<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
VENUS EXPLORATION, INC.
(Name of Registrant as Specified in Its Charter)
VENUS EXPLORATION, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------
5) Total Fee Paid:
------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
-------------------------------------------
2) Form Schedule or Registration Statement No.:
----------------------
3) Filing Party:
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4) Date Filed:
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<PAGE> 2
VENUS EXPLORATION, INC.
1250 N.E. LOOP 410, 10TH FLOOR
SAN ANTONIO, TEXAS 78209
(210) 930-4900
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD _________________, 1999
----------------------
TO THE STOCKHOLDERS OF VENUS EXPLORATION, INC.
NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders of
VENUS EXPLORATION, INC., will be held at ________________________________, San
Antonio, Texas, on ______________, 1999, at ________, Central Time, for the
following purposes:
1. To elect eight (8) directors to serve until the next annual meeting
of stockholders;
2. To approve an amendment to the 1997 Incentive Plan of Venus
Exploration;
3. To ratify the appointment of KPMG LLP as Venus Exploration's
independent certified public accountants for the fiscal year ending
December 31, 1999;
4. To ratify the possible issuance, upon conversion of a Convertible
Promissory Note issued to EXCO Resources, Inc., of up to 10,133,333
shares of common stock;
5. To approve an amendment to the Certificate of Incorporation of Venus
Exploration to increase the number of authorized shares of common
stock to 50,000,000 shares;
6. To approve an amendment to the Certificate of Incorporation of Venus
Exploration to enlarge the power of the Board of Directors to
determine the voting rights of each share of preferred stock that
may be issued; and
7. To transact such other business as may properly come before the 1999
annual meeting.
Only stockholders of record at the close of business on __________,
1999, will be entitled to notice of and to vote at the 1999 annual meeting or
any adjournment(s) thereof. For a period of at least ten (10) days prior to the
1999 annual meeting, a complete list of stockholders entitled to vote at the
meeting will be open to examination by any stockholder during ordinary business
hours at the offices of Venus Exploration, 1250 N.E. Loop 410, Suite 1000, San
Antonio, Texas 78209.
Information concerning the matters to be acted upon at the 1999 annual
meeting is set forth in the accompanying proxy statement.
A proxy card is enclosed in the envelope in which these materials were
mailed to you. Please fill in, date and sign the proxy card, and return it
promptly in the enclosed postage-paid return envelope. If you attend the 1999
annual meeting, you may withdraw your proxy at that time and vote in person.
<PAGE> 3
A copy of the Annual Report to Stockholders for the fiscal year ended
December 31, 1998, is enclosed.
By Order of the Board of Directors
San Antonio, Texas John H. Sowell, III,
___________, 1999 Secretary
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY SO THAT YOUR VOTE MAY BE RECORDED
AT THE ANNUAL MEETING IF YOU DO NOT ATTEND PERSONALLY. PROXIES FORWARDED BY OR
FOR BROKERS OR FIDUCIARIES SHOULD BE RETURNED AS REQUESTED BY THEM.
<PAGE> 4
PRELIMINARY
PROXY MATERIALS
VENUS EXPLORATION, INC.
1250 N.E. LOOP 410, 10TH FLOOR
SAN ANTONIO, TEXAS 78209
(210) 930-4900
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD _________________, 1999
This Proxy Statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors of Venus Exploration, Inc., a
Delaware corporation, to be voted at the 1999 Annual Meeting of Stockholders of
Venus Exploration to be held at _______________________________________, San
Antonio, Texas, on _____________, 1999, at __________, Central Time, and at any
adjournments thereof.
The 1999 annual meeting is being held for the following purposes:
1. To elect eight (8) directors to serve until the next annual meeting
of stockholders;
2. To approve an amendment to the 1997 Incentive Plan of Venus
Exploration;
3. To ratify the appointment of KPMG LLP as Venus Exploration's
independent certified public accountants for the fiscal year ending
December 31, 1999;
4. To ratify the possible issuance, upon conversion of a Convertible
Promissory Note (the "EXCO Note") issued to EXCO Resources, Inc.,
of up to 10,133,333 shares of common stock;
5. To approve an amendment to the Certificate of Incorporation of Venus
Exploration to increase the number of authorized shares of common
stock to 50,000,000 shares;
6. To approve an amendment to the Certificate of Incorporation of Venus
Exploration to enlarge the power of the Board of Directors to
determine the voting rights of each share of preferred stock that
may be issued; and
7. To transact such other business as may properly come before the 1999
annual meeting.
The mailing address of the principal offices of Venus Exploration is
1250 N.E. Loop 410, 10th Floor, San Antonio, Texas 78209. The approximate date
on which this proxy statement and form of proxy are first being sent or given to
stockholders is ________________, 1999.
VOTING AT THE MEETING
Only holders of record of Venus Exploration's common stock, par value
$.01 per share, outstanding at the close of business on ___________, 1999, the
record date for the 1999 annual meeting, are entitled to notice of and to vote
at the 1999 annual meeting and at any adjournment(s) thereof. As of the close of
business on the record date, _________ shares of common stock were outstanding
and entitled to vote at the 1999 annual meeting. Unless otherwise indicated, all
references herein to percentages of
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outstanding shares of common stock are based on such number of shares
outstanding on the record date. Each share of common stock is entitled to one
(1) vote. Stockholders do not have the right to cumulate their votes for
directors.
A Quorum is Required to Transact Business
The presence, in person or by proxy, of holders of a majority of the
outstanding shares of common stock entitled to vote is necessary to constitute a
quorum at the annual meeting. For purposes of determining the presence of a
quorum and of determining the number of votes necessary to take stockholder
action, as discussed below, stockholders of record who are present at the
meeting in person or by proxy and who abstain, including brokers holding
customers' shares of record who cause abstentions to be recorded at the meeting,
are considered stockholders who are present and entitled to vote, and they count
toward the quorum.
Voting Requirements for Each Proposal
Brokers holding shares of record for customers generally are not
entitled to vote on matters unless they receive voting instructions from their
customers. As used herein, "uninstructed shares" means shares held by a broker
who has not received instructions from its customers on such matters and the
broker has so notified Venus Exploration on a proxy form in accordance with
industry practice or has otherwise advised Venus Exploration that the broker
lacks voting authority. As used herein, "broker non-votes" means the votes that
could have been cast on the matter in question by brokers with respect to
uninstructed shares if the brokers had received their customers' instructions.
Election of Directors. Directors are elected by a plurality vote, and
the eight (8) nominees who receive the most votes will be elected. In the
election of directors, votes may be cast in favor of or withheld with respect to
each nominee. Abstentions and broker non-votes will not be taken into account in
determining the outcome of the election.
Approval of the Amendment to the 1997 Incentive Plan. To be approved,
the plan amendment must receive the affirmative vote of the majority of the
shares present in person or by proxy at the annual meeting and entitled to vote.
Uninstructed shares are not entitled to vote on this matter. Therefore, broker
non-votes do not affect the outcome. Abstentions have the effect of negative
votes.
Ratification of Auditors. To be adopted, this matter must receive the
affirmative vote of the majority of the shares present in person or by proxy at
the annual meeting and entitled to vote. Uninstructed shares are entitled to
vote on this matter. Therefore, abstentions and broker non-votes have the effect
of negative votes.
Ratification of Share Issuance. To be adopted, the ratification of the
possible issuance of shares under the EXCO Note must receive the affirmative
vote of the majority of the shares present in person or by proxy at the annual
meeting and entitled to vote. Uninstructed shares are not entitled to vote on
this matter. Therefore, broker non-votes do not affect the outcome. Abstentions
have the effect of negative votes.
Amendments to the Certificate of Incorporation. The amendment to the
Certificate of Incorporation to increase the number of authorized shares of
common stock and the amendment to permit the Board of Directors to determine the
voting rights of any shares of preferred stock require the affirmative vote of a
majority of the shares of common stock outstanding. Uninstructed shares are not
entitled to vote on this matter. Therefore, broker non-votes do not affect the
outcome. Abstentions have the effect of negative votes.
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How to Vote Your Shares
Your proxy will be valid only if you sign, date and return it before
the 1999 annual meeting. If you complete all of the proxy card except the voting
instructions, then the designated proxies will vote your shares "for" the
election of the nominated directors and "for " the other five proposals. If any
nominee for election to the Board is unable to serve, which is not anticipated,
or if any other matters properly come before the meeting, the designated proxies
will vote your shares in accordance with their best judgment. Venus Exploration
does not know of any matters, other than those described in the Notice of Annual
Meeting of Stockholders, that will come before the 1999 annual meeting.
If the 1999 annual meeting is postponed or adjourned for any reason, at
any subsequent reconvening of the 1999 annual meeting all proxies will be voted
in the same manner as such proxies would have been voted at the original
convening of the 1999 annual meeting (except for proxies that have theretofore
effectively been revoked or withdrawn), notwithstanding that they may have been
effectively voted on the same or any other matter at a previous meeting.
A stockholder of Venus Exploration who executes and returns a proxy has
the power to revoke it at any time before it is voted. A stockholder who wishes
to revoke a proxy can do so by:
o executing a later dated proxy relating to the same shares and
by delivering it to the corporate secretary of Venus
Exploration prior to the vote at the 1999 annual meeting,
o giving written notice of the revocation to the secretary of
Venus Exploration prior to the vote at the 1999 annual
meeting, or
o appearing in person at the meeting and voting in person the
shares to which the proxy relates.
All written notices of revocation and other communications relating to the
revocation of proxies should be addressed as follows: Venus Exploration, Inc.,
1250 N.E. Loop 410, 10th Floor, San Antonio, Texas 78209, Attention: John H.
Sowell, III, Secretary.
PROXY SOLICITATION EXPENSES
Venus Exploration will bear the cost of soliciting its proxies,
including the expenses of distributing its proxy materials. In addition to the
use of the mail, proxies may be solicited by personal interview, telephone or
telegram by directors, officers, employees and agents of Venus Exploration who
will receive no additional compensation for doing so. Venus Exploration will
reimburse brokers, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in forwarding proxy materials to the
beneficial owners of the common stock held by them as stockholders of record.
OWNERSHIP OF SECURITIES
The following table sets forth the information as of August 1, 1999,
regarding the shares of common stock owned, and shares of common stock issuable
upon exercise or conversion of outstanding options, warrants or convertible
securities that can be exercised or converted by their terms on or before [60
days], 1999, by (a) each person, including any group, who is known by management
to be the beneficial owner of more than 5% of the common stock as of such date,
(b) each director and director nominee, (c) Venus
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Exploration's executive officers, and (d) all directors and executive officers
as a group based upon shares of common stock outstanding on such date.
<TABLE>
<CAPTION>
AMOUNT & NATURE OF
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
- ------------------------------------------ ------------------------ ----------------
<S> <C> <C>
Eugene L. Ames, Jr................................. 1,971,179 (2) 14.45%
John Y. Ames....................................... 510,563 (3) 3.74%
Eugene L. Ames, III................................ 346,989 (4) 2.54%
J. C. Anderson..................................... 16,194 *
Martin A. Bell..................................... 54,981 (5) *
Patrick A. Garcia.................................. 176,505 (6) 1.29%
James W. Gorman.................................... 304,476 (7) 2.23%
Michael E. Little.................................. 222,723 (8) 1.63%
Jere W. McKenny.................................... 57,180 (9) *
John H. Pinkerton.................................. 13,481(10) *
Directors and Executive Officers as a group
(10 persons)...................................... 3,674,271 26.94%
</TABLE>
<TABLE>
<CAPTION>
AMOUNT & NATURE OF
NAME AND ADDRESS OF FIVE PERCENT SHAREHOLDERS BENEFICIAL-OWNERSHIP (1) PERCENT-OF-CLASS
- --------------------------------------------- ------------------------ ----------------
<S> <C> <C>
Eugene L. Ames, Jr
1250 N.E. Loop 410, Suite 1000
San Antonio, TX 78209............................. 1,971,179 (2) 14.45%
J. Morton Davis
44 Wall Street
New York, NY 10005................................ 1,549,139 (5) 11.36%
Range Resources Corporation
500 Throckmorton Street
Fort Worth, TX 76102.............................. 2,326,532 (10) 17.06%
Stratum Group Energy Partners, LP
1330 Sixth Avenue, 33rd Floor
New York, NY 10019................................ 1,100,000 8.07%
</TABLE>
- --------------------
* Less than one percent (1%).
