<PAGE> 1
As filed with the Securities and Exchange Commission on September 8, 1999
Registration No. 333-73457
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------------
VENUS EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3299127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 N.E. LOOP 410
SUITE 1000
SAN ANTONIO, TEXAS 78209
(210) 930-4900
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
------------------------------------
JOHN Y. AMES
PRESIDENT & CHIEF OPERATING OFFICER
1250 N.E. LOOP 410, SUITE 1000
SAN ANTONIO, TEXAS 78209
TELEPHONE: (210) 930-4900
FAX: (210) 930-4901
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------------
COPY TO:
WILL C. JONES IV
HAYNES AND BOONE, LLP
SUITE 1600
112 E. PECAN STREET
SAN ANTONIO, TEXAS 78205
TELEPHONE: (210) 978-7000
FAX: (210) 978-7450
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share 11,233,333 shares $1.56 $17,523,999 $4,872(3)
=================================================================================================================================
</TABLE>
(1) Pursuant to Rule 416, the Registration Statement also covers such
indeterminate additional shares of Common Stock as may become issuable to
prevent dilution resulting from stock splits, stock dividends or similar
events.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the average of the high and low prices reported on
the Nasdaq SmallCap Market(SM) on September 2, 1999
(3) The Registrant has previously paid a filing fee of $364.00 with respect to
the registration of 1,100,000 shares on this Registration Statement.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and, it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, PROSPECTUS FOR THE SALE OF
Dated September 8, 1999 COMMON STOCK BY OWNERS
OTHER THAN THE ISSUER
[Venus logo]
11,233,333 SHARES OF COMMON STOCK
This prospectus covers the resale of 11,233,333 shares of common stock of Venus
Exploration, Inc. Stratum Group, L.P. owns 1,100,000 of the shares covered by
this prospectus, and EXCO Resources, Inc. may acquire up to the remaining
10,133,333 shares pursuant to a convertible promissory note issued by Venus
Exploration to EXCO.
Stratum and EXCO may offer these shares from time to time in various types of
transactions, including sales on the open market and in privately negotiated
transactions. These sales may be at fixed prices, at prevailing market prices,
varying prices and negotiated prices. There are no underwriting arrangements
with respect to this offering. Venus Exploration will not receive any proceeds
from these resales of our common stock.
The common stock is traded on the Nasdaq SmallCap Market(SM) under the symbol
VENX.
---------------------
This investment involves a high degree of risk, and you should purchase shares
only if you can afford a complete loss of your investment. Please consider the
"Risk Factors" beginning on page 5 before you make an investment in the shares
covered by this prospectus.
Neither the U.S. Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities. None of those
agencies has determined whether this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
---------------------
, 1999.
---------------------
<PAGE> 3
You should rely only on the information contained in this document or
on information to which we have referred you. We have not authorized anyone else
to provide you with information that is different.
This prospectus covers only offers to sell and solicitations of offers
to buy the 1,100,000 shares of common stock held by Stratum and the 10,133,333
shares that may be issued to EXCO. However, in any situation in which the
circumstances would make an offer or a solicitation unlawful, this prospectus
will not be considered to cover that offer to sell or that solicitation of an
offer to buy.
You should remember that the information contained in this prospectus
is correct as of , 1999. You should not assume that the information will remain
correct after that date. For example, just because this prospectus is delivered
after that date, you should not presume that Venus Exploration's affairs are the
same as they were on , 1999. If there are material changes in Venus
Exploration's affairs, we will disclose those changes to you by filing a
post-effective amendment updating the information in this prospectus.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary ........................................................................ 3
Risk Factors..................................................................... 5
Forward-Looking Statements.......................................................15
Venus Exploration, Inc...........................................................16
Recent Developments..............................................................17
Description of Capital Stock.....................................................25
Use of Proceeds..................................................................25
Selling Stockholders.............................................................26
Plan of Distribution.............................................................28
Legal Matters....................................................................29
Experts ........................................................................30
Disclosure of SEC Position on Indemnification for Securities Act Liabilities.....30
Where You Can Find More Information..............................................31
Information Incorporated by Reference............................................31
</TABLE>
---------------
2
<PAGE> 4
SUMMARY
In this prospectus, when we use the terms "Venus Exploration," "we,"
"us" or "our," we are referring to Venus Exploration, Inc., together with our
subsidiaries and predecessors, unless the context of the statement in which the
term is used indicates another meaning.
The Company
Venus Exploration has been engaged in the exploration, development and
acquisition of oil and gas properties since 1996. We presently have oil and gas
properties, acreage and production in nine states; however, our primary
exploration and development activity is focused in Texas, Oklahoma and
Louisiana. Venus Exploration is a Delaware corporation. Our principal executive
offices are located at 1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209,
and our telephone number is (210) 930-4900.
Recent Developments
EXUS Energy. On June 30, 1999, EXUS Energy, LLC, a Delaware limited
liability company owned 50% by Venus Exploration, and 50% by EXCO Resources,
Inc., acquired from Apache Corporation oil and natural gas properties located in
Jackson Parish, Louisiana. EXUS Energy acquired leasehold interests covering
approximately (a) 6,411 acres that are considered to have already been developed
for oil and gas production, and (b) 1,532 acres that have not been developed.
The purchase price, before closing adjustments, was $28.5 million.
EXUS Energy had initial equity capital of $14 million. EXCO provided $7
million from its cash on hand. We provided $7 million, which we borrowed from
EXCO under the terms of an $8 million convertible promissory note (the "EXCO
Note"). Beginning on July 1, 2000, and continuing until the EXCO Note is paid in
full, EXCO, at its option, may convert all or any portion of the outstanding
principal balance and accrued interest into shares of our common stock for $1.50
per share, subject to adjustment. The shares that may be issued under the terms
of the EXCO Note are subject to a registration rights agreement. That agreement
requires us to register the 10,133,333 shares for resale by EXCO that are being
offered by this prospectus. The 10,133,333 shares represent: (a) 5,333,333 that
will be issued if EXCO converts $8 million of principal under the EXCO Note at
$1.50 per share; and (b) 4,800,000 shares that will be issued if we paid all
interest accruing on $8 million principal of the EXCO Note at an assumed market
price of $1.00 per share.
On June 30, 1999, EXUS Energy entered into a credit facility with
NationsBank, N.A. as administrative agent and lender. The credit facility
provides for borrowings up to $50 million, subject to borrowing base
limitations. The credit facility consists of a regular revolver, which on July
15, 1999, had a borrowing base of $19.5 million.
Private Placement. In the second quarter of 1999 we completed the
private placement to six investors of six unsecured convertible subordinated
promissory notes (each a "Subordinated Note" and collectively, the "Subordinated
Notes") totaling $1,000,000. We
3
<PAGE> 5
received net proceeds of $975,000 after legal fees and other miscellaneous
expenses. The net proceeds were used for general working capital.
Property Sales. On January 27, 1999, we sold our oil and gas properties
in West Virginia to Allegheny Interests, Inc., and Meridian Exploration
Corporation for a gross purchase price of $1,170,000. On February 12, 1999, we
sold our interest in the H.E. White Unit in Freestone County, Texas to Petroleum
Development Corporation and Warren Resources, Inc. for a gross purchase price of
$1,150,000. We used $1,650,000 out of the net proceeds from these sales to
reduce our indebtedness; the rest was used for general operating expenses. Both
sales were of non-core properties, and the H.E. White Unit was not operated by
us.
Our Financial Condition. During 1998 our financial situation
deteriorated. Throughout the past year we have received a series of waivers from
our principal lender for defaults under our revolving credit agreement.
Currently, we are in default under two of the financial covenants in that credit
agreement. These covenant defaults have been waived by that lender until
September 30, 1999. In addition, our independent auditors raised a "going
concern" question in the auditors' report on our 1998 financial statements.
In April 1999 we received letters from the Nasdaq SmallCap Market(SM)
regarding our auditors' "going concern" question and stating that we did not
meet all the Nasdaq listing criteria due to the decline in our tangible net
worth. Subsequent to Nasdaq's initial letter, we responded in detail with our
plans to address their concerns. On August 30, 1999, Nasdaq advised us that they
intended to delist us effective with the close of business on September 8, 1999.
We have responded by asking for a hearing by a Nasdaq Listing Qualifications
Panel so that we can appeal the Nasdaq staff's determination. The request for a
hearing will stay the delisting action pending a final decision by the panel.
We have begun implementing a plan to solve the immediate financial
concerns. The EXUS Energy transaction, the private placement of the subordinated
debt, and the sale of the non-core properties were parts of that plan. The EXUS
Energy transaction is significant to us. We expect that it will reduce our
quarterly loss and that it will have a positive impact on our operating cash
flow. We are also working on a number of other alternatives, including the
possibility of a merger, the sale of other assets, and the issuance of debt or
equity capital.
4
<PAGE> 6
RISK FACTORS
You should carefully consider the following factors before you purchase
shares of our common stock.
Our Auditors Have Raised A Going Concern Question That May Negatively
Impact Our Operations.
In KPMG LLP's opinion on the results of its audit of our financial
statements for fiscal 1998, KPMG states that the financial statements had been
prepared assuming we would continue as a going concern. Our auditors state that
our recurring losses from operations and accumulated deficit raise substantial
doubt about our ability to continue as a going concern. This concern will
complicate our ability to raise new capital for our business due to the negative
connotations of this going concern question. As discussed in greater detail
below in "-- We May Be Delisted From the Nasdaq SmallCap Market," the Nasdaq
SmallCap Market has contacted us about the going concern matter raised by our
auditors. If we are unable to satisfy the officials at Nasdaq that we can
overcome this issue, the Nasdaq SmallCap Market could move to delist our common
stock from trading on that market. Also, as a result of the going concern issue
raised by our auditors, our vendors, suppliers, well operators and others with
whom we do business may become concerned and may be unwilling to conduct
business with us. Alternatively, they may demand cash deposits before supplying
materials to us, or they may take other actions that could hurt our day-to-day
business operations and strain our cash position.
Our Lenders May Foreclose on Our Oil and Gas Properties Due to Our
Defaults Under Financial Covenants.
We are in default on two of our financial covenants under our revolving
credit agreement with our principal lender. We are required to maintain a ratio
of current assets to current liabilities of at least 1:1 and a tangible net
worth of at least $5,250,000. As of June 30, 1999, our current ratio was 0.84:1,
which represents a current asset deficiency of $262,000. As of the same date,
our aggregate tangible net worth was a negative $454,000.
Our lender has waived these defaults through September 30, 1999. We are
trying to arrange additional capital to achieve a long term resolution of our
defaults under the credit agreement. If we are not successful, our lender may
declare all amounts borrowed under the credit agreement, together with accrued
interest, to be due and payable. If we do not repay the indebtedness promptly,
our lender could then foreclose against any collateral securing the payment of
the indebtedness. Substantially all of our oil and gas interests, other than our
interests held in the EXUS Energy, LLC joint venture with EXCO, secure our
credit agreement.
