FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____to______
Commission file number _____0-14334________
Venus Exploration, Inc. _
(Exact name of registrant as specified in its charter)
Delaware 13-3299127
- ------------------------------- ---------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
1250 N.E. Loop 410, Suite 205, San Antonio, Texas 78209
------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(210) 930-4900
-------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 9 , 2002
- ---------------------------- --------------------------------
Common Stock $0.01 par value 12,448,730
1
VENUS EXPLORATION, INC. AND SUBSIDIARY
INDEX
PAGE
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
September 30, 2002 and December 31, 2001
(b) Consolidated Statements of Operations for 4
the three-month periods ended September 30,
2002 and 2001
(c) Consolidated Statements of Operations for 5
the nine-month periods ended September 30,
2002 and 2001
(d) Consolidated Statements of Cash Flows 6
for the nine-month periods ended
September 30, 2002 and 2001
(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 17
Market Risk
Item 4. - Controls and Procedures 17
PART II. - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K 18
Signatures 18
Exhibits Index 21
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30,
2002 December 31,
(Unaudited) 2001
-------------------- ---------------------
(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 61 $ 431
Trade accounts receivable 497 1,861
Prepaid expenses and other 173 83
---------------- -----------------
Total current assets 731 2,375
Oil and gas properties and equipment, at cost
under the successful efforts method, net 2,053 6,686
Oil and gas properties held for sale 2,299 -
Other property and equipment, net 104 151
Deferred financing costs, at cost less accumulated amortization 102 147
Other assets, at cost less accumulated amortization 16 33
---------------- -----------------
$ 5,305 $ 9,392
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 6,505 $ 8,038
Other liabilities 335 934
Current notes payable 2,000 1,254
---------------- -----------------
Total current liabilities 8,840 10,226
Other long-term liabilities 12 28
---------------- -----------------
Total liabilities 8,852 10,254
Shareholders' equity (deficit):
Preferred stock; par value of $0.01; 5,000,000 shares
authorized; none issued and outstanding
Common stock; par value of $.01; 50,000,000 shares
authorized; 12,475,610 and 12,441,375 shares issued,
and 12,448,730 and 12,414,495 outstanding in 2002 and 125 124
2001, respectively
Additional paid-in capital 18,940 18,815
Accumulated deficit (22,572) (19,761)
Less cost of treasury stock (26,880 shares) (40) (40)
---------------- -----------------
Total shareholders' equity (deficit) (3,547) (862)
Commitments and contingencies
---------------- -----------------
$ 5,305 $ 9,392
================ =================
See accompanying notes to consolidated financial statements.
3
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30
(in thousands except per share data)
------------------------------------------
2002 2001
------------------- -------------------
Oil and gas revenues $ 387 $ 318
--------------- ---------------
Costs of operations:
Production expense 219 202
Exploration expenses, including dry holes 145 195
Depreciation, depletion and amortization 43 68
General and administrative 413 573
--------------- ---------------
Total expenses 820 1,038
--------------- ---------------
Operating loss (433) (720)
--------------- ---------------
Other income (expense):
Interest expense (75) (33)
Gain on sale of assets 4 -
Interest and other income (expense), net 1 34
--------------- ---------------
(70) 1
--------------- ---------------
Loss from continuing operations before income taxes (503) (719)
Income tax expense - -
--------------- ---------------
Loss from continuing operations (503) (719)
Sale of properties:
Income (loss) from discontinued operations (including
net gain on sale of $1 and impairment of $1,434 in 2002) (1,382) 197
--------------- ---------------
Net loss $ (1,885) $ (522)
=============== ===============
Basis and diluted earnings (loss) per share:
(Loss) from continuing operations $ (.04) $ (.06)
Income (loss) from discontinued operations (11) .02
--------------- ---------------
Net loss $ (.15) $ (.04)
=============== ===============
Common shares and equivalents outstanding,
Basic and diluted 12,449 12,383
=============== ===============
See accompanying notes to consolidated financial statements.
4
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30
(in thousands except per share data)
------------------------------------------
2002 2001
------------------- -------------------
Oil and gas revenues $ 1,002 $ 988
--------------- ---------------
Costs of operations:
Production expense 551 634
Impairment of oil and gas properties - 93
Exploration expenses, including dry holes 503 537
Depreciation, depletion and amortization 121 229
General and administrative 1,373 1,563
--------------- ---------------
Total expenses 2,548 3,057
--------------- ---------------
Operating loss (1,546) (2,069)
--------------- ---------------
Other income (expense):
Interest expense (367) (126)
Gain on sale of assets 9 -
Interest and other income (expense), net 6 169
--------------- ---------------
(352) 43
--------------- ---------------
Loss from continuing operations before income taxes (1,898) (2,026)
Income tax expense - -
--------------- ---------------
Loss from continuing operations (1,898) (2,026)
Sale of properties:
Income (loss) from discontinued operations
(including net gain on sale of $316 and
impairment of $1,434 in 2002) (913) 748
--------------- ---------------
Net loss $ (2,811) $ (1,278)
=============== ===============
Basis and diluted earnings (loss) per share:
Income (loss) from continuing operations $ (.15) $ (.16)
Income (loss) from discontinued operations (.07) .06
--------------- ---------------
Net loss $ (.23) $ (.10)
=============== ===============
Common shares and equivalents outstanding,
Basic and diluted 12,448 12,362
=============== ===============
See accompanying notes to consolidated financial statements.