(1) All persons named have sole voting and investment power, except as
otherwise noted.
(2) Includes (a) 267,178 shares and 79,697 exercisable options owned by Eugene
L. Ames, Jr.; (b) 1,140,086 shares and 56,548 exercisable options owned by
Ellen R.Y. Ames, the spouse of Eugene L. Ames, Jr.; and (c) 407,924 shares
and 19,746 exercisable options owned by Venus Oil Company, which is
controlled by Mr. and Mrs. Eugene L. Ames, Jr. Ellen R.Y. Ames may be
deemed to own 1,196,634 shares, or 8.77% of the common stock. This does not
include 26,667 unvested options owned by Eugene L. Ames, Jr., granted under
the 1997 Incentive Plan. See "Stockholders Agreement" below for certain
information regarding the voting of these shares.
(3) Includes exercisable options to purchase 50,466 shares. This does not
include unvested options to purchase 13,333 shares of common stock granted
under the 1997 Incentive Plan. See "Stockholders Agreement" below for
certain information regarding the voting of these shares.
(4) Includes exercisable options to purchase 34,616 shares. This does not
include unvested options to purchase 8,000 shares of common stock granted
under the 1997 Incentive Plan. See "Stockholders Agreement" below for
certain information regarding the voting of these shares.
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(5) Includes 40,000 exercisable options. The data with respect to Mr. Bell
excludes shares owned by D.H. Blair Investment Banking Corp., by which Mr.
Bell is employed, as beneficial ownership of such shares is disclaimed by
Mr. Bell. The Chairman and owner of D.H. Blair is J. Morton Davis, who is
deemed to own 1,549,139 shares, including 500,000 exercisable options. See
"Stockholders Agreement" below for certain information regarding the voting
of these shares.
(6) Includes exercisable options to purchase 27,155 shares. This does not
include unvested options to purchase 8,000 shares of common stock granted
under the 1997 Incentive Plan. See "Stockholders Agreement" below for
certain information regarding the voting of these shares.
(7) Includes exercisable options to purchase 9,225 shares. See "Stockholders
Agreement" below for certain information regarding the voting of these
shares. Includes 86,956 shares of common stock issuable upon conversion of
that certain 7.0% Convertible Subordinated Note held by Mr. Gorman. See
"Certain Relationships and Related Party Transactions" for a summary of the
terms of this note.
(8) Includes 217,391 shares of common stock issuable upon conversion of that
certain 7.0% Convertible Subordinated Note held by Mr. Little. See "Certain
Relationships and Related Party Transactions" for a summary of the terms of
this note.
(9) Includes exercisable options to purchase 1,995 shares. See "Stockholders
Agreement" below for certain information regarding the voting of these
shares.
(10) The data with respect to Mr. Pinkerton does not reflect the 2,326,532
shares, including 192,353 exercisable options, that are beneficially owned
by Range Resources Corporation, of which Mr. Pinkerton is President. Mr.
Pinkerton disclaims beneficial ownership of such shares. The data with
respect to Range Resources Corporation does not reflect the shares reported
by Mr. Pinkerton, individually. See "Stockholders Agreement" below for
certain information regarding the voting of these shares.
STOCKHOLDERS AGREEMENT
A Stockholders Agreement (the "Stockholders Agreement") was entered
into effective May 27, 1997 among former stockholders of The New Venus
Exploration, Inc. (a predecessor to Venus Exploration), including Messrs. Eugene
L. Ames, Jr., John Y. Ames, Eugene L. Ames, III, Patrick A. Garcia, James W.
Gorman, Jere W. McKenny, other members of the Ames family and other former New
Venus stockholders (collectively, the "Ames Group," which owns beneficially
3,988,042 shares of Venus Exploration's common stock); D. H. Blair Investment
Banking Corp., Rivkalex Corp., Rosalind Davidowitz and Parliament Hill
Corporation (collectively, the "Blair Group," which owns beneficially 1,549,139
shares); and Range Resources Corporation ("Range Resources"), formerly known as
Lomak Petroleum, Inc. The Stockholders Agreement provides that, in the 1999
election of directors of Venus Exploration, the Ames Group, the Blair Group and
Range Resources will vote their shares for the four (4) nominees designated by
the Ames Group and the one (1) nominee designated by Range Resources. The
Stockholders Agreement also provides for certain rights of first refusal and
rights of participation between the Ames Group and Range Resources in the event
of a proposed sale of shares by either. The Stockholders Agreement has a term
expiring on May 27, 2000, but terminates earlier as to any party in the event
that such party's beneficial ownership of Venus Exploration's shares falls below
250,000 shares. See "Ownership of Securities."
PROPOSAL ONE
ELECTION OF DIRECTORS
GENERAL
At a meeting of the Board of Directors held in the second quarter of
1999, Venus Exploration's Bylaws were amended to increase the board size to
eight (8) directors. Mr. Michael E. Little was elected to fill that new
position. Mr. Little was elected to the Board of Directors contemporaneously
with his loan to Venus
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Exploration of $250,000. See "Certain Relationships and Related Party
Transactions -- Michael E. Little and James W. Gorman -- 7.0% Convertible
Subordinated Note Issuance." Mr. Little had become a consultant to the company
before he made the loan to the company.
At the 1999 annual meeting, stockholders will be asked to elect eight
(8) directors to serve as members of the Board of Directors until their
successors are duly elected and qualified. Your Board of Directors recommends
that the eight (8) nominees named below be elected to serve as directors. The
persons named in the proxy intend to vote the proxies FOR the election of the
nominees named below. Each nominee has consented to being named in this Proxy
Statement and to serve if elected. If any nominee refuses or becomes unable to
serve as a director, which is not anticipated, the persons named as proxies
reserve full discretion to vote for such other person as may be nominated by the
Board of Directors. Of the nominees listed below, Messrs. Eugene L. Ames, Jr.,
John Y. Ames, Gorman and McKenny are the designees of the Ames Group under the
Stockholders Agreement. John H. Pinkerton ("Mr. Pinkerton") is the nominee of
Range Resources under the Stockholders Agreement.
EUGENE L. AMES, JR.
JOHN Y. AMES
J.C. ANDERSON
MARTIN A. BELL
JAMES W. GORMAN
MICHAEL E. LITTLE
JERE W. MCKENNY
JOHN H. PINKERTON
NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS
The following paragraphs set forth certain information concerning each
nominee for election as a director. All positions and offices with Venus
Exploration held by each such person are also indicated.
EUGENE L. AMES, JR., 66, became Chairman, Chief Executive Officer and a
director of Venus Exploration following its acquisition of the assets and
liabilities of The New Venus Exploration, Inc. ("New Venus") in 1997. He is a
member of the Executive Committee. He has been in the oil and gas business since
1954 and had been associated with New Venus and its predecessor entities since
1962 and chief executive officer of those predecessor entities since 1991. He
graduated from the University of Texas at Austin in 1955 with a B.S. degree in
Geology. He served from 1991-93 as the Chairman of the Independent Petroleum
Association of America, the national trade group representing independent oil
and natural gas producers in Washington, D.C., and he currently serves as a
member of the Management Committee of the American Petroleum Institute (API).
JOHN Y. AMES, 43, became President, Chief Operating Officer and a
director of Venus Exploration following the acquisition of New Venus in 1997. He
is a member of the Executive Committee. He had been associated with New Venus
and its predecessor entities as Vice President since 1984. He became Executive
Vice President of those predecessor entities in 1995 and President and Chief
Operating Officer in 1996. He is the son of Eugene L. Ames, Jr., and the brother
of Eugene L. Ames, III, a Vice President of Venus Exploration. He graduated from
the University of Texas at Austin in 1978 with a B.B.A. in Petroleum Land
Management. He serves as the Regional Governor for the South Texas region of the
Independent Petroleum Association of America.
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J.C. ANDERSON, 67, is the Chairman and Chief Executive Officer of
Anderson Exploration, Ltd., a public oil and gas exploration and development
company based in Canada. He founded Anderson Exploration, Ltd., as a private
company in 1968 and has been employed by it since that time. Mr. Anderson has
been a director since 1998. He holds a B.S. in Petroleum Engineering from the
University of Texas at Austin and has more than 40 years experience in the oil
and gas business.
MARTIN A. BELL, 47, is the Vice Chairman and General Counsel of D. H.
Blair Investment Banking Corp., New York, New York, and has been a senior
officer of that organization and predecessor companies since 1991. D. H. Blair
Investment Banking Corp. is a member of the New York Stock Exchange. Mr. Bell
has been a director since 1997. He is a member of Venus Exploration's Audit
Committee.
JAMES W. GORMAN, 68, became a director of the company following the
acquisition of New Venus in 1997. He is a member of the Executive and
Compensation Committees. He is a petroleum geologist and has been engaged in the
oil and gas business either as a drilling contractor or independent producer for
43 years. He is currently, and has been for more than 5 years, an independent
investor in various ventures, including exploration and development of oil and
gas properties. He is President of Cockfield Exploration, Inc., a closely-held
oil and gas company based in San Antonio, Texas. He also serves as a member of
the Board of Directors of Cullen Frost Bancshares Corporation, a bank holding
company (NYSE).
MICHAEL E. LITTLE, 44, has been employed as Chairman and Chief
Executive Officer of South Texas Drilling and Exploration, Inc., an oil and gas
drilling company based in San Antonio, Texas, since 1999. From 1982 until 1999
he was President and Chairman of the Board of Dawson Production Services, Inc.,
a well servicing company based in San Antonio, Texas. He has more than 23 years
of experience in oil and gas operations management, including six years as a
drilling foreman and engineer. He is a graduate of Texas Tech University with a
B.S. Degree in Petroleum Engineering. He became a director of Venus Exploration
in 1999. Venus Exploration also retains him as a consultant.
JERE W. MCKENNY, 69, became a director of Venus Exploration following
the acquisition of New Venus in 1997. He is a member of the Audit and
Compensation Committees. He has been President of McKenny Energy Co., an oil and
gas exploration company based in Oklahoma City, Oklahoma, since September 1994.
In 1977, he became a director and the Vice Chairman of the Board of Kerr-McGee
Corp., an oil and gas exploration company based in Tulsa, Oklahoma, and from
1984 until 1993, he also was President and Chief Operating Officer of Kerr-McGee
Corp. He is a director of Rutherford-Moran Oil Corp.
JOHN H. PINKERTON, 45, became a director of Venus Exploration following
the acquisition of New Venus in 1997. He is a member of the Audit and
Compensation Committees. He has been employed by Range Resources (formerly Lomak
Petroleum, Inc.), an independent oil and gas operating company based in Fort
Worth, Texas since 1988, of which he was appointed President in 1990 and Chief
Executive Officer in 1992. He is a director of Range Resources and of North
Coast Energy, Inc., an oil and gas exploration and production company in which
Range Resources acquired an approximately 50% interest in 1996. Prior to joining
Range Resources, he was Senior Vice President of Snyder Oil Corporation. He
holds a B.A. degree in Business Administration from Texas Christian University
and an M.B.A. from the University of Texas.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEES FOR DIRECTOR NAMED ABOVE.
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BOARD MEETINGS AND STANDING COMMITTEES
The Board of Directors met five (5) times during 1998. All directors
attended at least 75% of the total number of meetings of the Board of Directors
and committees on which they served.
The three committees of the Board of Directors are:
o the Executive Committee, composed of Messrs. Eugene L. Ames, Jr.,
John Y. Ames and Gorman;
o the Audit Committee, composed of Messrs. Bell, McKenny and
Pinkerton; and
o the Compensation Committee, composed of Messrs. Gorman, McKenny
and Pinkerton.
Venus Exploration does not have a standing nominating committee. The functions
customarily attributable to a nominating committee are performed by the Board of
Directors as a whole.
