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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14334
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Venus Exploration, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3299127
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209
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(Address of principal executive offices) (Zip Code)
(210) 930-4900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 23, 1998
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Common Stock $.01 par value 9,871,325 shares
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
September 30, 1998 and December 31, 1997
(b) Consolidated Statements of Operations for 4
the three-month periods ended September 30,
1998 and 1997
(c) Consolidated Statements of Operations for 5
the nine-month periods ended September 30, 1998
and 1997
(d) Consolidated Statements of Cash Flows 6
for the nine-month periods ended
September 30, 1998 and 1997
(e) Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 18
Market Risk
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities 18
Item 5. - Other information 18
Item 6. - Exhibits and Reports on Form 8-K 19
Signatures 20
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
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(UNAUDITED)
(In thousands)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 203 $ 682
Trade accounts receivable and other 835 2,374
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TOTAL CURRENT ASSETS 1,038 3,056
OIL AND GAS PROPERTIES AND EQUIPMENT,
net(successful efforts method), at cost 8,567 9,101
OTHER PROPERTY AND EQUIPMENT, net, at cost 265 274
DEFERRED FINANCING COSTS ,
at cost less accumulated amortization 340 377
OTHER ASSETS, at cost less accumulated amortization 123 123
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TOTAL ASSETS $ 10,333 $ 12,931
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 1,026 $ 3,080
Advances from interest owners 26 18
Other liabilities 86 227
Current maturities of long-term debt, including
long-term debt reclassified as current 5,130 500
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TOTAL CURRENT LIABILITIES 6,268 3,825
LONG-TERM DEBT 1,619 1,505
OTHER LONG-TERM LIABILITIES 24 27
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TOTAL LIABILITIES 7,911 5,357
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SHAREHOLDERS' EQUITY
Preferred stock, par value of $.01;
5,000,000 shares authorized; none issued
and outstanding as of September 30, 1998
and December 31, 1997, respectively -- --
Common stock, par value of $.01;
30,000,000 shares authorized;
9,865,635 and 9,736,815
shares issued and outstanding as of
September 30, 1998 and December 31, 1997,
respectively 98 97
Additional paid-in capital 15,435 15,010
Retained earnings (deficit) (12,839) (7,533)
Unearned compensation - restricted stock (272) --
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TOTAL SHAREHOLDERS' EQUITY 2,422 7,574
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,333 $ 12,931
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
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1998 1997
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(In thousands, except per share data)
OIL AND GAS REVENUES $ 659 $ 1,174
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EXPENSES
Production expense 311 326
Exploration expense, including dry holes 222 182
Depreciation, depletion and amortization 229 379
General and administrative 814 718
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Total expenses 1,576 1,605
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Operating profit (loss) (917) (431)
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OTHER INCOME (EXPENSE)
Interest expense (184) (60)
Gain (loss) on sale of assets (5) 2
Interest and other income 8 33
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(181) (25)
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Net earnings (loss) $ (1,098) $ (456)
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Earnings (loss) per share,
Basic and diluted $ (.11) $ (.05)
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Common shares and equivalents outstanding,
Basic and diluted 9,860 9,724
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30,
------------------------------------
1998 1997
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(In thousands, except per share data)
OIL AND GAS REVENUES $ 2,323 $ 1,934
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EXPENSES
Production expense 1,148 553
Exploration expense, including dry holes 1,037 392
Impairment of oil and gas properties 1,915 432
Depreciation, depletion and amortization 851 587
General and administrative 2,302 2,049
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Total expenses 7,253 4,013
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Operating profit (loss) (4,930) (2,079)
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OTHER INCOME (EXPENSE)
Interest expense (411) (134)
Gain on sale of assets 5 1
Interest and other income 30 56
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(376) (77)