Our only other secured debt is the convertible promissory note (the
"EXCO Note") issued to EXCO. An uncured or unwaived default on our revolving
credit agreement would result in a cross-default under the EXCO Note. EXCO could
then demand repayment of the
5
<PAGE> 7
EXCO Note. If we did not repay the EXCO Note promptly, EXCO could foreclose on
our entire equity interest in EXUS Energy.
In addition, the lender has complete discretion in determining the
amount that we can borrow under our revolving credit agreement. If oil or gas
prices were to decline materially relative to the prices used by our lender in
establishing our borrowing base, if the estimated proved oil and gas reserves
securing the revolving credit agreement were to materially decline or if any
other development were to occur affecting our lender's determination, then our
lender could decide to lower our borrowing base. If our borrowing base is
reduced, our lender can require us to pay down our outstanding debt at a time
when we have not planned to do so. If we do not reduce our debt to a level
within our borrowing base, our lender may declare a default. Even if our lender
does not declare a default before the debt matures, we may not be able to pay
the debt when it does mature. If we do not repay our debt, our lender would be
able to foreclose on our oil and gas properties.
We Currently Do Not Have Sufficient Cash Reserves to Implement Our
Business Plan.
We do not have the cash reserves or available bank credit to carry out
our business plan. In order to complete more acquisitions of properties and to
explore and to develop prospects, we must arrange additional capital. The cash
flow generated by current operations is only sufficient to fund our general and
administrative expenses. We cannot borrow additional money under our revolving
credit agreement. Moreover, substantially all of our assets, excluding our
interest in EXUS Energy, are pledged to our lender under our credit agreement.
Our interest in EXUS Energy and our distribution and income rights in EXUS are
pledged to secure the repayment of all of our borrowings under the EXCO Note.
Our assets are predominately real property rights and intellectual
information that we have developed in our exploration and development efforts.
The market for these types of properties fluctuates and is generally very small.
Thus, our assets may be very illiquid and not easily converted to cash. As a
result of our lack of cash reserves and our lack of liquidity, we may miss
acquisition opportunities, engage in less exploratory and development drilling,
and default on our debt.
If We Do Not Obtain Stockholder Approval for Issuances of Our Common
Stock to EXCO, We Must Transfer a Portion of Our Equity Interest in the
Joint Venture to EXCO.
The Nasdaq SmallCap Market requires us to obtain the approval of our
stockholders to issue additional shares of common stock under certain
circumstances. We are required to obtain our stockholders' consent to that
portion of the shares of common stock issuable either in payment of interest on
the EXCO Note or upon conversion of the EXCO Note itself into an amount that
exceeds 20% of our outstanding common stock on June 30, 1999. We intend to call
a stockholders' meeting later this year to seek stockholder approval of the
potential issuance. If our stockholders do not approve the issuance by December
15, 1999, we must transfer 42.9% of our equity interest in the joint venture to
EXCO in exchange for cancellation of $3 million of the outstanding indebtedness
under the EXCO Note. In
6
<PAGE> 8
addition, our right to borrow up to an additional $1 million under the EXCO Note
would be terminated.
We Have Not Yet Established Profitable Operations.
Since commencing operations in 1996, Venus Exploration has not been
profitable. We incurred net losses of approximately $2,007,000 for the year
ended December 31, 1996, $4,168,000 for the year ended December 31, 1997, and
$9,410,000 for the year ended December 31, 1998. Our net losses were
approximately $4,208,000 for the six months ended June 30, 1998, and $668,000
for the six months ended June 30, 1999. We expect to report a loss for the year
ending December 31, 1999.
We may never generate sufficient revenues to achieve profitability.
Even if we attain profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. At June 30, 1999, we had an
accumulated retained earnings deficit of approximately $17.6 million.
We May Use More Expensive or Non-Traditional Financing to Fund Our
Business Plan.
We may use non-traditional sources of financing to acquire any
properties or to fund our capital expenditures, including the costs of drilling
wells. For example, if we find unencumbered properties to buy, we may use
financing which is secured only by those properties and the oil and gas
production from those properties. In an arrangement like this, the lender will
have no recourse against our other assets, and we may be required to pay the
lender a higher rate of interest on the indebtedness.
In addition, we may issue temporary or bridge financing, including
indebtedness, or issue preferred stock or other securities in order to raise
capital. Given our current financial condition, if we issue these securities we
may be required to pay a premium to any purchaser or agree to more onerous
conversion or other terms.
We Are Significantly Affected By Changes in the Market Prices of Oil
and Gas.
Historically, the market prices for oil and gas have been volatile, and
they are likely to continue to be volatile in the future. We sell most of our
oil and gas at current market prices rather than through fixed-price contracts.
Thus, our financial condition, operating results and future growth could be
jeopardized by volatility in market prices. Sharply reduced oil and gas prices
during 1998 and early 1999 hurt our results of operations, our access to capital
and the estimated value of our oil and gas reserves. They also increased our
operating losses. The price volatility is the result of factors beyond our
control including:
o domestic and foreign political conditions,
o the overall supply of, and demand for, oil and gas,
o the price of imports of oil and gas,
o weather conditions,
7
<PAGE> 9
o the price and availability of alternative fuels,
o overall economic conditions,
o exploration and drilling costs,
o pipeline availability and transportation costs, and
o federal and state regulatory and statutory developments.
On a pro forma basis for the six months ended June 30, 1999, taking
into account the sale of non-core properties and the acquisition of the Jackson
Parish properties through the joint venture with EXCO, our current production is
about 75% natural gas; however, our earnings and cash flow are sensitive to
fluctuations in both oil and gas prices. On a pro forma basis a $0.10 per Mcf
change in gas prices would have resulted in $74,000 difference in gross revenues
for the six months ended June 30, 1999. Also on a pro forma basis, a $1.00 per
Bbl change in oil prices would have resulted in a $40,000 difference in gross
revenue for the six months ended June 30, 1999. "Mcf" means 1000 cubic feet of
natural gas at standard atmospheric conditions, and "Bbl" means a standard
42-gallon barrel of crude oil.
Our Use of Debt Financing Presents Various Limitations on Our
Operations.
We already have incurred significant indebtedness, and we plan to incur
additional indebtedness as we execute our exploration, exploitation and
acquisition strategy. Our current level of indebtedness requires us to pursue
non-traditional and more expensive financing. Our level of indebtedness will
have several important effects on future operations, including:
o a substantial portion of our cash flow from operations will be
used to pay interest on the outstanding debt and will not be
available for other purposes,
o the uses of capital will be limited by covenants in our revolving
credit agreement,
o our ability to obtain additional financing in the future may be
impaired, and
o since the interest on our indebtedness is calculated with a
variable rate, increases in that rate could further decrease our
liquidity.
Our Future Success Depends on Our Ability to Expand Our Reserve Base.
Our financial condition and results of operations depend substantially
upon our ability to find or acquire additional oil and gas reserves that are
economically viable and to successfully develop these reserves. If we are unable
to do so, our proved reserves will generally decline as those reserves are
produced. As used in this prospectus, the term "proved reserves" means the
estimated quantities of oil and gas that the geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions and current
regulatory practices.
The value of our company is directly related to our level
of reserves. We must replace our reserves, even during periods of low oil and
gas prices when it is difficult to raise the capital necessary to finance
acquisitions or development. Without successful exploration,
8
<PAGE> 10
development or acquisition activities, our reserves, production and revenues
will decline rapidly. We may not be able to find or acquire new reserves or to
profitably develop and produce new reserves.
Exploration is a High-Risk Activity, and the 3-D Seismic and Other
Advanced Technologies We Use Are Expensive, Require Experienced
Personnel, and Cannot Eliminate Exploration Risk.
Our business strategy focuses in part on adding reserves through
exploration, where the risks are greater than in acquisitions and development
drilling. By definition, exploration involves operations in areas about which
little is actually known. We use 3-D seismic data and other advanced
technologies to identify possible new reserve locations and to reduce our
exploration risk, but exploratory drilling remains speculative. Even when
extensively used and properly interpreted, 3-D seismic data and other similar
visualization techniques only assist geoscientists in identifying subsurface
structures and hydrocarbon indicators. They do not conclusively allow an
interpreter to know if hydrocarbons in the form of oil or gas are present or if
they are economically producible. Our use of 3-D seismic data and other
technologies also requires greater pre-drilling expenditures than traditional
drilling strategies. We could incur losses as a result of these higher
expenditures. We may fail to increase our reserves through exploration.
We May Not Identify All Acquisition Risks.
Part of our business plan is to acquire properties already producing
oil and gas and to increase the reserves attributable to those properties
through development drilling. The successful acquisition of producing properties
requires an assessment of recoverable reserves, future oil and gas prices,
operating costs and potential environmental and contractual liabilities. Our
assessment, however, will not reveal all existing or potential problems, nor
will it permit us to become sufficiently familiar with the properties to fully
assess their deficiencies and capabilities. Inspections generally are not
performed on every well or pipeline, and structural and environmental problems
are not necessarily observable even when an inspection is undertaken. Even when
problems are identified, the seller may not be willing, or financially able, to
give contractual protection against the problems, and we may decide to assume
environmental and other liabilities in connection with acquired properties.
After a property is acquired, we may discover environmental liabilities that may
exceed our total net worth. These factors and others can turn an apparently
beneficial acquisition into a financially disastrous liability.
We Will Encounter Risks Associated with Drilling and Operating Wells.
A large part of our business plan is to drill exploratory wells.
Exploratory wells are wells drilled into horizons with little or no history of
oil or gas production. Our business plan heightens many of the considerable
risks associated with drilling in general. We encounter unexpected circumstances
more often when we drill exploratory wells versus other types of wells, because
we are often drilling at locations and in formations about which there is little
or no information because few or no wells have been drilled at that location
before. Moreover the probability that we will discover and produce oil or gas
from an exploratory well is lower than drilling a development well where the
chances of success are greater because of the existence of nearby wells or other
data. Therefore, these risks may
9
<PAGE> 11
pose more of a danger to Venus Exploration than they would to a company that
focuses primarily on drilling development wells. Development wells are wells
drilled into known producing oil and gas fields and horizons. We anticipate
drilling or participating in the drilling of six (6) development wells during
1999. However, even if we drill and complete these wells as producing wells,
they may not produce sufficient net revenues to return a profit after our
drilling, operating and other costs.
The cost of drilling, completing and operating wells is often
uncertain. Our drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors. These factors include:
o mechanical problems encountered in drilling the well,
o unexpected pressure or irregularities in formations,
o land title problems,
o weather conditions,
o compliance with governmental requirements, and
o shortages or delays in the delivery of equipment and services.
Other operating hazards we face include:
o fires, whether on the ground level or down in the well bore,
o blowouts where oil or gas flows uncontrolled at a wellhead,
o the collapse of the well bore, whether due to loss of underground
formation support or failure of the well bore casing,
o explosions, and
o environmental accidents such as uncontrollable flows of oil, gas
or well fluids into the environment, including groundwater
contamination.
