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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 0-14334
VENUS EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3299127
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1250 N.E. LOOP 410, SUITE 1000, SAN ANTONIO, TX 78209
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (210) 930-4900
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (all directors, officers and holders of five percent or more of the
Common Stock of the Company are presumed to be affiliates for purposes of this
calculation), computed by reference to the closing bid price of such stock on
April 12, 1999, was approximately $3,703,929. As of April 12, 1999, the
Registrant had outstanding 10,982,365 shares of Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K will
be included in the Registrant's definitive Proxy Statement for its 1999 Annual
Shareholder Meeting. It is expected that the Proxy Statement will be filed with
the Commission not later than April 30, 1999.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I...................................................................................................... -3-
ITEM 1. BUSINESS................................................................................ -3-
ITEM 2. PROPERTIES.............................................................................. -18-
ITEM 3. LEGAL PROCEEDINGS....................................................................... -19-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... -19-
PART II..................................................................................................... -19-
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............... -19-
ITEM 6. SELECTED FINANCIAL DATA................................................................. -20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... -20-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................. -27-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. -28-
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................................... -28-
PART III.................................................................................................... -28-
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................... -28-
ITEM 11. EXECUTIVE COMPENSATION.................................................................. -28-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................... -28-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... -28-
PART IV..................................................................................................... -29-
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES................................................ -29-
</TABLE>
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains statements that are considered
"forward-looking statements," as defined in the Private Securities Litigation
Reform Act of 1995 and as described under "-Forward-Looking Statements" in this
Item 1 - "BUSINESS." Actual results may differ materially from those
contemplated by the forward-looking statements herein.
Certain oil and gas terms and abbreviations are defined in this Item 1 under
"BUSINESS - Definitions of Certain Oil and Gas Terms." Those terms are usually
capitalized in the text.
BACKGROUND
Venus Exploration, Inc. applies advanced geoscience technology to the
exploration for undiscovered onshore oil and gas reserves in the United States.
It also develops and exploits existing oil and gas fields. In addition, its
business plan includes the acquisition of producing properties. The Company
presently has oil and gas properties, acreage and production in nine states. The
Company's emphasis is on oil and gas exploration and development projects and
prospects in Texas, Oklahoma and Kansas. The Company was incorporated in the
State of Delaware in September 1985. The management of Venus has been involved
as a privately held independent oil and gas operator in the development and
exploitation of several large oil and gas fields.
The predecessor to Venus (from an accounting perspective) commenced business in
May 1996, and its primary assets were an inventory of exploration Prospects and
Prospect Leads and some undeveloped oil and gas fields with very little oil and
gas production. In 1998, average daily net production increased to 3,521
Mcfe/day from 2,450 Mcfe/day in 1997, a 43% increase. The total Proved Reserves
increased from 12.4 Bcfe at year-end 1997 to 13.1 Bcfe in 1998, or 6%. During
the first quarter of 1999, the Company sold properties estimated to contain 3.7
Bcfe of reserves as of December 31, 1998. As of December 31, 1998, approximately
67.6 % of the Company's reserves are natural gas reserves. After adjusting for
the property divestiture during the first quarter 1999, 54.8% are natural gas
reserves. Venus operates 82% of its Net Wells.
1997 BUSINESS COMBINATION AND PROPERTY ACQUISITION
On May 21, 1997, the Company (then known as "Xplor Corporation") acquired
substantially all of the assets and liabilities of The New Venus Exploration,
Inc., a privately-held Texas corporation ("New Venus"), in exchange for
5,626,473 shares of the Company's Common Stock, par value $0.01 per share (the
"Common Stock"), and warrants to purchase an additional 272,353 shares of Common
Stock exercisable at $3.00 per share until October 23, 2000 ("Acquisition
Warrants"). Simultaneously, the Company acquired certain oil and gas properties
from Lomak Petroleum, Inc. ("Lomak") in exchange for 2,037,171 shares of the
Company's Common Stock and Acquisition Warrants to purchase an additional
272,353 shares of Common Stock. As a result of this transaction and a related
one (collectively, the "Acquisition"), the former stockholders of New Venus
acquired, as of the effective date of the Acquisition, 58% of the Company's
outstanding Common Stock, and Lomak acquired 22%, while the preexisting
stockholders of the Company then owned 20% of the Common Stock.
The Acquisition Agreement provided, among other things, that the Board of
Directors of the Company be composed of four directors nominated by New Venus,
one director nominated by Lomak and two continuing directors of the Company. At
the consummation of the Acquisition, a stockholders agreement (the "Stockholders
Agreement") was entered into among certain former stockholders of New Venus
(collectively, the "Ames Group," which owns beneficially 3,721,600 shares of the
Company's Common Stock), certain major shareholders of the Company (collectively
the "Blair Group," which owns beneficially 1,066,512 shares) and Lomak. The
Stockholders Agreement provided that at the 1997 election of directors of the
Company, the Ames Group, the Blair Group and Lomak would vote their shares of
the Company for the four nominees designated by the Ames Group, the two nominees
designated by the Blair Group, and the one nominee designated by Lomak. The
Blair Group's right to designate two nominees is reduced to the right to
designate one nominee effective with the 1998 Annual Meeting of Stockholders of
the Company and ceases altogether effective with the 1999 Annual Meeting of
Stockholders. The Stockholders Agreement also provides for certain rights of
first refusal and rights of participation between the Ames Group and Lomak in
the event of a proposed sale of shares by either. The Stockholders Agreement has
a term of
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three years, but it terminates earlier as to any party in the event that such
party's beneficial ownership of the Company's Common Stock falls below 250,000
shares.
