crude oil or natural gas produced from or allocable to the secured
properties including, without limitation, all of the production
attributable to Development's net revenue interest in the secured
properties subject to the rights of other working interest and royalty
interest owners. The term of the purchase and sale agreement extends seven
years with three additional one-year options.
The loan agreement requires, among other matters, maintenance of a minimum
working capital amount. Development was either in compliance with, or had
obtained waivers with respect to, these covenants as of December 31, 1997.
(6) INCOME TAXES
No provision for income taxes has been recorded for the years ended
December 31, 1997 and 1996 due to the losses recorded by the Company. The
Company's predecessor, Venus Oil Company, elected Subchapter S Corporation
status for U.S. federal income tax purposes. Under the Subchapter S
provisions, the stockholders of Venus Oil Company are liable for any U.S.
federal income taxes related to taxable income of Venus Oil Company.
Accordingly, no U.S. federal income taxes related to the operations of
Venus Oil Company are reflected in the accompanying consolidated financial
statements.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below.
1997 1996
---- ----
Deferred tax assets:
Oil and gas and other property and
equipment, principally due to differences
in depreciation and amortization $ -- 922,000
Stock option expense recorded for
financial reporting purposes 198,000 96,000
Net operating loss carryforwards 1,595,000 253,000
----------- ----------
Total gross deferred tax assets 1,793,000 1,271,000
Less valuation allowance (1,697,000) (1,271,000)
----------- ----------
Net deferred tax assets 96,000 --
Deferred tax liabilities:
Deferred financing costs,
principally due to
differences in amortization (53,000) --
Oil and gas and other property
and equipment, principally
due to differences in
depreciation and amortization (43,000) --
----------- ----------
Net deferred tax asset $ -- --
=========== ==========
(Continued)
F-17
54
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) INCOME TAXES, CONTINUED
The valuation allowance for deferred tax assets as of January 1, 1997 and
1996 was $1,271,000 and $0, respectively. The net change in the total
valuation allowance for the years ended December 31, 1997 and 1996 was an
increase of $426,000 and $1,271,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. The net deferred
tax asset at December 31, 1997 and 1996 has been offset entirely by a
valuation allowance due to the uncertainty of the ultimate realization of
such benefits.
As of December 31, 1997, the Company had an estimated net operating loss
carryforward for U.S. federal income tax purposes of approximately
$4,311,000 which is available to offset future taxable income, if any,
through 2012. The utilization of the Company's net operating loss
carryforwards may be limited as a result of the transactions referred to in
note 1.
The Company intends to liquidate Venus Energy PLC, an inactive U.K.
subsidiary. Management of the Company believes that there will be no
significant tax obligations in the United Kingdom as a result of such
liquidation.
(7) SHAREHOLDERS' EQUITY
The New Venus Exploration, Inc. ("New Venus") was formed to be the
successor entity to certain oil and gas exploration, development, and
production operations of Venus Energy PLC and Venus Oil Company as
described below. Venus Energy PLC and subsidiaries were organized in 1996
to acquire certain oil and gas exploration, development, and production
operations of Venus Oil Company. Venus Energy PLC and subsidiaries
commenced operations effective July 1, 1996 upon the transfer of certain
oil and gas properties from Venus Oil Company.
All share and per share information related to shares issued to effect the
original organization transactions described herein (the "convertible
shares") have been restated to present their equivalent number of shares of
the Company's common stock.
Venus Energy PLC was incorporated on May 15, 1996 as a public limited
company in the United Kingdom. Upon formation, the shareholders of Venus
Oil Company contributed $26,740 to Venus Energy PLC in exchange for
2,910,077 shares.
(Continued)
F-18
55
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) SHAREHOLDERS' EQUITY, CONTINUED
Venus Exploration, Inc. ("Old Venus") was incorporated in the state of
Texas on May 16, 1996 as a wholly-owned subsidiary of Venus Energy PLC.
