<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14334
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Venus Exploration, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3299127
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209
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(Address of principal executive offices) (Zip Code)
(210) 930-4900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 12, 1998
----- ------------------------------
<S> <C>
Common Stock $.01 par value 9,855,635 shares
</TABLE>
<PAGE> 2
VENUS EXPLORATION, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
June 30, 1998 and December 31, 1997
(b) Consolidated Statements of Operations for 4
the three-month periods ended June 30,
1998 and 1997
(c) Consolidated Statements of Operations for 5
the six-month periods ended June 30, 1998
and 1997
(d) Consolidated Statements of Cash Flows 6
for the six-month periods ended
June 30, 1998 and 1997
(e) Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 19
Market Risk
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds 20
Item 6. - Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(UNAUDITED)
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 607 $ 682
Trade accounts receivable and other 1,703 2,374
-------- --------
TOTAL CURRENT ASSETS 2,310 3,056
OIL AND GAS PROPERTIES AND EQUIPMENT,
net(successful efforts method), at cost 8,253 9,101
OTHER PROPERTY AND EQUIPMENT, net, at cost 287 274
DEFERRED FINANCING COSTS,
at cost less accumulated amortization 345 377
OTHER ASSETS, at cost less accumulated amortization 125 123
-------- --------
TOTAL ASSETS $ 11,320 $ 12,931
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 2,363 $ 3,080
Advances from interest owners 231 18
Other liabilities 15 227
Current maturities of long-term debt 1,631 500
-------- --------
TOTAL CURRENT LIABILITIES 4,240 3,825
LONG-TERM DEBT 3,604 1,505
OTHER LONG-TERM LIABILITIES 25 27
-------- --------
TOTAL LIABILITIES 7,869 5,357
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, par value of $.01;
5,000,000 shares authorized; none issued
and outstanding as of June 30, 1998
and December 31, 1997, respectively -- --
Common stock, par value of $.01;
30,000,000 shares authorized;
9,849,950 and 9,736,815
shares issued and outstanding as of
June 30, 1998 and December 31, 1997,
respectively 98 97
Additional paid-in capital 15,394 15,010
Retained earnings (deficit) (11,741) (7,533)
Unearned compensation - restricted stock (300) --
-------- --------
TOTAL SHAREHOLDERS' EQUITY 3,451 7,574
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,320 $ 12,931
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
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(In thousands, except per share data)
<S> <C> <C>
OIL AND GAS REVENUES $ 723 $ 615
------- -------
EXPENSES
Production expense 396 173
Exploration expense, including dry holes 675 124
Impairment of oil and gas properties 1,200 --
Depreciation, depletion and amortization 281 179
General and administrative 787 695
------- -------
Total expenses 3,339 1,171
------- -------
Operating profit (loss) (2,616) (556)
------- -------
OTHER INCOME (EXPENSE)
Interest expense (145) (40)
Gain (loss) on sale of assets 10 (2)
Interest and other income 9 19
------- -------
(126) (23)
------- -------
Net earnings (loss) $(2,742) $ (579)
======= =======
Earnings (loss) per share,
Basic and diluted $ (.28) $ (.09)
======= =======
Common shares and equivalents outstanding,
Basic and diluted 9,848 6,201
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
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(In thousands, except per share data)
<S> <C> <C>
OIL AND GAS REVENUES $ 1,664 $ 760
------- -------
EXPENSES
Production expense 837 227
Exploration expense, including dry holes 815 210
Impairment of oil and gas properties 1,915 432
Depreciation, depletion and amortization 622 208
General and administrative 1,488 1,331
------- -------
Total expenses 5,677 2,408
------- -------
Operating profit (loss) (4,013) (1,648)
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OTHER INCOME (EXPENSE)
Interest expense (227) (74)
Gain (loss) on sale of assets 10 (1)
Interest and other income 22 23
------- -------
(195) (52)
------- -------
Net earnings (loss) $(4,208) $(1,700)
======= =======
Earnings (loss) per share,
Basic and diluted $ (.43) $ (.36)
======= =======
Common shares and equivalents outstanding,
Basic and diluted 9,810 4,734
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (4,208) $ (1,700)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization of oil
and gas properties 622 208
Other depreciation, depletion and amortization 110 132
Impairments, abandoned leases and dry hole costs 2,424 485
Expenses compensated with restricted and unrestricted
stock and stock options 85 252
Loss on sale property and equipment -- 1
Change in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable and other 671 (308)
Decrease in trade accounts payable (717) (134)
Increase (decrease) in advances from
interest owners 213 (345)
Increase (decrease) in other liabilities (212) 258
-------- --------
Net cash used in operating activities (1,012) (1,151)
-------- --------
INVESTING ACTIVITIES
Capital expenditures (2,278) (1,289)
Cash acquired in business combination -- 2,921
Proceeds from sales of property and equipment 11 37
-------- --------
Net cash provided by (used in) investing activities (2,267) 1,669
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FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt
and revolving credit agreement 3,286 1,460
Proceeds from options exercised -- 28
Principal payments on long-term debt (56) (131)
Deferred financing costs (26) (12)
-------- --------
Net cash provided by financing activities 3,204 1,345
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INCREASE (DECREASE) IN CASH AND EQUIVALENTS (75) 1,863
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 682 1,304
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 607 $ 3,167
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
VENUS EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three and Six Months Ended June 30, 1998 and 1997
1. Organization and Business Combination
Venus Exploration, Inc. (the "Company") is primarily engaged in the business
of exploring for, acquiring, developing and operating onshore oil and gas
properties in the United States. The Company's major areas of activity are
Texas, Oklahoma, Utah and West Virginia.
2. Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated financial statements presented
should be read in connection with the 1997 consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997 (the "Form 10-K").
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of June 30, 1998 and the results of its operations for the three and
six months ended June 30, 1998 and 1997.
The results of operations for the three and six month periods ended June 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the current presentation.
3. Summary of Significant Accounting Policies
For a description of the accounting policies followed by the Company, refer
to the notes to the 1997 consolidated financial statements included in the
Company's report on Form 10-K.
4. Earnings (loss) Per Share
Basic net earnings (loss) per common share is computed by dividing net loss
by the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed by assuming the issuance of common shares for all
dilutive potential common shares outstanding.
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" which changed the calculation and financial statement
presentation of earnings per share. Prior year earnings per share amounts have
been restated.
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<PAGE> 8
Earnings (loss) per share for the three month periods ended June 30, 1998 and
1997 are calculated based on 9,848,322 and 6,200,610 weighted average shares
outstanding, respectively, and the six month periods ended June 30, 1998 and
1997 are calculated based on 9,810,004 and 4,733,987 shares outstanding,
respectively.