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Net earnings (loss) $ (5,306) $ (2,156)
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Earnings (loss) per share,
Basic and diluted $ (.54) $ (.33)
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Common shares and equivalents outstanding,
Basic and diluted 9,827 6,439
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
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1998 1997
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(In thousands)
OPERATING ACTIVITIES
Net earnings (loss) $ (5,306) $ (2,156)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization of oil
and gas properties 851 587
Other depreciation, depletion and amortization 167 169
Impairments, abandoned leases and dry hole costs 2,440 485
Expenses compensated with restricted and unrestricted
stock and stock options 133 252
Gain on sale property and equipment 5 1
Change in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable and other 1,539 (1,904)
Increase (decrease) in trade accounts payable (2,054) 894
Increase in advances from interest owners 8 649
Increase (decrease) in other liabilities (141) 335
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Net cash used in operating activities (2,358) (688)
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INVESTING ACTIVITIES
Capital expenditures (2,886) (2,260)
Cash acquired in business combination -- 2,921
Proceeds from sales of property and equipment 51 37
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Net cash provided by (used in) investing activities (2,835) 698
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FINANCING ACTIVITIES
Proceeds from issuance of long-term debt
and revolving credit agreement 4,812 1,460
Proceeds from options exercised 21 61
Principal payments on long-term debt (68) (197)
Deferred financing costs (51) (12)
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Net cash provided by financing activities 4,714 1,312
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INCREASE (DECREASE) IN CASH AND EQUIVALENTS (479) 1,322
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 682 1,304
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CASH AND EQUIVALENTS AT END OF PERIOD $ 203 $ 2,626
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three and Nine Months Ended September 30, 1998 and 1997
1. Organization and Business Combination
Venus Exploration, Inc. (the "Company") is primarily engaged in the business
of exploring for, acquiring, developing and operating onshore oil and gas
properties in the United States. The Company's major areas of activity are
Texas, Oklahoma, Utah and West Virginia.
2. Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated financial statements presented
should be read in connection with the 1997 consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997 (the "Form 10-K").
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of September 30, 1998 and the results of its operations for the three
and nine months ended September 30, 1998 and 1997.
The results of operations for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year.
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the current presentation.
3. Summary of Significant Accounting Policies
For a description of the accounting policies followed by the Company, refer
to the notes to the 1997 consolidated financial statements included in the
Company's report on Form 10-K.
4. 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 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.
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8
Earnings (loss) per share for the three month periods ended September 30,
1998 and 1997 are calculated based on 9,859,815 and 9,724,424 weighted average
shares outstanding, respectively, and the nine month periods ended September 30,
1998 and 1997 are calculated based on 9,826,790 and 6,439,170 shares
outstanding, respectively.
The common stock issued in 1996 by Venus Energy PLC to capitalize Venus
Exploration, Inc. has been treated as outstanding to May 21, 1997 for purposes
of calculating earnings per share.
5. Long-Term Debt
Long-term debt consists of the following:
September 30, December 31,
1998 1997
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(In thousands)
Revolving credit due on June 30, 2000 $5,130* $ 500*
Subsidiary term loan due October 8, 2005 1,619 1,505
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$6,749 $2,005
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*Classified as a current liability.
Revolving Credit
In May 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 a
borrowing base determined every six months by the bank based on the Company's
oil and gas reserves that secure the loan. On August 19, 1998, the credit
facility was amended resulting in the interest on related borrowings becoming
the bank's prime lending rate plus 1%.
A commitment fee of 3/8 of one percent of the undrawn balance of the
borrowing base 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. As of September 30, 1998, the borrowing base was $5,240,000, and the
amount drawn by the Company was $5,130,000 resulting in an unused borrowing base
of $110,000.
