<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
------------------------------------
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 2000
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: 000-25717
[GRAPHIC OMITTED][GRAPHIC OMITTED]
BETA OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
Nevada 86-0876964
(State of Incorporation) (I.R.S. Employer Identification No.)
6120 S. Yale, Suite 813, Tulsa, OK 74136
(Address of principal executive
offices) (Zip Code)
(918) 495-1011
(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 __
As of August 1, 2000, the Registrant had 9,978,760 shares of Common Stock, $.001
par value, outstanding.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
INDEX
PAGE NO.
PART 1 - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1 Financial Statements...........................................................................3
Condensed Consolidated Balance Sheets June 30, 2000 (unaudited) and
December 31, 1999.........................................................................3
Condensed Consolidated Statements of Operations for the three months ending
June 30, 2000 and June 30, 1999 and for the six months ending June 30, 2000
and June 30, 1999 (unaudited) ............................................................4
Condensed Consolidated Statements of Cash Flows for the six months ending
June 30, 2000 and June 30, 1999(unaudited)................................................5
Supplemental Disclosure of Noncash Investing and Financing Activities for the
six months ending June 30, 2000 and June 30, 1999.........................................5
Notes to Condensed Consolidated Financial Statements........................................6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................7
Disclosure Regarding Forward-Looking Statements.......................................7
Financial Condition, Liquidity and Capital Resources..................................8
Historical Cash Used In and Provided by Operating, Investing and Financing
Activities........................................................................8
Beta Acquisition of Red River Energy, Inc.............................................8
Plan of Operation for 2000............................................................8
Long Term Liquidity and Capital Resources............................................10
Effect of Merger with Red River on Long Term Liquidity and Capital Resources.........10
Unevaluated Properties...............................................................11
1999 Bridge Note.....................................................................12
Comparison of Results of Operations for the three months ended June 30, 2000
and 1999 (unaudited).............................................................12
Comparison of Results of Operations for the six months ended June 30, 2000 and
1999 (unaudited).................................................................13
Income Taxes.........................................................................14
Drilling Activity....................................................................15
Exercise of Warrants.................................................................15
Impact of Recently Issued Standards..................................................15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...................................15
PART II. - OTHER INFORMATION
ITEM 1 ..Legal Proceedings............................................................................16
ITEM 2 ..Changes in Securities........................................................................16
ITEM 3 ..Defaults Upon Senior Securities..............................................................16
ITEM 4 ..Submission of Matters to a Vote of Security Holders .........................................16
ITEM 5 ..Other Information............................................................................17
ITEM 6 ..Exhibits and Reports on Form 8-K.............................................................17
Signatures.............................................................................................17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I
ITEM 1. FINANCIAL STATEMENTS
BETA OIL & GAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS ...................................... June 30, December 31,
2000 1999
----------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ............... $ 3,006,118 $ 1,448,655
Accounts receivable -
Oil and gas sales 984,746 745,493
Other 8,303 1,178
Prepaid expenses 54,211 104,241
----------- -------------
Total current assets 4,053,378 2,299,567
----------- -------------
Property and equipment:
Oil and gas properties, at cost (full cost method)
Evaluated properties 10,581,984 9,810,198
Unevaluated properties 12,564,191 12,091,627
Equipment, furniture and fixtures 38,303 38,303
----------- -------------
23,184,478 21,940,128
Less: accumulated depreciation, depletion
and amortization .................. (4,995,828) (3,823,299)
----------- -------------
Property and equipment - net 18,188,650 18,116,829
Other assets 1,390,183 465,079
----------- -------------
$ 23,632,211 $ 20,881,475
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade .................. $ 300,478 225,174
Premiums payable- current portion 26,775 28,224
Payroll and payroll taxes payable 331 10,631
Other accrued expenses 55,436 1,270
----------- -------------
Total current liabilities 383,020 265,299
----------- -------------
L.T. payables - premium payable 14,236 27,939
Shareholders' equity:
Preferred stock, $.001 par value; 5,000,000
shares authorized; none issued or outstanding -- --
Common stock, $.001 par value; 50,000,000 share authorized; 9,975,159 and
9,400,124 shares issued and outstanding at June 30, 2000 (unaudited) and
December 31, 1999, respectively .......... 9,976 9,400
Additional paid-in capital 31,371,423 28,549,313
Accumulated deficit ..................... (8,146,444) (7,970,476)
----------- -------------
Total shareholders' equity (deficit) 23,234,955 20,588,237
----------- -------------
$ 23,632,211 $ 20,881,475
=========== =============
The accompanying notes are an integral part of these condensed consolidated financial statements
</TABLE>
<PAGE>
BETA OIL & GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
The three The three The six The six
months ended months ended months ended months ended
June 30, 2000 June 30, 1999 June 30,2000 June 30, 1999
---------------- ---------------- ---------------- ---------------
Revenues
<S> <C> <C> <C> <C>