The common stock issued in 1996 by Venus Energy PLC to capitalize Venus
Exploration, Inc. has been treated as outstanding to May 21, 1997 for purposes
of calculating earnings per share.
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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(In thousands)
<S> <C> <C>
Revolving credit due on June 30, 2000 $ 3,604 $ 500*
Subsidiary term loan due October 8, 2005 1,631* 1,505
------- -------
$ 5,235 $ 2,005
======= =======
</TABLE>
* Classified as a current liability
Revolving Credit
In May 1997, the Company entered into a loan agreement establishing a
$20,000,000 revolving line of credit. In December 1997 this agreement was
restated and amended to increase the credit facility to $50,000,000 subject to a
borrowing base determined every six months by the bank based on the Company's
oil and gas reserves that secure the loan. Interest on related borrowings is
based on either of two methods at the option of the Company: the bank's prime
lending rate or LIBOR plus 1.75%. For balances outstanding at June 30, 1998 the
Company chose the LIBOR based rate (7.4% at June 30, 1998) for $2,000,000 of the
outstanding balance and the bank's prime lending rate (8.5% at June 30, 1998)
for the remaining balance outstanding, $1,604,000.
A commitment fee of 3/8 of one percent of the undrawn balance of the
borrowing base is payable quarterly. Interest is payable monthly, and principal
payments are required only when the balance outstanding exceeds or is projected
to exceed, prior to the next borrowing base redetermination date, the borrowing
base. As of June 30, 1998, the borrowing base was $5,250,000, and the amount
drawn by the Company was $3,604,000 resulting in an unused borrowing base of
$1,646,000. On July 8, 1998, the credit facility was amended whereby the
borrowing base was reduced to $4,940,000. On August 19, 1998, the credit
facility was amended whereby the borrowing base was increased by $300,000 to
$5,240,000.
Under the terms of the credit facility, the Company is required to maintain
specified levels of current ratio and tangible net worth. Among other matters,
the credit facility contains covenants which limit the incurrence of additional
indebtedness and restrict payments of dividends. On May 19, 1998, the credit
facility was amended whereby the tangible net worth requirement was reduced from
$7,500,000 to $5,250,000. At June 30, 1998, the Company was either in compliance
with, or had obtained waivers with respect to, these covenants. On June 30,
1998, the Company's tangible net worth was below that required under the
facility. The Company has obtained a waiver to September 30, 1998, of the
tangible net worth requirement. Because the Company believes that it will be in
compliance with the debt covenants subsequent to that date, the Company
continues to classify the debt as long-term in the accompanying consolidated
financial statements.
8
<PAGE> 9
Subsidiary Term Loan
In October 1996, Venus Development, Inc. ("Development"), a wholly-owned
subsidiary, entered into a term loan and security agreement with a lender to
finance the acquisition and development of oil and gas properties. Borrowings
are subject to limitations based on the value of the proved reserves of the
properties. The borrowings are to be repaid over a period not to exceed five
years from the date of closing of the agreement.
Payments on borrowings under the agreement are based on 85 or 90 percent of
the net revenue, as defined in the agreement, from the secured properties,
depending on the value of the proved reserves of the secured properties relative
to the outstanding loan balance. Payments increase to 100 percent of net revenue
if Development is not in compliance with certain financial requirements.
The term loan and security agreement requires, among other matters,
maintenance of a minimum working capital amount and collateral value to loan
value coverage ratios. Development was not in compliance with these requirements
at June 30, 1998, nor is it in compliance as of August 13, 1998. Due to this
non-compliance, the interest rate on outstanding debt to Development's lender
has risen from 9.5% to 11.5% per annum effective June 1, 1998.
Under the terms of the agreement, the loan cannot be prepaid prior to October
1999 without the lender's approval. Presently the Company is negotiating with
the lender to terminate the term loan agreement. Accordingly, the amount
borrowed under this agreement, $1,631,000, has been classified as a current
liability pending final settlement with lender and development of further plans
for longer term financing.
6. Shareholders' Equity
Effective March 1, 1998 the Company awarded, under its existing incentive
plan, qualified stock options and restricted stock grants that vest over a
three-year period. The qualified stock options were issued to all employees. The
restricted stock grants (100,000 shares) were issued at no charge to two key
technical employees who are not officers of the Company. The Company is
recognizing compensation expense for the value of the restricted stock grants
over the vesting period.
7. Accounting for Income Taxes
No provision for income taxes has been recorded for the periods ended June
30, 1998 and 1997 due to the losses recorded by the Company.
8. Hedging Transaction
The Company uses price swaps for production on properties pledged under
Development's term loan agreement discussed in Note 5 as a hedging strategy to
manage commodity prices associated with certain oil and gas sales and to reduce
the impact of price fluctuations.
The Company records gains and losses on these hedging instruments as revenues
when the related natural gas or oil production is recorded as revenue. As a
result, gains and losses on commodity financial instruments are generally offset
by similar changes in the realized prices of natural gas and crude oil. To
qualify as hedging instruments, these instruments must be highly correlated to
9
<PAGE> 10
anticipated future sales such that the Company's exposure to the risks of
commodity price changes is reduced. The commodity financial instruments not only
reduce the Company's exposure to declines in the market price of natural gas and
crude oil but also limit the Company's gain from increases in the market price
of natural gas and crude oil.
On December 2, 1996, Development entered into a financial swap, as required
under the term loan agreement discussed in Note 5 above, whereby the
counterparty agrees to pay Development the difference between the floating price
and the fixed price for certain volumes of production in future months
(commencing with January 1997 production) should the floating price fall below
the negotiated fixed price of $2.0497 per thousand British thermal units
("mmbtu") for natural gas or $19.045 per barrel for oil, respectively. Should
the floating price exceed the fixed price for natural gas or oil, Development is
required to remit the difference to the counterparty. As of June 30, 1998,
quantities hedged are 68,868 mmbtu's of natural gas and 24,102 barrels of oil.
As of June 30, 1998, the estimated fair value of Development's swap positions
was a net receivable of approximately $24,000 based upon an estimate of what
Development would receive if the contracts were liquidated. This financial swap
agreement expires December 31, 2001.
9. Commitments and Contingencies
The Company is involved in various claims and legal actions in the ordinary
course of business. Management believes the ultimate disposition of these
matters will not have a material effect on the financial statements.
10
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
As discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, the consolidated statement of operations for the three
and six month periods ended June 30, 1997 reflects the operations of New Venus
only for the periods prior to May 21, 1997 and of the combined entity for the
period after May 21, 1997, whereas the consolidated statement of operations for
the same period ended June 30, 1998 reflects the operations of the combined
entities subsequent to the combination date. Variances are addressed in the
following paragraphs by significant operating captions.