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. On May 19, 1998, the credit
facility was amended whereby the tangible net worth requirement was reduced from
$7,500,000 to $5,250,000. At September 30, 1998, the Company was not in
compliance with the tangible net worth requirement. The bank has agreed to waive
the requirement until January 15, 1999. In addition, the bank has agreed to
increase the Company's borrowing base by $300,000 to $5,540,000. The Company
believes that the increase in the borrowing base will be sufficient to provide
operating cash flow for the near term. For the longer term, the Company
is working on a number of alternatives that it believes will address its future
liquidity and financing needs. However, because as of November 19, 1998, the
Company has not completed a transaction which would have put it in compliance
with the tangible net worth requirement after January 15, 1999, the outstanding
loan amount has been classified as a current liability. For a more detailed
discussion see the Liquidity section of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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Subsidiary Term Loan
In October 1996, Venus Development, Inc. ("Development"), a wholly-owned
subsidiary, entered into a term loan and security agreement ("agreement") with a
lender to finance the acquisition and development of oil and gas properties, The
"Development Facility." Borrowings are subject to limitations based on the value
of the proved reserves of the properties. The borrowings are to be repaid over a
period not to exceed five years from the date of closing of the agreement. The
lenders only recourse is against Development and its 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. Payments increase to 100 percent of net revenue
if Development is not in compliance with certain financial requirements.
The agreement requires, among other matters, maintenance of a minimum working
capital amount and collateral value to loan value coverage ratios. Development
was not in compliance with these requirements at September 30, 1998, nor was it
in compliance as of November 19, 1998. Due to this non-compliance, the interest
rate on outstanding debt to Development's lender has increased from 9.5% to
11.5% per annum effective June 1, 1998.
Under the terms of the agreement, the loan cannot be prepaid prior to October
1999 without the lender's approval. On November 12, 1998, the Company and lender
entered into an agreement whereby the Company acquires lender's rights and
interests in Development, Development's Term Loan, and Development's oil and gas
properties in exchange for 1,100,000 shares of the Company's common stock. The
acquisition of lender's interest includes the overriding royalties that the
lender had originally acquired pursuant to the agreement and certain warrants
held by the lender to acquire Venus Exploration, Inc. shares held by certain of
its shareholders. The overriding royalties, the warrants, and other matters
related to the indebtedness are discussed in more detail in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997. The Company and
the lender signed a commitment letter on November 19, 1998 and expect to close
the transaction during the fourth quarter of 1998. Although this is a non-cash
transaction, the Company expects to record in the fourth quarter of 1998 a loss
from the early extinguishment of debt as a result of writing off deferred
financing costs related to this loan.
6. Shareholders' Equity
Effective March 1, 1998 the Company awarded, under its existing incentive
plan, qualified stock options and restricted stock grants that vest over a
three-year period. The qualified stock options were issued to all employees. The
restricted stock grants (100,000 shares) were issued at no charge to two key
technical employees who are not officers of the Company. The Company is
recognizing compensation expense for the value of the restricted stock grants
over the vesting period.
7. Accounting for Income Taxes
No provision for income taxes has been recorded for the periods ended
September 30, 1998 and 1997 due to the losses recorded by the Company.
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8. Hedging Transaction
The Company uses price swaps for production on properties pledged under
Development's term loan agreement discussed in Note 5 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 records gains and losses on these hedging instruments as revenues
when the related natural gas or oil production is recorded as revenue. 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. The commodity financial instruments not only
reduce the Company's exposure to declines in the market price of natural gas and
crude oil but also limit the Company's gain from increases in the market price
of natural gas and crude oil.
On December 2, 1996, Development entered into a financial swap, as required
under the term loan agreement discussed in Note 5 above, whereby the
counterparty agrees to pay Development 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 thousand British thermal units
("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, Development is
required to remit the difference to the counterparty. As of September 30, 1998,
quantities hedged are 62,304 mmbtus of natural gas and 21,825 barrels of oil. As
of September 30, 1998, the estimated fair value of Development's swap positions
was a net receivable of approximately $15,000 based upon an estimate of what
Development would receive if the contracts were liquidated. This financial swap
agreement expires December 31, 2001.
9. Commitments and Contingencies
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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
As discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, the consolidated statement of operations for the three
and nine month periods ended September 30, 1997 reflects the operations of New
Venus only for the periods prior to May 21, 1997 and of the combined entity for
the period after May 21, 1997, whereas the consolidated statement of operations
for the same period ended September 30, 1998 reflects the operations of the
combined entities subsequent to the combination date. Variances are addressed in
the following paragraphs by significant operating captions.