We may suffer substantial losses due to injury and loss of life, severe damage
to, and destruction of, property and equipment as a result of these hazards. The
hazards can also be the cause of pollution and other environmental damage. We
carry insurance that we believe is in accordance with customary industry
practices, but, as is common in the oil and gas industry, we do not fully insure
against all risks associated with our business, either because the insurance is
not available or because the cost is prohibitive. The occurrence of an event
that is not covered by our insurance, or not fully covered by our insurance,
could materially harm our financial condition and results of operations.
Estimates of Our Reserves and Future Net Revenues May Not Prove To Be
Correct Because Assumptions May Turn Out To Be Wrong.
The reserve data set forth, or included by reference, in this
prospectus are only estimates, even when referred to as "proved." Petroleum
engineers consider many factors and make assumptions in estimating our oil and
gas reserves and future net cash flows. These estimates utilize assumptions the
Securities and Exchange Commission requires for all public companies, including
us. Estimates by definition are imprecise. Reservoir
10
<PAGE> 12
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured exactly and making assumptions based on the
process. Inherent uncertainties exist in the projection of future rates of
production and the timing of development expenditures. The timing of production
may be considerably different from the periods estimated. Assumptions are based
on factors such as historical production from the area as compared with
production from other areas, assumed effects of governmental regulation and
assumptions regarding future oil and gas prices, costs, taxes and capital
expenditures. Although we believe that our reserve estimates are reasonable, you
should expect that actual production, revenues and expenditures relating to our
reserves will vary from any estimates, and these variations may be material.
The estimates of future net revenues from our proved reserves and the
present value of the revenues are based upon assumptions about future production
levels. These assumptions may be wrong. The SEC PV-10 values as reported in the
Annual Report on Form 10-K for the year ended December 31, 1998, which is
incorporated by reference into this prospectus, should not be considered as
representative of the fair market value of Venus Exploration's proved oil and
gas properties. "SEC PV-10" refers to present value calculated using a 10%
discount rate and other conditions required by the Securities and Exchange
Commission. The discounted future net cash flows upon which these SEC PV-10
values are based do not provide for changes in oil and gas prices or for
escalation of expenses and capital costs. Our actual future prices and costs may
differ materially from the assumed conditions.
We Do Not Have Control Over the Sale and Abandonment of Some of Our
Assets.
We own less than a majority interest in 158 wells, and those wells
yielded about 89% of our net revenues from the sale of production in the second
quarter of 1999. We may not control the timing of plugging and abandoning these
wells because we do not own a majority working interest. The majority owners of
these oil and gas properties have the right to abandon any well whether or not
we believe that the well or property is still capable of producing oil or gas in
commercially paying quantities.
Our Use of the "Successful Efforts" Method of Accounting May Have A
Negative Effect on Our Earnings.
We use the "successful efforts" method of accounting for our investment
in oil and gas properties. This method of accounting can adversely affect our
reported earnings and thereby the market value of our stock because it can
result in Venus Exploration having to charge to expense many drilling and other
costs earlier than might be the case with "full cost" accounting, which is used
by many oil and gas companies. This charge to expense can result in reduced
earnings or larger losses than might be the case with the full cost accounting
method.
Governmental and Environmental Regulation Could Hamper Our Oil and Gas
Operations.
Our business is subject to extensive federal rules and regulations. If
we fail to comply with these rules and regulations, we can incur substantial
penalties. In general, the regulatory burden on the oil and gas industry
increases our cost of doing business and
11
<PAGE> 13
decreases our profitability. Because these rules and regulations are frequently
amended or reinterpreted, we cannot predict the future cost or impact of
complying with these laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations. They also impose
other requirements relating to the exploration and production of oil and natural
gas. Many states have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells, and the regulation
of spacing, plugging and abandonment of wells.
Our activities with regard to exploration, development and production
of oil and gas, including the operation of saltwater injection and disposal
wells, are subject to various federal, state and local environmental laws and
regulations. These laws and regulations can increase the costs of planning,
designing, installing and operating oil and gas wells. Various governmental
entities can impose civil and criminal fines and penalties for noncompliance
with these environmental laws and regulations. Some environmental laws can
impose joint and several retroactive liability, without regard to fault or the
legality of the original conduct. In addition, a release of oil into water or
other areas can result in Venus Exploration being held responsible for the costs
of cleaning up the release. That liability can be extensive, depending on the
nature of the release. Other environmental regulations impose standards for the
treatment, storage and disposal of both hazardous and nonhazardous solid wastes.
We generate hazardous and nonhazardous solid waste in connection with our
routine operations. Additionally, these environmental laws and regulations
require operators like Venus Exploration to get permits or other governmental
authorizations before undertaking routine industry activities.
Because any violation of environmental statutes could affect a large
area and because our exploration projects are drilled into horizons where little
is known about the conditions we will encounter, we could incur substantial
liability under these environmental statutes. If we incur a large environmental
liability, our costs would increase. Increased costs could reduce the
profitability and value of our properties. Given our dependence on debt
financing and the importance of our lender's valuation of our collateral, any
substantial decrease in the then-current estimates of total value could have
detrimental effects on our operations and business plan.
The Issuance of New Shares of Our Stock May Dilute Existing Owners'
Status and May Prevent a Takeover Attempt.
The Board of Directors has total discretion in the issuance of any
shares of common stock and preferred stock. The issuance of shares of common
stock or preferred stock could reduce the voting power of the purchasers of
common stock covered by this prospectus, and it could have the effect of
delaying, deferring or preventing a change of control of Venus Exploration. For
example, under certain circumstances, the issuance of common stock or preferred
stock could complicate or discourage a merger, tender offer or proxy contest,
the assumption of control by a holder of a large block of our securities, or the
removal of incumbent management. We currently are authorized to issue 30,000,000
shares of common stock, and the Board of Directors intends to ask the
shareholders to approve an increase to 50,000,000 authorized shares. We had
11,029,383 shares of common stock issued and
12
<PAGE> 14
outstanding as of August 1, 1999. We are authorized to issue 5,000,000 shares of
preferred stock. We had no issued and outstanding preferred stock as of August
1, 1999.
Third Party Sales of Our Common Stock Can Lower Our Stock Prices.
Sales of substantial amounts of our common stock in the public market,
pursuant to Rule 144 or otherwise, or the availability of shares for sale, could
lower the prevailing market price of our common stock and could impair our
ability to raise additional capital through the sale of equity securities.
As of August 1, 1999, Venus Exploration had outstanding 11,029,383
shares of common stock. In addition, 1,739,635 shares were subject to issuance
if all the outstanding warrants and vested options for our common stock are
exercised. Of the issued and outstanding shares of our common stock,
approximately 1,000,000 shares are freely tradeable without restriction or
further registration under the Securities Act of 1933. That number does not
include the 11,233,333 shares covered by this prospectus. It also does not
include the approximately 2,380,315 shares issued in 1997 to the shareholders of
Venus Exploration's predecessor that can now be sold pursuant to Rule 144. We
have registered approximately 760,596 shares that may be issued upon the
exercise of outstanding stock options. Most of these shares would be freely
tradeable; though the shares issued to our affiliates would not be freely
tradeable. All of the remaining shares of common stock held by existing
stockholders are subject to restrictions on resale. These "restricted"
securities may not be resold unless they are registered under the Securities Act
or are sold pursuant to an available exemption from registration, including Rule
144 under the Securities Act. Some stockholders, including holders of
"restricted" securities, have been granted rights with respect to registration
under the Securities Act of shares of common stock that they may acquire. If
substantial amounts of our common stock are sold, then the market price of our
common stock may decline making it more difficult for us to raise money by
issuing equity securities.
We May Issue Significant Amounts of Common Stock in the Future That May
Depress Our Stock Price and Dilute Existing Stockholders.
Under the terms of the EXCO Note and under the terms of the 7%
Convertible Notes described below, we could be required to issue up to 6,202,898
shares of our common stock upon conversion. Also, under the terms of those
notes, we may issue shares of our common stock in lieu of cash interest
payments. The issuance of common stock instead of cash is based upon the average
market price of our common stock over a period of time immediately preceding the
payment date. For example, if the average price was $1.00 per share at the time
of all interest payment dates until maturity, we might issue up to 5,137,074
shares of common stock if we so elected under both notes. This prospectus covers
the resale of up to 10,233,333 shares of common stock under the terms of the
promissory note held by EXCO.
As described above, as of August 1, 1999, there are 1,739,635 shares of our
common stock currently issuable upon exercise of outstanding warrants or vested
options. Approximately 70% of these warrants or options have exercise prices
that are less than the recent trading prices of our common stock. The issuance
of any of these shares could be considered dilutive to then-existing
stockholders and could depress our stock price. In
13
<PAGE> 15
addition, the possibility that so many shares could be issued; i.e., an
"overhang effect," could further depress the price of our common stock.
We May Be Delisted From The Nasdaq SmallCap Market.
On April 26, 1999, the Nasdaq SmallCap Market notified us about its
concern about our ability to sustain compliance with its continued listing
requirements. It also notified us about the possibility that we could be
delisted because our tangible net worth was below the minimum required by the
Nasdaq SmallCap Market. We sent Nasdaq a written response that supplied the
information that it requested. On August 30, 1999, Nasdaq advised us that it
intended to delist us effective with the close of business on September 8, 1999.
We have responded by asking for a hearing by a Nasdaq Listing Qualifications
Panel so that we can appeal the Nasdaq staff's determination. The request for a
hearing will stay the delisting action pending a final decision by the panel.
However, if we are not successful in our efforts to address Nasdaq's
concerns, Nasdaq could take steps to delist our common stock from being traded
on the Nasdaq SmallCap Market. This could result in our common stock being
traded on the OTC Bulletin Board or the "pink sheets," or not traded at all.
Many institutional and other investors refuse to invest in stocks that are
traded at levels below the Nasdaq SmallCap Market, and that could make our
effort to raise capital more difficult. In addition, the firms that currently
make a market for our common stock could discontinue that role. OTC Bulletin
Board and "pink sheet" stocks are often lightly traded or not traded at all on
any given day. Any reduction in liquidity or active interest on the part of
investors in our common stock could hurt our holders either because of reduced
market prices or a lack of a regular, active trading market for our common
stock.
A Few Stockholders Have Effective Control of Venus Exploration.
As of August 1, 1999, Range Resources Corporation and the current
officers and directors of Venus Exploration as a group beneficially own
forty-seven percent (47%) of the undiluted voting power of the voting equity.
One of our directors is the president of Range Resources Corporation.
Consequently, if our current officers and directors and Range Resources
Corporation act together, these shareholders are in a position to effectively
control the affairs of Venus Exploration, including the election of all of our
directors and the approval or prevention of certain corporate transactions that
require majority stockholder approval.
There is a stockholders agreement among some of our directors, their
affiliates and other stockholders. Pursuant to that agreement, in the election
of directors at our 1999 annual stockholder meeting and subsequent applicable
annual stockholder meetings, the parties will vote their shares for the four
nominees nominated by a stockholder group led by the Chairman of the Board and
for one nominee of Range Resources Corporation. This stockholders agreement
effectively increases the control by those stockholders who are a party to it
because their 61% of total outstanding shares of common stock will, by
agreement, be voted as a single block in the election of our board of directors.