5
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
(in thousands)
---------------------------------------------
2002 2001
-------------------- ---------------------
Operating Activities:
Net earnings (loss) $ (2,811) $ (1,278)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization of oil and gas properties 381 624
Other depreciation and amortization 297 427
Impairment, abandoned leases, and dry hole costs 1,434 93
Gain on sale of property and equipment (325) -
Compensation expense for stock and stock options 25 85
Changes in operating assets and liabilities:
Trade accounts receivable 1,364 (1,179)
Prepaid expenses and other (72) (37)
Trade accounts payable (1,532) 3,165
Other liabilities (599) 13
--------------- -----------------
Net cash (used in) provided by operating activities (1,838) 1,913
--------------- -----------------
Investing Activities:
Capital expenditures (141) (2,972)
Proceeds from sales of property and equipment 986 -
--------------- -----------------
Net cash provided by (used in) investing activities 845 (2,972)
--------------- -----------------
Financing Activities:
Net proceeds from issuance of long-term debt and notes payable 5,390 1,442
Principal payments on long-term debt and notes payable (4,660) (1,134)
Deferred financing costs (106) (173)
--------------- -----------------
Net cash provided by (used in) financing activities 624 135
--------------- -----------------
Increase (decrease) in cash and equivalents (369) (924)
Cash and equivalents, beginning of period 430 1,086
--------------- -----------------
Cash and equivalents, end of period $ 61 $ 162
=============== =================
See accompanying notes to consolidated financial statements.
6
VENUS EXPLORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months and Nine Months Ended September 30, 2002 and 2001
1. Organization
Venus Exploration, Inc. (the "Company") is a Delaware corporation primarily
engaged in the business of exploring for, acquiring, developing and operating
on-shore oil and gas properties in the United States. The Company presently has
oil and gas properties and production in eight states. On October 8, 2002, three
of the Company's trade creditors filed an involuntary bankruptcy petition
against the Company in the United States Bankruptcy Court for the Eastern
District of Texas, Beaumont Division, requesting an order for relief under
Chapter 11 of the U.S. Bankruptcy Code. A hearing to consider the petition has
been scheduled for January 21, 2003. The Company has filed a motion to dismiss
and answer in the case, and is continuing to negotiate with these creditors in
an effort to reach an out of court resolution and dismissal of the bankruptcy.
2. Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated financial statements presented
should be read in connection with the audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of September 30, 2002 and the results of its operations for the three and nine
month periods ended September 30, 2002 and 2001.
The results of operations for the three and nine month periods ended September
30, 2002 are not necessarily indicative of the results to be expected for the
full year.
3. Summary of Significant Accounting Policies
For a description of the accounting policies followed by the Company, refer to
notes 4 and 8 below and to the notes to the 2001 consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.
4. Accounting for Derivative Investments and Hedging Activities
Effective January 1, 2001 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 provides guidance on accounting and financial
reporting for derivative instruments and hedging activities. SFAS No. 133
requires the recognition of all derivatives as either assets or liabilities on
the consolidated balance sheet, and the periodic measurement of those
instruments at fair value. The Company determined that hedge accounting would
not be elected for derivatives existing at January 1, 2001, which consisted of
commodity collar agreements covering at least fifty percent (50%) of its monthly
oil and gas production. Future changes in the fair value of those derivatives
were recorded in income. The adoption of SFAS No. 133 as of January 1, 2001,
resulted in a cumulative-effect-type expense to other comprehensive income of
$334,000 which was recognized as a reduction of oil and gas revenues over the
remaining five month term of the commodity collar agreements. During the second
quarter of 2001, the Company recognized no reduction of oil and gas revenues
relating to the transition adjustment and recorded no other expense related to
the change in the fair value of the commodity collar agreements. On September
28, 2001, the Company entered into a new commodity collar agreement and has not
elected hedge accounting for these derivative instruments. The agreement expired
April 30, 2002 and as of September 30, 2002, there was no value or liability
associated with a commodity collar agreement.
7
5. Earnings (loss) Per Share
Basic net loss per common share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted income (loss) per
share is computed by assuming the issuance of common shares for all dilutive
potential common shares outstanding.
Loss per share for the three months ended September 30, 2002 and 2001 are
calculated based on 12,448,730 and 12,383,466 weighted average shares
outstanding, respectively. Loss per share for the nine months ended September
30, 2002 and 2001 are calculated based on 12,447,727 and 12,361,890 weighted
average shares outstanding, respectively. In the three months and nine months
ended September 30, 2002 and September 30, 2001, the Company reported net
losses; therefore, diluted earnings per share is not presented.