Revenues and expenses were higher during 1998 due to the inclusion of the
combined entities subsequent to May 21, 1997 and wells completed during the last
12 months. As reflected in the following table, oil and gas volumes increased
for the nine month period ended September 30, 1998 compared with the same period
in 1997 while average oil prices decreased substantially in 1998.
1998 1997
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Sales Average Sales Average
Volume Prices Volume Prices
------ ------ ------ ------
Nine Months Ended September 30,
Gas (Mcf) 426,246 $ 2.20 417,405 $ 2.12
Oil (Bbls) 98,169 $ 13.77 68,352 $ 18.37
Three Months Ended September 30,
Gas (Mcf) 140,693 $ 2.12 278,831 $ 1.96
Oil (Bbls) 30,764 $ 11.51 45,053 $ 17.95
The first nine months of 1998 were impacted by lower oil prices because most
of the Company's significant increase in volumes were subject to current market
prices which averaged approximately $13.77 per barrel, or 25%, lower than market
prices for the first nine months of 1997. The average market price for natural
gas increased by approximately $.08 per thousand cubic feet, or 4%. The impact
on revenue from the oil price decline during the first nine months of 1998 was a
decrease of approximately $427,000. The revenues from certain volumes (both oil
and gas) reported during the three and nine month periods ended September 30,
1997, which had been estimated through the third quarter principally related to
the properties from the acquisition, were subsequently reversed in the fourth
quarter of 1997 (see Note 13 of Notes to Consolidated Financial Statements
included in the Company's 1997 Annual Report on Form 10-K).
Three Months Ended September 30, 1998 and 1997
The Company's net loss of $1,098,000 for the quarter ended September 30, 1998
compares with last year's net loss of $456,000 for the same period. This
$642,000 variance is primarily attributable to a decrease in reported revenue
and increases in exploration and dry hole expenses and general administrative
expenses.
For the third quarter of 1998, oil and gas revenues decreased by $515,000
primarily as a result of lower oil prices and estimated 1997 revenues related to
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the properties from the acquisition which were subsequently reversed in the
fourth quarter of 1997. Net of the reversal, on an equivalent unit basis,
production volume increased by 10% in 1998 over 1997. Oil and gas sales for the
three months ended September 30, 1998 include a $12,000 gain on hedging
instruments.
Production expenses of $311,000 for the quarter ended September 30, 1998,
decreased by $15,000 as a result of lower reported production volumes. Direct
operating expenses relative to oil and gas revenues increased to 47% compared
with 28% for the quarter ended September 30, 1997 primarily as a result of lower
product prices. This was partially offset by deliveries from the nine new wells
which have higher production levels and lower operating and maintenance expense
on an equivalent unit basis as compared with the Company's producing wells in
1997.
Exploration and dry hole expense of $222,000 for the three months ended
September 30, 1998 was an increase of $40,000 from the three months ended
September 30, 1997. This increase was primarily attributable to an increase in
exploration activities.
Depreciation, depletion and amortization expense for the three months ended
September 30, 1998 was $229,000, a decrease of $150,000 from the same period in
1997 as the result of lower reported volumes.
For the three month periods ended September 30, 1998 and 1997 the Company
recognized $48,000 and $151,000, respectively, of compensation expenses related
to restricted and unrestricted stock and stock options.
Nine Months Ended September 30, 1998 and 1997
The Company's net loss of $5,306,000 for the nine months ended September 30,
1998 compares with last year's net loss of $2,156,000 for the same period. This
$3,150,000 variance is primarily attributable to increases in production
expenses, exploration and dry hole expenses, and impairments due to price
decreases.
For the first nine months of 1998, oil and gas revenues increased by $389,000
primarily as a result of nine producing wells completed and brought on stream
after September 30, 1997 and the additional revenue recorded from the properties
acquired in the business combination of May 21, 1997. Oil and gas sales for the
nine months ended September 30, 1998 include a $26,000 gain on hedging
instruments.