Subject to certain limitations specified by Venus Exploration's Bylaws
and the Delaware General Corporation Law, the Executive Committee is authorized
to exercise the powers of the Board of Directors when the Board is not in
session. The Executive Committee held six (6) meetings during 1998. The Audit
Committee provides advice and assistance regarding accounting, auditing and
financial reporting, recommends the company's independent auditors and monitors
the results of the audit and the internal controls structure. It met once in
1998. The Compensation Committee reviews and recommends executive compensation
and employee benefit plans. It met twice in 1998.
MANAGEMENT AND REMUNERATION
EXECUTIVE OFFICERS
Set forth below are the names and ages of all executive officers of
Venus Exploration. All positions and offices with the company and its
subsidiaries held by each such person are also indicated. Officers generally are
elected annually for one (1) year terms or until their successors are elected
and qualified. All executive officers are United States citizens.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Eugene L. Ames, Jr.......... 66 Chairman of the Board of Directors and Chief Executive Officer
John Y. Ames................ 43 President, Chief Operating Officer and Director
Eugene L. Ames, III......... 40 Vice President
Patrick A. Garcia........... 43 Treasurer and Chief Financial Officer
</TABLE>
The following is a brief description of the business background of
Messrs. Eugene L. Ames, III and Garcia. For a narrative description of the
business background of Messrs. Eugene L. Ames, Jr. and John Y. Ames, see
"Proposal One - Election of Directors."
EUGENE L. AMES, III became Vice President of Venus Exploration
following the acquisition of New Venus in 1997. He had been a Vice President of
New Venus and its predecessor entities for more than the past five (5) years. He
is a graduate of Trinity University with B.S. degrees in Geology and Business
Administration. He is the son of Eugene L. Ames, Jr., and the brother of John Y.
Ames.
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PATRICK A. GARCIA became Chief Financial Officer and Treasurer of Venus
Exploration following the acquisition of New Venus in 1997. He had held the
position of Treasurer at New Venus and its predecessors since 1984. He is a
graduate of Texas A&M University with a B.B.A. degree in Accounting.
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth the compensation paid by Venus
Exploration for the past three fiscal years to its chief executive officer and
its other executive officers whose salary and bonus exceeded $100,000. The
financial and operating data presented in the Annual Report on Form 10-K for the
year ended December 31, 1997, for the period prior to May 21, 1997, the date of
the merger of New Venus and Xplor Corporation, are data in respect of New Venus
(due to the reverse acquisition accounting applied in the merger). Accordingly,
the only information presented for 1996 relates to Mr. Gayle who continued as an
officer after the merger. At no time during this period did Venus Exploration
pay any other executive officer annual compensation exceeding $100,000. No
compensation information is given for any person for any year in which that
person was not an officer of Venus Exploration.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION SECURITIES ALL OTHER
FISCAL ---------------------- UNDERLYING COMPENSATION
NAME AND POSITION YEAR SALARY($) BONUS ($) OPTIONS (#) ($) (1)
----------------- ------ --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
EUGENE L. AMES, JR., CHAIRMAN & 1998 190,000 - 0 - 40,000 3,354
CHIEF EXECUTIVE OFFICER (2)............. 1997 118,750 - 0 - - 0 - 4,387
James E. Gayle, 1998 86,500 - 0 - 11,000 42,604(4)
Executive Vice President (3)............ 1997 96,000 7,500 - 0 - - 0 -
1996 112,910 - 0 - - 0 - - 0 -
John Y. Ames, President & 1998 106,250 - 0 - 20,000 7,125
Chief Operating Officer (5).............. 1997 59,458 - 0 - - 0 - 4,302
Eugene L. Ames, III, 1998 86,750 - 0 - 12,000 5,491
Vice President (6)...................... 1997 48,208 - 0 - - 0 - 2,200
Patrick A. Garcia, Treasurer & 1998 78,750 - 0 - 12,000 4,061
Chief Financial Officer (7)............ 1997 46,625 - 0 - - 0 - 2,298
</TABLE>
- --------------------
(1) Except as otherwise specified, this amount consists of cash amounts
contributed by Venus Exploration to match a portion of the executive's
contributions under the 401(k) Plan and the costs of group term life
insurance provided to employees and personal use of a company-owned
vehicle.
(2) Eugene L. Ames, Jr., became Chief Executive Officer in May 1997,
replacing Mr. Gayle, who was President and CEO before the acquisition
of New Venus. After that transaction, Mr. Gayle was elected by the
Board of Directors to serve as Executive Vice President.
(3) James E. Gayle served as chief executive officer of Xplor before the
reverse merger into New Venus in May 1997. He then became Executive
Vice President of the company. Mr. Gayle resigned from Venus
Exploration effective November 15, 1998.
(4) The 1998 figure of $42,604 for all other compensation includes
termination benefits.
(5) John Y. Ames became President and Chief Operating Officer on May 21,
1997.
(6) Eugene L. Ames, III became Vice President on May 21, 1997.
(7) Patrick A. Garcia became Treasurer and Chief Financial Officer on
May 21, 1997.
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OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- ----------------------------------------------------------------------------------------------- ----------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- ---------- ------------ --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Eugene L. Ames, Jr.......... 40,000 20.0% $ 3.7125 02/28/03 $ 41,028 $ 90,661
James E. Gayle.............. 11,000 5.5% $ 3.3750 02/29/08 $ 10,257 $ 22,665
Eugene L. Ames, III......... 12,000 6.0% $ 3.7125 02/28/03 $ 12,308 $ 27,198
Patrick A. Garcia........... 12,000 6.0% $ 3.3750 02/29/08 $ 25,470 $ 64,547
John Y. Ames................ 20,000 10.0% $ 3.7125 02/28/03 $ 20,514 $ 5,330
</TABLE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table shows, for the company's chief executive officer
and the other executive officers named in the Summary Compensation Table, the
number of shares acquired upon the exercise of options during 1998, the amount
realized upon such exercise, the number of shares covered by both exercisable
and non-exercisable stock options as of December 31, 1998, and the values for
"in-the-money" options, based on the positive spread between the exercise price
of any such existing stock options and the year-end price of the common stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT DECEMBER 31, 1998 OPTIONS AT DECEMBER 31, 1998(1)
ACQUIRED ON ---------------------------- ---------------------------------
EXERCISE OF VALUE
NAME OPTIONS(#) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eugene L. Ames, Jr (3)... - 0 - $ - 0 - 90,584 40,000 $ - 0 - $ - 0 -
James E. Gayle........... - 0 - $ - 0 - 211,000 - 0 - $ 6,250 $ - 0 -
John Y. Ames............. - 0 - $ - 0 - 21,901 20,000 $ - 0 - $ - 0 -
Eugene L. Ames, III...... - 0 - $ - 0 - 12,700 12,000 $ - 0 - $ - 0 -
Patrick A. Garcia........ - 0 - $ - 0 - 7,229 12,000 $ - 0 - $ - 0 -
</TABLE>
- --------------------
(1) Aggregate market value based on December 31, 1998 stock price of $1.375
per share of the shares covered by the options. Only 100,000 of the
211,000 options issued to Mr. Gayle were in-the-money, and they had a
value of $6,250.
(2) Represents the difference between the aggregate exercise price and the
aggregate value, based upon the stock price on the date of exercise.
(3) Exercisable options include 56,548 options owned by Ellen R.Y. Ames,
wife of Eugene L. Ames, Jr., and 19,746 options owned by Venus Oil
Company, which is controlled by Eugene L. Ames, Jr., and his wife.
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<PAGE> 14
EMPLOYMENT AGREEMENT WITH CHIEF EXECUTIVE OFFICER
On July 1, 1999, Eugene L. Ames, Jr. entered into a two-year employment
contract with Venus Exploration that established his annual salary at $190,000
per year and other compensation, including the use of an automobile. This
agreement replaces the three-year agreement that expired on June 1, 1999. The
prior agreement also provided for annual compensation of $190,000. Since May
1998, Eugene L. Ames, Jr., has declined the use of the automobile under his
previous employment agreement and under the present one. The employment
agreement also included agreements by Eugene L. Ames, Jr. with regard to
confidentiality and noncompetition in order to protect Venus Exploration's
proprietary information.
Beginning on March 1, 1999, Mr. Ames, Jr. agreed to take a 21.5% salary
reduction, and on May 1, 1999, the salary reduction was increased to 35%. In
return for the salary reduction, Venus Exploration granted Mr. Ames, Jr., 52,074
options to buy shares of Venus Exploration's common stock. The exercise price is
$1.23, which was 110% of the fair market value of a share of the common stock on
the date of grant of the option. The options expire on February 28, 2004, and
they vested in semi-monthly increments beginning March 1, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER INFORMATION
The Compensation Committee of the Board of Directors currently consists
of James W. Gorman, Jere W. McKenny, and John H. Pinkerton. No member of the
Compensation Committee was, during fiscal 1998, an officer or employee of Venus
Exploration or any of its subsidiaries, nor was any member of the Compensation
Committee formerly an officer of Venus Exploration or any of its subsidiaries.
Also, during that year, no executive officer of the company served either as:
o a member of the compensation committee or board of directors of
another entity, one of whose executive officers served on the
Compensation Committee, or
o a member of the compensation committee of another entity, one of
whose executive officers served on Venus Exploration's Board of
Directors.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Currently, decisions on compensation of Venus Exploration's executive
officers are made by the Compensation Committee of the Board of Directors. The
following addresses Venus Exploration's executive officer compensation policies
for 1998.
GENERAL. Venus Exploration's compensation program is designed to enable
Venus Exploration to attract, to motivate and to retain high quality senior
management by providing a competitive total compensation opportunity based on
performance. To this end, Venus Exploration provides for base salaries, bonuses
based on subjective factors and stock-based incentives that strengthen the
mutuality of interests between employees and Venus Exploration's stockholders.
SALARIES. Eugene L. Ames, Jr.'s salary for 1998 was provided for in an
employment agreement. The material terms of Eugene L. Ames, Jr.'s employment
agreement are described above under the caption "Employment Agreement with Chief
Executive Officer."
Salaries of the executive officers were determined based upon the level
of responsibility, time with Venus Exploration, contribution and performance of
the particular executive officer. Evaluation of these factors
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<PAGE> 15
was subjective, and no fixed or relative weights were assigned to the factors
considered. Because of the economic conditions in the oil and natural gas
industry and the impact upon Venus Exploration's performance, the executive
officers for 1999 have agreed to temporarily reduce their salaries from between
21.5% to 35%. These salary reductions will be offset by the grant of additional
stock options to Venus Exploration's executive officers. Those options are
similar to those granted to Mr. Ames, Jr., and discussed in the paragraph above
that describes the employment agreement with the chief executive officer, except
that the options granted to employees other than Messrs. Ames, Jr., John Y.
Ames, and Eugene L. Ames, III, have a term of 10 years and an exercise price of
$1.1191 per share, which was the market price on the data of grant.
BONUS COMPENSATION. Through the use of annual bonuses, Venus
Exploration seeks to effectively tie executive compensation to Venus
Exploration's performance. The Compensation Committee determined during 1998
that no bonuses would be paid to its officers and employees based on various
factors, including: (a) the market price of the common stock at the 1997 year
end; (b) the attainment of Venus Exploration's goals for 1997; and (c) the
discretion of the Compensation Committee taking into account the financial
performance of Venus Exploration.
OPTIONS AND RESTRICTED STOCK GRANTS. Venus Exploration uses grants of
stock options and restricted stock to its key employees and executive officers
to closely align the interests of such employees and officers with the interests
of its stockholders. The 1997 Incentive Plan is administered by the Compensation
Committee, which determines the persons eligible, the number of shares subject
to each grant, the exercise price of options thereof and the other terms and
conditions of the option or restricted stock.
THE COMPENSATION COMMITTEE
--------------------------
James W. Gorman
Jere W. McKenny
John H. Pinkerton
DIRECTOR COMPENSATION
Directors of Venus Exploration are compensated under the 1997 Incentive
Plan. Under the 1997 Incentive Plan, non-employee directors receive (a) $12,000
per year, and (b) $500 per board meeting attended, whether in person or by
phone. Such payments are made in the form of grants of shares of common stock
or, at the option of a director, a combination of Venus Exploration's common
stock and cash. In the case of the second option, the cash compensation is
limited to a maximum of 25% of the $12,000 per year.