6. Comprehensive Income
The following are the components of comprehensive income (loss):
Three Months Ended September 30,
(in thousands)
2002 2001
---------------- -----------------
Net loss $ (1,885) $ (522)
================ ================
Nine Months Ended September 30,
(in thousands)
2002 2001
---------------- ----------------
Net loss $ (2,811) $ (1,278)
Unrealized loss on derivative instruments:
Initial loss upon adoption of SFAS No. 133 - (334)
Reclassification adjustment for loss recognized as reduction of oil
and gas income - 334
---------------- ----------------
$ (2,811) $ (1,278)
================ ================
7. Notes Payable
Notes payable consists of the following at September 30, 2002 and December 31,
2001:
(in thousands)
September 30, 2002 December 31, 2001
------------------ ------------------
Revolving Credit $ 2,000 $ 1,254
================= ==================
Credit Facility
On July 6, 2001 (the "Loan Closing Date"), we entered into a Loan Agreement with
a bank that was initially for a two year, $5,000,000 revolving line of credit.
The line of credit was subject to a borrowing base based on oil and gas
reserves. The initial borrowing base under this Loan Agreement was $2,000,000,
with reductions of $50,000 per month during the term of the facility. The
facility was secured by all of our oil and gas properties, and contained
certain financial covenants. As of May 31, 2002, this credit facility was paid
off using the proceeds from our new credit facility.
Other Note Payable
As of March 1, 2002, we entered into a note payable with one of our largest
creditors in replacement of our then existing indebtedness to that creditor.
This note was secured by the personal guarantee of E.L. Ames, Jr., our Chairman
and CEO. The note carried an interest rate of seven percent (7%) and had an
original term of April 30, 2002. We subsequently entered into an amendment to
the note that extended the term of the note to June 1, 2002. The note was paid
off using the proceeds from our new credit facility.
8
New Credit Facility
We entered into a loan agreement for a new $2,000,000 revolving credit facility
provided by a San Antonio-based lender as of May 30, 2002. The one-year facility
will mature on May 30, 2003, and is secured by a first lien mortgage on all of
the Company's presently producing oil and gas properties, as well as limited
personal guaranties provided by certain individuals acceptable to the lender,
including certain directors of the Company. The Company used the proceeds from
the facility primarily to pay off outstanding loans from a creditor and the
Company's prior bank lender. The facility bears interest at the bank's prime
rate plus 200 basis points. The facility contains usual and standard covenants
such as debt and lien restrictions, dividend and distribution prohibitions and
financial statement reporting requirements. As of September 30, 2002, we were
not in compliance with certain of our loan covenants; however, we sought and
received from our lender waivers for our non-compliance with those covenants,
which waiver is conditioned on our cure of such non-compliance on or before
December 31, 2002. In order for us to achieve future compliance with our loan
covenants, we will need to raise additional capital, improve our liquidity
position and/or obtain amendments of certain loan covenants.
Seven individuals (the "Guarantors"), including Company directors Eugene L.
Ames, Jr., John Y. Ames, James W. Gorman and Michael E. Little who provided
guaranties for an aggregate of 35% of the loan amount, agreed to provide limited
personal guaranties to support the loan to the Company. As required by the
lender, each individual was required to guarantee up to 125% of his individual
share of the total loan amount. In consideration of their agreement to provide
the guaranties, the Company granted to the Guarantors, proportionately in
accordance with the amount of their respective guaranties, (i) warrants to
acquire an aggregate of 1,000,000 shares of the Company's Common Stock, and (ii)
interests in an overriding royalty pool, ranging from 0.25% to 1.00%, on certain
prospects being developed by the Company. The exercise price for the warrants
was based upon the average closing price of the Company's Common Stock for the
30-day period prior to the closing date, which resulted in an exercise price of
$0.40 per share. Guarantors were also provided with a second lien mortgage in
the properties pledged to the lender and first lien mortgages in other
properties of the Company as security in the event that they are required to
perform pursuant to the guaranties provided to the lender. The fair value of the
warrants and overriding royalties have been included in deferred financing costs
to be amortized over the term of the loan.
8. Sale of Properties
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
issued in August 2001, addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supercedes SFAS No.
121, "Accounting for the Impairment of Long Lived Assets to Be Disposed Of".
However, it retains the fundamental provisions of Statement 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale. The
Company adopted the provisions of SFAS No. 144 beginning January 1, 2002.
During the nine months ended September 30, 2002, the Company sold or held for
sale oil and gas properties that meet the definition of a "component of an
entity". Accordingly, the results of operations of these properties have been
reported in discontinued operations in the accompanying Consolidated Statements
of Operations for the periods ended September 30, 2002 and 2001, in accordance
with SFAS No. 144.