Production expenses of $1,148,000 for the nine months ended September 30,
1998, increased by $595,000 as a result of nine producing wells completed and
brought on stream during the past twelve months and the operating expenses
associated with the wells acquired in the business combination. Direct operating
expenses relative to oil and gas revenues increased to 49% compared with 29% for
the nine months ended September 30, 1997 primarily as a result of lower product
prices. Also contributing to this increase is the relatively higher operating
cost associated with mature, non-operated properties acquired in the business
combination. This was partially offset by deliveries from the nine new wells
which have higher production levels and lower operating and maintenance expense
on an equivalent unit basis as compared with the Company's producing wells in
1997.
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Exploration and dry hole expense of $1,037,000 for the nine months ended
September 30, 1998 was an increase of $645,000 from the nine months ended
September 30, 1997. This increase was primarily attributable to an increase in
dry hole costs and exploration activities.
Impairment of oil and gas properties increased from $432,000 for the first
nine months of 1997 to $1,915,000 for the same period of 1998. The Company
recognized increased impairments in 1998 due primarily to the significant
decrease in oil prices. In addition, the Company experienced a downward revision
in reserves on one of its fields based on the results of a well completed during
the period.
Depreciation, depletion and amortization expense for the nine months ended
September 30, 1998 was $851,000, an increase of $264,000 over the same period in
1997 as the result of wells acquired in the business combination and new wells
completed over the past 12 months.
For the nine month periods ended September 30, 1998 and 1997 the Company
recognized $133,000 and $252,000, respectively, of compensation expenses related
to restricted and unrestricted stock and stock options.
Exploration and Development Activities
In the Southern Permian Basin area of West Texas, the Company is currently
finalizing negotiations to begin shooting an extensive 3-D seismic survey over
an 85 square mile area. The investigation of the area, over the last few years,
has resulted in the identification of at least 16 multi-target prospects and
leads. The 3-D data will be used to optimize drilling locations, lower the
overall risk of the project and identify additional previously unidentified
prospects.
A 3-D seismic survey has commenced in the Yegua Constitution field in
Jefferson County, Texas for purposes of optimally developing that field. The
field redevelopment project offers significant potential to Venus for new Yegua
reserves over an area of up to 3,000 acres. The first well drilled by Venus in
the field, the No. 1 Westbury Farms tested at a rate of 2,031 Mcf of gas per
day and 355 barrels of oil per day. The well was turned to sales on August 27,
1998 after being shut-in for four months while waiting for a pipeline. The well
is currently producing 750 Mcf of gas per day and 100 barrels of condensate per
day. A recent bottom-hole pressure build-up test recorded original reservoir
pressure, good permeability but indicates a very high degree of skin damage.
Remedial workover operations are expected to greatly improve the production
rate.
In the Dew Field in Freestone County, Texas, the Company owns a 25% working
interest in a 704 acre unit in the Bossier Sand play. The #2 H.E. White,
operated by Anadarko was turned to sales on September 10, 1998. The well is
currently producing at a rate of 1,500 Mcf of gas per day. Anadarko has
commenced drilling the H.E. White #3 the well is expected to reach total depth
of 13,000 feet before the end of the year.
The Company's exploration and development activities are subject to the
availability of capital which is discussed below under Liquidity and Capital
Resources.
Liquidity and Capital Resources
(a) Liquidity
At September 30, 1998, the Company had a working capital deficit of
$5,230,000 compared with a deficit of $769,000 at December 31, 1997, a decrease
in working capital of $4,461,000. This decrease is primarily attributable to the
increase in the classification of long-term debt as current ($4,630,000), a
decrease in cash and equivalents, and a decrease in accounts receivable
partially offset by a decrease in accounts payable.