Revenues and expenses were higher during 1998 due to the inclusion of the
combined entities subsequent to May 21, 1997 and wells completed during the last
12 months. As reflected in the following table, oil and gas volumes increased
while average oil and gas prices decreased in 1998 compared with like periods in
1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
Sales Average Sales Average
Volume Prices Volume Prices
------ ------- ------ -------
<S> <C> <C> <C> <C>
Six Months Ended June 30,
Gas (Mcf) 285,553 $ 2.25 138,574 $ 2.36
Oil (Bbls) 67,405 $ 14.80 23,299 $ 18.20
Three Months Ended June 30,
Gas (Mcf) 140,973 $ 2.10 112,342 $ 2.48
Oil (Bbls) 30,244 $ 13.88 18,188 $ 17.94
</TABLE>
Average oil and gas prices reflect the effect of price hedging. The Company
only hedges oil and gas volumes as required under Development's term loan
agreement (see Note 5 of Notes to Consolidated Financial Statements).
Accordingly, the Company has not entered into any new hedging contracts since
December 1996. Because production volumes have increased significantly since
January 1, 1997, the effect of hedges maturing during the first half of 1997,
which negatively impacted prices, was significantly higher relative to volumes
reported during that period than the effect of the hedges maturing during the
first half of 1998. For the six months ended June 30, 1997 approximately 23% of
the oil volumes and 9% of the gas volumes were hedged. For the six months ended
June 30, 1998 approximately 7% of the oil volumes and 5% of the gas volumes were
hedged. In 1997, as a result of the hedge, oil prices were lower by
approximately $.76 per barrel, and gas prices were lower by approximately $.05
per thousand cubic feet. In 1998, as a result of the hedge, oil prices were
higher by approximately $.25 per barrel, and gas prices were unaffected.
The first half of 1998 was impacted by lower oil prices because most of the
Company's significant increase in volumes were subject to current market prices
which averaged approximately $3.88, or 21%, per barrel lower than first half of
1997 market prices. The average market price for natural gas also decreased by
approximately $.17, or 7%, per thousand cubic feet. The impact on revenue during
the first half of 1998 was a decrease of approximately $290,000.
11
<PAGE> 12
Three Months Ended June 30, 1998 and 1997
The Company's net loss of $2,742,000 for the quarter ended June 30, 1998
compares with last year's net loss of $579,000 for the same period. This
$2,163,000 variance is primarily attributable to increases in production
expenses, exploration and dry hole expenses, and impairments due to price
decreases.
For the second quarter of 1998, oil and gas revenues increased by $108,000
primarily as a result of seven producing wells completed and brought on stream
after June 30, 1997 and the additional revenue recorded from the properties
acquired in the business combination of May 21, 1997. Oil and gas sales for the
three months ended June 30, 1998 include a $8,000 gain on hedging instruments.
Production expenses of $396,000 for the quarter ended June 30, 1998,
increased by $223,000 as a result of seven producing wells completed and brought
on stream during the past twelve months and the operating expenses associated
with the wells acquired in the business combination. Direct operating expenses
relative to oil and gas revenues increased to 55% compared with 28% for the
quarter ended June 30, 1997 primarily as a result of lower product prices. Also
contributing to this increase is the relatively higher operating cost associated
with mature, non-operated properties acquired in the business combination. This
was partially offset by deliveries from the seven new wells which have higher
production levels and lower operations and maintenance expense on an equivalent
unit basis as compared with the Company's producing wells in 1997.
Exploration and dry hole expense of $675,000 for the three months ended June
30, 1998 was an increase of $551,000 from three months ended June 30, 1997. This
increase was primarily attributable to an increase in dry hole costs.
A $1,200,000 impairment of oil and gas properties was recorded in the second
quarter of 1998 while no impairment was incurred for the same period of 1997.
The Company recognized an impairment in the second quarter of 1998 on two high
operating-cost fields due to the decrease in oil prices during the quarter.
Depreciation, depletion and amortization expense for the three months ended
June 30, 1998 was $281,000, an increase of $102,000 over the same period in 1997
as the result of wells acquired in the business combination and new wells
completed over the past 12 months.
For the three month periods ended June 30, 1998 and 1997 the Company
recognized $43,000 and $101,000, respectively, of expenses compensated with
restricted and unrestricted stock and stock options.
Six Months Ended June 30, 1998 and 1997
The Company's net loss of $4,208,000 for the six months ended June 30, 1998
compares with last year's net loss of $1,700,000 for the same period. This
$2,508,000 variance is primarily attributable to increases in production
expenses, exploration and dry hole expenses, and impairments due to price
decreases.
For the first six months of 1998, oil and gas revenues increased by $904,000
primarily as a result of seven producing wells completed and brought on stream
after June 30, 1997 and the additional revenue recorded from the properties
12
<PAGE> 13
acquired in the business combination of May 21, 1997. Oil and gas sales for the
six months ended June 30, 1998 include a $14,000 gain on hedging instruments.
Production expenses of $837,000 for the six months ended June 30, 1998,
increased by $610,000 as a result of seven producing wells completed and brought
on stream during the past twelve months and the operating expenses associated
with the wells acquired in the business combination. Direct operating expenses
relative to oil and gas revenues increased to 50% compared with 30% for the six
months ended June 30, 1997 primarily as a result of lower product prices. Also
contributing to this increase is the relatively higher operating cost associated
with mature, non-operated properties acquired in the business combination. This
was partially offset by deliveries from the seven new wells which have higher
production levels and lower operations and maintenance expense on an equivalent
unit basis as compared with the Company's producing wells in 1997.
Exploration and dry hole expense of $815,000 for the six months ended June
30, 1998 was an increase of $605,000 from six months ended June 30, 1997. This
increase was primarily attributable to an increase in dry hole costs.
Impairment of oil and gas properties increased from $432,000 for the first
six months of 1997 to $1,915,000 for the same period of 1998. The Company
recognized increased impairments in 1998 due in part to the significant decrease
in oil prices. In addition, the Company experienced a downward revision in
reserves on one of its fields based on the results of a well completed during
the period.
Depreciation, depletion and amortization expense for the six months ended
June 30, 1998 was $622,000, an increase of $414,000 over the same period in 1997
as the result of wells acquired in the business combination and new wells
completed over the past 12 months.
For the six month periods ended June 30, 1998 and 1997 the Company recognized
$85,000 and $252,000, respectively, of expenses compensated with restricted and
unrestricted stock and stock options.