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
The Company has entered into letters of intent to sell certain producing and
non-producing properties in East Texas; however, there can be no assurance that
these transactions will ultimately be consummated, nor whether, when
consummated, that they will be on the same terms as those reflected in the
letters of intent. Accordingly, producing property has been classified as held
for sale. The estimated sale price is $2,200,000. An impairment of $1,434,000
has been recorded to reduce the carrying value to the estimated sale price. The
operations of the producing property have been classified as discontinued
operations. The non-producing property has also been classified as held for
sale. The estimated sale price is $1,200,000. The Company expects to retain an
interest in the non-producing property.
9. Accounting for Income Taxes
No provision for income taxes has been recorded for the period ended September
30, 2002 and September 30, 2001 due to the losses recorded for these periods.
9
10. Commitments and Contingencies
From time to time, the Company is involved in litigation relating to claims
arising out of our operations in the normal course of business. As of September
30, 2002, the Company was not engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on
our financial condition or results of operations. One of the petitioners in the
bankruptcy has alleged an amount due from the Company of approximately $118,000
more than the Company has recorded based on original billings from the
petitioner. The additional amounts have apparently been asserted by the
petitioner based on the Company's failure to pay such outstanding bills in a
timely manner. The Company believes the ultimate resolution of this uncertainty
will not have a material effect on the Company's financial position or results
of operations.
11. Liquidity and Capital Resources
At September 30, 2002, the Company had a working capital deficit of $8,109,000,
compared with a working capital deficit of $7,851,000 at December 31, 2001, a
decrease in working capital of $258,000.
Our current financing will not be sufficient to allow us to execute the drilling
and property acquisition activities that are a part of our business plan.
Accordingly, to continue operations, such as drilling additional development and
exploration wells, as well as acquiring additional acreage, we will have to
raise capital and/or liquidate assets. We have engaged a financial advisor to
assist us in exploring all financial alternatives ranging from a
recapitalization of the Company to a merger or sale of the Company or certain of
its properties. There can be no assurances, however, that these events will
occur and their timing may be uncertain.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company's recurring losses, net working
capital deficit and net capital deficiency raise substantial doubt about the
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Notwithstanding the foregoing, we are continually seeking methods and
alternatives of financing in order to provide us with the capital to refinance
our working capital deficit and to improve our financial position. In addition,
we are reviewing our asset base so as to monetize assets that are
underperforming. Further, a portion of our business entails selling working
interest participations in oil and gas projects in order to finance certain
exploration drilling activities. The Company also anticipates additional
reduction of general and administrative expenses.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes thereto included
elsewhere and with Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001. Certain statements contained herein are
"Forward Looking Statements" and are thus prospective. As discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, such
forward-looking statements are subject to risks, uncertainties and other factors
that could cause actual results to differ materially from future results
expressed or implied by such forward-looking statements.
Recent Developments
(a) Third Party Petition for Bankruptcy
On October 8, 2002, three of the Company's trade creditors filed an involuntary
bankruptcy petition against the Company in the United States Bankruptcy Court
for the Eastern District of Texas, Beaumont Division, requesting an order for
relief under Chapter 11 of the U.S. Bankruptcy Code. A hearing to consider the
petition has been scheduled for January 21, 2003. The Company has filed a motion
to dismiss and answer in the case, and is continuing to negotiate with these
creditors in an effort to reach an out of court resolution and dismissal of the
bankruptcy.
(b) Possible Asset Sale Transactions
The Company has executed letters of intent with a third party to sell certain
producing and non-producing properties in East Texas for approximately $2.2
million and $1.2 million, respectively. The Company has also entered into a
letter of intent with another third party to sell the Company's Hansford County
project for approximately $400,000. The terms of the sale of the Company's
interest in the non-producing project and the Hansford County project also
provide for the Company to retain interests in both projects.
These transactions are subject to execution of definitive agreements and a
number of other closing conditions and there can be no certainty that they will
be consummated on the terms set forth in the respective letter of intents, or at
all. In particular, the consummation of the sale of the producing property
appears to be subject to resolution of issues with certain of the Company's
creditors, including those who filed the involuntary bankruptcy petition
described above. The Company is continuing to work diligently to resolve all
such issues in order to enable these proposed sales to be consummated as soon as
is reasonably practicable.
(c) Resignations of Directors
Two directors, Mike Little and John Pinkerton, Chief Executive Officers of
Pioneer Drilling and Range Resources, respectively, resigned from the Board of
Directors of the Company in August 2002. In both instances, the directors
informed the Company that their election to resign from the Company's Board of
Directors resulted from potential conflicts of interest relating to past due
accounts owed by the Company to their companies.
Overview
The Company applies advanced geoscience technology to the exploration for and
exploitation of undiscovered onshore oil and gas reserves in the United States.
In addition, the Company's business plan includes the acquisition of producing
properties. The Company presently has oil and gas properties, acreage and
production in eight states. The Company's emphasis is on oil and gas exploration
and development projects and prospects in Texas, Louisiana, Oklahoma and Utah,
with a current primary focus being in the Expanded Yegua Trend of the Upper
Texas Gulf Coast and the Cotton Valley Trend of East Texas and Western
Louisiana. The Company's management team has been responsible for the discovery,
development and exploitation of relatively significant reserves of oil and gas
for privately held predecessor companies over the past 30 years.