Net cash used in operating activities during the nine months ended September
30, 1998, was $2,358,000, whereas $688,000 was used in operating activities for
the same nine month period in 1997. During the first nine months of 1998, the
Company realized a net loss of $5,306,000. This compares with a net loss of
$2,156,000 for the first nine months of 1997. These losses include non-cash
expenses (impairments, depreciation, depletion and amortization, and expenses
compensated with restricted and unrestricted stock and stock options) totaling
$3,066,000 for 1998 and $1,423,000 for 1997. Accounts receivable and other
current assets decreased in the first nine months of 1998 by $1,539,000
primarily due to reduced oil and gas sales.
During the first nine months of 1998 the Company incurred capital
expenditures on oil and gas properties of $2,822,000 and $64,000 on other fixed
assets. During the same period in 1997, the Company had capital expenditures of
$2,260,000.
For the nine months ended September 30, 1998, $4,714,000 was provided by
financing activities consisting of $4,812,000 of proceeds from long-term debt
issued and $21,000 from stock options exercised less $119,000 of repayments and
deferred financing costs. This compares with $1,312,000 provided by financing
activities for the nine month period ended September 30, 1997, from exercised
options of $61,000, and the issuance of $1,460,000 in long-term debt offset by
repayments and deferred financing costs of $209,000.
On September 30, 1998, the Company's tangible net worth was below that
required under the revolving credit facility. The bank has agreed to waive the
requirement until January 15, 1999. In addition, the bank has agreed to
increase the Company's borrowing base by $300,000 to $5,540,000. The Company
believes that the increase in the borrowing base will be sufficient to provide
operating cash flow for the near term. For the longer term, the Company is
working on a number of alternatives that it believes will address its future
liquidity and financing needs. However, because as of November 19, 1998, the
Company has not completed a transaction which would have put it in compliance
with the tangible net worth requirement after January 15, 1999, the outstanding
loan amount has been classified as a current liability. Additionally, the
exchange of Development's debt ($1,619,000 discussed below) for shares of the
Company's common stock will help to address the short-term needs by providing
additional borrowing base for the line of credit currently in place and save
approximately $23,000 per month in interest cost. Another step taken recently is
the closing of the Company's Houston office in November 1998. This entailed
cutting two positions, and three positions were cut at its headquarters in San
Antonio, a total of a 21% reduction in work force.
The capital expenditure budget is in the process of being substantially
reduced, and the Company plans to sell $2 million to $4 million worth of
non-core oil and gas properties, with the proceeds going to reduce debt.
Depending on the level of success in selling these properties, further cost
cutting may follow.
The Company is also actively pursuing strategic acquisitions or mergers with
other industry companies, to increase profitability through economics of scale.
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Although management considers it unlikely, if none of the alternatives under
consideration develop into successful solutions to its future liquidity and
financing needs, the Company may have to pursue additional cuts to its general
and administrative expense budget. This would affect the number of projects in
which the Company could be involved. Additional rounds of liquidation of assets,
including core oil and gas assets, are other alternatives. Implementation of
either the budget cuts or the partial liquidation of assets would require a
re-evaluation of the Company's business plan. Such actions could lead to
impairment of assets and/or losses on dispositions. In addition, if the Company
is unsuccessful by January 15, 1999, the bank, among other matters, could
exercise its rights under the agreement to begin directly collecting revenues
from the sales of production.
As discussed in note 5 of Notes to Consolidated Financial Statements,
Development was not in compliance with certain financial requirements of the
Subsidiary Term Loan Agreement as of September 30, 1998. On November 12, 1998,
the Company and lender entered into an agreement whereby the Company acquires
lender's rights and interests in Development, Development's Term Loan, and
Development's oil and gas properties in exchange for 1,100,000 shares of the
Company's common stock. The acquisition of lender's interest includes the
overriding royalties that the lender had originally acquired pursuant to the
agreement and certain warrants held by the lender to acquire Venus Exploration,
Inc. shares held by certain of its shareholders. The overriding royalties, the
warrants, and other matters related to the indebtedness are discussed in more
detail in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997. The Company and the lender signed a commitment letter on
November 19, 1998 and expect to close the transaction during the fourth quarter
of 1998. Although this is a non-cash transaction, the Company expects to record
in the fourth quarter of 1998 a loss from the early extinguishment of debt as a
result of writing off deferred financing costs related to this loan.