Liquidity and Capital Resources
(a) Liquidity
At June 30, 1998, the Company had a working capital deficit of $1,930,000
compared with a deficit of $769,000 at December 31, 1997, a decrease in working
capital of $1,161,000. This decrease is primarily attributable to a decrease in
cash and equivalents, a decrease in accounts receivable and an increase in
current maturities of long-term debt partially offset by a decrease in accounts
payable. On June 30, 1998, the Company's tangible net worth was below that
required under the revolving credit facility. The Company has obtained a waiver
to September 30, 1998, of the tangible net worth requirement. Because the
Company believes that it will be in compliance with the debt covenants
subsequent to that date, the Company continues to classify the debt as long-term
in the accompanying consolidated financial statements. The bank has increased
the Company's borrowing base by $300,000. The Company is actively exploring
various options including sales of debt, convertible debt and securities in the
public or private markets to increase the Company's tangible net worth.
Net cash used in operating activities during the six months ended June 30,
1998, was $1,012,000, whereas $1,151,000 was used in operating activities for
the same six month period in 1997. During the first six months of 1998, the
Company realized a net loss of $4,208,000. This compares with a net loss of
$1,700,000 for the first six months of 1997. These losses include non-cash
expenses (impairments, depreciation, depletion and amortization, and expenses
compensated with restricted and unrestricted stock and stock options) totaling
$2,732,000 for 1998 and $1,015,000 for 1997. Accounts receivable and other
decreased in the first six months of 1998 by $671,000 primarily due to reduced
oil and gas sales.
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<PAGE> 14
During the first six months of 1998 the Company incurred capital expenditures
on oil and gas properties of $2,215,000 and $63,000 on other fixed assets.
During the same period in 1997, the Company had capital expenditures of
$1,289,000.
For the six months ended June 30, 1998, $3,204,000 was provided by financing
activities consisting of $3,286,000 of proceeds from long-term debt issued less
$82,000 of repayments and deferred financing costs. This compares with
$1,345,000 provided by financing activities for the six month period ended June
30, 1997 from exercised options of $28,000 and the issuance of $1,460,000 in
long-term debt offset by repayments and deferred financing costs of $143,000.
As discussed in note 5 of Notes to Consolidated Financial Statements,
Development is not in compliance with certain financial requirements of the
Subsidiary Term Loan Agreement. Development and the Company are currently
negotiating with the lender to terminate the agreement. Accordingly, the amount
borrowed under this agreement, $1,631,000, has been classified as a current
liability pending final settlement with lender and development of further plans
for longer term financing.
If the Company and lender are not able to reach an agreement, under the terms
of the Agreement, the lender has the option to exercise its security interests
in all the pledged properties, which includes the Company's ownership interests
in Development. However, the lender has no recourse against the Company's other
assets. At June 30, 1998, Development's debt exceeded the carrying value of the
secured assets by $508,000. For the six months ended June 30, 1998, 14% of the
Company's revenues are attributed to Development's properties.
Management has estimated the cost in the remainder of 1998 and in 1999 for
3-D seismic studies, acquisition of oil and gas leases and drilling of 18 to 24
initial exploration wells on the prospects or prospect leads, which activities
are discussed under "Capital Resources" below, to be $8,000,000 to $9,700,000.
There is no assurance that all 24 prospects will be drilled. Substantially all
of this amount is discretionary in nature, as opposed to contractually committed
for.
The Company's current cash flow from operations will need to be supplemented
with contributions from capital to maintain the current level of general and
administrative expenditures, exploration overhead expenses and other costs
through the remainder of the fiscal year. The Company expects improvements in
cash flows from operations in the near future as two recently completed wells
are put on-line and sales of production begin. Until the Company is able to
develop a larger reserve base through exploration, development or acquisition
activities, cash flow from operations available for investment, e.g.,
exploration and development drilling, is limited. On August 19, 1998, the credit
facility was amended whereby the borrowing base was increased by $300,000 to
$5,240,000; however, as of August 19, 1998, the Company does not have funds
available under its existing credit facilities to fund the capital expenditures
mentioned above. Most of this increase in the borrowing base will be used to
fund non-capital expenditures. Accordingly, the ability of the Company to carry
out its exploration and development program as discussed under "Capital
Resources" below will be dependent upon its ability to raise additional capital.
In addition, to comply with the terms of its revolving credit agreement the
Company will have to raise additional capital by September 30, 1998. As
discussed in Note 5 of the Notes to Consolidated Financial Statements, as of
June 30, 1998, the Company was not in compliance with the tangible net worth
requirement of its revolving line of credit facility, and the Company has
obtained a waiver, to September 30, 1998, of that requirement. Because the
Company believes that it will be in compliance with the debt covenants
subsequent to that date, the Company continues to classify the debt as long-term
in the accompanying consolidated financial statements. The Company is actively
exploring various options including sales of debt, convertible debt and equity
securities in the public or private markets to
14
<PAGE> 15
fund the Company's capital and expenditure budget. In the event the Company is
unable to raise the full amount of capital required to fund its capital budget,
the Company would explore other sources of funding, including farm-out
opportunities, other industry partnering activities and asset sales. In
addition, the Company would necessarily have to delay certain of its exploration
and development projects until funding was available for those projects. Any
such delays in implementing its capital expenditure program would necessarily
impact its ability to develop a larger reserve base and, therefore, its ability
to increase cash flow.
(b) Capital Resources
The Company's principal business activity is the identification of and
acquisition of leasehold interests on drilling prospects that are prospective
for discovery of oil or gas. The methods used to identify drilling prospects
include the application of advanced geological and geophysical technology.
Geological and geophysical research usually requires significant investment by
the Company in general and administrative costs, which costs may not produce
related income for several years or until discovery and production of oil or gas
from a project. This, plus the fact that the Company's exploration activities
are significant in relation to its current production base, results in the
Company's general and administrative expense burden currently being
disproportionately high in relation to oil and gas revenues.
The Company uses successful efforts accounting as opposed to full cost
accounting. Under successful efforts, companies capitalize the cost of
successful exploratory wells and the cost of all development wells. They expense
all other exploration cost such as seismic and other geological and geophysical
cost. Full cost companies capitalize all exploration costs, including dry holes.
Full cost accounting tends to reduce expenditures charged against earnings in
early periods because full cost companies charge these capitalized costs against
earnings in future periods as depreciation, depletion and amortization expense.
Consequently, over time, this expense tends to be higher for full cost
companies.
The Company incurred an impairment write-down of $1,200,000 in the current
quarter as a result of lower crude oil prices. The write-down is the result of
the carrying value of two fields being higher than their fair value based on
June 30, 1998 oil prices. For the six month period, the Company incurred
impairment write-downs totaling $1,915,000; $1,480,000 of the impairment for the
six month period is a direct result of lower oil prices. The two fields are
non-operated, and they were acquired in the May 1997 business combination.