Upon formation, Old Venus paid $22,500 to Venus Oil Company for an option
that would allow Old Venus to acquire certain oil and gas properties from
Venus Oil Company for $2,000,000.
Venus Energy PLC raised $4,955,000 from the sale of 247,750 convertible
redeemable preference shares through a private offering to new investors.
Venus Energy PLC contributed substantially all of the proceeds of the
private offering to Old Venus. Effective July 1, 1996, Old Venus exercised
its option to acquire certain oil and gas properties from Venus Oil Company
for $2,000,000. Venus Oil Company then paid $1,000,000 to acquire 412,044
convertible shares of Venus Energy PLC. Venus Energy PLC subsequently
contributed substantially all of the proceeds from the sale of the shares
to Old Venus.
In September 1996, Venus Development, Inc. was incorporated in the State
of Texas as a wholly-owned subsidiary of Old Venus. Certain oil and gas
properties were transferred from Old Venus to Venus Development, Inc.
The oil and gas properties and the stock of Venus Development, Inc. have
been pledged as security for borrowings under one of the debt agreements
described in note 5.
Old Venus acquired oil and gas properties with a net financial statement
carrying amount of $532,820 from Venus Oil Company for $2,022,500 in 1996.
In addition, Old Venus paid Venus Oil Company $111,908 for certain other
assets with a net financial statement carrying amount of $67,704. The
properties and other assets transferred from Venus Oil Company have been
recorded by Old Venus at the net carrying amounts of such properties and
other assets in the financial statements of Venus Oil Company at the time
of transfer. The amounts paid to Venus Oil Company for the properties and
other assets and the remaining net assets of Venus Oil Company which were
not transferred to Venus Energy PLC or its subsidiaries of $1,430,555,
including cash of $481,280, have been recorded as distributions in the 1996
statement of shareholder's equity.
As described in note 1, in a series of related transactions in 1997, the
shareholders of Venus Energy PLC, became the shareholders of New Venus, and
New Venus succeeded to the assets of Old Venus. The shareholders of Venus
Energy PLC exchanged their shares for the outstanding shares of New Venus,
and the assets and liabilities of Old Venus were transferred to the New
Venus. In conjunction with the Acquisition described below the 247,750
convertible redeemable preference shares were converted into 2,041,674
common shares.
(Continued)
F-19
56
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) SHAREHOLDERS' EQUITY, CONTINUED
As described in note 1, on May 21, 1997, the Company, then known as Xplor
Corporation ("Xplor"), acquired substantially all of the assets and
liabilities of The New Venus Exploration, Inc. ("New Venus"), a Texas
corporation, in exchange for 5,626,473 shares of Xplor's previously
authorized and unissued shares of common stock and warrants to purchase
272,353 additional shares of common stock. Simultaneously, Xplor acquired
certain oil and gas properties of two wholly-owned affiliates of Lomak
Petroleum, Inc. (together, "Lomak") in exchange for 2,037,171 shares of
Xplor's previously authorized and unissued shares of common stock and
warrants to purchase 272,353 additional shares of common stock. At the same
time, Lomak acquired from an existing stockholder of Xplor 97,008 shares of
common stock. On June 4, 1997 Xplor changed its name to Venus Exploration,
Inc.
(8) RELATED PARTY TRANSACTIONS
Certain officers and shareholders of the Company have working interests in
certain properties operated by the Company. In addition, they participate
with the Company in developing certain properties. Management believes
these transactions are conducted on a basis similar to transactions with
third parties.
The Company receives $2,500 per month from Venus Oil Company, which is
owned by certain shareholders of the Company, for overhead reimbursement
of certain administrative costs. Prior to 1997, the Company had a program
whereby certain officers and employees were awarded overriding royalty
interests in certain properties prior to their development. The value of
such interests at the time of award was not significant.
At December 31, 1997, trade accounts payable include $68,762 due to Venus
Oil Company. Included in trade accounts receivable at December 31, 1996 is
$6,848 due from Venus Oil Company.