That virtually ensures that those stockholders will elect the controlling
majority of the board of directors. If the stockholders agreement was not in
place, those stockholders might not
14
<PAGE> 16
vote for the same candidates. Of course, the percentage of outstanding shares
owned by the group may change if some of those stockholders' shares are sold or
if new shares are issued.
The stockholders who are signatories to the stockholders agreement are
Mr. E. L. Ames, Jr., Ellen R.Y. Ames, John Y. Ames, Eugene L. Ames, III, Stephen
J. Ames, Elizabeth Ames Jones, George J. Ames, Robert Oliver, Patrick A. Garcia,
the Estate of Raymond M. Koger, Gloria Barrett, Venus Oil Company, James W.
Gorman, Jere W. McKenny, D.H. Blair Investment Banking Corp., Rivkalex Corp.,
Rosalind Davidowitz, Parliament Hill Corporation, Range Production I L.P., and
Range Resources, LLC. The stockholders agreement terminates on May 27, 2000,
except that the rights and obligations of any party to the agreement cease
earlier when that party owns beneficially less than 250,000 shares of our common
stock.
Our Liquidity and Prices May Be Reduced by the Lack of an Active
Trading Market for Our Stock.
A significant portion of our common stock is held by a small number of
stockholders, including directors, officers and a few larger stockholders. Many
of those shares are restricted from resale pursuant to the Securities Act of
1933. As a result, our common stock is not actively traded, and a shareholder
may not be able to sell his or her stock when he or she wants to sell. On many
days our common stock is not traded at all. A large block of shares of the
common stock may not be able to be sold in a short period of time. In addition,
the trading price of our common stock has been, and can be, volatile.
We Depend Heavily on Senior Management and An Experienced Technical
Staff.
We are dependent upon Eugene L. Ames, Jr., Chairman of the Board and
Chief Executive Officer and John Y. Ames, President and Chief Operating Officer.
Mr. Eugene L. Ames, Jr. is our executive with the most extensive contacts and
relationships in the oil and gas industry. John Y. Ames has extensive experience
in land management and acquisition. We are also dependent on Thomas E. Ewing and
Bonnie Weise, both of whom are actively involved in the technical application of
the geoscience methods that are the basis for our exploration activities. Mr.
Ewing and Ms. Weise possess valuable experience and knowledge with regard to oil
and gas exploration and their technical expertise would be difficult to replace.
We have employment agreements with Messrs. Ames, Jr., and Ewing and Ms. Weise,
all of which have non-competition clauses. We do not carry key-man insurance on
any of these individuals. Our business and operations could be seriously harmed
if Mr. Ames, Jr., Mr. J. Ames, Mr. Ewing or Ms. Weise were to leave Venus
Exploration.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference as
discussed under "Where You Can Find More Information" may contain
"forward-looking statements" within the meaning of federal securities laws. We
use words such as "may," "will," "believe," "expect," "intend," "plan," "seek,"
"anticipate," "estimate" or "continue" to identify many of our forward-looking
statements. Forward-looking statements may also be identified by the negative
form or other variations of these verbs. We may use many other comparable terms
which by their nature indicate forward-looking statements.
15
<PAGE> 17
Examples of forward-looking statements we make in this prospectus
include statements regarding our financial position and liquidity, the volume or
discounted present value of our oil and natural gas reserves, our ability to
service indebtedness and our strategic plans, including our ability to acquire
oil and natural gas assets and to develop new reserves attributable to the
assets.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we do not know if they will prove to
be correct. When you consider any of these forward-looking statements, you
should keep in mind the factors and cautionary statements disclosed in this
prospectus. The risk factors noted throughout this prospectus provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from those contained in any forward-looking statement.
VENUS EXPLORATION, INC.
General
We have been engaged in the exploration, development and acquisition of
oil and gas properties since 1996. Our corporate predecessors started in the oil
and gas business in 1962, and our chief executive officer has been actively
involved in the industry since 1954. We presently have oil and gas properties,
acreage and production in nine states with our primary exploration and
development activity focused in Texas, Oklahoma and Louisiana. We are a Delaware
corporation, and our principal executive offices are located at 1250 N.E. Loop
410, Suite 1000, San Antonio, Texas 78209. Our telephone number is (210)
930-4900.
Business Strategy
Venus Exploration uses a growth strategy of:
o exploring for oil and gas reserves,
o expanding reserves in existing oil and gas fields, and
o acquiring strategic producing properties with upside potential.
We explore for undiscovered onshore oil and gas reserves using advanced
geoscience technology. The primary geoscience technologies we use are 3-D
seismic surveys and the scientific techniques used to interpret the data
gathered by these seismic surveys. A 3-D seismic survey sends pulses of sound
from the surface down into the earth, and records the echoes reflected back to
the surface. By calculating the speed at which sound travels through the various
layers of rock, we can estimate the depth to the reflecting surface. We use
computers to perform calculations. It then becomes possible to create a picture
of the possible rock structures deep below the earth's surface. A 3-D seismic
survey provides us a three dimensional picture of these rock structures. These
pictures enable us to determine the potential size of a potential oil and gas
reservoir and the best location for drilling an exploratory well. Considerable
computer resources and geophysical expertise are required to process and to
interpret the 3-D survey and to transform it into a useable product.
In addition to exploring for new oil and gas reserves in previously
undiscovered fields, we also use advanced geoscience technology to exploit and
to develop oil and gas reserves in
16
<PAGE> 18
currently producing fields. The fields being exploited or developed consist of
fields discovered by us or fields discovered by others but that we believe are
not fully developed. We are conducting active exploitation and development
activities in 10 different fields in Texas and Oklahoma. Our working interest in
those fields varies in size from 2.5% to 100%, and we operate in 9 of the 10
active fields. During 1999, due to the significant decline in oil and natural
gas prices during 1998 and our shortage of capital, we have emphasized acquiring
and expanding reserves in existing oil and gas fields rather than exploring for
new reserves in unestablished areas.
We will continue to seek strategic producing property acquisitions that
offer near-term production and longer-term development and exploration
opportunities that can be investigated through the application of advanced
technology by our exploration team. We also seek to accomplish strategic
acquisitions of producing assets with development and exploratory potential
through strategic alliances with other oil and gas companies. We may also sell
non-strategic properties as a part of our effort to concentrate on our focus
areas.
RECENT DEVELOPMENTS
1. During 1999, a joint venture was formed to acquire properties from
Apache Corporation.
On June 30, 1999, EXUS Energy, LLC, a Delaware limited liability
company owned 50% by EXCO Resources, Inc., and 50% by Venus Exploration,
acquired from Apache Corporation oil and natural gas properties located in
Jackson Parish, Louisiana. EXCO is a publicly-held oil and gas company based in
Dallas, Texas. The Jackson Parish properties include 17 producing wells, and the
acquired interest entitles EXUS Energy to an average of approximately 83.8% of
production from these wells.
EXCO is the named operator of the Jackson Parish properties, and it
assumed operational responsibility for all 17 wells. The acquired properties
include (a) 6,411 acres that are considered to have already been developed for
oil and gas production, and (b) 1,532 acres that have not been developed. EXUS
Energy will be entitled to an average of 88.4% of the production from the
developed acreage and an average of 74.9% from the undeveloped acreage. As of
April 1, 1999, the Jackson Parish properties were estimated to contain 2,815
barrels of oil and 66.5 billion cubic feet of gas.
The purchase price, before closing adjustments, was $28.5 million.
After adjustments, it was approximately $27.6 million. The adjustments were made
to recognize the value of production received since March 1, 1999, the effective
date of the acquisition. The purchase price was funded with $14 million drawn
under a new credit facility established by EXUS Energy and $14 million of EXUS
Energy equity capital. We engaged in arms-length negotiations with Apache
Corporation to determine the purchase price.
The purchase and sale agreement. We acquired the Jackson Parish
properties pursuant to the terms of a purchase and sale agreement dated May 13,
1999, between Apache Corporation and Venus Exploration. At the closing of the
acquisition, we assigned EXUS Energy our rights and obligations under the
purchase and sale agreement.
17
<PAGE> 19
The limited liability company agreement. EXCO and Venus Exploration
entered into a limited liability company agreement in which we each own a 50%
equity interest in EXUS Energy. We are entitled to a 50% share of the profits
and losses of EXUS Energy, subject to special allocations in certain events.
EXUS Energy's principal business purpose initially is to manage and develop the
Jackson Parish properties. In addition, EXCO and Venus Exploration have
established an area of mutual interest agreement with regard to the Jackson
Parish properties, and it governs any additional acquisitions of properties
within the area by either party. Also, either EXCO or Venus Exploration may
acquire other oil and gas properties through EXUS Energy.
EXUS Energy is managed by a management committee comprised of four
people, two designated by EXCO and two people we designate. Initially, EXCO
Resources's representatives are Douglas H. Miller, its Chairman and Chief
Executive Officer, and T.W. Eubank, its President, and our representatives are
Eugene L. Ames, Jr., our Chairman and Chief Executive Officer, and John Y. Ames,
our President and Chief Operating Officer.
EXUS Energy's officers are:
Eugene L. Ames, Jr., Chairman of the Management Committee;
T.W. Eubank, President;
J. Douglas Ramsey, Vice President and Treasurer; and
Richard E. Miller, Secretary.
Most actions of the members require majority consent. Certain actions require
consent of members holding 66 2/3% of the membership interests. These include:
o merger;
o sale of all of EXUS Energy's assets;
o liquidation;
o conversion of the legal form of the entity to another form; and
o amending the LLC agreement to change any minority membership
interest protection.
EXCO and Venus Exploration capitalized EXUS Energy with $14 million of
equity capital, all of which was applied to fund the purchase of the Jackson
Parish properties. EXUS Energy also arranged a credit facility, which is
discussed in greater detail below, through NationsBank, N.A. to fund a portion
of the acquisition. That facility may also be used to fund additional
development drilling of the properties and to fund additional acquisitions.
The members have identified some development drilling opportunities in
the Jackson Parish properties, and they have budgeted $5.1 million, subject to
lender approval, for these activities. The LLC agreement permits the management
committee to call for additional capital contributions from the members to fund
the capital needs of EXUS Energy. Furthermore, either member may propose a
subsequent operation on the Jackson Parish properties. A "subsequent operation"
would encompass significant drilling activities such as
18
<PAGE> 20
a new well, recompletion of an existing well, or a workover project. If EXCO and
Venus Exploration are unable to agree to fund a project through EXUS Energy, the
proposing member may elect to proceed with the subsequent operation in EXUS
Energy's name, but the subsequent operation will be funded solely by the
proposing member. In that event, all expenses, losses, gains or income from the
project will be specially allocated solely to the proposing member until the
proposing member has recouped a sum equal to 300% of the additional capital
contribution that would have been funded by the non-proposing member had it
participated in the project. Upon reaching the 300% threshold, all losses,
expenses, gains or income will be allocated to the members in proportion to
their equity interest in EXUS Energy.
The LLC agreement includes other customary terms, including terms
governing transfers of membership interests, voting, meetings and tax matters.