The Company's strategy consists of:
- Exploration for oil and natural gas reserves in geographic areas where
we have expertise
- Exploitation and development drilling in existing oil and gas fields
- Strategic acquisitions of producing properties with upside potential
11
In light of the Company's restricted working capital situation (see "Liquidity
and Capital Resources" below), it has presently discontinued its primary
business activities to focus on reducing its deficit. In order to continue
operations, such as drilling additional development and exploration wells or
acquiring additional acreage, the Company must either raise additional capital
and/or liquidate some of its existing assets. While the Company has retained a
financial advisor to assist it in evaluating such opportunities, there can be no
assurance that these events will occur and the timing of these events may be
uncertain.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES - Our discussion and analysis of our
financial condition and results of operation are based upon consolidated
financial statements, which have been prepared in accordance with accounting
principles generally adopted in the United States. The preparation of these
financial statements requires that we make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses. We analyze
these estimates, including those related to oil and gas revenues, bad debts, oil
and gas properties, derivative instruments, income taxes and contingencies. We
base these estimates on historical experience and various other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements. We
recognize revenues from the sale of products and services in the period
delivered. We provide an allowance for doubtful accounts for specific
receivables we judge unlikely to be collected. Oil and gas properties are
accounted for under the successful efforts method of accounting and are
periodically evaluated for possible impairment. Impairments are recorded when
our management believes that a property's net book value is not recoverable
based on current estimates of expected future cash flows. Our reserve estimates
are prepared by engineers knowledgeable of and following the guidelines for
reserves as established by the SEC. The estimation of reserves requires the
engineers to make a significant number of assumptions based on professional
judgment. Estimated reserves are, therefore, often subject to future revision,
certain of which could be substantial, based on the availability of additional
information, including: reservoir performance, new geological and geophysical
data, additional drilling, technological advancements, price changes and other
economic factors. Changes in oil and natural gas prices can lead to a decision
to start-up or shut-in production, which can lead to revisions to reserve
quantities. Reserve revisions inherently lead to adjustments of depletion rates
that we utilize. We cannot predict the types of reserve revisions that will be
required in future periods. To the extent that we have investments in derivative
instruments, we have analyzed our accounting treatment of them on a case by case
basis and have typically not elected to treat those investments as hedges under
FAS 133.
Liquidity and Capital Resources
(a) Liquidity
At September 30, 2002, we had a working capital deficit of $8,109,000 compared
with a deficit of $7,851,000 at December 31, 2001, a decrease in working capital
of $258,000.
Net cash used in operating activities during the nine-month period ended
September 30, 2002, was $1,838,000, whereas $1,913,000 was provided by operating
activities for the same period in 2001. Net changes in operating assets and
liabilities accounted for $839,000 of the cash flow used in operating
activities. During the nine-month period ended September 30, 2002, the Company
realized a net loss of $2,811,000. This compares with a net loss of $1,278,000
for the same period in 2001. The 2001 loss reflects no gain from the sale of
long-term assets as compared to $325,000 reflected in the 2002 loss.
During the first nine months of 2002 the Company incurred capital expenditures
of $141,000. During the same period in 2001 the Company had capital expenditures
of $2,972,000.
For the nine months ended September 30, 2002, $624,000 was provided by financing
activities. This compares with $135,000 provided by financing activities for the
same period in 2001.
12
In May 2002, the Company entered into a one-year $2 million revolving credit
facility with a new lender that allowed the Company to pay off outstanding loans
to its existing lender and another creditor of the Company. The facility bears
interest at the lender's prime rate plus 200 basis points. As of September 30,
2002, the Company's borrowings outstanding under the facility totaled $2
million, the entire amount available under the facility. As of September 30,
2002, the Company was not in compliance with certain of its loan covenants;
however, it sought and received from its lender waivers for its non-compliance
with those covenants, which waiver is conditioned on the Company's cure of such
non-compliance on or before December 31, 2002. In order for the Company to
achieve future compliance with its loan covenants, it will need to raise
additional funds, improve its liquidity position and/or obtain amendments of
certain loan covenants.
(b) Capital Resources
The Company's capital expenditure budget is continually reviewed and revised as
necessary, based on perceived opportunities and business conditions. In light of
our current working capital situation, we are discontinuing our drilling and
exploration activities and do not anticipate making any further material capital
expenditures until such time as we have significantly reduced our deficit.
Our current financing will not be sufficient to allow us to execute the drilling
and property acquisition activities that are a part of our business plan.
Accordingly, to continue operations, such as drilling additional development and
exploration wells, as well as acquiring additional acreage, we will have to
raise capital and/or liquidate assets. We have engaged a financial advisor to
assist us in exploring all financial alternatives ranging from a
recapitalization of the Company to a merger or sale of the Company or certain of
its properties. While the Company has been in discussions with a number of
companies regarding a variety of possible transactions, there can be no
assurances that these events will occur, and their timing may be uncertain.