(9) STOCK OPTIONS
The Company has adopted an incentive plan that authorizes the grant of
awards to employees, consultants, contractors and non-employee directors.
The awards to employees, consultants and contractors can be in the form of
options, stock appreciation rights, stock or cash. The awards to
non-employee directors are limited to grants for shares of the Company's
common stock. The plan is administered by the compensation committee of
the Company's board of directors.
(Continued)
F-20
57
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) STOCK OPTIONS, CONTINUED
The number of shares of the Company's common stock that is subject to the
incentive plan is 10% of the Company's outstanding shares up to a maximum
of 1,500,000 shares, less the number of shares that were subject to
previous plans of the Company and that are not assumed by the current
incentive plan. As of December 31, 1997, the Company had reserved 653,365
shares for the incentive plan.
As of December 31, 1997 there had been no awards under the 1997 incentive
plan, however, the Company assumed certain outstanding stock options of
Xplor as a result of the Acquisition.
Years ended December 31,
-----------------------------------------------
1997 1996
--------------------- --------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
------- -------- ------- ----------
Options outstanding,
beginning of period 262,678 $ 0.389 -- --
Options granted -- -- 262,678 .389
Assumed from Xplor 426,000 1.770 -- --
Options exercised (298,678) 0.204 -- --
-------- --------
Options outstanding,
end of period 390,000 1.782 262,678 0.389
======== ========
Options exercisable,
end of period 350,415 1.814 133,914 0.753
======== ========
(Continued)
F-21
58
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) STOCK OPTIONS, CONTINUED
The following summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding
--------------------------------------------------------------------------------
Weighted average
Range of Number remaining contractual Weighted average
exercise price outstanding life exercise price
-------------- ----------- ---- --------------
$1.25 - $1.3125 120,000 6.19 years $1.30
$1.50 160,000 7.25 years $1.50
$1.875 - $2.125 50,000 6.70 years $2.03
$3.29 60,000 4.92 years $3.29
The Company accounts for its stock-based compensation plans under APB
Opinion No. 25, under which no compensation expense is recognized when
options are granted with an exercise price equal to the fair value of the
Company's common stock on the date of grant. In addition, the Company
adopted Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" ("FAS No. 123") for disclosure purposes in
1996. The Company granted no stock options during 1997 or 1995. Options
issued during 1996 were issued at a strike price below fair market price.
The compensation expense reported by the Company was equal to the expense
that would have been recognized under FAS No. 123.
The Company granted options to certain directors to acquire 221,474 shares
at an exercise price of $0.01 per share. The Company has recognized
compensation expense and a corresponding increase in additional
paid-in-capital of $252,002 in 1997 and $283,430 in 1996 related to the
these options. The Company has also granted options to special counsel to
acquire 41,204 shares. The compensation expense reported by the Company
approximates the expense that would have been recognized under FAS No. 123.
(Continued)
F-22
59
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) EMPLOYEE BENEFIT PLAN
The Company has a Profit Sharing 401(k) Plan (the Plan). Benefits under the
Plan are based on the participants vested interests in the value of their
respective accounts at the time the benefits become payable as a result of
retirement, separation from service, or other events. Eligible participants
include all Company employees who have reached age 21 and have completed
three months of service with the Company. Employees may elect to contribute
a portion of their base compensation to the Plan. The Company may make
matching contributions on behalf of the participants based on actual
participant contributions. Employer contributions are discretionary. The
Company made contributions to the plan of $7,734, $4,643, and $5,010 for
1997, 1996, and 1995, respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain automobiles under noncancelable
operating leases. The following is a schedule of future minimum lease
payments under noncancelable operating leases with initial or remaining
lease terms in excess of one year as of December 31, 1997:
Years ending December 31,
1998 $ 267,445
1999 263,959
2000 261,040
2001 249,830
2002 255,580
---------------
Total future minimum lease payments $ 1,297,854
===============
Rental expense under operating leases was $201,057, $101,524, and $102,120
for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company is involved in various claims and legal actions in the ordinary
course of business. Management believes the ultimate disposition of these
matters will not have a material effect on the financial statements.