In conjunction with the LLC agreement, we have entered into an
agreement among members governing transfer of the membership interests,
including a right of first refusal, and buy/sell rights in the event we deadlock
with EXCO on a matter that requires a super-majority vote of the members under
the LLC agreement.
The convertible promissory note. EXUS Energy had initial equity capital
of $14 million. EXCO provided $7 million from its cash on hand, and we provided
$7 million. On June 30, 1999, we borrowed $7 million from EXCO under the terms
of an $8 million convertible promissory note. We contributed this $7 million to
EXUS Energy as our share of the equity capital.
Subject to restrictions on the use of proceeds, our promissory note to
EXCO allows us to borrow up to $8 million, including the $7 million capital
contribution to EXUS Energy. The EXCO Note provides for additional draws
beginning after January 1, 2000, not to exceed $1 million, solely to fund
additional capital contributions to EXUS Energy and/or to fund the expenses of
one issuance of equity securities. We are not permitted to draw any of the $1
million until we have obtained the stockholder approval described below.
All our borrowings under the EXCO Note are secured by a first priority
lien providing a security interest in our membership interest in EXUS Energy and
our distribution and income rights in EXUS Energy. The EXCO Note provides that
advances will bear interest at a rate of 10% from June 30, 1999, through June
30, 2000, with interest increasing 1% per year through June 30, 2004. We may
make the interest payments in cash or, at our election, in our common stock. In
the event we default, advances will bear interest at a rate of 15% after the
event of default. If we pay interest in the form of common stock, the number of
shares to be issued will be determined by dividing the interest payment due by
the average market price of one share of our common stock for the twenty trading
days immediately preceding the interest payment date. Interest is payable
semi-annually beginning on January 1, 2000. The EXCO Note matures on July 1,
2004, at which time we must pay all of the unpaid principal.
Beginning on July 1, 2000, and continuing until the EXCO Note is paid
in full, EXCO, at its option, may convert all or any portion of the outstanding
principal balance and accrued interest into shares of our common stock for $1.50
per share, subject to adjustment. On or before December 15, 1999, we are
required to obtain stockholder approval of the
19
<PAGE> 21
issuance of our common stock that may be issued upon conversion under the terms
of the EXCO Note. Although the timing is by agreement, the stockholders'
approval is required by the rules of the Nasdaq SmallCap Market because of the
number of shares that may be issued under the agreement. If we do not get
stockholder approval, we would be required to prepay $3 million of the EXCO Note
plus accrued interest. The Nasdaq SmallCap Market rules allow us to issue shares
of common stock upon conversion of up to $4 million of the principal of the EXCO
Note without the approval of our stockholders; accordingly, the $3 million
mandatory prepayment equates to the principal amount EXCO would not be able to
convert to our common stock if we do not obtain stockholder approval.
Alternatively, we may elect to transfer membership interests in EXUS
Energy equal to 21.43% of the aggregate outstanding interests of EXUS Energy in
exchange for a cancellation of $3 million of principal owed under the EXCO Note.
The 21.43% is about 3/7 of our equity interest in EXUS Energy.
The EXCO Note also requires a mandatory prepayment of principal equal
to 50% of the net proceeds of each equity issuance we make on or after June 30,
1999. Excluded from that mandatory prepayment is our first $5 million of
aggregate net proceeds of all equity issuances after June 30, 1999. We may also
voluntarily prepay any or all of the EXCO Note, subject to a prepayment penalty
of 3.57% of the principal prepaid for any prepayment occurring on or prior to
July 1, 2000.
The EXCO Note contains other customary terms including:
o certain representations, affirmative covenants such as conduct of
our business, reports to EXCO, and compliance with laws;
o negative covenants such as no purchase or redemption of our
common stock, and no sale, transfer, mortgage or pledge of the
collateral securing the EXCO Note; and
o events of default such as failure to pay principal or interest as
required, violation of covenants in the EXCO Note, bankruptcy,
change of control of Venus Exploration, default under our secured
credit facility, and failure to obtain stockholder approval of
the issuance of stock in accordance with the EXCO Note.
The registration rights agreement. The shares that may be issued under
the terms of the EXCO Note are subject to a registration rights agreement dated
June 30, 1999. That agreement requires us to register the 10,133,333 shares for
resale by EXCO that are being offered by this prospectus. The 10,133,333 shares
represent: (a) 5,333,333 that will be issued if EXCO converts $8 million of
principal under the EXCO Note at $1.50 per share; and (b) 4,800,000 shares that
will be issued if we paid all interest accruing on $8 million principal of the
EXCO Note at an assumed market price of $1.00 per share. The registration rights
agreement provides that a registration statement must be filed with the
Securities and Exchange Commission by September 28, 1999, and that it must be
effective on or prior to the 120th day following the first issuance of any
shares under the EXCO Note. The 120 day period may be extended to 210 days if
(a) we have timely complied with our covenants under the registration rights
agreement, and (b) the registration statement is still under
20
<PAGE> 22
review by the Securities and Exchange Commission. The registration rights
agreement contains other customary terms and provisions including
indemnification for certain liabilities under applicable securities laws. A
breach of the agreement would constitute an event of default under the EXCO
Note.
The EXUS credit facility. On June 30, 1999, EXUS Energy entered into a
credit facility with NationsBank, N.A., as administrative agent and lender. The
credit facility provides for borrowings up to $50 million, subject to borrowing
base limitations. The bank has sole discretion to determine the borrowing base
based on its semi-annual valuation of EXUS Energy's reserves.
The credit facility consists of a regular revolver, which on July 15,
1999, had a borrowing base of $19.5 million. At July 15, 1999, EXUS Energy had
approximately $5.5 million available for borrowing under the credit facility. A
portion of the borrowing base is available for the issuance of letters of
credit. All borrowings under the credit facility are secured by a first lien
mortgage providing a security interest in substantially all assets owned by EXUS
Energy, including all mineral interests.
The credit facility provides that if the aggregate outstanding
indebtedness of EXUS Energy is less than 75% of the borrowing base, advances
will bear interest at 1.5% over LIBOR. If the borrowing base usage equals or
exceeds 75%, advances will bear interest at 1.75% over LIBOR.
Under the terms of the credit facility, EXUS Energy must not permit the
ratio of its consolidated current assets to its consolidated current liabilities
to be less than 1:1 at any time. Furthermore, EXUS Energy must not incur or pay
general and administrative expenses in an aggregate amount over $100,000 during
the period from June 30, 1999, through December 31, 1999, or $200,000 during any
fiscal year after that. On June 30, 1999, EXUS Energy was in compliance with
both the current ratio covenant and the general and administrative expense
covenant.
Beginning on September 25, 1999, and continuing each month until
maturity, EXUS Energy must make mandatory payments on the credit facility in an
amount equal to 50% of EXUS Energy's Net Revenues, as defined in the credit
facility, for the immediately preceding calendar month. Each payment will be
applied first to accrued but unpaid interest and then to principal. However, if
a borrowing base deficiency exists after giving effect to a redetermination,
EXUS Energy would have to eliminate the borrowing base deficiency by doing one
of the following:
o making a single mandatory prepayment of principal on the
revolving loan in an amount equal to the entire amount of the
borrowing base deficiency on the first monthly date following the
date on which the borrowing base deficiency is determined to
exist;
o making six consecutive mandatory prepayments of principal on the
revolving loan each of which will be in the amount of one sixth
(1/6th) of the amount of the borrowing base deficiency beginning
on the first monthly date following the date on which the
borrowing base deficiency is determined to exist; or
21
<PAGE> 23
o submitting additional mineral interests as security to the banks
on the first monthly date following the date on which the
borrowing base deficiency is determined to exist; however, the
banks, in their sole discretion, have the right to determine
whether those interests have a value sufficient to increase the
borrowing base by at least the amount of the borrowing base
deficiency.
The credit facility matures on June 30, 2002. The next borrowing base
redetermination is scheduled for January 1, 2000, and on or about each April 30
and October 31 after that. EXUS Energy may seek additional borrowing capacity at
that time for its development drilling program. However, the current development
program of EXUS Energy may not result in increased collateral values, and these
values may not enable EXUS Energy to borrow the funds it needs to continue the
program.
The credit facility contains a number of covenants affecting the
liquidity and capital resources of EXUS Energy, including restrictions on its
ability to incur indebtedness at any time in an amount exceeding $25,000 or to
pledge assets outside of the credit facility, the maintenance of a current
ratio, limitations on general and administrative expenses, and restrictions on
the payment of dividends on the equity capital units of EXUS Energy.
2. In the second quarter of 1999, we sold convertible subordinated
promissory notes totaling $1,000,000.
In the second quarter of 1999 we completed the private placement to six
investors of six unsecured convertible subordinated promissory notes (each a
"Subordinated Note" and collectively, the "Subordinated Notes") totaling
$1,000,000. We received net proceeds of $975,000 after legal fees and other
miscellaneous expenses. We used the proceeds to fund general operating expenses.
Our obligations to the noteholders are unsecured and subordinated to the rights
of our bank and other lenders unless those lenders have agreed otherwise.
Interest payments under the Subordinated Notes may be paid, at our election,
with our common stock.
The Subordinated Notes. The Subordinated Notes bear interest at a rate
of 7% per annum, or 10% in the event of default. If we pay interest in common
stock, the number of shares we will issue will be determined by dividing the
interest payment due by the market price of one share of our common stock on the
last trading day preceding the interest payment date. Interest is payable
quarterly beginning on June 30, 1999. We paid the June 30, 1999 interest
payments with a total of 7,984 shares of our common stock.
The Subordinated Notes mature on March through June 2004, at which time
all of the unpaid principal is due and payable. The noteholders can convert the
debt to common stock at any time, and the conversion is based on a price of
$1.15 per share. The conversion price will be adjusted proportionately in cases
where the number of the outstanding shares of common stock is changed on a pro
rata basis; e.g., dividends of stock and stock splits.
Another cause of an adjustment to the conversion price is if we issue
common stock, or securities convertible into common stock, at a price lower than
the $1.15 conversion price, as adjusted. If that happens, the conversion price
will be reduced to the price as which those other securities are being sold.
22
<PAGE> 24
If we issue convertible subordinated notes or other similar securities
with better terms to new noteholders, the holders of the six notes also have the
right to get replacement notes with those better terms, at least with regard to
a higher stated interest rate, a higher premium upon early redemption, a lower
per-share conversion price, or a longer period before we can cause a mandatory
redemption.
We have a conditional option of converting the outstanding balance of
each Subordinated Note to our shares of common stock. That option does not
mature until thirty-six months after the original issuance of the Subordinated
Notes, and the condition to our option to convert is that the closing market
price for the shares of our common stock must have exceeded $3.60 per share for
at least 25 out of the preceding 30 trading days. The conversion is based on the
same $1.15 price per share.
The notes allow us to redeem them for cash and the payment of a
redemption premium. We also have a preferential right to buy the Subordinated
Notes if the holders decide to sell them.
If an event of default occurs, the noteholders may demand immediate
repayment of the principal amount and any accrued but unpaid interest. They will
also have all other rights generally allowed by contract and applicable law.