Accordingly, their carrying values were assigned under purchase accounting
rules. Both fields are mature and have high operating costs, which makes their
values highly sensitive to changes in product prices. These impairments plus the
lower revenues caused by the lower oil prices were the most significant cause of
the reduction in tangible net worth.
The Company recorded dry hole cost of $509,000 for the six-month period ended
June 30, 1998 compared to $62,000 in 1997.
At the current time, the Company's exploration team has identified an
inventory of 43 individual prospects and prospect leads that the Company's
exploration team believes are prospective to contain undiscovered oil or gas
reserves. Dependent upon the quantity and quality of geological and geophysical
evidence available in and around each such area, such areas may be classified
either as a prospect or a prospect lead. A prospect is defined as an area that,
to a large extent, is confirmed by geological or geophysical data as drillable;
a prospect lead is defined as an area that contains indications that it may be a
favorable area for containing hydrocarbons but that requires additional
geoscientific data confirmation before being upgraded to a prospect.
15
<PAGE> 16
Although advanced geoscientific technology in many areas can condemn certain
prospects and eliminate the need for drilling test wells and can in many areas
improve the probability for drilling successful exploration wells, advanced
geoscience technology provides no assurance that an exploration test well will
be productive of oil or gas in commercial quantities.
The Company has identified 18 to 24 exploratory prospects and prospect leads
that have already been, or that management believes may be, confirmed as
drilling prospects and that could reach the drilling stage in 1998 or 1999. The
estimated cost to the Company in additional seismic activity and in leasing and
in drilling exploration test wells, if all these areas are drilled, is
$8,000,000 to $9,700,000. Management plans to confirm by additional seismic
analysis, to obtain oil and gas leases to the extent required, and to drill as
many of the initial test wells as is possible in 1998 and 1999. It is recognized
that for a variety of reasons outside of the Company's control, certain of these
prospects in the 1998 - 1999 drilling program may not actually be drilled in
that time frame. The 3-D seismic information gathered may condemn certain
prospects or leads currently identified, thus eliminating them from the drilling
schedule. The 3-D seismic data, however, may also identify new, heretofore
unrecognized prospects.
One 3-D seismic project is planned to be conducted within an area that may
cover 80 sections (a section is a 640-acre tract) in an area in the South
Permian Basin of West Texas. The Company drilled an exploratory test well in
this area in the second quarter of 1998. That well was drilled to a depth of
8,100 feet and was plugged and abandoned as a dry hole at a cost to the Company
of $171,000. Although this well was drilled in search of oil or gas, one of the
reasons for drilling this well was to obtain seismic velocity information, which
is important in the accurate processing of both existing 2-D seismic data and
3-D seismic coverage. Within the area of interest to be covered by this 3-D
seismic data acquisition project, the Company's exploration team has used its
proprietary and non-proprietary 2-D data to identify six or more drilling
prospects or prospect leads of varying size that are believed to be large enough
to be prospective.
Of the 24 exploratory prospects and prospect leads management hopes can be
confirmed for drilling and placed on the operations schedule for drilling in
1998 and 1999, 15 are located on the Texas Gulf Coast and South Central
Louisiana in the Yegua Trend, which is an area where the Company has been
actively involved in exploration since 1984.
The Company also drills exploitation wells to develop or extend the area of
oil and gas reserves that the Company or others have discovered previously
through exploration drilling. Such exploitation of existing reserves also, in
some cases, may result in discovery and development of new and/or undeveloped
producing reservoirs in existing fields.
Excluding and unrelated to the previously mentioned exploration prospects and
prospect leads, the Company's geoscientists have identified locations for as
many as 50 oil or gas wells in existing oil and gas fields on properties where
the Company has an interest, and several years could be required to complete
field development drilling. Most of these locations are classified as unproven.
The Company's current business plan provides for commencement of drilling of 6
to 8 exploitation wells in the remaining months of 1998 and 12 to 17 wells in
1999, or a maximum of 25 field exploitation wells in the balance of 1998 and
1999. (Exploitation drilling planned for herein does not consider or include any
development wells that may need to be drilled as a result of the exploration
success.)
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<PAGE> 17
The estimated investment to the Company for its average 29.7% working
interest in these field exploitation wells would range from $5,500,000 to
$7,129,000.
One of the field exploitation projects is in the Allen Field of Seminole
County, Oklahoma, where the Company drilled and completed two wells in 1998. The
#1 and #2 Culley are producing approximately 155 barrels of oil per day. The
Company operates these wells with a 100% working interest. The #3 Culley well
drilled by the Company in June 1998 was determined to be non-productive and has
been converted to a salt-water disposal well capable of disposing more than
2,000 barrels of salt water per day. Both the #1 and #2 Culley producing wells
produce salt water.
Another of the fields in the exploitation portfolio is the Dew Field in
Freestone County, Texas, where the Company owns a 25% interest in the H.E. White
unit operated by Anadarko Petroleum Corporation ("Anadarko"). The #2 White unit
well was drilled to a total depth of 13,950 feet and perforated and stimulated
in the Bossier Sandstone. The well is waiting pipeline connection at which time
it will be tested into the pipeline. Anadarko has recently completed new wells
near the White unit. The Company's 25% working interest in the #2 H.E. White
unit is estimated to cost $350,000. Anadarko has indicated that at least one
additional well may be proposed this year on the White unit.
The Company believes that the Constitution Field in Jefferson County, Texas,
offers the Company potential for new reserves. Several gas condensate reservoirs
known to exist in the Yegua formation between 12,000 feet and 14,500 feet deep
are productive. The Company is redeveloping a field that was discovered by a
major oil company in the 1970s but that was not economically successful for that
company. The Company's engineers believe that modern drilling and completion
technology, coupled with increased experience and knowledge about unique
drilling and completion problems associated with the overpressured Yegua
formation, can help overcome the mechanical problems previously experienced. The
first well drilled by the Company in the Constitution Field was the #1 Westbury
Farms, which was drilled relatively trouble free and revealed that the Company
obtained improvement in drilling results related to some of the problems the
former operator faced. The Company owns 15% working interest and is the operator
of the project.
Completed on March 22, 1998, the #1 Westbury Farms well tested at an initial
rate of 2,031 Mcf of gas per day, plus 355 barrels of condensate per day through
perforations between 13,910 and 13,940 feet. Because of delays associated with
pipeline right-of-way and permits, the first sale of gas is estimated to occur
in August 1998. A second well is planned to commence drilling on or before
October 1, 1998. A development drilling program for the field is expected to be
commenced if satisfactory stabilized production rates are confirmed in the
initial wells. A total of five additional wells could be required in 1998 and
1999 to develop this field. If these wells are successful, additional wells
could be required in future years.