Oil and gas sales .......................... $ 1,082,253 $ 91,599 $ 2,022,503 $ 121,263
----------- ----------- ----------- -----------
Costs and expenses:
Lease operating expense 122,544 2,916 156,432 11,951
General and administrative 435,105 224,142 924,738 482,387
Impairment expense ......................... -- 1,227 -- 1,227
Depreciation and depletion expense 611,457 35,768 1,172,529 48,183
----------- ----------- ----------- -----------
Total costs and expenses 1,169,106 264,053 2,253,699 543,748
----------- ----------- ----------- -----------
Loss from operations ................................ (86,853) (172,454) (231,196) (422,485)
Other income and (expense):
Interest expense ............................ (963) (907,434) (2,059) (1,373,782)
Interest income 37,274 1,679 57,287 3,954
----------- ----------- ----------- -----------
Net loss ............................................$ (50,542) $(1,078,209) $ (175,968) $(1,792,313)
=========== =========== =========== ===========
Basic and diluted loss per common share ($ 0.005) ($ 0.14) ($ 0.018) ($ 0.24)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 9,680,598 7,471,209 9,651,143 7,388,267
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements
</TABLE>
<PAGE>
BETA OIL & GAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
The six The six
months ended months ended
June 30,2000 June 30, 1999
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss ........................................................... $ (175,968) $(1,792,313)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and depletion 1,172,529 48,183
Impairment expense -- 1,227
Salary contributed to Beta -- 10,000
Amortization of notes payable discount and debt issuance costs -- 1,262,145
Changes in operating assets and liabilities:
Accounts receivable ........................................... (246,378) (24,732)
Prepaid expenses 50,030 8,959
Accounts payable, trade 75,305 1,933,916
Interest payable -- 61,917
Accrued payroll ............................................... (10,300) (3,062)
Other accrued expenses ........................................ 54,166 (800)
----------- -----------
Net cash provided by operating activities 919,384 1,505,440
----------- -----------
Cash Flows From Investing Activities:
Oil and gas property expenditures .................................. (1,244,351) (4,001,313)
Change in other assets ............................................. (925,104) (361,539)
Acquisition of furniture, fixtures & equipment ..................... -- (1,947)
----------- -----------
Net cash used in investing activities ................... (2,169,455) (4,364,799)
Cash Flows From Financing Activities:
Proceeds from exercise of warrants
2,822,686 70,000
Repayment of premiums payable ...................................... (15,152) --
Offering costs of previous private placements ...................... -- (42,995)
Proceeds from issuance of bridge notes, net ........................ -- 2,835,000
Increase in deferred offering costs ................................ -- (95,657)
----------- -----------
Net cash provided by financing activities
2,807,534 2,766,348
----------- -----------
Net Increase (Decrease) In Cash & Cash Equivalents ................... 1,557,463 (93,011)
Cash and cash equivalents - Beginning of period 1,448,655 198,043
----------- -----------
Cash and cash equivalents - End of period ............................ $ 3,006,118 $ 105,032
=========== ===========
Supplemental Disclosure Of Cash Flow Information:
Cash paid for interest ........................................ $ 2,059 $ 49,720
=========== ===========
Cash paid for income taxes .................................... $ -- $ 4,610
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The six months The six months
ended ended
June 30, 2000 June 30, 1999
---------------- ----------------
Fair market value of common stock issued for:
Oil and gas properties ........... $ -- $ 25,000
Discount on notes payable ........ $ -- $ 2,574,000
Interest on bridge notes ........ $ -- $ 180,000
The accompanying notes are an integral part to these condensed consolidated financial statements
</TABLE>
<PAGE>
BETA OIL & GAS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1. The accompanying condensed consolidated financial statements of Beta Oil
& Gas, Inc. and subsidiary ("Beta") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions of Form 10-Q and Article 10 of Regulation S-X. The balance
sheet as of June 30, 2000, the statements of operations for the three and six
months ended June 30, 2000 and 1999 and the statements of cash flows for the six
months ended June 30, 2000 and 1999 are unaudited but include all adjustments
(consisting of normal recurring adjustments) which we consider necessary for a
fair presentation of the financial position at such dates and the operating
results and cash flows for those periods. Although we believe that the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information normally included in financial
statements and related footnotes prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The December 31, 1999
condensed consolidated balance sheets were derived from audited financial
statements, but do not include all disclosures required by generally accepted
accounting principles. The accompanying financial statements should be read in
conjunction with the financial statements as contained in our 1999 Form 10-K
which was filed March 25, 2000.
Note 2. The results of operations for the three and six months ended June 30,
2000 may not necessarily be indicative of the results of operations that may be
incurred for the entire fiscal year.
Note 3. Basic earnings per share excludes dilution and was computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. All
such securities or other contracts were anti-dilutive for all periods presented
and, therefore, excluded from the computation of earnings per share.
Note 4. On May 25, 2000 we completed a warrant call of 795,762 callable warrants
to purchase common stock at $5.00 per share and 100% of the warrants associated
with the call were exercised. For the six months ended June 30, 2000, gross
proceeds of $2,372,850 were realized from this call for a total gross proceeds
realized of $3,978,810 from the $5.00 warrants. The call was on the warrants
issued per Section 2 of the warrant agreements dated September 5, 1997 and
expired May 24, 2000. In addition to the call, 100,463 various priced warrants,
realizing an additional $449,833 in gross proceeds, were redeemed in associated
voluntary exercises during the six months ended June 30, 2000.