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(b) Capital Resources
Capital expenditures for the remainder of 1998 are budgeted at approximately
$500,000; however, the current liquidity situation may affect that budget. The
Company's capital expenditure budget is continually reviewed and revised as
necessary, based on perceived opportunities and business conditions and capital
availability. Pursuant to a November 20, 1998 amendment to the existing
revolving credit facility, the Company currently has a borrowing base of
$5,540,000.
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Recent Accounting Pronouncements
On January 1, 1998, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("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. Adoption of SFAS No. 130 did not have an
impact on the Company's financial presentation of income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards of accounting
and reporting for derivative instruments and for hedging activities. It requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and measures these instruments at fair value.
This statement is effective for financial statements for periods beginning after
June 15, 1999. The Company believes that SFAS No. 133 will not have a material
impact on its financial statements and disclosures.
Information Regarding Forward Looking Statements
The information contained in this Form 10-Q includes certain forward-looking
statements. When used in this document, such words as "expect", "believes",
"offers", "potential", and similar expressions are intended to identify
forward-looking statements. Although the Company believes that its expectations
are based on reasonable assumptions, it is important to note that actual results
could differ materially from those projected by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, the
timing and extent of changes in commodity prices for oil and gas, the need to
develop and replace reserves, environmental risk, the substantial capital
expenditures required to fund its operations, the uncertainties related to the
year 2000 effect discussed below, drilling and operating risks, risks related to
exploration and development, uncertainties about the estimates of reserves,
competition, government regulation and the ability of the Company to implement
its business strategy and to raise the necessary capital for such
implementation. See Item 1 "Business - Forward Looking Statements" and "- Risk
Factors" in the Form 10-K for additional information about the Company's risks.
Impact of Year 2000
1. State of Readiness
The Company has been collecting data on possible problems that may
arise from the potential inability of computers and other date-sensitive
equipment to recognize a date in the year 2000 and beyond (the "Y2K"
effect). The Company has conducted an internal survey of the information
technology systems that are used in its principal office. That survey
indicates that the major internal operations of the Company will not be
directly affected by the Y2K events. Of particular importance to the Company
are the computer workstations in the geological/geophysical department.
Based on information from the software developer, the Company believes that
the programs used in that area are Y2K-ready. The Company has contracted
with a
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computer-consulting firm to assess the computers and the computer network
used within the Company's principal office. Based on that report all the
Company's computers and software should be Y2K compliant during the normal
course of new equipment and software purchases during the first quarter of
1999. With regard to non-information technology systems (which include
volume measurement devices on Company operated wells), the Company intends
to complete a survey of those systems during the fourth quarter of 1998,
and after a review of that survey, to decide on a course of action by
year-end.
Third parties with which the Company has material relationships include
its out-sourced accounting, bank, purchasers of oil and gas production,
working interest owners who have interests in properties in which the
Company desires to drill wells, operators of wells in which the Company owns
a non-operated interest, and suppliers of services and equipment critical to
the Company's business. The Company plans to survey those parties about
their Y2K compliance, and believes these surveys will be completed during
the first quarter of 1999.
2. Cost to Address Y2K Issues
The Company has not needed to spend a significant amount on efforts to
address Y2K issues as of the date of this report on Form 10-Q because
efforts have been limited largely to assessment of internal systems, which
have been determined to by Y2K ready. By the end of the fourth quarter of
1998, the Company intends to have a more detailed analysis of expenditures,
if any, which may be required.