Capital expenditures for the remainder of 1998 are budgeted at approximately
$4.8 million. The Company's capital expenditure budget is continually reviewed
and revised as necessary, based on perceived opportunities and business
conditions and capital availability. Pursuant to a July 1998 amendment to the
existing revolving credit facility, the Company currently has a borrowing base
17
<PAGE> 18
of $4,940,000. As of August 13, 1998, the amount drawn by the Company was
$4,790,000 resulting in an unused borrowing base of $150,000. The loan agreement
supporting that revolving credit facility was amended on May 19, 1998, to reduce
the Tangible Net Worth requirement from $7,500,000 to $5,250,000. On June 30,
1998, the Company's tangible net worth was below that required under the
facility. The Company has obtained a waiver to September 30, 1998, of the
tangible net worth requirement. Because the Company believes that it will be in
compliance with the debt covenants subsequent to that date, the Company
continues to classify the debt as long-term in the accompanying consolidated
financial statements. The bank has increased the Company's borrowing base by
$300,000, and the Company is actively exploring various options including sales
of debt, convertible debt and securities in the public or private markets to
increase the Company's tangible net worth.
Recent Accounting Pronouncements
On January 1, 1998, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
displaying of comprehensive income and its components. This statement requires a
separate statement to report the components of comprehensive income for each
period reported. The provisions of this statement are effective for fiscal years
beginning after December 15, 1997. Adoption of SFAS No. 130 did not have an
impact on the Company's financial presentation of income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards of accounting
and reporting for derivative instruments and for hedging activities. It requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and measures these instruments at fair value.
This statement is effective for financial statements for periods beginning after
June 15, 1999. The Company is currently evaluating the impact that SFAS No. 133
will have on its financial statements and disclosures.
Information Regarding Forward Looking Statements
The information contained in this Form 10-Q includes certain forward-looking
statements. When used in this document, such words as "expect", "believes",
"offers", "potential", and similar expressions are intended to identify
forward-looking statements. Although the Company believes that its expectations
are based on reasonable assumptions, it is important to note that actual results
could differ materially from those projected by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, the
timing and extent of changes in commodity prices for oil and gas, the need to
develop and replace reserves, environmental risk, the substantial capital
expenditures required to fund its operations, drilling and operating risks,
risks related to exploration and development, uncertainties about the estimates
of reserves, competition, government regulation and the ability of the Company
to implement its business strategy and to raise the necessary capital for such
implementation. See Item 1 "Business - Forward Looking Statements" and "- Risk
Factors" in the Form 10-K for additional information about the Company's risks.
Impact of Year 2000
1. State of Readiness
The Company has not completely assessed all possible sources of
problems that may arise from the potential inability of computers and
other date-sensitive equipment to recognize a date in the year 2000 and
beyond (the "Y2K" effect). The Company has conducted a preliminary
survey of the internal information technology systems that are used in
its principal office, and it has solicited responses from the primary
external entities on which it relies, e.g., its out-sourced accounting
contractor. That survey and those responses indicate that the major
18
<PAGE> 19
operations of the Company will not be directly affected by the Y2K
events. Of particular importance to the Company are the computer
workstations in the geological/geophysical department. Based on
information from the software developer, the Company believes that the
programs used in that area are Y2K-ready. The Company has contracted
with a computer consulting firm to assess the computers and the
computer network used within the Company's principal office, and the
report should be ready by the third quarter of 1998.
With regard to non-information technology systems, the Company
intends to complete a cursory survey of those systems during the fourth
quarter of 1998, and after a review of that survey, to decide on a
course of action by year-end.
Third parties with which the Company has material relationships
include its bank, purchasers of oil and gas production, working
interest owners who have interests in properties in which the Company
desires to drill wells, and suppliers of services and equipment
critical to the Company's business. The Company started contacting
those parties about their Y2K compliance, and the Company believes it
will have responses back by the fourth quarter of 1998.
2. Cost to Address Y2K Issues
The Company has not spent a significant amount on efforts to address
Y2K issues as of the date of this report on Form 10-Q. By the end of
the fourth quarter of 1998, it intends to have a more definite estimate
of past and future expenditures.
3. Y2K Risks to Company
The worst case scenario that is most reasonably likely is if third
parties were delayed in paying or advancing funds to the Company in its
efforts to drill wells. Another likely worst case scenario is if a
supplier of drilling materials is late in supplying necessary materials
for a planned well, or if a purchaser of the Company's product is not
able to take delivery because of pipeline or valve problems related to
the Y2K effect. In such cases, leasehold interests could be lost due to
expiration of the leasehold estate. Given the inherent lack of
knowledge of value of unexplored or undeveloped mineral estates, the
Company is unable to determine in advance what the magnitude of the
effect of Y2K issues could be.
4. Company's Contingency Plan
The Company intends to prepare an appropriate contingency plan
during the first and second quarters of 1999 when a more thorough
compilation of the survey of the information technology systems in the
principal office has been completed and when the results of the surveys
of the non-information technology systems in the principal office and
of the surveys of any field operations are complete.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Excluded as provided by Item 305(e) of Regulation S-K.
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<PAGE> 20
PART II - OTHER INFORMATION
Item 2. Changes in Securities
Effective March 1, 1998, the Compensation Committee of the Board of
Directors of the Company approved the issuance of 100,000 shares of the
Company's Common Stock and 202,500 options to acquire shares of the
Company's Common Stock. Those securities were issued pursuant to the
Company's 1997 Incentive Plan that was previously approved by the
Company's shareholders. The shares of restricted Common Stock were
granted to two senior non-executive employees of the Company. The
options were granted to substantially all of the Company's officers,
employees and consultants.
The Company considers these issuances of securities to be private
placements and exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) of the Act. However, on
August 11, 1998, the Company filed an S-8 registration statement for
securities to be issued under the 1997 Incentive plan.
All the securities issued to date to employees and consultants under
the 1997 Incentive Plan are subject to a 3-year vesting period and the
continued employment with, or services to, the Company. A third of the
securities issued to each of the recipients vests at the end of each of
the three years following the effective date of issuance. The exercise
price for 130,500 of the options is $3.375 and were issued with a term
of ten years. The remaining 72,000 options were granted to E.L. Ames,
Jr., John Y. Ames, and Eugene L. Ames, III with an exercise price of
$3.75 and a term of five years.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.10 First Amendment to Second Amended and Restated Loan Agreement
dated May 19, 1998 between Venus Exploration, Inc. and Wells
Fargo Bank (Texas), N.A.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
20
<PAGE> 21
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: August 19, 1998 BY: /s/ Eugene L. Ames, Jr.