<PAGE>
PART I (CONTINUED)
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion is to inform you about our financial position,
liquidity and capital resources as of June 30, 2000 and December 31, 1999 and
the results of operations for the three and six month periods ended June 30,
2000 and 1999.
Disclosure Regarding Forward-Looking Statements
Included in this report are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we can
give no assurance that such expectations reflected in such forward-looking
statements will prove to have been correct.
All forward looking statements contained in this section are based on
assumptions believed to be reasonable.
These forward looking statements include statements regarding:
- Beta's financial position
- Proved or possible reserve quantities and net present values of those
reserves
- Business strategy
- Plans and objectives of management of Beta for future operations and
capital expenditures
We can give no assurance that such expectations and assumptions will prove
to be correct. Reserve estimates of oil and gas properties are generally
different from the quantities of oil and natural gas that are ultimately
recovered or found. This is particularly true for estimates applied to
exploratory prospects. Additionally, any statements contained in this report
regarding forward-looking statements are subject to various known and unknown
risks, uncertainties and contingencies, many of which are beyond our control.
Such things may cause actual results, performance, achievements or expectations
to differ materially from the anticipated results, performance, achievements or
expectations.
Factors that may affect such forward-looking statements include, but are
not limited to:
- Beta's ability to generate additional capital to complete its planned
drilling and exploration activities
- Risks inherent in oil and gas acquisitions, exploration, drilling,
development and production; price volatility of oil and gas
- Competition from other oil and gas companies
- Shortages of equipment, services and supplies
- Government regulation
- Environmental matters
- Financial condition and operating performance of the other companies
participating in the exploration, development and production of oil
and gas ventures that we are involved in
In addition, since most of our prospects are currently operated by third
parties, we may not be in a position to control costs, safety and timeliness of
work as well as other critical factors affecting a producing well or exploration
and development activities.
<PAGE>
Financial Condition, Liquidity and Capital Resources
Our working capital was a surplus of $3,670,358 at June 30, 2000 compared
to a surplus of $2,034,268 at December 31, 1999. Our working capital increased
due primarily to the exercise of common stock warrants and positive cash flow
from operations. In order to fund capital expenditures in the first six months
of 2000, we issued a warrant call for our $5 callable warrants which is further
discussed below under "Exercise of Warrants."
Historical Cash Used In and Provided by Operating, Investing and Financing
Activities
During the six months ended June 30, 1999 we realized net proceeds of
$2,835,000 from a bridge note financing. During the six months ended June 30,
2000 we realized $2,822,686 from the exercise of warrants which is discussed
below.
The net proceeds of the bridge note financing, the initial public offering
and the exercise of warrants have been primarily invested in oil and gas
properties totaling $1,244,351 and $4,001,313 for the six months ended June 30,
2000 and 1999.
Our cash balance at June 30, 2000 was $3,006,118 compared to a cash balance
of $105,032 at June 30, 1999. The change in our cash balance is summarized as
follows:
Cash balance at December 31, 1999 $ 1,448,655
Sources of cash:
Cash provided by operating activities 919,384
Cash provided by financing activities 2,807,534
--------------------
Total sources of cash 3,726,918
Uses of cash:
Oil and gas property expenditures (1,244,351)
Other assets (increase in advances to
industry partners) (925,104)
--------------------
Total uses of cash (2,169,455)
--------------------
Cash balance at June 30, 2000 $ 3,006,118
====================
Beta Acquisition of Red River Energy, Inc.
We have entered into an agreement to purchase Red River Energy, Inc. of
Tulsa, Oklahoma, a private oil and natural gas company. The purchase price will
be paid by the issuance of approximately 2.25 million shares of Beta common
stock. The purchase is subject to approval by Beta shareholders.
The assets of Red River Energy, Inc. consist of five components: 1) a 97.4%
working interest (80% net revenue interest) in a 30,160 acre unit which is
currently producing approximately 2.8 net MMBTU/d and 96 net Bopd from 22 active
wells in the Hunton Limestone formation in Central Oklahoma; 2) an 85% working
interest (68% net revenue interest) in 8,100 acres which are currently producing
630 net MMBTU/d from 45 wells in the Atoka and Gilcrease formations in Eastern
Oklahoma; 3) a gas gathering system consisting of 40 miles of pipeline which is
currently transporting approximately 1950 MMBTU/d in Eastern Oklahoma; 4) a 46
well coal bed methane project also located in Eastern Oklahoma which is operated
by Red River and is currently under development and producing approximately 600
MMBTU/d; and 5) as of June 14, 2000 Red River purchased from ONEOK Resources
Company, 124 oil and gas properties and prospects in 26 fields in Kansas,
Oklahoma and Texas and is currently producing approximately 1050 net MMBTU/d and
128 net bopd.