(Continued)
F-23
60
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(a) Costs Incurred in Oil and Gas Property Acquisition, Exploration and
Development Activities
Years ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
Property acquisition costs:
Proved $5,640,955 -- --
Unproved 224,650 569,906 144,118
Exploration costs 1,340,081 92,287 311,072
Development costs 2,612,224 1,614,881 241,839
The proved property acquisition costs for 1997 includes the properties
acquired from Lomak and Xplor.
(b) Results of Operations for Oil and Gas Producing Properties
Years ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
Oil and gas revenues $ 2,476,040 543,233 798,233
Production expense (963,822) (286,030) (479,950)
Exploration expenses, including
dry holes (504,983) (116,905) (532,222)
Impairment of oil and gas properties (1,051,617) (981,178) --
Depreciation, depletion
and amortization (1,078,942) (76,286) (122,659)
----------- ----------- -----------
Operating profit (loss) (1,123,324) (917,166) (336,598)
Income tax expense -- -- --
----------- ----------- -----------
Results of operations from
producing activities $(1,123,324) (917,166) (336,598)
=========== =========== ===========
(Continued)
F-24
61
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED), CONTINUED
(c) Reserve Quantity Information
The following table presents the Company's estimate of its proved oil
and gas reserves, all of which are located in the United States. The
Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available. The
estimates have been prepared by independent petroleum reservoir
engineers, in conjunction with the Company's internal petroleum
reservoir engineers.
Years ended December 31,
------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Oil Gas Oil Gas Oil Gas
(mbbl) (mmcf) (mbbl) (mmcf) (mbbl) (mmcf)
------ ------ ------ ------ ------ ------
PROVED DEVELOPED AND
UNDEVELOPED RESERVES:
Beginning of the year 225 1,460 446 2,326 259 3,874
Revision of previous
estimates (9) (159) (198) (797) 221 (1,372)
Extensions, discoveries and
additions 251 1,838 -- -- -- --
Purchases 591 3,762 -- -- -- --
Production (81) (410) (23) (69) (34) (176)
------ ------ ------ ------ ------ ------
End of year 977 6,491 225 1,460 446 2,326
====== ====== ====== ====== ====== ======
PROVED DEVELOPED RESERVES:
Beginning of the year 107 523 125 356 73 500
====== ====== ====== ====== ====== ======
End of the year 634 5,337 107 523 125 365
====== ====== ====== ====== ====== ======
(d) Standardized Measure of Discounted Future Net Cash Flows
The Company's standardized measures of discounted future net cash
flows and changes therein as of December 31, 1997, 1996 and 1995 are
provided based on present values of future net revenues from proved
oil and gas reserves estimated by independent petroleum engineers in
conjunction with the Company's internal petroleum reservoir engineers
in accordance with guidelines established by the Securities and
Exchange Commission.
(Continued)
F-25
62
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED), CONTINUED
These estimates were computed by applying appropriate current oil and
natural gas prices to estimated future production of proved oil and gas
reserves over the economic lives of the reserves and assuming
continuation of existing economic conditions. Year ended 1997
calculations were made utilizing average prices for oil and natural gas
that existed at December 31, 1997 of $17.56 per barrel and $2.49 per Mcf,
respectively. Income taxes are computed by applying the statutory federal
income tax rate to the net cash inflows relating to proved oil and gas
reserves less the tax bases of the properties involved and giving effect
to net operating loss carryforwards, tax credits and allowances relating
to such properties. The reserve volumes provided by the independent
petroleum engineers are estimates only and should not be construed as
exact quantities. These reserves may or may not be recovered and may
increase or decrease as result of future operations of the Company and
changes in market conditions.