Events of default include:
o the continuation of a failure to pay for more than three days
after any amount becomes due,
o failure to perform material obligations under the Subordinated
Notes,
o a default under other indebtedness or securities,
o a materially false or misleading representation in the note or any
filings with the SEC as of the date of the note,
o bankruptcy, or
o uninsured judgment claims over $25,000 that are not promptly
discharged.
The registration rights agreements. The Subordinated Notes were issued
in a private placement exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. We will issue common stock in lieu of cash interest
payments under the Subordinated Notes in the same manner. As a result, the
transfers of these securities are restricted.
Concurrently with the execution of the Subordinated Notes, we entered
into a registration rights agreement with each noteholder that gives that
noteholder the option to register for resale under the Securities Act of 1933
any of their shares of our common stock on a registration statement otherwise
being filed by Venus Exploration for sales on our own behalf. We also agreed not
to grant any new registration rights to third parties if those rights would
adversely impact the rights of the holders of the six Subordinated Notes
described above.
3. During 1999, We Sold Oil and Gas Properties to Reduce Our Indebtedness.
On January 27, 1999, we sold our oil and gas properties in West
Virginia to Allegheny Interests, Inc., and Meridian Exploration Corporation for
a gross purchase price of
23
<PAGE> 25
$1,170,000. We used $1 million of the net purchase price to reduce our
outstanding bank debt. The properties included interests in 58 wells and a
pipeline system that serviced many of the wells. We also sold our interest in a
limited partnership that owned property rights in oil and gas wells in West
Virginia. During 1998, the production from these properties was the equivalent
of 145,285 thousand cubic feet of natural gas, or about 11.3% of our total 1998
production. According to the estimates of the proved reserves included in our
Annual Report on Form 10-K for the year ended December 31, 1998, the properties
we sold were 17.5% of our total proved reserves as of December 31, 1998. We made
this calculation before we recognized any production or reserves from the
properties acquired from Apache Corporation.
On February 12, 1999, we sold our interest in the H.E. White Unit in
Freestone County, Texas to Petroleum Development Corporation and Warren
Resources, Inc. for a gross purchase price of $1,150,000. Out of the net
proceeds, we used $650,000 to reduce our outstanding bank debt. The properties
that we sold included interests in 3 existing wells with production of 41,841
thousand cubic feet of natural gas during 1998, or about 3.3% of our total 1998
production. According to the estimates of proved reserves included in our Annual
Report on Form 10-K for the year ended December 31, 1998, the properties we sold
were 10.9% of our total proved reserves as of December 31, 1998. We made this
calculation before we recognized any production or reserves from the properties
acquired from Apache Corporation.
4. Our Financial Condition
During 1998 our financial situation deteriorated in large part due to a
downturn in oil and gas prices, a lack of cash flow and an inability to raise
capital to finance new drilling projects or acquisitions of oil and gas
properties. Throughout the past year we have received a series of waivers from
our lender for defaults under our revolving credit agreement. Currently, we are
in default under two of the financial covenants in that revolving credit
agreement with our principal lender. We have failed to maintain (a) our ratio of
current assets to current liabilities at 1:1 or more, and (b) our tangible net
worth at $5,250,000 or more. These covenant defaults have been waived by our
lender until September 30, 1999. In addition, our independent auditors raised a
"going concern" question in the auditors' report on our 1998 financial
statements.
In April 1999, we received a letter from the Nasdaq SmallCap Market
regarding our auditors' "going concern" question and the level of our tangible
net worth. On August 30, 1999, Nasdaq advised us that they intended to delist us
effective with the close of business on September 8, 1999. We have responded by
asking for a hearing by a Nasdaq Listing Qualifications Panel so that we can
appeal the Nasdaq staff's determination. We believe that the request for a
hearing will stay the delisting action pending a final decision from Panel.
For the medium and longer terms, we are working on a number of
alternatives that we believe will address our revolving credit agreement
requirements and future liquidity and financing needs if we successfully
complete various combinations of those alternatives. They include mergers, sales
of assets, farmouts or other partnering arrangements on selected
24
<PAGE> 26
properties, and issuance of indebtedness or equity capital. We do not know if
we will be successful.
We have made some progress on the solutions to the situation. During
the first quarter of 1999, we sold non-core properties for $2,586,000 in cash,
and that allowed us to repay $1,670,000 of our debt on the revolving credit
facility. In the second quarter, we sold 7% convertible promissory notes in the
principal amount of $1,000,000 and netted about $975,000. We also acquired the
Jackson Parish Properties with EXCO in the second quarter. We expect, as a
result of the acquisition, that our revenues will increase by over 100%
beginning in July 1999. In fact, we expect to generate positive operating cash
flow, after debt service, beginning with July 1999 operations. The increase in
oil and natural gas prices is also helping.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of (a) 30,000,000 shares of
common stock, and (b) 5,000,000 shares of preferred stock. At August 1, 1999, we
had (a) 11,029,383 shares of common stock outstanding, and (b) no issued or
outstanding shares of preferred stock. We also had options to purchase 539,000
shares of common stock outstanding at that date. In the aggregate, 1,739,635
shares of our common stock have been reserved for issuance pursuant to the
exercise of currently outstanding options.
Common Stock
The holders of shares of common stock possess full voting power for the
election of directors and for all other purposes. Each holder of common stock is
entitled to one vote for each share of common stock held of record by that
holder. The shares of common stock do not have cumulative voting rights.
Preferred Stock
At any time, the Board of Directors may allow the issuance of fully
authorized shares of preferred stock. Approval may not be needed from the
existing stockholders. The preferred stock may be in classes or series and may
have various powers, rights, preferences and limitations. Any dividend
preferences given to preferred stock could reduce the funds available for the
payment of dividends on common stock.
Also, holders of preferred stock could be given a priority position
over the common stockholders upon any liquidation, dissolution or winding up of
Venus Exploration. Under some circumstances, the issuance of that preferred
stock could complicate or discourage a merger, tender offer or proxy contest,
the assumption of control by a holder of a large block of our securities, or the
removal of incumbent management.
USE OF PROCEEDS
We will not receive any proceeds from any sale of shares of common
stock covered by this prospectus.
25
<PAGE> 27
SELLING STOCKHOLDERS
The selling stockholders who may offer common stock through this
prospectus are Stratum Group, L.P. and EXCO Resources, Inc.
Our Relationship with Stratum: The Stratum Debt-for-Equity Exchange.
On December 3, 1998, we completed a debt-for-equity exchange with
Stratum Group, L.P. As a result, we converted our subsidiary's debt of $1.605
million into 1.1 million shares of common stock covered by this prospectus. Our
subsidiary had borrowed the $1.605 million under a credit facility created in
1996. Stratum Group Energy Partners, L.P. was the lender, and the credit
facility provided that the lender's only recourse was against our subsidiary and
the properties that it owned. In connection with the credit facility, our
subsidiary assigned Stratum some overriding royalty interests. These overriding
royalty interests were equal to 5% of the subsidiary's net revenue interest in
the properties that were subject to the Stratum deed of trust. Under the terms
of the credit agreement, Stratum could convert the overriding royalty interests
into equity and was given restricted warrants to buy our common stock. These
conversion rights and warrants were exercisable against 589,822 shares of common
stock that were owned by the entities that were the stockholders at the time the
credit facility was created. In connection with the debt-for- equity exchange,
we obtained (a) a full release from our other obligations to the Stratum Group,
L.P. and its affiliates, (b) the warrants to acquire up to 589,882 shares of our
common stock, and (c) the overriding royalties in our subsidiary's producing
properties.
"Overriding royalty interests" are real property interests that entitle
the owner to a part of the revenue stream from oil and gas production without
having to pay the costs of production and without being subject to most
liabilities related to drilling and production.
In connection with the debt-for equity exchange, Venus Exploration and
Stratum entered into a registration rights agreement. In that agreement, we
agreed to file this registration statement on Form S-3 on or before March 5,
1999. We must use our reasonable best efforts to cause this registration
statement to be declared effective, and we must also use our reasonable best
efforts to keep the registration statement continuously effective until two
years after the effective date of the registration statement unless all the
covered shares may be sold without restrictions under Rule 144(k).
The registration rights agreement also provides for piggyback
registration rights that allow the owners of the 1,100,000 shares to include
those shares in any registration statement that we file for our own behalf.
Exceptions are (a) Venus Exploration's registrations on Forms S-4 and S-8, and
(b) our right to limit the number of Stratum shares to be included to that which
our managing underwriter believes can be included without materially
jeopardizing the successful marketing of shares to be registered. Stratum must
de-register under this registration statement any shares to be sold under our
other registration statements. These piggyback registration rights expire at the
same time as the other rights under the registration rights agreement.
Under the registration rights agreement, we generally bear the expense
of any registration statement, while Stratum and any other selling stockholders
generally bear selling expenses, such as underwriting commissions and discounts.
The registration rights
26
<PAGE> 28
agreement also includes customary indemnification provisions. The information
below is as of the date of this prospectus and has been furnished by Stratum.
The ultimate beneficial owners of Stratum are numerous individual investors who
own, in the aggregate, a 5% beneficial interest in Stratum, and The Beacon Group
Energy Investment Fund, L.P., a New York, New York based limited partnership
that has the principal business purpose of engaging in energy-related
investments and which owns, in the aggregate, a 95% beneficial interest in
Stratum. The sole general partner of the limited partnership is Beacon Energy
Investors, LLC, which is a Delaware limited liability company managed by
numerous individual investors. Stratum has not held any position or office, nor
has it had any other material relationship with us or any of our predecessors or
affiliates in the last three years, other than as lender to our wholly-owned
subsidiary.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES PERCENTAGE OF SHARES NUMBER OF
OWNED OUTSTANDING BEING SHARES
NAME OF BEFORE THIS COMMON REGISTERED OWNED-AFTER
SELLING STOCKHOLDER OFFERING(1) STOCK(2) FOR RESALE THIS OFFERING(3)
------------------- ------------ ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Stratum Group, L.P.................... 1,100,000 4.9% 1,100,000 -0-
--------- --- --------- ---
TOTAL........................ 1,100,000 4.9% 1,100,000 -0-
</TABLE>
- -----------
(1) Stratum does not own any shares of our common stock other than
those shares described in and covered by this prospectus.
(2) Assumes all shares of our common stock registered for resale
pursuant to this prospectus are outstanding.
(3) Assumes all shares of common stock registered for resale pursuant
to this prospectus are sold.
Our Relationship with EXCO.
The 10,133,333 shares of common stock that may be issued to EXCO and
that are covered by this prospectus are described previously on page 19. The
information below is as of the date of this prospectus and has been furnished by
EXCO. EXCO has not held any position or office, nor has it had any other
material relationship with us or any of our predecessors or affiliates in the
last three years, other than as described under "Recent Developments" beginning
on page 17.