<PAGE>
Plan of Operation for 2000
In the opinion of our management, our existing working capital, net cash
flow from operations and the exercise of common stock purchase warrants
subsequent to December 31, 1999 will be sufficient to fund the operations and
projected capital requirements of Beta throughout 2000. We are allocating our
cash resources from all sources, including the net proceeds of the initial
public offering, to the following categories of expenditures:
1) With the completion of the Red River merger, Beta estimates revenue will be
approximately $10 to $12 million for 2000, and EBITDA will be approximately
$4 million for 2000.
2) Drilling and completion costs for wells on our prospects which are
estimated to be approximately $4,100,000 for 2000. While it is difficult to
predict the exact timing of when these wells will be proposed for drilling,
our operating agreements generally provide a 30 day period in which to
elect participation in a proposed well. Generally funds must be advanced
within 30 days or less after the 30 day election period;
3) Costs of $750,000 estimated during 2000 to drill new wells, convert certain
producing wells to saltwater disposal wells, reactivate certain wells and
fracture treat certain wells associated with the Red River properties;
4) Leasehold acquisition costs which are estimated to be $665,000;
5) 3-D seismic acquisition costs only if funds are available; and
6) General and administrative overhead.
Other than item 2) above, we do not anticipate the Red River merger will
impact our year 2000 capital budget or financing plans. As discussed below under
"Long Term Liquidity and Capital Resources," we may have to advance additional
funds to Red River in future periods to facilitate development of the Red River
properties and this may impact our planned capital expenditures and financing
plans.
Our planned capital expenditures and administrative expenses could exceed
those amounts budgeted and could exceed our cash from all sources. If this
happens, it may be necessary for us to raise additional funds. It is anticipated
that additional funds will be raised from one or more of the following sources:
1) We have approximately 383,375 callable common stock purchase warrants
outstanding exercisable at a price of $7.50 per share. We are able to call
these warrants at any time after our common stock has traded on Nasdaq at a
market price equal to or exceeding $10.00 per share for 10 consecutive days
which was achieved in July 2000. It is our intent to call all of these
warrants at such time, if and when, the cash is needed to fund capital
requirements. We will receive proceeds equal to the exercise price times
the number of shares which are issued from the exercise of warrants net of
commission to the broker of record, if any. We could realize net proceeds
of approximately $2,875,000 from the exercise of these warrants. There is
no assurance that we will ever realize any proceeds from the $7.50 warrant
calls.
2) We may seek bank or other debt financing at such time that cash flow from
operations is established. We are not able to predict when, if ever, such
financing will be available. We are currently seeking bank financing in the
range of $1,000,000 to $5,000,000.
3) We may seek mezzanine financing, if available, on terms acceptable to us.
Mezzanine financing usually involves debt with a higher cost of capital as
compared to conventional bank financing. We would seek mezzanine financing
in the range of $1,000,000 to $5,000,000. We would seek to use this means
of financing in the event that a particular acquisition did not have
sufficient proved producing reserve collateral to support a conventional
bank loan.
4) We may realize additional cash flow from oil and gas wells to be drilled,
if found to be productive. We own a working interest in wells that are
currently producing and in additional wells which are presently being
completed and equipped for production. We currently estimate that during
2000 the wells will generate approximately $3,400,000 of net cash flow
after deducting lease operating expenses.
<PAGE>
If the above additional sources of cash are insufficient or are unavailable
on terms acceptable to us, we will be compelled to reduce the scope of our
business activities. If we are unable to fund planned expenditures within a
thirty to sixty day period after a well is proposed for drilling, it may be
necessary to:
1) Forfeit our interest in wells that are proposed to be drilled;
2) Farm-out our interest in proposed wells;
3) Sell a portion of our interest in proposed wells and use the sale
proceeds to fund our participation for a lesser interest; and
4) Reduce general and administrative expenses.
As stated above, we believe there is sufficient working capital to fund our
capital expenditure requirements throughout 2000. In the event that we cannot
raise additional capital, it may be necessary for us to curtail our business
activities until other financing is available.
Beta's long term goal is to continue the pattern of growing the Company by
accumulating oil and gas reserves through acquisition and drilling the next
three to five year period, and then selling the Company. In the event Beta
cannot raise additional capital, or the industry market is unfavorable, Beta may
have to slow or alter its long term goal accordingly.
These are forward looking statements that are based on assumptions which in
the future may not prove to be accurate. Although our management believes that
the expectations reflected in such forward looking statements are based on
reasonable assumptions, it can give no assurance that our expectations will be
achieved.
Long Term Liquidity and Capital Resources
The timing of most of our capital expenditures is discretionary. We have no
material long-term commitments associated with our capital expenditure plans or
operating agreements. Consequently, we have a significant degree of flexibility
to adjust the level of such expenditures as circumstances warrant. The level of
capital expenditures will vary in future periods depending on the success we
experience on planned exploratory drilling activities in future periods, gas and
oil price conditions and other related economic factors. Accordingly, we have
not yet prepared an estimate of capital expenditures for future periods beyond
2000.