Years ended December 31,
(in thousands)
1997 1996 1995
-------- -------- --------
Future cash inflow $ 33,097 7,955 12,535
Future development costs (2,840) (889) (1,764)
Future production costs (11,421) (2,481) (3,537)
-------- -------- --------
Future net cash flows before
income taxes 18,836 4,585 7,234
10 % annual discount (7,439) (1,633) (2,898)
Discounted income taxes * * *
-------- -------- --------
Standardized measure of
discounted future net
cash flows $ 11,397 2,952 4,336
======== ======== ========
(*) No income tax expense has been reflected as the operations were
conducted by Venus Oil Company, the New Venus' predecessor which is an S
Corporation, and the Company had operating loss carryforwards from oil and
gas operations and sufficient tax basis in oil and gas properties to offset
the future net cash flows before income taxes.
(Continued)
F-26
63
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED), CONTINUED
(e) Principal Sources of Changes in the Standardized Measure of Discounted
Future Net Cash Flows
Years Ended December 31,
(In thousands)
1997 1996 1995
-------- -------- --------
Standardized measure of discounted
future net cash flows, beginning
of year $ 2,952 4,336 5,105
Revisions of previous quantity estimates (649) (3,937) (1)
Net changes in prices and production costs (800) 589 181
Changes in estimated future development costs 314 208 691
Development costs incurred during period that
reduced future development costs 494 1,200 132
Purchases 6,115 -- --
Extensions or discoveries 4,188 -- --
Sales of oil and gas produced during period,
net of production costs (1,512) (257) (318)
Accretion of discount 295 434 511
Other (changes in production rates, timing
and other) -- 379 (1,965)
-------- -------- --------
Standardized measure of discounted
future net cash flows, end of year $ 11,397 2,952 4,336
======== ======== ========
(Continued)
F-27
64
VENUS EXPLORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 (in thousands, except
per share data) are as follows:
First Second Third Fourth
quarter quarter quarter quarter Total
-------- -------- -------- -------- --------
1997
Oil and gas revenues $ 135 624 1,174 543 2,476
Operating profit (loss) (1,092) (556) (431) (1,968) (4,047)
Net income (loss) (1,121) (579) (456) (2,012) (4,168)
Earnings (loss) per share -
basic and diluted (0.34) (0.09) (0.05) (0.21) (0.57)
1996
Oil and gas revenues 159 160 110 114 543
Operating profit (loss) (227) (182) (523) (1,360) (2,292)
Net income (loss) (238) 80 (504) (1,345) (2,007)
Earnings (loss) per share -
basic and diluted (0.07) 0.02 (0.15) (.40) (0.60)
The fourth quarters of 1997 and 1996 include adjustments to reflect the
impairment of oil and gas properties of approximately $620,000 and
$981,000, respectively. Also included in the fourth quarter of 1997 is an
adjustment of approximately $425,000 to record reversals of oil and gas
revenues which had been estimated through the third quarter principally
related to the properties from the Acquisition. Quarterly information
presented above has been restated from the applicable 10-Q's to (a) conform
with presentations utilized in the 1997 year end financial statements
included herein and (b) to present basic and diluted earnings per share in
conformity with FAS No. 128 including the exclusion of the convertible
redeemable preference shares from basic earnings per share for the period
prior to their conversion to common shares. The sum of the quarterly
earnings per share will not necessarily equal earnings per share for the
entire year.
(14) Supplemental Disclosure of Cash Flow Information
The Company paid $203,213, $10,331, and $27,401 for interest in 1997, 1996
and 1995, respectively. The Company assigned overriding royalty interests
to a lender totaling $88,718 and $57,500 for 1997 and 1996, respectively.
In 1997 the Company issued 4,074,342 shares of common stock to acquire the
assets and liabilities of Xplor and Lomak totaling $8,504,315. In
connection with the Acquisition, the convertible redeemable preference
shares outstanding at December 31, 1996 were converted to 2,041,674 common
shares.
F-28
65
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
EX 3.1
EX 3.2
EX 4.1
EX 4.2
EX 9
EX 10.10
EX 10.11
EX 21
EX 23.1
EX 23.2
EX 27