FIVE-YEAR STOCKHOLDER RETURN COMPARISON
Set forth below is a line graph comparing, for the five (5)-year period
ended December 31, 1998, the yearly percentage change in the cumulative total
stockholder return on the common stock with that of (a) all U.S. companies
quoted on the Nasdaq Market Index and (b) the SIC Code Index for crude petroleum
and natural gas stocks. The stock price performance shown on the graph below is
not necessarily indicative of future price performance.
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COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
AMONG VENUS EXPLORATION INC.,(1)
SIC CODE INDEX AND
NASDAQ MARKET INDEX
<TABLE>
<CAPTION>
FISCAL YEARS ENDING DECEMBER 31,
--------------------------------------------------------------------------------
COMPANY 1993 1994 1995 1996 1997 1998
- ------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Venus Exploration, Inc.............. 100.000 122.22 144.44 188.89 311.11 122.22
Industry Index...................... 100.000 104.91 112.92 143.74 134.83 86.35
Broad NASDAQ Market................. 100.000 96.80 135.44 166.20 203.60 282.27
</TABLE>
- --------------------
* $100 INVESTED ON 12/31/93 IN STOCK OR INDEX INCLUDING REINVESTMENT OF
DIVIDENDS.
(1) Stock prices shown for dates prior to May 21, 1997 are attributable to
Xplor Corporation, and its financial history is not contained in Venus
Exploration's Annual Report on Form 10-K for the year ended December 31,
1998. Therefore, comparisons of the stock price history with other
historical financial data for the period before May 21, 1997 is misleading.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
COCKFIELD EXPLORATION COMPANY
Venus Exploration currently operates approximately forty-five (45)
wells, projects and prospects in which Cockfield Exploration Company owns an
interest. Cockfield Exploration Company is owned by Mr. James W. Gorman, who has
been a director of Venus Exploration or its predecessors since June 1996. All
wells and prospects in which Mr. Gorman has participated since becoming a
director are operated under project agreements or joint operating agreements
entered into prior to Mr. Gorman becoming a director of the company. Cockfield
Exploration Company pays annual joint costs between $10,000 and $100,000
depending upon the level of drilling activity during the year. Cockfield
Exploration Company received $66,300 last year in proceeds from wells and
projects operated by Venus Exploration.
WILL C. JONES, IV
Will C. Jones, IV, is the son-in-law of Eugene L. Ames, Jr., and the
brother-in-law of John Y. Ames and Eugene L. Ames, III. He is currently of
counsel to Haynes and Boone, LLP. Mr. Jones and Haynes and Boone, LLP provide
legal counsel to Venus Exploration.
RANGE RESOURCES CORPORATION
Range Resources Corporation owns a 15% working interest in the Venus
Westbury Farms #1 well, Constitution Field, Jefferson County, Texas. Mr. John H.
Pinkerton is the president and chief executive officer of Range Resources, and
he has been a director of Venus Exploration since May 1997. The Westbury Farms
well was completed in early 1998 with sales commencing in late August 1998.
Range Resources participated
Page 13
<PAGE> 17
on the same basis, adjusted for size of working interest, as other
non-operators. During 1998 Range Resources paid Venus Exploration $866,000 for
its share of joint costs.
JAMES W. GORMAN AND MICHAEL E. LITTLE - 7.0% CONVERTIBLE SUBORDINATED NOTE
ISSUANCE
On April 14, 1999, Venus Exploration issued to James W. Gorman, a
director of Venus Exploration, a 7.0% Convertible Subordinated Promissory Note
(a "Subordinated Note") in the principal amount of $100,000. On May 24, 1999,
Venus Exploration issued to Michael E. Little, who is now a director of the
company, a similar note in the principal amount of $250,000. In addition to the
Subordinated Notes issued to Messrs. Gorman and Little, Venus Exploration has
issued Subordinated Notes to four other persons, none of whom are or were
affiliated with Venus Exploration, aggregating $650,000.
The Subordinated Notes. The Subordinated Notes bear interest at a rate
of 7% per annum, or 10% in the event of default. If interest is paid in common
stock, the number of shares to be issued will be determined by dividing the
interest payment due by the market price of one share of Venus Exploration
common stock on the last trading day preceding the interest payment date.
Interest is payable quarterly beginning on June 30, 1999. Venus Exploration paid
the June 30, 1999 interest payments to all six noteholders with a total of 7,984
shares of its common stock.
The Subordinated Notes mature on March 31, 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 Venus
Exploration issues 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.
If Venus Exploration issues convertible subordinated notes or other
similar securities with better terms, the holders of the six Subordinated Notes
also have the right to get replacement notes that have those better terms, at
least with regard to a higher stated interest rate, a higher premium upon early
redemption by Venus Exploration, a lower per-share conversion price, or a longer
period before Venus Exploration can cause a mandatory redemption.
Venus Exploration has a conditional option of converting the
outstanding balance of each Subordinated Note to shares of its common stock.
That option does not mature until thirty-six months after the original issuance
of the note, and the condition to Venus Exploration's option to convert is that
the closing market price for the shares of Venus Exploration 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 Subordinated Notes allow Venus Exploration to redeem them for cash
and the payment of a redemption premium. That right begins on the second
anniversary of the original issuance. The redemption premium begins at 18% and
decreases 1% per month after that, and there is a credit against the premium for
all accrued interest on the Subordinated Notes to the date of the redemption.
Venus Exploration also has a preferential right to buy the Subordinated Notes if
the holders decide to sell them.
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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 the noteholders 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
Subordinated Notes or any filings with the SEC as of the date
of the Subordinated Notes,
o bankruptcy, or
o an uninsured judgment of more than $25,000 that is not promptly
discharged.
The registration rights agreements. Concurrently with the execution of
the Subordinated Notes, Venus Exploration entered into a registration rights
agreement with each noteholder that gives the noteholders the option to register
for resale under the Securities Act of 1933 the shares of Venus Exploration
common stock that they will receive upon conversion of the Subordinated Notes.
The registration would only be on a registration statement otherwise being filed
by Venus Exploration for sales on its own behalf. Venus Exploration 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 Subordinated Notes described
above.
MICHAEL E. LITTLE
Beginning April 1, 1999, Michael E. Little was engaged by Venus
Exploration as a consultant. He provides advice and assistance in financial and
organizational matters. The company pays him $3500 per month and reimburses him
for his expenses incurred on behalf of the company. The relationship may be
terminated by either party upon thirty (30) days notice.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the company's officers and directors, and persons who own more than 10%
of a registered class of the company's equity securities, to file reports of
securities ownership and changes in such ownership with the Securities and
Exchange Commission. Statements of Changes of Beneficial Ownership of Securities
on Form 4 generally are required to be filed by the tenth day of the month
following the month during which the change in beneficial ownership of
securities occurred. Venus Exploration believes that all reports of securities
ownership and changes in such ownership required to be filed during 1998 were
timely filed.
PROPOSAL TWO
APPROVAL OF AMENDMENT TO 1997 INCENTIVE PLAN
INTRODUCTION AND SUMMARY
Venus Exploration is asking for your approval of an amendment to the
Venus Exploration 1997 Incentive Plan. The 1997 Incentive Plan was approved by
the stockholders at the 1997 annual meeting for the following purposes:
Page 15
<PAGE> 19
o To attract and to retain the services of employees, directors,
consultants and other qualified contractors;
o To provide employees, directors and consultants a proprietary
interest in Venus Exploration;
o To increase interest in Venus Exploration's welfare;
o To furnish an incentive for continued service; and
o To provide a means to recruit persons to enter employment with
Venus Exploration.
The components of the 1997 Incentive Plan are incentive stock options,
non-qualified stock options, stock appreciation rights, stock awards and cash
awards. The exercise price of the incentive stock options must be at least the
fair market value of the common stock on the day the option is granted. Upon
exercising an option, an optionee must pay Venus Exploration the exercise price
in cash or other consideration as determined by the compensation committee. Any
employee or non-employee consultant, contractor or director of Venus Exploration
or its subsidiaries or partnerships is eligible to receive an award under the
1997 Incentive Plan. Venus Exploration's compensation committee, which consists
of at least two outside directors, administers the 1997 Incentive Plan. The
compensation committee has the discretion to determine vesting periods,
expiration dates and the other terms of each option granted. The compensation
committee and the Board of Directors can adjust, cancel and amend awards granted
under the 1997 Incentive Plan, subject to certain conditions.
Each of Venus Exploration's directors (including nominees for director)
and executive officers may be deemed to have an interest in the outcome of this
proposal. As described elsewhere in these proxy materials, the executive
officers are foregoing a portion of their cash compensation as a cost-cutting
measure. In lieu thereof, those persons are receiving stock options granted
under the 1997 Incentive Plan. These option grants are in addition to options
that may be granted to such officers from time to time in the sole discretion of
the compensation committee of the Board of Directors or the Board of Directors
itself. In addition, non-employee directors receive shares of common stock
issued pursuant to the 1997 Incentive Plan as part of the directors'
compensation plan.
If this proposal is not approved, Venus Exploration might reach the cap
that would be abolished by this proposal, and registered shares would not be
available to issue to executive officers, other employees, consultants or
directors under the 1997 Incentive Plan. To the extent the 1997 Incentive Plan
is not available as a compensation plan, Venus Exploration would likely be
compelled to implement alternative plans (including, possibly, a new incentive
plan mirroring the 1997 Incentive Plan). This would likely entail additional
out-of-pocket expenses to Venus Exploration to set up and to implement such a
plan.
REASONS FOR AMENDMENT
Since the adoption of the 1997 Incentive Plan, Venus Exploration has
expanded its Board of Directors to add an additional non-employee director. Of
more importance is that during 1999 Venus Exploration has implemented a salary
reduction program to conserve its cash resources, and it has been replacing the
reduction in cash salary with incentive stock options. Through August 1, 1999,
options to purchase 248,263 shares of common stock had been granted due to the
salary reduction program. At that date, 417,332 shares of common stock and
options to purchase shares of common stock had been granted pursuant to other
compensation plans adopted under the 1997 Incentive Plan.
The 1997 Incentive Plan provides that Venus Exploration may only issue
awards in an amount not to exceed 10% of Venus Exploration's then-outstanding
common stock, but there is an absolute cap of the 1,500,000 shares of common
stock authorized to be issued under the 1997 Incentive Plan. From those limits,
the options granted under previous plans must also be subtracted. At the record
date, there were [11,029,383] shares of common stock outstanding; accordingly,
only [1,102,938] shares of common stock may be issued
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<PAGE> 20
under the 1997 Incentive Plan and the prior plans. Those prior-plan options and
shares total 279,585. Therefore, only an additional 157,758 shares and options
could be issued on the record date under the 1997 Incentive Plan.
The 1997 Incentive Plan also has a limitation of 1,000,000 incentive
stock options, regardless of the number of shares that have been issued.
Both of these limitations will limit both the purpose of the 1997
Incentive Plan itself and Venus Exploration's salary reduction plan. For
example, the "10% of outstanding" limitation prevents the continuation of the
salary reduction program through the end of the 1999 calendar year, and the "1
million Incentive Stock Options" limitation would leave only about 350,000
incentive stock options for all other purposes if the salary reduction program
is continued through the end of 1999.
THE AMENDMENT
Venus Exploration requests stockholder approval of an amendment to the
1997 Incentive Plan that would remove both the 10% limit described above and the
cap of 1,000,000 shares for incentive stock options. This amendment would permit
Venus Exploration to grant options to purchase shares of common stock up to the
full 1,500,000 shares authorized under the plan. The Board of Directors has
approved the amendment.
Any Stockholder may obtain a copy of the 1997 Incentive Plan by writing
to Venus Exploration, Inc., 1250 N.E. Loop 410, Suite 1000, San Antonio, Texas
78209, Attention: Corporate Secretary.
Requests may also be made by fax to (210) 930-4901.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE AMENDMENT TO
VENUS EXPLORATION'S 1997 INCENTIVE PLAN.