27
<PAGE> 29
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF NUMBER OF NUMBER OF
OWNED OUTSTANDING SHARES BEING SHARES
NAME OF BEFORE THIS COMMON REGISTERED OWNED-AFTER
SELLING STOCKHOLDER OFFERING(1) STOCK(2) FOR RESALE THIS OFFERING(3)
- -------------------------------------- ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C>
EXCO Resources, Inc................... 10,133,333 45.5% 10,133,333 -0-
---------- ---- ---------- ---
TOTAL........................ 10,133,333 45.5% 10,133,333 -0-
</TABLE>
- -------------
(1) Assumes that all shares covered by this prospectus have been issued
to EXCO. EXCO does not own any shares of our common stock other than
those shares described in and covered by this prospectus.
(2) Assumes all shares of our common stock registered for resale
pursuant to this prospectus are outstanding.
(3) Assumes all shares of common stock registered for resale pursuant
to this prospectus are sold.
PLAN OF DISTRIBUTION
This prospectus covers offers and sales from time to time by:
o Stratum Group, L.P. of the 1,100,000 shares of the common stock that
it received in the debt-for-equity exchange with Venus Exploration;
and
o EXCO Resources, Inc., of the 10,133,333 shares of the common stock
that it may be issued as a result of the EXCO convertible promissory
note.
It also covers offers and sales by other parties to which Stratum or
EXCO has legally transferred any of these shares. Pursuant to Rule 416 under the
Securities Act of 1933, the selling stockholders may also offer and sell shares
of common stock issued as a result of, among other events, stock splits, stock
dividends and similar events.
Stratum and EXCO and their pledgees, donees, transferees or other
successors-in-interest may sell all or a portion of the shares of common stock
being registered hereunder:
o to or through one or more underwriters,
o directly to other purchasers or through agents,
o in ordinary brokerage transactions,
o in negotiated transactions,
o at market prices prevailing at the time of sale, or
o at prices related to the then prevailing market price or some
other negotiated price.
The selling stockholders may engage in short sales, short sales against
the box, puts and calls and other transactions in our securities or derivatives
of our securities. They may sell and deliver the shares of common stock or
assign the shares in settlement of loans. The selling stockholders may pledge
their shares of common stock pursuant to the margin
28
<PAGE> 30
provisions of their customer agreements with their brokers. Upon a default by
the selling stockholders, the broker may offer and sell the pledged shares of
common stock.
In effecting sales, the selling stockholders' brokers and dealers may
arrange for other brokers or dealers to participate in the transactions. Brokers
or dealers may get commissions or discounts from the selling stockholders. If
any broker-dealer acts as agent for the purchaser of shares, it may get a
commission or discount from that purchaser. Those commissions or discounts may
be in amounts to be negotiated, but they are not expected to exceed those
customary in the types of transactions involved.
Broker-dealers may agree with the selling stockholders to sell a
specified number of shares of common stock at a stipulated price per share. If
the broker-dealer cannot do so, it may purchase for itself any unsold shares of
common stock at the price required to fulfill the broker-dealer commitment to
the selling stockholders. Broker-dealers who acquire shares of common stock as a
principal may later resell those shares of common stock in transactions in the
over-the-counter market or otherwise at similar prices and on terms like the
ones the selling stockholders are allowed to sell those shares. In connection
with those resales, the broker-dealers may pay commissions to the purchasers or
receive commissions from the purchasers. The selling stockholders may also sell
the shares of common stock in accordance with Rule 144 promulgated under the
Securities Act of 1933, rather than pursuant to this prospectus.
The selling stockholders and any broker-dealers or agents that
participate with the selling stockholders in sales of the shares of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933 in connection with those sales. In that case, any commissions received by
those broker-dealers or agents and any profit on the resale of the shares of
common stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
In order to comply with applicable states' securities laws, the shares
of common stock will be sold in jurisdictions only through registered or
licensed brokers or dealers. In addition, some states' laws require that the
common stock not be sold unless the common stock has been registered or
qualified for sale in that state or unless an exemption from registration or
qualification is available and is satisfied.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for Venus Exploration, Inc. by our legal counsel, Haynes and Boone,
LLP, San Antonio, Texas. Will C. Jones IV, Of Counsel to Haynes and Boone, LLP,
is married to Elizabeth Ames Jones. Mrs. Jones beneficially owns 262,373 shares
of common stock and is a member of the Ames Group, which is a signatory to the
stockholders agreement described in the "Risk Factors" section on page 14. Mrs.
Jones is the daughter of Eugene L. Ames, Jr., Chairman and Chief Executive
Officer, and she is the sister of John Y. Ames, President and Chief Operating
Officer, and of Eugene L. Ames, III, Vice President.
29
<PAGE> 31
EXPERTS
The consolidated financial statements of Venus Exploration, Inc. and
subsidiaries as of December 31, 1997 and 1998, and for each of the years in the
three-year period ended December 31, 1998 appearing in Annual Report on Form
10-K for the year ended December 31, 1998, have been incorporated herein by
reference in reliance upon the report of KPMG LLP, independent certified public
accountants, incorporated herein by reference and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG LLP covering the
December 31, 1998 consolidated financial statements contains an explanatory
paragraph that states that Venus Exploration's recurring losses from operations
and accumulated deficit raise substantial doubt about the entity's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
The statements of revenues and direct operating expenses of the Jackson
Parish properties for the years ended December 31, 1998, 1997 and 1996 appearing
in the Company's Current Report on Form 8-K dated June 30, 1999, as amended by
Current Report on Form 8-K/A dated September 7, 1999, have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such financial statements have
been incorporated herein by reference in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The estimates relating to our proved oil and gas reserves and future
net revenues of oil and gas reserves as of December 31, 1998, incorporated in
this prospectus by reference from the Annual Report on Form 10-K for the year
ended December 31, 1998, are based upon estimates of reserves prepared by
Pollard, Gore and Harrison Petroleum Engineers in reliance upon its reports and
upon the authority of that firm as experts in petroleum engineering.
DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Pursuant to the registration rights agreements between Venus
Exploration and Stratum and EXCO, we have agreed to indemnify each selling
stockholder and its officers, directors, agents, brokers, investment advisors
and employees against any losses, claims, damages, liabilities, costs and
expenses arising out of or relating to (a) any untrue statement or alleged
untrue statement of a material fact contained in the registration statement or
any prospectus, including any amendments or supplements thereto, or (b) the
omission or alleged omission to state in those documents a material fact
required to be stated or necessary to make the statements not misleading. There
is an exception if those liabilities arise solely out of, or are based upon, any
information furnished in writing to Venus Exploration by a selling stockholder
for use in the registration statement or an amendment or supplement thereto. In
addition, each Stratum selling stockholder has agreed to indemnify us and our
officers, directors, employees and agents against any losses, claims, damages,
liabilities, costs or expenses arising solely out of written information
furnished by that selling stockholder for use in the registration statement or
any amendment or supplement. The selling stockholder's liability is limited to
the dollar amount that it receives from the sale of the common stock.
30
<PAGE> 32
If its directors and officers are indemnified for liabilities under the
Securities Act of 1933 and if that indemnification is based on the terms of the
registration rights agreement, we have been advised by the Securities and
Exchange Commission that it believes that such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
You can read and copy any of the reports, proxy statements and other
information that we file with the Securities and Exchange Commission as required
by the Securities Exchange Act of 1934. These are available at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can get
information about the Public Reference Room by calling the SEC at
1-800-SEC-0330, or 1-800-732-0330. The SEC also maintains a Website at
(http://www.sec.gov). At the SEC's Website, you can get reports, proxy and
information statements and other information regarding Venus Exploration and
other issuers that file electronically with the SEC.
In addition, our common stock is traded on the Nasdaq SmallCap
Market(SM) under the symbol "VENX." Reports, proxy statements and other
information concerning Venus Exploration can be inspected and copied at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006. You may also contact us directly at our website at
(http://www.venusexploration.com).
We have filed with the SEC a registration statement on Form S-3 under
the Securities Act of 1933, as amended. This prospectus, which is a part of that
registration statement, does not contain all the information in the registration
statement. Parts of the registration statement are contained in schedules and
exhibits to the registration statement as permitted by the SEC. This prospectus
summarizes parts of the documents contained in those schedules and exhibits. You
should not rely on the summaries in this prospectus. Rather, you should read the
exhibits and schedules for the complete description. The registration statement,
including its exhibits, can be inspected and copied at the SEC's Public
Reference Room, the SEC's regional offices, and at the offices of the National
Association of Securities Dealers, Inc. referred to above in Washington, D.C.,
at prescribed rates.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" into this prospectus
information we file with the SEC in other documents. This means that we can
disclose important information to you by referring you to other documents we
file with the SEC. The information incorporated by reference is considered to be
part of this prospectus, and information we file after the date of this
prospectus will update and supersede information you read in this prospectus. We
incorporate by reference the documents listed below, except to the extent
information in those documents is different from the information contained in
this prospectus, and all future filings we make with the SEC under Sections
13(a), 13(c), 14
31
<PAGE> 33
or 15(d) of the Securities Exchange Act of 1934, as amended until the offering
of the shares offered by this prospectus is terminated:
o Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended,
o Quarterly Report on Form 10-Q for the quarter ended March 31,
1999,
o Quarterly Report on Form 10-Q for the quarter ended June 30,
1999,
o Current Report on Form 8-K dated January 27, 1999, and filed on
February 11, 1999, as amended,
o Current Report on Form 8-K dated February 12, 1999, and filed on
February 26, 1999 as amended,
o Current Report on Form 8-K dated June 30, 1999, and filed on
filed July 15, 1999, as amended, and
o Registration Statement on Form 8-A filed on March 12, 1986.
Any statement contained in a document incorporated into this prospectus
should be considered superseded or modified for purposes of this prospectus to
the extent that a statement contained in this prospectus (or in any other
subsequently filed document that also is incorporated by reference) modifies or
supersedes that statement. Any modified or superseded statement, except as so
modified or superseded, will not be considered a part of this prospectus.
We will provide to each person, including any beneficial owner, to whom
this prospectus is delivered any of the information that has been incorporated
into this prospectus by reference but is not delivered with it. We will send
that information without charge if you call or write with that request. You may
ask for the information by calling Mr. John Y. Ames at (210) 930-4900, or you
can send written requests to:
Venus Exploration, Inc.
1250 N.E. Loop 410, Suite 1000
San Antonio, Texas 78209
Attention: John Y. Ames, President
32
<PAGE> 34
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.................................................. $ 4,872
Nasdaq SmallCap Market(SM) Listing Fee............................................................... 7,500
Transfer Agent Fees.................................................................................. 100
Printing Expenses.................................................................................... 250
Accounting Fees and Expenses......................................................................... 20,000
Legal Fees and Expenses.............................................................................. 30,000
Engineer Fees and Expenses........................................................................... 1,000
Blue Sky Fees and Expenses........................................................................... 200
Miscellaneous Expenses............................................................................... 1,078
-------
Total............................................................................................. $65,000
=======
</TABLE>
All of the above expenses, except the Securities and Exchange
Commission registration fee and the Nasdaq SmallCap Market(SM) listing fee, are
estimated. All of those expenses will be borne by Venus Exploration.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation, as amended, provides that no director
of Venus Exploration will be personally liable to us or any of our stockholders
for monetary damages arising from the director's breach of fiduciary duty as a
director. However, this does not apply with respect to any action in which the
director would be liable under Section 174 of the General Corporation Law of the
State of Delaware, nor does it apply with respect to any liability in which the
director (a) breached his duty of loyalty to us or our stockholders; (b) did not
act in good faith or, in failing to act, did not act in good faith; (c) acted in
a manner involving intentional misconduct or a knowing violation of law or, in
failing to act, has acted in a manner involving intentional misconduct or a
knowing violation of law; or (d) derived an improper personal benefit.