Notwithstanding the foregoing, we are continually seeking methods and
alternatives of financing in order to provide us with the capital to refinance
our working capital deficit and to improve our financial position. In addition,
we are reviewing our asset base so as to monetize assets that are
underperforming. Further, a portion of our business entails selling working
interest participations in oil and gas projects in order to finance certain
exploration drilling activities. The company also anticipates additional
reduction of genereal and administrative expenses.
(c) Results of Operations
Revenues have been lower during 2002 due to decreased equivalent unit volumes
and price per unit. The decrease in volumes is mainly due to the sale of
producing properties during 2002. During the first nine months of 2001, a hedge
was in effect which accounted for a decrease in revenue of $334,000. During
2002, no reduction in revenue was recorded as a result of a hedge. As shown
below, oil volumes decreased by 21% while natural gas volumes decreased by 31%
during the nine-month period ended September 30, 2002. Oil volumes decreased 31%
and gas volumes decreased 45% for the three- month period ended September 30,
2002.
2002 2001
------------------------------------ -----------------------------------
Sales Average Sales Average
Volume Prices Volume Prices
--------------- ---------------- ------------- -----------------
Nine Months Ended September 30,
Gas (MCF) 173,932 $ 3.05 252,252, $ 5.15
Oil (BBLS) 48,431 $ 23.71 61,008 $ 26.11
Three Months Ended September. 30,
Gas (MCF) 50,179 $ 2.82 91,263 $ 3.23
Oil (BBLS) 14,356 $ 27.04 20,849 $ 25.66
The production from discontinued operations for the nine-months ended September
30 was 17,613 BBLS and 75,343 MCF for 2002 and 28,708 BBLS and 142,172 MCF for
2001. The production from discontinued operations for the third quarter was
2,634 BBLS and 13,926 MCF for 2002 and 12,005 BBLS and 57,350 MCF for 2001.
13
Average daily production of oil was 177 barrels for the three-month period ended
September 30, 2002, and 227 for the same period in 2001. Average daily
production of natural gas was 637 MCF for the three-month period ended September
30, 2002, and 997 for the same period in 2001. On May 12, 2000, the Company
entered into hedge contracts for 125 barrels of oil per day for twelve months
and 500 mmbtu per day for twelve months. The hedged volumes represented
approximately 50% of estimated production for the twelve-month period ended May
2001. The Company entered into the hedge contracts to comply with the terms of
its then existing bank credit facility. These hedges expired on May 31, 2001.
Under terms set forth under the Company's succeeding Loan Agreement, the Company
was required to enter into hedges in amounts that represent 25% of the estimated
production for periods up to twelve months. On September 28, 2001, the Company
entered into a commodity collar agreement for 112 barrels of oil per day for six
months with a floor price of $22.20 per barrel and a ceiling of $24.50. The
contracted volumes represented approximately 50% of estimated oil production for
the six month period beginning in November 2001 and ending April 2002. Since the
Company's oil production was approximately the same in proportion as gas is to
its overall production, the Company satisfied its obligation to hedge 25% of its
overall production by hedging 50% of its oil production. Transaction gains and
losses were determined monthly and are included in oil and gas revenues in the
period the hedged production is sold. We have determined that hedge accounting
will not be elected for our derivative positions. We entered into this costless
collar with Enron North America Corp ("Enron"). Since we have a receivable from
Enron in the amount of $18,209, we have elected to record a provision for bad
debt in the same amount. In order to enter into this costless collar we had to
give Enron a letter of credit ("L/C") in the amount of $100,000 with them as the
beneficiary of the L/C. The L/C expired on April 1, 2002.
(d) Contingencies
One of the petitioners in the bankruptcy has alleged an amount due from the
Company of approximately $118,000 more than the Company has recorded based on
original billings from the petitioner. The additional amounts have apparently
been asserted by the petitioner based on the Company's failure to pay such
outstanding bills in a timely manner. The Company believes the ultimate
resolution of this uncertainty will not have a material effect on the Company's
financial position or results of operations.
Three Months Ended September 30, 2002 and 2001
The Company reported a net loss of $1,885,000 for the quarter ended September
30, 2002, compared to a net loss of $522,000 in the same quarter in 2001. Oil
and gas revenues decreased by $300,000, exploration expense decreased $50,000,
production expense decreased $105,000, depreciation, depletion, and amortization
decreased $126,000 and general and administrative expense decreased $160,000.
These were offset by a increase in impairments of $1,434,000 and an increase in
interest expense of $41,000.
Oil and gas revenues decreased by $300,000 as compared to the same period in
2001 (before the effect of SFAS No. 144 the implementation of which required
that revenue of $143,000 and $512,000 in 2002 and 2001 respectively, be reported
as part of income from discontinued operations - see note 8 to the consolidated
financial statements). A decrease in production accounted for a $299,000
decrease and a decrease in unit prices accounted for a $1,000 decrease. Gas
production decreased 41,000 mcf, and oil production decreased 6,000 bbls.