PROPOSAL THREE
APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of Venus Exploration has appointed the firm of
KPMG LLP to serve as independent auditors of the company for the fiscal year
ending December 31, 1999. You are being asked to ratify this appointment. KPMG
has served as independent auditor for Venus Exploration since May 21, 1997. KPMG
replaced Arthur Andersen, LLP, which had been the company's independent
auditors. Arthur Andersen's reports on the financial statements for 1996 did not
contain an adverse opinion or a disclaimer of opinion, nor were their reports
qualified or modified as to uncertainty, audit scope or accounting principles.
One or more representatives of KPMG are expected to be present at the annual
meeting. Such representatives will be given an opportunity to make a statement
and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
RATIFY THE APPOINTMENT OF KPMG LLP AS INDEPENDENT AUDITORS OF VENUS
EXPLORATION FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
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PROPOSAL FOUR
APPROVAL OF ISSUANCE OF SHARES OF
COMMON STOCK UPON CONVERSION OF NOTES
THE APACHE ACQUISITION
On June 30, 1999, EXUS Energy, LLC, a Delaware limited liability
company ("EXUS"), owned 50% by Venus Exploration and 50% by EXCO Resources, Inc.
("EXCO"), completed the acquisition from Apache Corporation of oil and natural
gas properties located in Jackson Parish, Louisiana (the "Jackson Parish
Properties"). EXCO is a publicly-held oil and gas company based in Dallas,
Texas. The Jackson Parish Properties include 17 gross (14.25 net) producing
wells. EXCO is now the named operator of the Jackson Parish Properties; it
assumed operations of all 17 wells upon completion of the transaction. The
Jackson Parish Properties include 6,411 gross (5,672 net) developed acres and
1,532 gross (1,148 net) undeveloped acres. As of December 31,1998, the Jackson
Parish Properties were estimated to contain 2,500 barrels of oil ("Bbls") and
64 billion cubic feet ("Bcf") of gas. The purchase price, before closing
adjustments, was $28.5 million, and after adjustments (the adjustments
principally reflect production since March 1, 1999, the effective date of the
acquisition), was $27.6 million cash. The purchase price was funded with $14
million drawn under a new credit facility established by EXUS and $14 million of
EXUS equity capital. The purchase price was determined based upon arms-length
negotiations between Apache Corporation and Venus Exploration taking into
account reserve estimates and other items customarily considered in acquisitions
of this type.
Purchase and Sale Agreement. The Jackson Parish Properties were
acquired pursuant to the terms of a Purchase and Sale Agreement (the "Purchase
Agreement"), dated as of May 13, 1999, entered into between Apache Corporation
and Venus Exploration. At closing of the acquisition, EXUS was assigned Venus
Exploration's rights and obligations under the Purchase Agreement. The Purchase
Agreement includes representations, warranties, covenants and closing conditions
customary for transactions of this type.
FORMATION OF EXUS
Limited Liability Company Agreement. Venus Exploration and EXCO have
entered into a Limited Liability Company Agreement (the "LLC Agreement"). Venus
Exploration and EXCO each own a 50% equity interest in EXUS and thereby are
entitled to a 50% share of the profits and losses of EXUS, subject to special
allocations in certain events. EXUS's principal business purpose is initially
the management and development of the Jackson Parish Properties. Venus
Exploration and EXCO have established an area of mutual interest in respect of
the Jackson Parish Properties that governs any additional acquisitions of
properties by either partner within the area. In addition, the partners may also
undertake other acquisitions of oil and gas properties through EXUS.
EXUS is managed by a management committee comprised of two persons
designated by EXCO (initially, EXCO's representatives are Douglas H. Miller, its
Chairman and Chief Executive Officer, and T.W. Eubank, its President) and two
persons designated by Venus Exploration (initially, Venus Exploration's
representatives are Eugene L. Ames, Jr., its Chairman and Chief Executive
Officer, and John Y. Ames, its President and Chief Operating Officer). EXUS'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
including: merger, sale of all of EXUS' assets, liquidation,
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conversion of the legal form of the entity to another form, or amendment of the
LLC Agreement to change any minority membership interest protection.
Venus Exploration and EXCO initially capitalized EXUS with $14 million
of equity capital, all of which was applied to fund the purchase of the Jackson
Parish Properties. EXUS also arranged a credit facility (discussed in greater
detail below) through NationsBank, N.A., to fund a portion of the Jackson Parish
Properties acquisition, to fund additional development drilling of the
properties, and to fund additional acquisitions.
The members of EXUS have identified to date certain additional
development drilling opportunities in the Jackson Parish Properties and have
initially budgeted $5.1 million (subject to lender approval) to fund those
activities. The LLC Agreement permits the Management Committee to call for
additional capital contributions from the members to fund the capital needs of
EXUS. Furthermore, either member may propose a Subsequent Operation (as that
term is defined in the joint operating agreement between EXUS and EXCO governing
operation of the Jackson Parish Properties) on the Jackson Parish Properties. A
"Subsequent Operation" would encompass significant drilling activities, such as
a new well, recompletion of an existing well or a workover project. In the event
Venus Exploration and EXCO are unable to agree to fund the project through EXUS,
the proposing member may elect to proceed with the Subsequent Operation in
EXUS's name, but the Subsequent Operation will be funded solely by the proposing
member. In that event, all expenses, losses, gain 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. Thereafter, all losses, expenses, gain or income shall be allocated
to the members pro rata according to their equity interest in EXUS.
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, Venus Exploration and EXCO 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
of a deadlock between Venus Exploration and EXCO on a matter that requires a
super-majority vote of the members under the LLC Agreement.
EXCO Note. Of the initial $14 million of EXUS equity capital, $7
million was provided by EXCO from its cash on hand, and $7 million was provided
by Venus Exploration from borrowed funds. On June 30, 1999, Venus Exploration
borrowed $7 million from EXCO under the terms of an $8 million Convertible
Promissory Note. The EXCO Note provides for borrowings up to $8 million, subject
to restrictions on the use of proceeds. As stated above, Venus Exploration drew
$7 million under the EXCO Note to fund Venus Exploration's capital contribution
to EXUS. 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 and/or to fund the expenses of one equity issuance. Venus Exploration is
not permitted to draw any of the $1 million until it has obtained the
stockholder approval of this Proposal Four. All borrowings under the EXCO Note
are secured by a first priority lien providing a security interest in the
membership interest of Venus Exploration in EXUS and in the distribution and
income rights of Venus Exploration in EXUS. The EXCO Note provides that advances
will bear interest, which can be paid in cash or, at Venus Exploration's
election, Venus Exploration common stock, at a rate of 10% from June 30, 1999
through June 30, 2000, with interest increasing 1% per year through June 30,
2004. Advances will bear interest at a rate of 15% thereafter in the event of
default. If interest is paid in common stock, the number of shares to be issued
shall be determined by dividing the interest payment due by the average market
price of one share of common stock for the twenty trading days immediately
preceding the interest payment date. Interest is payable semi-annually
commencing
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<PAGE> 23
on January 1, 2000. The EXCO Note matures on July 1, 2004, at which time all of
the unpaid principal is due and payable.
Beginning on July 1, 2000 and continuing until the payment in full of
the EXCO Note, EXCO, at its option, may convert all or any portion of the
outstanding principal balance and accrued interest into shares of Venus
Exploration common stock for $1.50 per share, subject to adjustment in certain
events. On or before December 15, 1999, Venus Exploration is required to obtain
approval of its stockholders (as required by the rules of the Nasdaq SmallCap
Market) of the issuance of the Venus Exploration common stock that may be issued
upon the conversion of principal or accrued interest under the terms of the EXCO
Note. It is the purpose of this Proposal Four to obtain that approval.
Messrs. Gene Ames, Jr., John Ames, Davis, Gorman and Pinkerton each
executed letters addressed to EXCO agreeing to vote their shares of common stock
in favor of this matter. In the event Venus Exploration is unable to obtain such
stockholder approval, Venus Exploration would be required to prepay $3 million
of the EXCO Note plus accrued interest thereon. Venus Exploration is currently
authorized to issue shares of its common stock upon conversion of up to $4
million of the principal of the EXCO Note without such stockholder approval;
accordingly the $3 million mandatory prepayment equates to the principal amount
EXCO would not be able to convert to Venus Exploration common stock if
stockholder approval was not obtained. Alternatively, Venus Exploration may
elect to transfer membership interests in EXUS held by Venus Exploration equal
to 21.43% of the aggregate outstanding interests of EXUS (this approximates 3/7
of Venus Exploration's equity interest in EXUS) in exchange for a cancellation
of $3 million of principal owed under the EXCO Note.
The EXCO Note also requires a mandatory prepayment of principal equal
to 50% of the net proceeds of each equity issuance by Venus Exploration on or
after June 30, 1999 (excluding the first $5 million of aggregate net proceeds of
all equity issuances after June 30, 1999). Venus Exploration 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 certain
representations, affirmative covenants (such as conduct of Venus Exploration's
business, reports to EXCO, compliance with laws), negative covenants (including
no purchase or redemption of Venus Exploration's common stock and no sale,
transfer, mortgage or pledge of the collateral securing the EXCO Note), and
events of default (including failure to pay principal or interest as required,
violation of covenants in the EXCO Note, bankruptcy, change of control of Venus
Exploration, or default under Venus Exploration's secured credit facility). An
event of default would occur if Venus Exploration is unable to obtain
stockholder approval.
The shares of common stock that may be issued under the terms of the
EXCO Note are subject to a Registration Rights Agreement dated June 30, 1999.
The Registration Rights Agreement requires Venus Exploration to register with
the Securities and Exchange Commission 10,133,333 shares of Venus Exploration
common stock that may be issuable to EXCO under the EXCO Note for resale by EXCO
from time to time. The 10,133,333 shares represents (a) 5,333,333 shares that
would be issued if EXCO were to convert $8 million of principal under the EXCO
Note at $1.50 per share, and (b) 4,800,000 shares assuming Venus Exploration
were to elect to pay 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 become effective
on or prior to the 120th day following the first issuance of any shares under
the EXCO Note, which 120 day period may be extended to 210 days if Venus
Exploration has timely complied with its covenants under the Registration Rights
Agreement, but the registration statement is still under review by the
Securities and
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<PAGE> 24
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.
EXUS Credit Facility. On June 30, 1999, EXUS 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'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 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, including all mineral interests.
The credit facility provides that if the aggregate outstanding
indebtedness of EXUS is less than 75% of the borrowing base, then advances will
bear interest at 1.5% over LIBOR. If the borrowing base usage equals or exceeds
75%, then advances will bear interest at 1.75% over LIBOR.
Under the terms of the credit facility, EXUS must not permit the ratio
of its consolidated current assets to its consolidated current liabilities to be
less than 1.0 to 1.0 at any time. Furthermore, EXUS must not incur or pay
general and administrative expenses in an aggregate amount exceeding $100,000
during the period from June 30, 1999 through December 31, 1999, or $200,000
during any fiscal year thereafter. On July 31, 1999, EXUS was in compliance with
both the current ratio covenant and the general and administrative expense
covenant.
Commencing on September 25, 1999 and continuing each month thereafter
until maturity, EXUS must make mandatory payments on the credit facility in an
amount equal to 50% of EXUS's Net Revenues (as defined in the credit facility)
for the immediately preceding calendar month. Each such payment shall be applied
first to accrued but unpaid interest and then to principal. However, if a
borrowing base deficiency were to exist after giving effect to a
redetermination, then EXUS would have to do one of the following:
o eliminate the borrowing base deficiency by 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 eliminate the deficiency by making six consecutive mandatory
prepayments of principal on the revolving loan, each of which
shall be in the amount of one sixth (1/6th) of the amount of
the borrowing base deficiency commencing on the first monthly
date following the date on which the borrowing base deficiency
is determined to exist and continuing on each monthly date
thereafter; or
o eliminate the borrowing base deficiency by submitting
additional mineral interests to the banks on the first monthly
date following the date on which the borrowing base deficiency
is determined to exist for evaluation as borrowing base
properties that the banks, in their sole discretion, determine
have a value sufficient to increase the borrowing base by at
least the amount of the borrowing base deficiency.