Effect of Merger with Red River on Long Term Liquidity and Capital Resources
Upon completion of the proposed merger with Red River, we will guarantee
approximately $3,000,000 of Red River's total $7,700,000 indebtedness at
December 31, 1999 with the Bank of Oklahoma. In addition, at June 15, 2000, Red
River increased its indebtedness with the Bank of Oklahoma by approximately $5.6
million in connection with the ONEOK property acquisition increasing the total
indebtedness with that bank to approximately $13,300,000. In the opinion of our
management, the estimated future net cash flow from the Red River oil and gas
properties and the ONEOK property acquisition will be sufficient to repay the
principal and interest associated with the Bank of Oklahoma debt. This
assessment is based on current oil and gas prices in effect and current reserve
estimates, all of which are subject to change. In the event of substantial
reductions in the prices received for oil and gas and/or downward revisions of
oil and gas reserve estimates, the cash flow from the Red River properties may
not be sufficient to service the Bank of Oklahoma debt. In this event, we may be
required to dedicate significant amounts of cash to service debt requirements.
The funds will have to come from one of the sources discussed above under "Plan
of Operation 2000." In the event that such funds are not available, we will be
compelled to sell oil and gas properties to repay the debt.
<PAGE>
Red River's 80% owned subsidiary, TCM, L.L.C., also has $2,165,000 of debt
associated with its coal bed methane properties as of December 31, 1999. The
debt is not guaranteed by Red River and TCM has no material amount of assets or
properties other than the coal bed methane properties. These are currently
classified as unevaluated since they are still in the testing phase. The
lender's recourse for repayment of the debt is limited to its mortgage on the
coal bed methane properties and the proceeds of production from those
properties. At present, Beta does not intend to dedicate any of its cash
resources to the repayment of this debt since the lender's recourse is limited.
Red River also has no material long-term commitments associated with its
capital expenditure plans or operating agreements other than its planned
activities in the "WEHLU" unit in Central Oklahoma. The level of Red River's
capital expenditures will vary in future periods depending on the results it
experiences in the "WEHLU" unit. Effective February 18, 2000 Red River entered
into an agreement with Avalon Exploration, Inc. of Tulsa to jointly test and
develop additional production in the Company's 30,000 acre producing WEHLU Unit
in Central Oklahoma.
The terms of the agreement call for Avalon to drill wells and expend an
estimated $4.4 million and will thereby be entitled to an assignment of all of
Red River's leasehold interest in the wells drilled by Avalon and in production
from the 160 acres surrounding each well. Red River has retained (a) a 12.5%
interest after Avalon achieves payout of the amounts it expends, plus (b) an
option to repurchase 25% of its original working interest in these same
properties after each five-well pilot project drilled by Avalon has been
completed, whereby Red River can elect to reimburse Avalon for 25% of the actual
costs incurred depending on the success of these pilot projects. The option to
purchase must be exercised within 120 days of the completion of the drilling
activities on each pilot project. Red River benefits from this option in that it
is able to review the initial success of the pilot project before deciding
whether to commit funds for the project. It is currently estimated that the
option to purchase will need to be exercised sometime in the first half of 2001
should Red River elect to participate. If Red River exercises its option to
purchase the pilot program interest, it will be required to advance its 25%
share of the estimated $4.4 million capital costs associated with the pilot
program, or $1.1 million. In the event funds are unavailable, Red River will
have to forfeit the 25% look back interest. If Red River is unable to utilize
its existing line of credit with the Bank of Oklahoma, then Beta may be required
to advance funds on Red River's behalf to allow Red River to exercise its
option. In this event, we will have to secure funds from one of the sources
discussed below under "Plan of Operation 2000." There is no assurance that these
funds will be available.
If the WEHLU pilot program is successful, the ongoing development of the
field will commence in the year 2001 with approximately 200 to 300 potential
locations to be drilled on the 30,000 acres. Red River will retain a 40% working
interest by paying for 36.3% of the development costs. It is estimated that this
development could take place over a three to five year period commencing in the
second half of 2001. Preliminary estimates are that Red River's net share of
development cost will range between $36,000,000 and $54,000,000 over the 3 to 5
year period. Red River will seek to fund these capital expenditures utilizing
bank financing. We may also seek to provide additional funding through the
issuance of its common stock in a public offering. If funds are unavailable to
Red River, either through a bank line of credit or cash advances provided by us,
Red River will be compelled to reduce its interest in the development of the 200
to 300 potential locations.
On June 14, 2000 the ONEOK properties were acquired for total net
consideration of $5,608,809, subject to additional post-closing adjustment for
the final accounting of net revenues and operating expenses from the effective
date to the closing. Such adjustment will be determined within 90 days after
closing. The acquisition of the ONEOK properties was funded through additional
borrowings under the Red River line of credit.
Unevaluated Properties
Substantially all of our unevaluated costs at December 31, 1999 and June
30, 2000 relate to seismic, geological and leasehold costs incurred in Beta's
Jackson County prospects. Beta and its partners have recently reprocessed <PAGE>
selected portions of the approximately 300 square miles of its 3-D data. In
addition, recent drilling activity by other oil and gas companies in the
vicinity of our prospects have yielded oil and gas discoveries in the deeper
Lower Yegua and Wilcox formations. As a result of the seismic reprocessing and
drilling activity, Beta and its partners have now identified in excess of 200
prospects and leads within the areas that have been evaluated by the 3-D
seismic. This is approximately twice the number of locations previously
identified by the 3-D seismic. The large number of additional prospects and
leads recently identified will delay somewhat the evaluation of the costs
associated with our unevaluated properties. Accordingly, we have revised our
previous estimates of when the unevaluated costs will be considered evaluated
and now believe that much of the evaluation will be delayed to future periods.