--------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)
Dated: August 19, 1998 BY: /s/ Patrick A. Garcia
--------------------------------
Patrick A. Garcia
(Principal Accounting Officer)
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<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.10 First Amendment to Second Amended and Restated Loan Agreement dated May 19, 1998
between Venus Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
FIRST AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT
This FIRST AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT (the
"First Amendment") dated May 19, 1998 is by and between VENUS EXPLORATION, INC.,
a Delaware corporation, formerly known as XPLOR CORPORATION, a Delaware
corporation (the "Borrower") and WELLS FARGO BANK (TEXAS), N.A., a national
banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, Bank and Borrower entered into that certain Second Amended and
Restated Loan Agreement dated December 22, 1997 (the "Loan Agreement"), pursuant
to which Borrower obtained a credit facility in the amount of up to the lesser
of the Borrowing Base (as defined in the Loan Agreement) or the Commitment (as
defined in the Loan Agreement); and
WHEREAS, Borrower and Bank now desire to amend the Loan Agreement as
hereinafter set forth in order to modify certain terms of the Loan Agreement to,
among other things, establish the current Borrowing Base and modify certain
financial covenants.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Definitions. Except as otherwise provided, unless the context
hereof indicates otherwise, all capitalized terms used herein shall have the
same meaning as such capitalized terms are defined in the Loan Agreement.
(a) The definition of "Current Ratio" is hereby deleted in its
entirety and the following substituted therefor:
"Current Ratio shall mean the ratio of the sum of all
assets of Borrower that are classified as current assets on
the balance sheet of Borrower in accordance with GAAP, plus an
amount equal to the unused availability under the Borrowing
Base; to all accounts payable and other current liabilities of
Borrower required to be accrued on the balance sheet of
Borrower in accordance with GAAP, excluding current maturities
of the Obligations; provided, however, if any portion of the
Debt due to Stratum under the Stratum Documents should be
classified as a current liability, such amount shall be
excluded from the calculation of this ratio."
(b) The definition of "Prime Rate" is hereby deleted in its
entirety and the following substituted therefor:
"Prime Rate shall be the rate most recently announced
by Bank at its principal office as its "Prime Rate". Prime
Rate is one of Bank's base rates and serves as the basis upon
which effective rates of interest are calculated for those
loans making reference thereto, and is evidenced by the
recording thereof after its announcement in such internal
publication or publications as Bank may designate. Any change
in the interest rate resulting from a change in such Prime
Rate shall become effective as of 12:01 a.m. of the Business
Day on which each change in Prime Rate is announced by Bank."
2. Borrowing Base. Section 2.2(b) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:
"(b) After receipt of all of the information required
by Section 2.2(a), Bank may redetermine the amount of the
Borrowing Base in accordance with the customary practices of
Bank for oil and gas loans to be effective as of April 1 and
October 1 of such year. In connection with the initial
Redetermination of the Borrowing Base as set forth herein,
Borrower agrees to pay to Bank an Engineering Fee in the
amount of $2,500. Thereafter, upon each subsequent delivery to
Bank of the information required by 2.2(a), Borrower shall pay
to Bank an Engineering Fee in the amount of $2,500.
1
<PAGE> 2
Until the next determination of the amount of the Borrowing
Base by Bank on or about June 1, 1998, the amount of the
Borrowing Base as of the Closing Date shall be deemed to be
$5,250,000. Until each new determination of Borrowing Base is
made by Bank, the amount of the Borrowing Base shall be deemed
to be the Borrowing Base last deemed or calculated, as the
case may be. In addition to the foregoing, Bank or Borrower
may initiate a redetermination of the Borrowing Base at any
other time as it so elects, provided, however, that Borrower
may initiate only two (2) such unscheduled redeterminations
during any consecutive twelve (12) month period by specifying
in writing to Bank the date on which Borrower will furnish the
information required by Section 2.2(a) and the date on which
it desires such redetermination to occur. Bank shall have at
least forty-five (45) days after the delivery of the
information required by Section 2.2(a) to make any unscheduled
redetermination of the Borrowing Base requested by Borrower.
Bank may, at any time and at its expense, initiate an
unscheduled redetermination of the Borrowing Base by
specifying in writing to Borrower the date by which Borrower
is to furnish the information required by Section 2.2(a)
(excluding the information required by Section 2.2(a)(i)) and
the projected date on which such redetermination is to occur.
Failure of Borrower to timely furnish such information
required by Section 2.2(a) shall not preclude Bank's right to
redetermine the Borrowing Base based on information previously
furnished to Bank. Bank shall promptly notify in writing
Borrower of the new Borrowing Base. Any redetermination of the
Borrowing Base shall not be effective until written notice is
sent to Borrower."
3. Tangible Net Worth. Section 6.17 of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:
"6.17 Tangible Net Worth. Borrower shall not permit
its Tangible Net Worth to ever be less than $5,250,000."
4. Year 2000 Compliance. A new Section 6.33 shall be added to the
Loan Agreement as follows:
"6.33 Year 2000 Compliance. Borrower shall perform
all acts reasonably necessary to ensure that (i) Borrower and
any business in which Borrower holds a substantial interest,
and (ii) all customers, suppliers and vendors that are
material to Borrower's business, become Year 2000 Compliant in
a timely manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all of
Borrower's systems and adopting a detailed plan, with itemized
budget, for the remediation, monitoring and testing of such
systems. As used in this paragraph, "Year 2000 Compliant"
shall mean, in regard to any entity, that all software,
hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of
such entity, will properly perform date sensitive functions
before, during and after the year 2000. Borrower shall,
immediately upon request, provide to Bank such certifications
or other evidence of Borrower's compliance with the terms of
this paragraph as Bank may from time to time require."
5. Arbitration Program. Exhibit 8.4(b) of the Loan Agreement
shall be deleted in its entirety and replaced with Exhibit 8.4(b) attached
hereto.
6. Ratifications. The terms and provisions as set forth in this
First Amendment shall modify and supersede all inconsistent terms and provisions
set forth in the Loan Agreement, and except as expressly modified and superseded
by this First Amendment, the terms of the Note and any and all other Loan
Documents executed in connection therewith or hereunto are hereby ratified and
confirmed and shall continue in full force and effect. Borrower and Bank agree
that the Loan Agreement, as amended hereby, the Note and the other Loan
Documents shall continue to be the legal, valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms.
7. Representations and Warranties. Borrower hereby represents and
warrants to Bank that (i) the execution, delivery and performance of this First
Amendment, and the other documents to be executed and delivered as required
hereby have been duly authorized by all requisite action on the part of
Borrower; (ii) after giving effect to this First Amendment, the representations
and warranties contained in the Loan Agreement, as amended hereby, and any other
Loan Document executed in connection herewith or therewith are true, correct and
complete on and as of the date hereof as though made on and as of the date
hereof; and (iii) after giving effect to this First Amendment, no Event of
Default or Potential Default has occurred and is continuing.