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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 thereafter. EXUS may seek additional borrowing capacity at that
time for its development drilling program. However, neither Venus Exploration
nor EXUS can assure you that the current development program of EXUS will result
in increased collateral values or that these values will enable Venus
Exploration to borrow the funds EXUS needs to continue the program.
The credit facility contains a number of covenants affecting the
liquidity and capital resources of EXUS, including restrictions on the 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.
FINANCIAL DATA
Attached as Appendix A to this proxy statement are certain pro forma
and historical financial statements in respect of the Jackson Parish Properties.
See "Incorporation By Reference of Certain Financial Data" for a description of
other financial data and information incorporated by reference into this proxy
statement.
THE PROPOSAL
Assuming that:
o Venus Exploration were to draw the full remaining $1 million
available under the EXCO Note (for total indebtedness of $8
million),
o Venus Exploration were to elect to pay all interest due and
payable under the EXCO Note in shares of common stock, at an
assumed price per share of $1.00,
o EXCO were to convert to common stock the full principal amount
outstanding under the EXCO Note at maturity, and
o There were no adjustments to the conversion formula in respect
of conversion of the EXCO Note,
then Venus Exploration would issue 10,133,333 shares of its common stock which
would represent [47.9%]% of the common stock outstanding on the record date
(including the assumed issuance of the shares to EXCO).
The issuance of the common stock pursuant to the EXCO Note is being
submitted for ratification by the stockholders at the 1999 annual meeting
because the rules of the Nasdaq SmallCap Market, upon which market Venus
Exploration's outstanding common stock is qualified for trading, require
stockholder approval or ratification of the issuance, other than in a public
offering, of common stock or securities convertible into common stock at a price
less than the greater of book or market value if such common stock has or would
have upon issuance voting power equal to or in excess of 20% of the voting power
outstanding before such issuance. Because the total number of shares issuable
under the EXCO Note is not fixed and may exceed 20% of the voting power
outstanding and may be issued at a price less than the greater of book or market
value at the time that they are issued, Venus Exploration is seeking stockholder
ratification of the issuance of common stock under the EXCO Note.
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In the event that stockholders did not ratify this proposal, Venus
Exploration would be forced to either (a) repay immediately $3 million of the
principal outstanding under the EXCO Note, or (b) transfer to EXCO approximately
42.9% of Venus Exploration's membership interest in EXUS in exchange for
cancellation of $3 million of the indebtedness outstanding under the EXCO Note.
In addition, Venus Exploration would not be able to draw the additional $1
million available to be borrowed by it under the EXCO Note. Management believes
this outcome would be damaging to Venus Exploration's recovery since management
believes that the acquisition of the Jackson Parish Properties provides not only
an additional source of cash flow for Venus Exploration but also upside drilling
opportunities. In addition, the $1 million draw arrangement under the EXCO Note
was made available to fund drilling activity by EXUS to be funded by Venus
Exploration or a public or private placement of equity securities by Venus
Exploration. This is an asset that we will forfeit if stockholder approval of
this proposal is not obtained.
POTENTIAL ANTI-TAKEOVER EFFECTS OF CONVERTIBILITY
If the stockholders approve this proposal, up to 4,347,200 additional
shares of common stock would be issuable by Venus Exploration that would
otherwise be issuable for other purposes if stockholder approval were not
obtained. If the additional shares of common stock are issued to EXCO, EXCO
could beneficially own in the aggregate [47.9%]% of the common stock of Venus
Exploration as of July 1, 2004. Therefore, the issuance of these shares of
common stock to EXCO, concentrating ownership of Venus Exploration in the hands
of one entity, could have the effect of delaying, discouraging or making more
difficult changes in control of Venus Exploration, including tender offers or
takeover attempts that some stockholders might consider to be in their best
interests. In addition, EXCO would be able to control the election of all
directors to Venus Exploration's Board of Directors as well as the outcome of
any other proposal put before stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
CONTINGENT ISSUANCE OF UP TO 10,133,333 SHARES OF VENUS EXPLORATION'S
COMMON STOCK UPON THE CONVERSION OF THE EXCO NOTE.
PROPOSAL FIVE
PROPOSED AMENDMENT OF THE CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Certificate of Incorporation of Venus Exploration currently
authorizes the issuance of up to 30,000,000 shares of common stock with a par
value of $0.01 per share. As of _____________, 1999, _______________ shares were
outstanding. Another _______________ shares of common stock are reserved for
issuance upon the exercise of outstanding warrants and options. The amendment to
the 1997 Incentive Plan that is being submitted for approval under Item Two
above would permit Venus Exploration to grant about 400,000 more shares, or
options to acquire shares, in addition to those that it already may grant under
the 1997 Incentive Plan. Subject to stockholder ratification as provided in
Proposal Four, Venus Exploration could issue up to 10,133,333 shares of common
stock to EXCO under the EXCO Note. Venus Exploration has also reserved
__________ shares for issuance under the Subordinated Notes. The shares
outstanding plus shares reserved for issuance under outstanding options,
warrants, the 1997 Incentive Plan, the EXCO Note and the Subordinated Notes
total _____ shares. There are no shares of preferred stock outstanding. The
Board of Directors deems it advisable to amend the Certificate of Incorporation
to increase the number of authorized shares of common stock to 50,000,000
shares.
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The additional shares of common stock would become part of the existing
class of common stock, and the additional shares, when issued, would have the
same rights and privileges as the shares of common stock now issued. There are
no preemptive rights relating to the common stock.
If the proposed amendment is approved, the additional authorized shares
would be available for issuance by the Board of Directors for any proper
corporate purpose at any time without further stockholder approval except as
otherwise required by applicable law or securities exchange listing rules. The
Board of Directors believes that it is desirable to give the company this
flexibility in considering such matters as acquisitions, raising additional
capital, stock dividends or other corporate purposes, although the company has
no present plans, agreements or understandings regarding the issuance of the
proposed additional shares other than for the uses described above. To the
extent that any future issue of shares is made on other than a pro rata basis to
current stockholders, the present ownership of current stockholders may be
diluted.
Although the company has no present commitment, arrangement or plan in
that regard, the authorized but unissued shares of such stock could be used to
make a takeover or change in control in the company more difficult.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF VENUS EXPLORATION RECOMMENDS A VOTE FOR THE
PROPOSAL TO APPROVE THE AMENDMENT OF THE CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK TO
50,000,000 SHARES.
PROPOSAL SIX
PROPOSED AMENDMENT OF THE CERTIFICATE OF INCORPORATION
TO MODIFY A TERM OF THE AUTHORIZED SHARES OF PREFERRED STOCK
Venus Exploration is authorized to issue up to 5,000,000 shares of
preferred stock. The preferred stock is so-called "blank check" preferred since
the Board of Directors may fix or change the terms, including:
o the division of such shares into series;
o the dividend or distribution rate;
o the dates of payment of dividends or distributions and the
dates from which they are cumulative;
o liquidation price;
o redemption rights and price;
o sinking fund requirements;
o conversion rights; and
o restrictions on the issuance of additional shares of any
class or series.
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This right to fix or to change the terms, limitations and restrictions of the
preferred stock is in the Board's sole discretion, with no further authorization
by the stockholders except as may be required by applicable laws or securities
exchange listing rules.
The amendment would add to that list by allowing the Board of Directors
to also determine the number of votes given to each share of preferred stock.
Currently, the Certificate of Incorporation can be interpreted to allow only one
vote per share of preferred stock, regardless of the amount paid for it and
without regard to any of the other rights allowed to the holder of that share of
preferred stock. If preferred stock is to be used effectively and efficiently,
it would be helpful to allow the Board of Directors to determine the number of
votes allowed for each share of preferred stock.
Therefore, if the stockholders approve this amendment, the Board of
Directors will be entitled to determine the number of votes each share of
preferred stock is allotted, in addition to determining the other terms,
limitations and restrictions of each share of preferred stock in the various
series that may be created.
It is not possible to state the effect of the preferred stock upon the
rights of holders of common stock until the Board determines the terms relating
to one or more series of preferred stock. However, such effects might include:
o the reduction of amounts otherwise available for payment of
dividends on common stock to the extent that dividends are
payable on any issued shares of preferred stock,
o restrictions on dividends on common stock if dividends on
preferred stock are in arrears,
o dilution of the voting power of the common stock and dilution
of net income and net tangible book value per share of common
stock as a result of any such issuance, depending on the
number of shares issued and the purpose, terms and conditions
of the issuance, and
o the holders of common stock not being entitled to share in the
company's assets upon liquidation until satisfaction of any
liquidation preference granted to shares of preferred stock.
Although Venus Exploration has no present commitment for the issuance
of shares of preferred stock, the authorized but unissued shares of such stock
could be used to make a takeover or change in control in Venus Exploration more
difficult. Under certain circumstances, rights granted upon issuance of shares
of the preferred stock in particular could be used to create voting impediments
or to discourage third parties seeking to effect a takeover or otherwise gain
control of Venus Exploration.
If both of the amendments to the Certificate of Incorporation are
adopted, the Article Four of the Certificate of Incorporation will read as shown
on Appendix B.
THE BOARD OF DIRECTORS OF VENUS EXPLORATION RECOMMENDS A VOTE FOR THE
PROPOSAL TO APPROVE THE AMENDMENT OF THE CERTIFICATE OF INCORPORATION
TO ENLARGE THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX THE VOTING
RIGHTS, AND THE EXTENT THEREOF, OF EACH SHARE OF PREFERRED STOCK THAT
MAY BE ISSUED BY THE COMPANY.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 2000 Annual
Meeting of Stockholders, in accordance with Rule 14a-8 of the proxy rules of the
Securities and Exchange Commission, must be received by Venus Exploration at its
principal executive offices on or before January 15, 2000, to be eligible for
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inclusion in its proxy statement and proxy relating to that meeting. At the 2000
annual meeting, management proxies will have discretionary authority to vote on
stockholder proposals that are not submitted for inclusion in the proxy
statement unless received by Venus Exploration before January 15, 2000.
INCORPORATION BY REFERENCE OF CERTAIN FINANCIAL DATA
Incorporated by reference into this proxy statement are the financial
data and other information described below. These data and other information are
incorporated from Venus Exploration's Annual Report on Form 10-K for the year
ended December 31,1998, as amended. Those financial data and other information
form a part of the Annual Report to Stockholders delivered to you with this
proxy statement. Since it is incorporated into this proxy statement, it should
also be considered to be a part of the proxy statement.
The following data and information are incorporated:
o Item 8. Financial Statements and Supplementary Data
o Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
o Item 9. Changes In, and Disagreements With,
Accountants on Accounting and Financial
Disclosure.
o Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
OTHER BUSINESS
Management does not presently know of any matters that may be presented
for action at the 1999 annual meeting other than those set forth herein.
However, if any other matters properly come before the 1999 annual meeting, it
is the intention of the persons named in the proxies solicited by management to
exercise their discretionary authority to vote the shares represented by all
effective proxies on such matters in accordance with their best judgment.
Please fill in, date and sign the enclosed proxy card and return it
promptly in the enclosed return envelope, which requires no additional postage
if mailed in the United States.
The Annual Report to Stockholders, which includes Venus Exploration's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is
enclosed. The Annual Report does not form any part of the material for the
solicitation of proxies.
By Order of the Board of Directors,
EUGENE L. AMES, JR.
Chairman and Chief Executive Officer
____________, 1999
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APPENDIX A
Attached are the audited and unaudited financial statements for the
Jackson Parish Properties and the pro forma financial statements showing the pro
forma effect of this acquisition for the periods presented.
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Venus Exploration, Inc.
We have audited the accompanying statements of operating revenues and direct
operating expenses of the Jackson Parish Properties (as defined in Note 1 to the
accompanying statements) acquired by Venus Exploration, Inc. for the years ended
December 31, 1996, 1997 and 1998. These statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statements of operating revenues and
direct operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of operating revenues and direct operating expenses. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation.
We believe our audits provide a reasonable basis for our opinion.
The accompanying statements of operating revenues and direct operating expenses
were prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of revenues and expenses of the Jackson Parish Properties.