This delay in the evaluation of unevaluated costs is not expected to adversely
impact our financial condition, results of operations and liquidity in future
periods.
1999 Bridge Note
During the six months ended June 30, 1999, we completed the private
placement of a $3,000,000 bridge note financing to three institutional investors
referred to as the "1999 bridge financing." We issued promissory notes having a
maturity date of one year and bearing an interest rate of 10%. In addition, a
total of 459,000 shares of our common stock were issued in connection with the
1999 bridge financing. The $3,000,000 in bridge notes was repaid in full with
accrued interest on July 7, 1999 from the proceeds of our initial public
offering.
We received net cash proceeds of $2,835,000 from the bridge notes. The
estimated fair market value of 429,000 shares of common stock issued in
connection with the bridge note of $2,574,000 was treated as a discount and was
amortized over the term of the promissory notes using the interest method.
Accordingly, we incurred additional interest expense of $1,227,091 for the six
months ended June 30, 1999 because of the common stock issued in connection with
the bridge notes. The debt issuance costs of the 1999 bridge financing of
$24,151 were amortized as additional interest expense six months ended June 30,
1999.
Comparison of Results of Operations for the Three Months Ended June 30, 2000 an
1999 (unaudited)
During the three months ended June 30, 2000 we had oil and gas revenues of
$1,082,253 as compared to $91,599 for the prior year period. Our net production
and average prices received were as follows:
Three Months Ended
June 30
2000 1999 Increase
-------------- ------------ ------------
Oil and gas sales $ 1,082,253 $ 91,599 1,082%
Net gas production (mcf) 318,359 43,824 626%
Net Oil production (barrels of oil) 539 - N/A
Average gas price $ 3.35 $ 2.09 60%
Average oil price $ 27.50 N/A N/A
During the three months ended June 30, 2000 we incurred lease operating
expenses of $122,544, which included approximately $30,000 of workover expense,
as compared to $2,916 for the prior year period. Our lease operating costs per
equivalent unit of production were as follows:
Three Months Ended
June 30
2000 1999 Increase
------------ --------- ----------
Lease operating expense $ 122,544 $ 2,916 4,102%
Average lifting cost per equivalent mcf $ .38 $ .07 443%
<PAGE>
General and administrative expenses for the three months ended June 30,
2000 were $435,105 compared to $224,142 for the three months ended June 30,
1999. This represents a 94% increase over the prior year period. The primary
reasons for the increase were due to:
(1) An increase in operational activities in 2000 versus 1999 (approximately
$11,200);
(2) An increase in the number of employees from six in 1999 to seven in 2000
(approximately $110,200); and
(3) Costs related to being a publicly traded company(approximately $89,700).
Depreciation and depletion expense for the three months ended June 30, 2000
was $611,457 compared to $35,768 for the three months ended June 30, 1999. This
represents a $575,689 increase over the prior year period. The primary reason
for the increase is due to the fact we had significantly higher oil and gas
production in the current period verses the prior year that would give rise to
higher depletion expense.
Loss from operations totaled $(86,853) for the three months ended June 30,
2000 compared to $(172,454) for the three months ended June 30, 1999. The
primary reason for the decrease in the loss was due to the significant increase
in revenues in the current period versus the prior year period.
Other income for the three months ended June 30, 2000 consisted of interest
income in the amount of $37,274. We realized $1,679 of interest income for the
same three month period in 1999. The reason for the increase was higher average
cash and cash equivalents balances for the 2000 period as compared to the 1999
period.
During the three months ended June 30, 2000, we incurred interest expense
of $963 as compared to $907,434 for the three months ended June 30, 1999.
Substantially all of the 1999 interest expense related to the bridge notes.
Interest expense related to the bridge notes for the 1999 period consists of the
following:
Cash interest expense $ 74,794
Amortization of note discount and fair market value of
30,000 shares 821,737
Amortization of deferred loan costs 10,903
---------
Bridge note interest expense for the three months ended
June 30, 1999 $ 907,434
==============
Net loss for the three months ended June 30, 2000 was $(50,542) compared to
$(1,078,209) for the three months ended June 30, 1999. The decrease in net loss
was primarily due to the reduction in interest expense and the significant
increase in revenues.