3. Y2K Risks to Company
The worst case scenario that is most reasonably likely is if third
parties were delayed in paying or advancing funds to the Company in its
efforts to drill wells. Another likely worst case scenario is if a supplier
of drilling materials is late in supplying necessary materials for a planned
well, or if a purchaser of the Company's product is not able to take
delivery because of pipeline or valve problems related to the Y2K effect. In
such cases, leasehold interests could be lost due to expiration of the
leasehold estate. Given the inherent lack of knowledge of value of
unexplored or undeveloped mineral estates, the Company is unable to
determine in advance what the magnitude of the effect of Y2K issues could
be. In addition, another possible scenario is that banks could not process
the Company's checks, loans or other transactions.
4. Company's Contingency Plan
The Company intends to prepare an appropriate contingency plan during
the first and second quarters of 1999 when the surveys have been completed
and public disclosures of principal purchasers and vendors have been
analyzed. The Company intends to finalize its plan during the second quarter
of 1999.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Excluded as provided by Item 305(e) of Regulation S-K.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
Effective March 1, 1998, the Compensation Committee of the Board of
Directors of the Company approved the issuance of 100,000 shares of the
Company's Common Stock and 202,500 options to acquire shares of the
Company's Common Stock. Those securities were issued pursuant to the
Company's 1997 Incentive Plan that was previously approved by the Company's
shareholders. The shares of restricted Common Stock were granted to two
senior non-executive employees of the Company. The options were granted to
substantially all of the Company's officers, employees and consultants.
Warrants issued in 1995 were excercised on August 19, 1998, and 10,000
shares of common stock were issued at a price of $2.125 per share.
The Company considers these issuances of securities to be private
placements and exempt from the registration requirements of the Securities
Act of 1933 pursuant to Section 4(2) of the Act. However, on August 11,
1998, the Company filed an S-8 registration statement for securities to be
issued under the 1997 Incentive plan.
All the securities issued to date to employees and consultants under
the 1997 Incentive Plan are subject to a 3-year vesting period and the
continued employment with, or services to, the Company. A third of the
securities issued to each of the recipients vests at the end of each of the
three years following the effective date of issuance. The exercise price for
130,500 of the options is $3.375 and were issued with a term of ten years.
The remaining 72,000 options were granted to E.L. Ames, Jr., John Y. Ames,
and Eugene L. Ames, III with an exercise price of $3.75 and a term of five
years.
Item 5. Other Information
(a) On September 15, 1998, the amended Ames Voting Trust Agreement was
terminated. That agreement arose out of a similar agreement dated March 23,
1997, and gave the right to vote all the shares subject to the agreement to
E.L. Ames, Jr. The owners subject to the agreement were Mr. Ames, Jr., the
members of his immediate family, certain of his assignees, Mr. Patrick A.
Garcia, and Ms. Gloria Barrett, a former employee of the Company. The
purpose for the agreement had lapsed, and therefore, it was terminated.
However, its termination does not materially affect the liquidity of the
shares subject to the agreement since five of the largest shareholders are
executive officers of the Company or their spouses and since the shares
remain subject to the Stockholder Agreement dated May 21, 1997, among the
Ames Group, the Lomak Group et al.
(b) On November 12, 1998, James E. Gayle resigned as Executive Vice
President of the Company. He was also an Advisory Director and the former
President and Chief Executive Officer of the Company. As a result of his
departure, the Company's Houston office will be closed.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.12 Second Amendment to Second Amended and Restated Loan Agreement
dated July 8, 1998 by and between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A.
10.13 Third Amendment to Second Amended and Restated Loan Agreement
dated August 18, 1998 by and between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENUS EXPLORATION, INC.
Dated: November 23, 1998 BY: /s/ Eugene L. Ames, Jr.
------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)
Dated: November 23, 1998 BY: /s/ Patrick A. Garcia
----------------------------
Patrick A. Garcia
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------------------------------------------------------
10.12 Second Amendment to Second Amended and Restated Loan
Agreement dated July 8, 1998 by and between Venus
Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
10.13 Third Amendment to Second Amended and Restated Loan
Agreement dated August 18, 1998 by and between Venus
Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
27.1 Financial Data Schedule