Our certificate of incorporation provides that we will indemnify our
directors and officers and former directors and officers to the fullest extent
permitted by the aforementioned Delaware corporate code. Pursuant to the
provisions of Section 145 of the Delaware corporate code, we have the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of Venus Exploration) by reason of the fact that he
is or was one of our directors, officers, employees or agents, against any and
all expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with that action, suit or proceeding. The
power to indemnify applies only if
II-1
<PAGE> 35
that person acted in good faith and in a manner he reasonably believed to be in
the best interest, or not opposed to the best interest, of Venus Exploration
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
Venus Exploration as well, but only to the extent of defense and settlement
expenses and not to any satisfaction of a judgment or settlement of the claim
itself. There is the further limitation that, in those actions, no
indemnification will be made in the event of any adjudication of negligence or
misconduct, unless the court, in its discretion, believes that, in light of all
the circumstances, indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby will not be deemed exclusive of any other rights to which any
officer or director may be entitled under any bylaws, agreements, vote of
stockholders or disinterested directors, or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling Venus
Exploration pursuant to the foregoing provisions, we have been advised that in
the opinion of the SEC that indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 16. EXHIBITS
EXHIBIT
NO. EXHIBIT
4.1 Certificate of Incorporation, filed as Exhibit 3.1 to Venus
Exploration's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, which Exhibit is incorporated herein
by reference.
4.2 Bylaws, filed as Exhibit 3.2 to Venus Exploration's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, which Exhibit is incorporated herein by reference.
4.3 Settlement Agreement dated November 19, 1998, between Stratum
Group, L.P., and Venus Exploration, Inc., previously filed.
4.4 Registration Rights Agreement dated November 30, 1998,
between Venus Exploration, Inc. and Stratum Group, L.P.,
previously filed.
4.5 Registration Rights Agreement between EXCO Resources, Inc.
and Venus Exploration, Inc. dated June 30,1999, filed as
Exhibit 10.6 to Venus Exploration's Current Report on
Form 8-K dated June 30, 1999, which Exhibit is incorporated
by reference.
4.6 Convertible Promissory Note made by Venus Exploration, Inc.
in favor of EXCO Resources, Inc. dated June 30, 1999, filed
as Exhibit 10.4 to Venus Exploration's Current Report on Form
8-K dated June 30, 1999, which Exhibit is incorporated by
reference.
4.7 Form of 7% Subordinated Notes, filed as Exhibit 10.4 to Venus
Exploration's Form 10-Q for the period ended June 30, 1999,
which Exhibit is incorporated by reference.
II-2
<PAGE> 36
4.8 Form of Registration Rights Agreement between Venus
Exploration, Inc. and various holders of 7% Subordinated
Notes, filed as Exhibit 10.5 to Venus Exploration's Form 10-Q
for the period ended June 30, 1999, which Exhibit is
incorporated by reference.
*5.1 Opinion of Haynes and Boone, LLP.
*23.1 Consent of KPMG LLP.
*23.2 Consent of Ernst & Young LLP.
*23.3 Consent of Haynes and Boone, LLP, contained in the opinion
filed as Exhibit 5.1.
23.4 Consent of Pollard, Gore and Harrison Petroleum Engineers,
previously filed.
24.1 Power of Attorney, included on signature page previously
filed.
- -------------
* Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) that, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to that information in the
registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
II-3
<PAGE> 37
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment will be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of those securities at that time will be deemed to be the initial bona
fide offering thereof;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering; and
(4) the undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement will be deemed to be a new registration statement
relating to the securities offered therein, and the offering of those securities
at that time will be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the issuer pursuant to the foregoing provisions, or otherwise, the issuer has
been advised that in the opinion of the Securities and Exchange Commission that
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event a claim for indemnification against
those liabilities is asserted by a director, officer or controlling person in
connection with the securities being registered, the issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether that
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of that issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act will be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
will be deemed to be a new registration statement relating to the securities
offered therein, and the offering of those securities at that time will be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 38
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Antonio, State of Texas, on the 8th day of
September, 1999.
VENUS EXPLORATION, INC.
By: /s/ EUGENE L. AMES, JR.
-------------------------------
Name: Eugene L. Ames, Jr.
Title: Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed by the following persons on
behalf of the registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ EUGENE L. AMES, JR. Chairman of the Board, September 8, 1999
- ------------------------- Chief Executive Officer and
Eugene L. Ames, Jr. Director (principal
executive officer)
/s/ JOHN Y. AMES President, Chief Operating September 8, 1999
- ------------------------- Officer and Director
John Y. Ames
* PATRICK A. GARCIA Treasurer and Chief September 8, 1999
- ------------------------- Financial Officer (principal
Patrick A. Garcia financial officer and
accounting officer)
* J.C. ANDERSON Director September 8, 1999
- -------------------------
J. C. Anderson
</TABLE>
II-5
<PAGE> 39
<TABLE>
<S> <C> <C>
* MARTIN A. BELL Director September 8, 1999
- -------------------------
Martin A. Bell
* JAMES W. GORMAN Director September 8, 1999
- -------------------------
James W. Gorman
* JERE W. MCKENNY Director September 8, 1999
- -------------------------
Jere W. McKenny
* JOHN H. PINKERTON Director September 8, 1999
- -------------------------
John H. Pinkerton
/s/ MICHAEL E. LITTLE Director September 8, 1999
- -------------------------
Michael E. Little
</TABLE>
Eugene L. Ames, Jr., by signing his name hereto, does sign and execute
this Pre-Effective Amendment No. 1 to Form S-3 on behalf of each of the
above-named officers and directors of the Registrant on this the 8th day of
September, 1999, pursuant to powers of attorney executed on behalf of each of
such officers and directors, and previously filed with the Securities and
Exchange Commission.
*By: /s/ Eugene L. Ames, Jr.
---------------------------
Eugene L. Ames, Jr.
Attorney-in-fact
II-6
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<S> <C>
4.1 Certificate of Incorporation, filed as Exhibit 3.1 to Venus
Exploration's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, which Exhibit is incorporated herein
by reference.
4.2 Bylaws, filed as Exhibit 3.2 to Venus Exploration's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, which Exhibit is incorporated herein by reference.
4.3 Settlement Agreement dated November 19, 1998, between Stratum
Group, L.P., and Venus Exploration, Inc., previously filed.
4.4 Registration Rights Agreement dated November 30, 1998,
between Venus Exploration, Inc. and Stratum Group, L.P.,
previously filed.
4.5 Registration Rights Agreement between EXCO Resources, Inc.
and Venus Exploration, Inc. dated June 30,1999, filed as
Exhibit 10.6 to Venus Exploration's Current Report on
Form 8-K dated June 30, 1999, which Exhibit is incorporated
by reference.
4.6 Convertible Promissory Note made by Venus Exploration, Inc.
in favor of EXCO Resources, Inc. dated June 30, 1999, filed
as Exhibit 10.4 to Venus Exploration's current report on Form
8-K dated June 30, 1999, which Exhibit is incorporated by
reference.
4.7 Form of 7% Subordinated Notes, filed as Exhibit 10.4 to Venus
Exploration's Form 10-Q for the period ended June 30, 1999,
which Exhibit is incorporated by reference.
4.8 Form of Registration Rights Agreement between Venus
Exploration, Inc. and various holders of 7% Subordinated
Notes, filed as Exhibit 10.5 to Venus Exploration's Form 10-Q
for the period ended June 30, 1999, which Exhibit is
incorporated by reference.
*5.1 Opinion of Haynes and Boone, LLP.
*23.1 Consent of KPMG LLP.
*23.2 Consent of Ernst & Young LLP.
*23.3 Consent of Haynes and Boone, LLP, contained in the opinion
filed as Exhibit 5.1.
23.4 Consent of Pollard, Gore and Harrison Petroleum Engineers,
previously filed.
24.1 Power of Attorney, included on signature page previously
filed.
</TABLE>
- ------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 5.1
[H&B Letterhead]
September 8, 1999
Venus Exploration, Inc.
1250 N.E. Loop 410
Suite 100
San Antonio, Texas 75209
Re: Registration Statement on Form S-3 of 11,233,333 shares of Common
Stock, par value $.01 per share, of Venus Exploration, Inc. ("Common
Stock")
Gentlemen:
We are securities counsel to Venus Exploration, Inc., a Delaware corporation
(the "Company"), in connection with the registration and issuance of up to
11,233,333 shares of Common Stock (the "Shares"), plus an indeterminate number
of additional shares of Common Stock issuable to prevent dilution resulting
from stock splits, stock dividends or similar events to be sold by the Selling
Stockholders named in the Prospectus constituting a part of this Registration
Statement (the "Selling Stockholders"), in some instances following the
exercise of that certain convertible note (the "Note") described in the
Prospectus or issued in lieu of cash interest payments due on the Note as
described in the Prospectus.
We have examined such documents, records and matters of law as we have deemed
necessary for purposes of this opinion. Based on the foregoing, we are of the
opinion that the Shares are duly authorized and are, or when issued to the
Selling Stockholders in accordance with the terms of the Note described in the
Prospectus contained in the Company's Registration Statement on Form S-3 to
which this opinion is an exhibit will be, validly issued, fully paid and
nonassessable.
In rendering the foregoing opinion, we have relied as to certain factual
matters upon certificates of officers of the Company, the Selling Stockholders
and public officials, and we have not independently checked or verified the
accuracy of the statements contained therein.
We hereby consent to the filing of this opinion as Exhibit 5.1 to this
Registration Statement on Form S-3 filed by the Company to effect registration
of the Shares under the Securities Act of 1933, as amended, and to the
reference to us under the caption "Legal Matters" in the Prospectus
constituting a part of such Registration Statement.
Very truly yours
/s/ Haynes and Boone, LLP
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Venus Exploration, Inc.:
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
Our report dated April 7, 1999, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has an
accumulated deficit which raise substantial doubt about its ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
/s/ KPMG LLP
San Antonio, Texas
September 7, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Venus Exploration,
Inc. (the "Company") for the registration of 11,233,333 shares of its Common
Stock and to the incorporation by reference therein of our report dated August
17, 1999, with respect to the statements of revenues and direct operating
expenses of the Jackson Parish properties for the years ended December 31,
1998, 1997 and 1996 appearing in the Company's Current Report on Form 8-K dated
June 30, 1999, as amended by Current Report on Form 8-K/A dated September 7,
1999 and filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Dallas, Texas
September 7, 1999