2
<PAGE> 3
8. Covenant Deviation and Waiver. As of December 31, 1997,
Borrower failed to observe or maintain compliance with the Tangible Net Worth
requirement set forth in Section 6.17 of the Loan Agreement. Borrower has
requested, and Bank has approved, a deviation from such compliance with respect
to such time period. It is understood and agreed that Bank's consent to such
deviation shall in no way act as a waiver of any covenants, restrictions, rights
or remedies with respect to the Loan Agreement, but that such deviation shall
apply only to the specific matter and instance set forth hereinabove.
9. Status of Claims. Borrower hereby represents and warrants to
Bank that no facts, events, status or conditions presently exist which, either
now or with the passage of time or the giving of notice or both, presently
constitute or will constitute a basis for any claim or cause of action against
Bank, or any defense to the payment of any of the Obligations. Borrower hereby
releases, relinquishes and forever discharges Bank, its successors, assigns,
agents, officers, directors, employees and representatives, of and from any and
all claims, demands, actions and causes of action of any and every kind or
character, whether known or unknown, present or future, which Borrower may have
against Bank, its successors, assigns, agents, officers, directors, employees
and representatives, arising out of or with respect to any and all transactions
relating to the Loan Agreement, this First Amendment, or any Loan Document,
including any loss, cost or damage, of any kind or character, arising out of or
in any way connected with or in any way resulting from the acts, actions or
omissions of Bank, its successors, assigns, agents, officers, directors,
employees or representatives.
10. Conditions Precedent to Effectiveness of First Amendment. This
First Amendment shall become effective and be deemed effective upon receipt by
Bank of the following:
(i) counterparts of this First Amendment duly executed by
Borrower and Bank;
(ii) a copy of resolutions approving this First Amendment, and
authorizing the transactions contemplated herein or therein duly
adopted by the Executive Committee of the Board of Directors of
Borrower, accompanied by a certificate of the duly authorized Secretary
of Borrower, that such copy is a true and correct copy of resolutions
duly adopted by the Executive Committee of the Board of Directors of
Borrower, and that such resolutions constitute all the resolutions
adopted with respect to such First Amendment and the transactions
contemplated herein, and have not been amended, modified or revoked in
any respect and are in full force and effect as of the date hereof;
(iii) payment by Borrower of an Engineering Fee in the amount
of $2,500 as required by Section 2.2(b);
(iv) there shall not have been, in the sole judgment of Bank,
any material adverse change in the financial condition, business or
operations of Borrower;
(v) payment by Borrower of the fees and expenses of counsel to
Bank in connection with the preparation and negotiation of this First
Amendment and all documents and instruments contemplated hereby; and
(vi) the execution and delivery by Borrower of such additional
documents and instruments that Bank and its counsel may deem necessary
to effectuate this First Amendment or any document executed and
delivered to Bank in connection herewith or therewith.
11. Execution Counterparts. This First Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which when taken together shall constitute but one and
the same instrument.
12. Governing Law. This First Amendment shall be governed by and
construed in accordance with the internal Laws of the State of Texas.
13. Successors and Assigns. This First Amendment is binding upon
and shall inure to the benefit of Borrower and Bank and their respective
successors and assigns; provided, however, Borrower may not assign or transfer
any of their rights or obligations hereunder without the prior written consent
of Bank.
3
<PAGE> 4
14. Headings. The headings, captions and arrangements used in this
First Amendment are for convenience only and shall not effect the interpretation
of this First Amendment.
15. NO ORAL AGREEMENTS. THIS FIRST AMENDMENT, TAKEN TOGETHER WITH
THE OTHER LOAN DOCUMENTS AND ALL SCHEDULES AND EXHIBITS THERETO, REPRESENTS THE
FINAL AGREEMENT OF THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
16. AGREEMENT FOR BINDING ARBITRATION. THE PARTIES AGREE TO BE
BOUND BY THE TERMS AND PROVISIONS OF THE CURRENT ARBITRATION PROGRAM OF WELLS
FARGO BANK (TEXAS), N.A., WHICH IS INCORPORATED BY REFERENCE HEREIN AND IS
ACKNOWLEDGED AS RECEIVED BY THE PARTIES, PURSUANT TO WHICH ANY AND ALL DISPUTES
SHALL BE RESOLVED BY MANDATORY BINDING ARBITRATION UPON THE REQUEST OF EITHER
PARTY.
"BORROWER"
VENUS EXPLORATION, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
"BANK"
WELLS FARGO BANK (TEXAS) N.A.
By:
------------------------------------
Theodore M. Nowak
Vice President
4
<PAGE> 5
EXHIBIT 8.4(b)
WELLS FARGO BANK (TEXAS), N.A. ARBITRATION PROGRAM
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the foregoing arising in
connection with the exercise of any self-help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who fails
or refuses to submit to arbitration following a lawful demand by any other party
shall bear all costs and expenses incurred by such other party in compelling
arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in Texas selected by
the AAA or other administrator. If there is any inconsistency between the terms
hereof and any such rules, the terms and procedures set forth herein shall
control. All statutes of limitation applicable to any Dispute shall apply to any
arbitration proceeding. All discovery activities shall be expressly limited to
matters directly relevant to the Dispute being arbitrated. Judgment upon any
award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. Section 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the Texas State Bar with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of Texas, (ii) may grant any
remedy or relief that a court of the state of Texas could order or grant within
the scope hereof and such ancillary relief as is necessary to make effective any
award, and (iii) shall have the power to award recovery of all costs and fees,
to impose sanctions and to take such other actions as they deem necessary to the
same extent a judge could pursuant to the Federal Rules of Civil Procedure, the
Texas Rules of Civil Procedure or other applicable law. Any Dispute in which the
amount in controversy is $5,000,000 or less shall be decided by a single
arbitrator who shall not render an award of greater than $5,000,000 (including
damages, costs, fees and expenses). By submission to a single arbitrator, each
party expressly waives any right or claim to recover more than $5,000,000. Any
Dispute in which the amount in controversy exceeds $5,000,000 shall be decided
by majority vote of a panel of three arbitrators; provided however, that all
three arbitrators must actively participate in all hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
Texas, and (iii) the parties shall have in addition to the grounds referred to
in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators
1
<PAGE> 6
are supported by substantial evidence, and (B) whether the conclusions of law
are erroneous under the substantive law of the state of Texas. Judgment
confirming an award in such a proceeding may be entered only if a court
determines the award is supported by substantial evidence and not based on legal
error under the substantive law of the state of Texas.
(f) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
2
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