In our opinion, the statements of operating revenues and direct operating
expenses referred to above present fairly, in all material respects, the results
of operations of the Jackson Parish Properties acquired by Venus
Exploration, Inc. for the years ended December 31, 1996, 1997, and 1998 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dallas, Texas
August 17, 1999
<PAGE> 32
JACKSON PARISH PROPERTIES
STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Oil and natural gas sales .................................. $ 3,624 $ 3,655 $ 2,812 $ 1,542 $ 1,081
Direct operating expenses .................................. 291 465 522 223 196
---------- ---------- ---------- ---------- ----------
Excess of revenues over direct operating expenses ......... $ 3,333 $ 3,190 $ 2,290 $ 1,319 $ 885
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 33
JACKSON PARISH PROPERTIES
NOTES TO STATEMENTS OF OPERATING REVENUES
AND DIRECT OPERATING EXPENSES
1. BASIS OF PRESENTATION
On June 30, 1999, EXUS Energy, LLC, a Delaware limited liability
company (EXUS), owned 50% by Venus Exploration, Inc. (Venus), and 50% by EXCO
Resources, Inc. (EXCO) completed the acquisition from Apache Corporation of
certain oil and natural gas properties located in Jackson Parish, Louisiana (the
Jackson Parish Properties). The Jackson Parish Properties include 17 gross
(14.25 net) producing wells. EXCO is the named operator of the Jackson Parish
Properties and assumed operations of all 17 wells acquired in the transaction.
The Jackson Parish Properties include 6,411 gross (5,672 net) developed acres
and 1,532 gross (1,148 net) undeveloped acres. The purchase price, before
closing adjustments, was approximately $28.5 million, and after adjustments was
$27.6 million cash.
The acquisition was funded with $14 million drawn under a new credit
facility established by EXUS with NationsBank, N.A., and $14 million of EXUS
equity capital which consisted of $7 million cash contributions each by Venus
and EXCO. Venus' capital was funded by a $7 million Convertible Promissory Note
in favor of EXCO dated June 30, 1999.
Venus will include in its accounts its 50% proportionate interest in
the assets, liabilities, revenues and expenses of the Jackson Parish Properties.
Accordingly, the accompanying statements present the interest acquired by Venus
in the operating revenues and direct operating expenses of the Jackson Parish
Properties. The operating revenues and direct operating expenses presented
herein relate only to the interests in the producing oil and natural gas
properties acquired and do not represent all of the oil and natural gas
operations of Apache nor the interest acquired by EXCO. Direct operating
expenses include the actual costs of maintaining the producing properties and
their production, but do not include charges for depletion, depreciation, and
amortization; federal and state income taxes, interest; or general and
administrative expenses. Presentation of complete historical financial
statements for the years ended December 31, 1996, 1997, and 1998 is not
practicable because the Jackson Parish Properties were not accounted for as a
separate entity by Apache; and therefore, such statements are not available. The
operating revenues and direct operating expenses for the periods presented may
not be representative of future operations.
Revenues in the accompanying statements of operating revenues and
direct operating expenses are recognized on the entitlement method. Direct
operating expenses are recognized on an accrual basis.
In management's opinion, the accompanying interim statements contain
all adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the consolidated interest acquired by Venus in the operating
revenues and direct operating expenses of the Jackson Parish Properties for the
six month periods ended June 30, 1998 and 1999.
The results of operations for the six months ended June 30, 1999, are
not necessarily indicative of the results expected for the full year.
3
<PAGE> 34
2. SUPPLEMENTAL OIL AND NATURAL GAS RESERVE AND STANDARDIZED MEASURE
INFORMATION (UNAUDITED)
OIL AND NATURAL GAS OPERATIONS
During the years ended December 31, 1996, 1997, and 1998 the
development costs incurred for the interest acquired by Venus were $2.0 million,
$2.4 million and $25,000, respectively. No exploration or incremental general
and administrative costs were incurred.
RESERVE QUANTITY INFORMATION
The following table presents Venus' estimate of the proved oil and
natural gas reserves of the Jackson Parish Properties, all of which are located
in the United States, as of December 31, 1998. Venus and EXCO have used
different petroleum reservoir engineers to prepare these estimates. As a result,
the reserve quantity estimate and the Standardized Measure of Discounted Future
Net Cash Flows below differ from those estimates presented by EXCO in its public
disclosures. Venus emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of producing
oil and natural gas properties. Accordingly, the estimates are expected to
change as future information becomes available.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF) MBOE*
------------ ------------ ------------
<S> <C> <C> <C>
Proved reserves ................... 1 31,929 5,323
============ ============ ============
Proved developed reserves ......... 1 17,873 2,980
============ ============ ============
</TABLE>
- ------------------
* Mboe - Thousand barrels of oil equivalent calculated 6 Mmcf of natural gas
to 1 Mbbl of oil.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Oil and Gas Reserves ("Standardized Measure") is a disclosure
requirement under Statement of Financial Accounting Standards No. 69. The
Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of the oil and natural gas reserves of the Jackson
Parish Properties. An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently classified as proved, the
value of unproved properties, and consideration of expected future economic and
operating conditions.
Under the Standardized Measure, future cash flows are estimated by
applying year-end prices, adjusted for fixed and determinable escalations, to
the estimated future production of year-end proved reserves. Future cash flows
are reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine net cash inflows. The Jackson
Parish Properties are
4
<PAGE> 35
not a separate tax paying entity. Accordingly, the Standardized Measure for the
Jackson Parish Properties is presented before deduction of income taxes. Future
net cash flows are discounted using a 10% annual discount rate to arrive at the
Standardized Measure.
The Standardized Measure of discounted future net cash flows relating
to proved oil and natural gas reserves of the interest acquired by Venus in the
Jackson Parish Properties at December 31, 1998 follows (in thousands):
<TABLE>
<S> <C>
Future cash inflows ........................................ $ 62,593
Future production costs .................................... 17,041
Future development costs ................................... 7,925
--------
Future net cash flows ...................................... 37,627
Discount of future net cash flows at 10% per annum ......... 24,793
--------
Discounted future net cash flows before income taxes ....... $ 12,834
========
</TABLE>
The future cash flows shown above include amounts attributable to
non-producing reserves requiring approximately $7.9 million of future
development costs. If these reserves are not developed, the Standard Measure of
discounted future net cash flows as of December 31, 1998, shown above would be
reduced significantly.
Estimates of economically recoverable oil and natural gas reserves and
of future net revenues are based upon a number of variable factors and
assumptions, all of which are to some degree speculative and may vary
considerably from actual results. Therefore, actual production, revenues, taxes,
development and operating expenditures may not occur as estimated. The reserve
data are estimates only, are subject to many uncertainties and are based on data
gained from production histories and on assumptions as to geologic formations
and other matters. Actual quantities of natural gas and oil may differ
materially from the amounts estimated.
The weighted average prices of oil and natural gas at December 31, 1998
used in the calculation of the Standardized Measure were $9.75 per barrel and
$1.96 per Mcf, respectively.
5
<PAGE> 36
VENUS EXPLORATION, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
As discussed in Item 2. Acquisition or Disposition of Assets, of Venus'
Form 8-K filed on July 15, 1999 dated June 30, 1999, EXUS Energy, LLC (EXUS), a
Delaware limited liability company, owned 50% by Venus Exploration, Inc. (Venus)
and 50% by EXCO Resources, Inc. (EXCO) completed the acquisition of the Jackson
Parish Properties on June 30, 1999. The acquisition was funded through
borrowings made under the EXUS credit facility with NationsBank, N.A. (the
Borrowings), and cash from working capital.
The accompanying pro forma combined financial statements are based on
the historical financial statements of Venus for the year ended December 31,
1998, and the six months ended June 30, 1999. The pro forma combined financial
statements are also based, in part, on Venus' share of the historical operating
revenues and direct operating expenses of the Jackson Parish Properties acquired
by Venus on June 30, 1999, reduced by the operating revenues and direct
operating expenses of properties sold by Venus in early 1999. On January 27,
1999, Venus sold its interests in oil and gas properties located in the state of
West Virginia (West Virginia Properties) and on February 12, 1999, Venus sold
its interests in oil and gas properties located in Freestone County, Texas (H.
E. White Unit). The statements of operating revenues and direct operating
expenses of the Jackson Parish Properties are included elsewhere herein.
The Pro Forma Combined Statement of Operations for the year ended
December 31, 1998, and the six months ended June 30, 1999, have been prepared
assuming the acquisition of the Jackson Parish Properties and the related
borrowings, and the sale of the West Virginia Properties and the H. E. White
Unit had been consummated on January 1, 1998.
The pro forma adjustments are based upon available information and
assumptions that management of Venus believes are reasonable. The pro forma
combined condensed financial statements do not purport to represent the
financial position or results of operations of Venus which would have occurred
had such transactions been consummated on the dates indicated or Venus'
financial position or results of operations for any future date or period.
6
<PAGE> 37
VENUS EXPLORATION, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
DISPOSITION OF
PROPERTIES
--------------
WEST VIRGINIA
AND
H.E. WHITE JACKSON PRO
VENUS UNIT PARISH PRO FORMA FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OIL AND GAS REVENUES $ 2,805 $ (431) $ 2,812 $ -- $ 5,186
COST OF OPERATIONS:
Production expense 1,610 (218) 522 -- 1,914
Exploration expense,
including dry holes 1,261 -- -- -- 1,261
Impairment of oil and
gas properties 3,543 (374) -- -- 3,169
Depletion, depreciation and
amortization 1,775 (164) -- 918(6) 2,529
General and administrative 3,174 -- -- -- 3,174
------------ ------------ ------------ ------------ ------------
Total expenses 11,363 (756) 522 918 12,047
------------ ------------ ------------ ------------ ------------
Operating profit (loss) (8,558) 325 2,290 (918) (6,861)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (568) -- -- (1,180)(2)(3)(4)(5) (1,748)
Gain on sale of properties 30 -- -- -- 30
Interest income and other 32 -- -- -- 32
------------ ------------ ------------ ------------ ------------
(506) -- -- (1,180) (1,686)
------------ ------------ ------------ ------------ ------------
Income (loss) before
extraordinary item (9,064) 325 2,290 (2,098) (8,547)
Extraordinary loss 346 -- -- -- 346
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (9,410) $ 325 $ 2,290 $ (2,098) $ (8,893)
============ ============ ============ ============ ============
Basic and diluted earnings per share:
Loss before extraordinary item $ (0.91) $ (0.86)
Extraordinary loss (0.04) (0.04)
------------ ------------
Net loss $ (0.95) $ (0.90)
============ ============
Common shares and equivalents
outstanding, basic and diluted 9,934 9,934
============ ============
</TABLE>
7
<PAGE> 38
VENUS EXPLORATION, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
DISPOSITION OF
PROPERTIES
--------------
WEST VIRGINIA
AND PRO FORMA
H.E. WHITE JACKSON ADJUSTMENTS PRO
VENUS UNIT PARISH FOR THE FORMA
HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS COMBINED
------------ ------------ ------------ ------------- ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OIL AND GAS REVENUES $ 819 $ (37) $ 1,081 $ -- $ 1,863
COST OF OPERATIONS:
Production expense 413 1 196 -- 610
Exploration expense,
including dry holes 361 -- -- -- 361
Impairment of oil and
gas properties -- -- -- -- --
Depletion, depreciation and
amortization 236 -- -- 380(6) 616
General and administrative 1,069 -- -- -- 1,069
------------ ------------ ------------ ------------ ------------
Total expenses 2,079 1 196 380 2,656
------------ ------------ ------------ ------------ ------------
Operating profit (loss) (1,260) (38) 885 (380) (793)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (220) -- -- (651)(2)(3)(4)(5) (871)
Gain on sale of properties 804 -- -- (785)(1) 19
Interest income and other 8 -- -- -- 8
------------ ------------ ------------ ------------ ------------
592 -- -- (1,436) (844)
------------ ------------ ------------ ------------ ------------
Net Income (loss) $ (668) $ (38) $ 885 $ (1,816) $ (1,637)
============ ============ ============ ============ ============
Basic and diluted loss per share $ (0.06) $ (0.15)
============ ============
Common shares and equivalents
outstanding, basic and diluted 10,982 10,982
============ ============
</TABLE>
8
<PAGE> 39
VENUS EXPLORATION, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
A. PRO FORMA ADJUSTMENTS FOR THE SALE OF WEST VIRGINIA PROPERTIES AND
H. E. WHITE UNIT
The accompanying unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1998 has been prepared as if the sale of the
West Virginia Properties and H. E. White Unit had been consummated on January 1,
1998 and reflects the following adjustments:
(1) To eliminate gain on sale of the West Virginia Properties and
H. E. White Unit.
(2) To reduce interest expense due to the reduction in the note
retired by the sale of the West Virginia Properties and H. E.