Comparison of Results of Operations for the Six Months Ended June 30, 2000 and
1999 (unaudited)
During the six months ended June 30, 2000 we had oil and gas revenues of
$2,022,503 as compared to $121,263 for the prior year period. Our net production
and average prices received were as follows:
Six Months Ended
June 30
2000 1999 Increase
------------------------ -------------
Oil and gas sales $ 2,022,503 $ 121,263 1,568%
Net gas production (mcf) 650,192 62,279 944%
Net Oil production (barrels of oil) 1,664 - N/A
Average gas price $ 3.04 $ 1.95 56%
Average oil price $ 27.76 N/A N/A
<PAGE>
During the six months ended June 30, 2000 we incurred lease operating
expenses of $156,432 as compared to $11,951 for the prior year period. Our lease
operating costs per equivalent unit of production were as follows:
Six Months Ended
June 30
2000 1999 Increase
------------ ------------ ----------
Lease operating expense $ 156,432 $ 11,951 1,209%
Average lifting cost per equivalent mcf $ .24 $ .19 26%
General and administrative expenses for the six months ended June 30, 2000
were $924,738 compared to $482,387 for the six months ended June 30, 1999. This
represents a $442,351 or a 92% increase over the prior year period. The primary
reasons for the increase were due to:
(1) An increase in operational activities in 2000 versus 1999 (approximately
$147,800);
(2) An increase in the number of employees from six in 1999 to seven in 2000
(approximately $127,400); and
(3) Costs related to being a publicly traded company (approximately $151,600).
Depreciation and depletion expense for the six months ended June 30, 2000
was $1,172,529 compared to $48,183 for the six months ended June 30, 1999. This
represents a $1,124,346 increase over the prior year period. The primary reason
for the increase is due to the fact we had significantly higher oil and gas
production in the current period verses the prior year that would give rise to
higher depletion expense.
Loss from operations totaled $(231,196) for the six months ended June 30,
2000 compared to $(422,485) for the six months ended June 30, 1999. The primary
reason for the decrease in the loss was due to the significant increase in
revenues in the current period versus the prior year period.
Other income for the six months ended June 30, 2000 consisted of interest
income in the amount of $57,287. We realized $3,954 of interest income for the
same six month period in 1999. The reason for the increase was higher average
cash and cash equivalents balances for the 2000 period as compared to the 1999
period.
During the six months ended June 30, 2000, we incurred interest expense of
$2,059 as compared to $1,373,782 for the six months ended June 30, 1999.
Substantially all of the 1999 interest expense related to the bridge notes.
Interest expense related to the bridge notes for the 1999 period consists of the
following:
Cash interest expense $ 111,637
Amortization of note discount and fair market value of
30,000 shares 1,227,091
Amortization of deferred loan costs 35,054
--------------
Bridge note interest expense for the six months ended
June 30, 1999 $ 1,373,782
==============
Net loss for the six months ended June 30, 2000 was $(175,968) compared to
$(1,792,313) for the six months ended June 30, 1999. The decrease in net loss
was primarily due to the reduction in interest expense and the significant
increase in revenues.
Income Taxes
As of December 31, 1999, we had available, to reduce future taxable income,
a tax net operating loss carryforward of approximately $9,500,000 which expires
in the years 2012 through 2018. As of December 31, 1999, Beta has a deferred tax
asset of approximately $3,294,000 which is fully reserved for with a valuation
allowance. The deferred tax asset consists almost entirely of the net operating
loss carryforward. Utilization of the tax net operating loss carryforward may be
limited in the event a 50% or more change of ownership occurs within a three
year period. The tax net operating loss carryforward may be limited by other
factors as well.
<PAGE>
Drilling Activity
During the six months ended June 30, 2000, we participated in the drilling
of 2 exploratory wells. Of the 2 wells drilled, 1was completed as a dry hole and
1 was completed for production in July 2000. Subsequent to June 30, 2000 we have
spudded 2 wells and they are currently being drilled at the time of this
reporting.
We are now the operator of the Jackson County project (over 200,000 acres
of proprietary 3-D seismic surveys) and have accelerated the pace of the Texas
program to 22 scheduled wells to be drilled before year end. Currently there are
3 scheduled Louisiana wells and 14 scheduled Oklahoma wells (part of the pending
Red River merger) to be drilled projecting a total of 39 additional wells
scheduled for Beta's domestic drilling program in the last half of 2000.
Exercise of Warrants
During 1997 Beta issued 797,245 callable common stock purchase warrants
entitling the holders to purchase 797,245 shares of Beta's common stock at an
exercise price of $5.00 per share. We were entitled to call these warrants at
any time on and after the date that our common stock is traded on any exchange,
including the NASD Over-the-Counter Bulletin Board, at a market price equal to
or exceeding $7.00 per share for 10 consecutive trading days, which was achieved
in November 1999.
We issued a call for these warrants as of February 23, 2000, the record
date. 100% of the warrants associated with the call were exercised realizing
gross proceeds of $2,372,850 and a total gross proceeds realized of $3,978,810
from the $5.00 warrants.
We have approximately 383,375 callable common stock purchase warrants
outstanding exercisable at a price of $7.50 per share. We are able to call these
warrants at any time after our common stock has traded on Nasdaq at a market
price equal to or exceeding $10.00 per share for 10 consecutive days, which was
achieved in July 2000. It is our intent to call all of these warrants at such
time, if and when, the cash is needed to fund capital requirements. We may
receive proceeds equal to the exercise price times the number of shares which
are issued from the exercise of warrants net of commission to the broker of
record, if any. We could realize net proceeds of approximately $2,875,000 from
the exercise of these warrants. There is no assurance that we will ever realize
any proceeds from the $7.50 warrant calls.