Production expense decreased by $105,000 as compared to the same period in 2001
(also before the effects of SFAS No. 144 which resulted in $35,000 and $157,000
in 2002 and 2001 respectively, being reported as part of income from
discontinued operations - see note 8 to the consolidated financial statements).
The decrease was due to a decrease in production. Severance taxes increased
$34,000 as a result of decreased revenue and a refund of $52,000 from the State
of Utah in 2001. Workover costs decreased $48,000 and other production costs
decreased $92,000 as a result of lower volumes of production. Production expense
averaged $1.86 per mcfe during the three-month period ended September 30, 2002,
compared to $1.66 per mcfe for the same period in 2001.
Exploration expense decreased by $50,000 due to decreased exploration activity
during the quarter as compared to the same quarter in the prior year.
Depreciation, depletion and amortization (DDA) decreased by $126,000 (also
before the effects of SFAS No. 144 which resulted in $56,000 and $157,000 in
2002 and 2001 respectively, being reported as part of income from discontinued
operations - see note 8 to the consolidated financial statements). A decrease of
approximately $83,000 is due to lower volumes, and a decrease of $43,000 is due
to a lower DDA rate. Depreciation, depletion and amortization averaged $.72 per
mcfe in 2002 as compared to $1.04 per mcfe for the same period in 2001.
Interest expense increased by $41,000, from $34,000 in 2001 to $75,000 in 2002.
The increase is due to higher loan balances. The average outstanding balance in
2001 was $1.4 million as compared to an average outstanding balance of $2.0
million in the current period.
14
Impairments of $1,434,000 were recorded in order to reduce the carrying value of
certain oil and gas assets to their estimated fair value (the effects of SFAS
No. 144 resulted in this amount being reported as part of income from
discontinued operations - see note 8 to the consolidated financial statements).
General and administrative expense decreased $160,000 primarily because of a
decrease in the number of employees and consultants.
Nine Months Ended September 30, 2002 and 2001
The Company reported a net loss of $2,811,000 for the nine-month period ended
September 30, 2002, compared to a net loss of $1,278,000 in the same period in
2001. Oil and gas revenues decreased by $881,000, depreciation, depletion, and
amortization decreased $243,000, production expense decreased $302,000 and
exploration expense decreased $33,000. Also an impairment expense for oil and
gas properties of $1,434,000 was recorded in 2002 and $93,000 was recorded for
the same period in 2001. There was also a decrease of general and administrative
expense of $190,000. These were partially offset with an increase in interest
expense of $241,000, and a decrease in other income of $163,000 primarily
because of the recognition of income in 2001 caused by adjusting the derivative
liability account to fair value as of March 31, 2001, pursuant to SFAS No. 133.
Also there was a gain on sale of assets in 2002 of $325,000 and none in 2001.
Oil and gas revenues decreased by $881,000 as compared to the same period in
2001 (before the effect of SFAS No. 144, the implementation of which required
that revenue of $676,000 and $1,572,000 in 2002 and 2001, respectively, be
reported as part of income from discontinued operations- see note 8 to the
consolidated financial statements). A decrease in production accounted for a
decrease of $732,000 and a decrease in product prices created a decrease of
approximately $483,000, and losses on hedging transactions in 2001 were $334,000
more than 2002 .
Production expense decreased by $302,000 as compared to the same period in 2001
(also before the effects of SFAS No. 144 which resulted in $211,000 and $430,000
in 2002 and 2001 respectively, being reported as part of income from
discontinued operations of - see note 8 to the consolidated financial
statements). The decrease was a combination of a decrease in workover costs of
$65,000, a decrease of other production costs of $157,000, and a decrease of
severance taxes of $81,000 which is primarily a result of decreased revenue. Of
the increase in other production cost of $157,000, a decrease in volume
accounted for a decrease of $203,000 and an increase in unit cost accounted for
an increase of $46,000. Production expense averaged $1.64 per mcfe during the
nine-month period ended September 30, 2002, compared to $1.72 per mcfe for the
same period in 2001.
Exploration expense decreased by $33,000 because of a decrease in exploration
activity.
Depreciation, depletion and amortization decreased by $243,000 (also before the
effects of SFAS No. 144 which resulted in $260,000 and $394,000 in 2002 and 2001
respectively, being reported as part of income from discontinued operations -
see note 8 to the consolidated financial statements). Approximately $155,000 is
a decrease due to lower volumes, and $88,000 is a decrease due to a lower DDA
rate. Depreciation, depletion and amortization averaged $.82 per mcfe in 2002 as
compared to $1.01 per mcfe for the same period in 2001.
Impairment of $1,434,000 was recorded in order to reduce the carrying value of
certain oil and gas assets to their estimated fair value (the effects of SFAS
No. 144 resulted in this amount being reported as part of income from
discontinued operations - see note 8 to the consolidated financial statements).