White Unit.
B. PRO FORMA ADJUSTMENTS FOR THE JACKSON PARISH PROPERTIES
The accompanying unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1998 and the six months ended June 30, 1999 have
been prepared as if Venus' share of the acquisition of the Jackson Parish
Properties and the related borrowings had been consummated on January 1, 1998
and reflects the following adjustments:
(3) To record interest expense on the borrowing of $7.0 million,
based on a 6.8% per annum interest rate.
(4) To record interest expense on the borrowing of $7.0 million,
based on a 12% per annum interest rate.
(5) To record amortization of deferred financing costs.
(6) To adjust depreciation, depletion and amortization of the oil
and gas properties to reflect the effect of the acquisition of
the Jackson Parish Properties, using the successful efforts
method of accounting on total pro forma proved oil and natural
gas reserves.
C. INCOME TAXES
No adjustment to income tax expense or benefit has been reflected in
the unaudited pro forma statements of operations due to the net operating losses
and the uncertainty of realizing deferred tax benefits.
D. PRO FORMA COMBINED SUPPLEMENTAL OIL AND NATURAL GAS RESERVE AND
STANDARDIZED MEASURE INFORMATION
RESERVE QUANTITY INFORMATION
The following table presents Venus' estimate of the pro forma combined
proved oil and natural gas reserves of Venus after giving effect to the
acquisition of Venus' share of the Jackson Parish Properties as of December 31,
1998 and the sale of the West Virginia Properties and the H. E. White Unit. All
reserves are located in the United States. Venus and EXCO have used different
petroleum reservoir engineers to prepare these estimates. As a result, the
reserve quantity estimate and the Standardized Measure of Discounted Future Net
Cash Flows below differ, with respect to the Jackson Parish Properties, from
those estimates presented by EXCO in its public disclosures. Venus emphasizes
that
9
<PAGE> 40
VENUS EXPLORATION, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
reserve estimates are inherently imprecise and that estimates of new discoveries
are more imprecise than those of producing oil and natural gas properties.
Accordingly, the estimates are expected to change as future information becomes
available.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF) MBOE*
---------- ---------- ----------
<S> <C> <C> <C>
Proved reserves ................... 708 37,087 6,890
========== ========== ==========
Proved developed reserves ......... 468 21,554 4,060
========== ========== ==========
</TABLE>
- -----------------
* Mboe - Thousand barrels of oil equivalent by converting 6 Mmcf of natural
gas to 1 Mbbl of oil.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND NATURAL GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows Relating
to Proved Oil and Natural Gas Reserves ("Standardized Measure") is a disclosure
requirement under Statement of Financial Accounting Standards No. 69. The
Standardized Measure does not purport to be, nor should it be interpreted to
present, the fair value of Venus' oil and natural gas reserves. An estimate of
fair value would also take into account, among other things, the recovery of
reserves not presently classified as proved, the value of unproved properties,
and consideration of expected future economic and operating conditions.
Under the Standardized Measure, future cash flows are estimated by
applying year-end prices, adjusted for fixed and determinable escalations, to
the estimated future production of year-end proved reserves. Future cash inflows
are reduced by estimated future production costs, based on period-end costs, and
projected future development costs to determine pre-tax cash inflows. Future
income taxes are computed by applying the statutory rate (based on the current
tax law adjusted for permanent differences and tax credits) to the excess of
pre-tax net cash flows over Venus' income tax basis of its oil and natural gas
properties and giving effect to net operating loss carryforwards, tax credits
and allowances relating to such properties. Future net cash flows are discounted
using a 10% annual discount rate to arrive at the Standardized Measure.
The pro forma Standardized Measure of discounted future net cash flows
relating to Venus' proved oil and natural gas reserves at December 31, 1998,
follows (in thousands):
<TABLE>
<S> <C>
Future cash inflows............................................ $ 81,535
Future production costs........................................ 24,126
Future development costs....................................... 9,431
Future income taxes............................................ 4,780
---------------
Future net cash flows.......................................... 43,198
Discount of future net cash flows at 10% per annum............. 26,577
---------------
Pro forma Standardized Measure of discounted future
net cash flows................................................ $ 16,621
===============
</TABLE>
10
<PAGE> 41
VENUS EXPLORATION, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The future cash flows shown above include amounts attributable to
non-producing reserves requiring approximately $9.4 million of future
development costs. If these reserves are not developed, the Standardized Measure
of discounted future net cash flows as of December 31, 1998, shown above would
be reduced significantly.
Estimates of economically recoverable oil and natural gas reserves and
of future net reserves are based upon a number of variable factors and
assumptions, all of which are to some degree speculative and may vary
considerably from actual results. Therefore, actual production, revenues, taxes,
development and operating expenditures may not occur as estimated. The reserve
data are estimates only, are subject to many uncertainties and are based on data
gained from production histories and on assumptions as to geologic formations
and other matters. Actual quantities of oil and natural gas may differ
materially from the amounts estimated.
The weighted average prices of oil and natural gas at December 31, 1998
used in the calculation of the Standardized Measure were $10.31 per barrel and
$2.00 per Mcf, respectively.
11
<PAGE> 42
APPENDIX B
ARTICLE FOUR
The Corporation shall have authority to be exercised by the Board of
Directors to issue (i) 50,000,000 shares of common voting stock of the par value
of $0.01 per share (the "Common Stock") having an aggregate par value of Five
Hundred Thousand Dollars ($500,000), and (b) 5,000,000 shares of preferred stock
of the par value of $0.01 per share (the "Preferred Stock") having an aggregate
par value of Fifty Thousand Dollars ($50,000). Shares of Preferred Stock shall
be designated as the Board of Directors may determine and may be issued in
series by the Board of Directors as hereinafter provided in paragraph (c) below.
The relative rights and preferences of the shares of capital stock of
the Corporation shall be as follows:
(a) (1) At every meeting of the stockholders of the
Corporation, each holder of Common Stock shall be
entitled to one vote in person or by proxy for each
share of Common Stock held by that holder, and
(2) At every meeting of the stockholders of the
Corporation, each holder of Preferred Stock with
voting rights shall be entitled to such number of
votes for each share of the Preferred Stock held by
that holder as is allowed for that share and to the
extent of such rights as specified pursuant to
paragraph (c)(vii) below.
(b) Subject to the rights, if any, of the holders of the Preferred
Stock, or any series thereof, the holders of the Common Stock are entitled to
the entire voting power, all dividends declared and paid by the Corporation and
all assets of the Corporation in the event of any liquidation, dissolution or
winding up of the Corporation.
(c) The Preferred Stock may be divided into and issued from time to
time in one or more series. All shares of the Preferred Stock shall be of equal
rank and shall be identical, except with respect to the particulars that may be
fixed by the Board of Directors as hereinafter provided pursuant to authority
that is hereby expressly vested in the Board of Directors; provided, however,
that each share of a given series of the Preferred Stock shall be identical in
all respects with the other shares of such series. Before any shares of the
Preferred Stock of any particular series shall be issued, the Board of Directors
shall fix and determine, in the manner provided by law, the following
particulars with respect to the shares of such series:
(i) the distinctive designation of such series and the
number of shares of Preferred Stock that shall
constitute such series, which number may be increased
(except where otherwise provided by the Board of
Directors in creating such series) or decreased (but
not below the number of shares of such series then
issued) from time to time by the Board of Directors
by resolution;
(ii) the dividend or rate of dividend payable with respect
to shares of Preferred Stock of such series, the time
of payment of any dividend, whether dividends shall
be cumulative and, if so, the conditions under which
and the date from which dividends shall be
accumulated;
(iii) the redemption provisions applicable to the shares of
Preferred Stock of such series, if any, and if
applicable, the time or times when, the price or
prices at which, and the
-i-
<PAGE> 43
other terms and conditions under which the shares of
Preferred Stock of such series shall be redeemable;
(iv) the amount payable on shares of Preferred Stock of
such series in the event of any voluntary or
involuntary dissolution, liquidation or winding up of
the affairs of the Corporation, which shall not be
deemed to include the merger or consolidation of the
Corporation or a sale, lease or conveyance of all or
part of the assets of the Corporation;
(v) the purchase, retirement or sinking fund provisions,
if any, for the redemption or purchase of shares of
Preferred Stock of such series;
(vi) the rights, if any, of the holders of shares of
Preferred Stock of such series to convert such shares
into or exchange such shares for shares of the Common
Stock or shares of any other series of the Preferred
Stock and the terms and conditions of such conversion
or exchange;
(vii) the extent of voting rights of the shares of
Preferred Stock of such series or the absence
thereof; and
(viii) such other terms, limitations, rights and
preferences, if any, of such series as the Board of
Directors may lawfully fix under the laws of the
State of Delaware as in effect at the time of
creation of such series.
-ii-
<PAGE> 44
VENUS EXPLORATION, INC.
Suite 1000
1250 N.E. Loop 410
San Antonio, Texas 78209
Phone: 210/930-4900
Fax: 210/930-4901
NASDAQ SmallCap Market(TM): VENX
<PAGE> 45
VENUS EXPLORATION, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS ON _______________, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Eugene L. Ames, Jr. and John Y. Ames, or
each of them as shall be in attendance at the Annual Meeting, as proxy or
proxies, with full power of substitution, to represent the undersigned at the
Annual Meeting of Stockholders of Venus Exploration, Inc., to be held on
__________, 1999, and at any adjournment thereof, and to vote as specified on
this Proxy the number of shares of Common Stock of Venus Exploration, Inc., the
undersigned would be entitled to vote if personally present upon the matters
referred to on the reverse side hereof and in their discretion upon any other
business as may properly come before the Annual Meeting.
IF NOT MARKED TO THE CONTRARY, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3,
4, 5 AND 6.
IMPORTANT: THIS PROXY IS CONTINUED AND MUST BE SIGNED AND DATED ON THE REVERSE
SIDE.
<PAGE> 46
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
VENUS EXPLORATION, INC.
_______________, 1999
Please Detach and Mail in the Envelope Provided
A /X/ Please mark your
votes as in this
example.
FOR all nominees WITHHOLD
listed to right AUTHORITY
(except as marked to the to vote for all
contrary at right) nominees listed to right
1. ELECTION OF
EIGHT / / / /
DIRECTORS:
(To withhold authority to vote for any individual nominee,
strike a line through that nominee's name at right)
The Board of Directors proposes and recommends a vote FOR
Proposals 1, 2, 3, 4, 5 and 6.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
Nominees: Eugene L. Ames, Jr. 2. APPROVAL OF AMENDMENT TO 1997 / / / / / /
John Y. Ames INCENTIVE PLAN.
Martin A. Bell
J.C. Anderson 3. RATIFY SELECTION OF KPMG LLP as / / / / / /
James W. Gorman independent auditors for the
Michael E. Little fiscal year ending December 31,
Jere W. McKenny 1999.
John H. Pinkerton
4. RATIFY THE POSSIBLE ISSUANCE OF / / / / / /
10,133,333 SHARES OF COMMON STOCK
upon the conversion of a convertible
promissory note issued to EXCO
Resources, Inc.
5. APPROVE AN AMENDMENT TO THE / / / / / /
CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK TO
50,000,000 SHARES.
6. APPROVE AN AMENDMENT TO THE / / / / / /
CERTIFICATE OF INCORPORATION TO
ENLARGE THE POWER OF THE BOARD OF
DIRECTORS to determine the voting
rights of each share of preferred
stock that may be issued.
Signature(s) Dated: , 1999
--------------------------------------------------------------- ----------
NOTE: Signature(s) of holders of Common Stock should agree with the name(s) shown on this Proxy.
For joint accounts, both owners should sign.
</TABLE>