Impact of Recently Issued Standards
We adopted SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," issued in June 1998 effective with our fiscal year beginning
January 1, 2000 as required by the Statement. Due to our current and anticipated
limited use of derivative instruments, management anticipates that adoption of
SFAS 133 will not have any significant impact on our financial position or
results of operations. SFAS 132, "Employees' Disclosures about Pensions and
other Postretirement Benefits," and SFAS 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" were issued in 1998 and are not expected to
impact us regarding future financial statement disclosures, results of
operations and financial position.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
To the best of our knowledge there are no legal proceedings pending or
threatened against us which would have a materially adverse effect on our
financial condition or results of operations.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of shareholders was held at the Marriott Newport Beach Hotel
and Tennis Club (at Fashion Island), 900 Newport Center Drive, Newport Beach,
California on Saturday, June 24, 2000, at 2:00 P.M. Pacific Daylight Time. The
matters submitted to a vote of our shareholders as well as the results of the
votes cast are as follows:
Matters voted upon by holders of common Stock:
Proposal No.1: Election of directors. A summary of the votes cast is as follows:
<TABLE>
<CAPTION>
% of % of % of
out-standing Number out-standing Number out-standing
Number For shares Against shares Abstain shares
<S> <C> <C> <C> <C> <C> <C>
Steve Antry .......... 8,468,857 87% 400 0.004 3,610 0.04%
R. Thomas Fetters .... 8,468,857 87% 400 0.004 3,610 0.04%
Joe C. Richardson, Jr 8,468,857 87% 400 0.004 3,610 0.04%
Lawrence W. Horwitz .. 8,468,857 87% 400 0.004 3,610 0.04%
John P. Tatum ........ 8,468,857 87% 400 0.004 3,610 0.04%
Rolf N. Hufnagel ..... 8,468,857 87% 400 0.004 3,610 0.04%
</TABLE>
As a result of the voting, Steve Antry, R. Thomas Fetters, Joe C. Richardson,
Jr., Lawrence W. Horwitz, John P. Tatum and Rolf N. Hufnagel were elected as our
directors to serve in that capacity until the annual meeting of shareholders in
2001.
Proposal No. 2: Amendment to Beta's Articles of Incorporation. A summary of
the votes cast is as follows:
<TABLE>
<CAPTION>
% of out- % of out- % of out-
standing standing Number standing
Number For shares Number Against shares Abstaining shares
<S> <C> <C> <C> <C> <C>
6,250,634 64% 319,370 3.3% 40,607 0.42%
</TABLE>
Prior to the approval of the Amendment, our Articles of Incorporation authorized
50,000,000 shares of $0.001 par value common stock. The Amendment did not change
the number of authorized shares of common stock. The Amendment authorized
5,000,000 shares of $0.001 par value preferred stock.
<PAGE>
Proposal No. 3: Ratification of Appointment of Independent Auditors.
A summary of the votes cast is as follows:
<TABLE>
<CAPTION>
% of out- % of out- % of out-
standing standing Number standing
Number For shares Number Against shares Abstaining shares
<S> <C> <C> <C> <C> <C>
8,431,817 87% 29,165 .30% 11,885 .12%
</TABLE>
We have engaged Hein + Associates LLP as independent auditors to perform the
audit of our financial statements for fiscal year 2000.
Item 5. Other Information
The newest member to be elected to our Board of Directors is Mr. Rolf N.
Hufnagel. Mr. Hufnagel is the Chairman, President and Chief Executive Officer of
Red River Energy, Inc., which he cofounded in 1997. We expect that we will
complete an acquisition of Red River in the third quarter of 2000. Prior to
forming Red River, Mr. Hufnagel founded and served as Chairman, President and
Chief Executive Officer of Carlton Resources Corporation, an oil and gas
acquisition company, from 1994 to 1998. From 1986 to 1992, Mr. Hufnagel served
as Senior Vice President of RAMCO Oil & Gas, Inc., a privately held property
acquisition company. Mr. Hufnagel received his Bachelor of Science from Cameron
University and his Master of Business Administration from the University of
Oklahoma in 1974.
On June 15, 2000 J. Chris Steinhauser resigned from Beta Oil & Gas, Inc. as
a Director and Chief Financial Officer in order to pursue other interests. He
has been replaced as CFO by Joseph L. Burnett who comes to Beta with 26 years of
oil and gas accounting experience and is a CPA. Mr. Burnett received his
Bachelor of Science in Business Administration from Oklahoma State University in
1974. Most recently, Mr. Burnett served American Central Gas Technologies, Inc.
as Controller for approximately six years.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
(1) Exhibit 27-1, "Financial Data Schedule" - for the quarter ended
June 30, 2000
(b) The following reports were filed on Form 8-K during the quarter ended
June 30, 2000:
(1) February 23, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned who is duly authorized.
BETA OIL & GAS, INC.
Date: August 14, 2000 By /s/ Joseph L. Burnett
Joseph L. Burnett
Chief Financial Officer and
Principal Accounting Officer