In the same period in 2001, $93,000 was recorded and this amount was not
reported as part of income from opertions of properties sold.
Interest expense increased by $241,000, from $126,000 in 2001 to $367,000 in
2002. The amortization of loan costs were $208,000 more in 2002 than 2001. The
average outstanding balance in 2001 was $1.2 million as compared to an average
outstanding balance of $1.7 million in the current period.
General and administrative expense decreased $190,000 primarily because of
reduction in the number of employees and consultants, and a decrease in rent
expense.
15
Recent Accounting Pronouncements
SFAS No. 143, "Accounting for Asset Retirement Obligations," issued in June
2001, significantly changes the method of accruing for costs associated with the
retirement of fixed assets (e.g. oil and gas production facilities, etc.) for
which an entity is legally obligated to incur. The Company will evaluate the
impact and timing of implementing SFAS No. 143. Implementation of this standard
is required no later than January 1, 2003, with earlier adoption encouraged.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
issued in August 2001, addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supercedes SFAS No.
121, "Accounting for the Impairment of Long Lived Assets to Be Disposed Of".
However, it retains the fundamental provisions of Statement 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale. The
Company adopted the provisions of SFAS No. 144 on January 1, 2002. We believe
the adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements other than presentation of the operations of properties
disposed of.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", and an amendment of that
Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". This Statement also rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers". This Statement amends SFAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for transactions occurring after May 15, 2002. The Company adopted
SFAS No. 145 on May 16, 2002 with no material impact on its financial
statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", issued in July 2002, addresses financial accounting and reporting
for costs associated with exit or disposal activities. SFAS No. 146 requires
that a liability be recognized for those costs only when the liability is
incurred and can be measured at fair value. This statement nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity", which required
liability recognition for an exit cost when a company committed to an exit plan.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company will adopt SFAS No. 146 as of January 1,
2003. At this time we do not believe that the adoption of SFAS No. 146 will have
a material impact on the financial statements.
16
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The information contained in this Form 10-Q includes certain forward-looking
statements. When used in this document, such words as "expect", "believes",
"potential", and similar expressions are intended to identify forward-looking
statements. Although the Company believes that its expectations are based on
reasonable assumptions, it is important to note that actual results could differ
materially from those projected by such forward-looking statements. Important
factors that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, the Company's
ability to procure a replacement credit facility, the timing and extent of
changes in commodity prices for oil and gas, the need to develop and replace
reserves, environmental risk, the substantial capital expenditures required to
fund its operations, drilling and operating risks, risks related to exploration
and development, uncertainties about the estimates of reserves, competition,
government regulation and the ability of the Company to implement its business
strategy and to raise the necessary capital for such implementation. Also see
"FORWARD-LOOKING STATEMENTS" under "Item 1. BUSINESS" of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding the Company's quantitative and qualitative disclosures
about market risk is contained in "Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT THE MARKET RISK" in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 and reference is made to the information
contained there. On September 28, 2001, the Company entered into commodity
collar contracts for 112 barrels of oil per day for six months with a floor
price of $22.20 per barrel and a ceiling of $24.50. The contracted volumes
represented approximately 50% of estimated oil production for the six-month
period beginning in November 2001 and ending April 2002. Since the Company's oil
production is approximately the same in proportion as gas is to its overall
production, the Company satisfied its obligation to hedge 25% of its overall
production by hedging 50% of its oil production. The Company entered into the
hedge contracts to comply with the terms of a loan agreement. These contracts
expired on April 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's chief executive officer and its chief accounting officer, based on
their evaluation of the Company's disclosure controls and procedures (as defined
in Exchange Act Rule 13a-14(c)) as of a date within 90 days prior to the filing
of this Quarterly Report on Form 10-Q, have concluded that the Company's
disclosure controls and procedures are adequate and effective for the
information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's ("SEC") rules and forms.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the date of their evaluation described above.
17
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Chief Executive Officer Certification Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
99.2 Chief Accounting Officer Certification Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
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 19, 2002 BY: /S/ JOHN Y. AMES
-----------------------------
John Y. Ames
(President and Chief Operating Officer)
Dated: November 19, 2002 BY: /S/ TERRY F. HARDEMAN
-----------------------------
Terry F. Hardeman
(Chief Accounting Officer)
18
CERTIFICATIONS
I, Eugene L. Ames, Jr., Chief Executive Officer of Venus Exploration, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Venus
Exploration, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Eugene L. Ames, Jr.
-----------------------
Eugene L. Ames, Jr.
Chief Executive Officer
19
CERTIFICATIONS
I, Terry F. Hardeman, Chief Accounting Officer (the company presently has no
Chief Financial Officer) of Venus Exploration, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Venus
Exploration, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Terry F. Hardeman
---------------------
Terry F. Hardeman
Chief Accounting Officer
20
EXHIBIT INDEX
(a) Exhibits
99.1 Chief Executive Officer Certification Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
99.2 Chief Accounting Officer Certification Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
21