For accounting purposes, the Acquisition was treated as a reverse acquisition
with New Venus being deemed to have acquired the assets of Xplor Corporation and
the Lomak entities. Therefore, unless otherwise stated all accounting and other
operating data for periods before May 21, 1997, in this Annual Report on Form
10-K are data of New Venus and its predecessors, none of which had previously
been publicly reported. Information after that date reflects the operations of
the combined entities and acquired properties.
BUSINESS STRATEGY
During 1998, we participated in the drilling of 8 gross (3.57 net) wells, of
which 5 gross (1.7 net) wells were completed as producers and 3 gross (1.9 net)
wells were dry holes. Of these wells, 3 gross (1.13 net) were exploratory, and 5
gross (2.44 net) wells were development.
EXPLORATION - We explore for oil and gas reserves in horizons that have no
history of production, and we use advanced geoscience technology to do so. The
reason we participate in such high-risk projects is that they give us
opportunities for the discovery of new and substantial oil and gas reserves and
rapid growth in asset values. Because of the inherent uncertainty and high
financial risk associated with the outcome of individual drilling prospects, we
attempt to maintain an inventory of many exploratory Prospect Leads from which
drilling prospects are confirmed and generated. We have used this strategy
successfully in the past. We typically obtain financing for a large portion of
the exploration costs through sale to oil and gas industry co-venturers of
working interest in prospects originated by us. Because of the decline in oil
prices in 1998 and the reduction of capital available for exploration budgets,
both for the oil and gas industry in general and for us specifically, we have
reduced exploration activity and will work only selected prospects believed to
have extraordinary merit during this period of low availability of exploration
capital.
Our exploration team currently concentrates on two primary geographical focus
areas: the south Midland Basin in West Texas and the Yegua Trend of the Texas
and Louisiana Gulf Coast. Other focus areas are under consideration. We have an
inventory of many exploration Prospects and Prospect Leads, and we are prepared
to reactivate and accelerate exploratory drilling activity when, and if,
industry drilling budgets are restored for exploration. We utilize 2-D Seismic
and 3-D Seismic data in combination with advanced geological concepts to
evaluate Prospects and Prospect Leads. Our in-house technical capability is an
important ingredient in our current and continuing ability to conduct
comprehensive exploration programs and to continue to generate exploratory
prospects with merit. In 1999, we intend to continue to develop prospects that
we feel have sufficient merit.
EXPLOITATION AND DEVELOPMENT OF PRODUCING FIELDS - In addition to exploring for
new oil and gas reserves in previously undiscovered fields, we also use advanced
geoscience technology to exploit and to develop oil and gas reserves in
currently producing fields. The fields being exploited or developed consist of
fields discovered by us or fields discovered by others but that we believe are
not fully developed. We are conducting active exploitation and development
activities in 10 different fields in Texas and Oklahoma. Our working interest in
those fields varies in size from 2.5% to 100%, and we operate in 9 of the 10
active fields. During this period of reduced availability of capital, we will
concentrate our drilling budget on drilling field exploitation wells.
ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES OF SELECTED PROPERTIES - We
will continue to seek strategic producing property acquisitions that offer
near-term production and longer-term development and exploration opportunities
that can be investigated through the application of advanced technology by our
exploration team. We also seek to accomplish strategic acquisitions of producing
assets with development and exploratory potential through strategic alliances
with other oil and gas companies. We may also sell non-strategic properties as a
part of our effort to concentrate on our focus areas.
RECENT DEVELOPMENTS (SINCE DECEMBER 31, 1998) - Preliminary results from
drilling, completion and exploration activities in the first quarter 1999 are
shown below. Divestiture activities are also described below.
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Westbury Farms #1 Well. Constitution Field, Jefferson County, Texas. We
own a 15% Working Interest in this well, which was completed in a Yegua
sandstone formation at a depth of 13,910 feet subsurface. An attempt to
hydraulically fracture the zone screened out and was unsuccessful. A
post-fracture remedial chemical treatment was also unsuccessful. The well is
flowing at a stabilized rate of 750 Mcf per day and 110 Bbls of condensate.
Further attempts to increase the rate by adding perforations or attempting
another fracture treatment are under consideration. 3D seismic is currently
being acquired over the field area for development purposes.
Pogo Producing Company, Ranch Hand #55-1 Well. Crockett County, Texas.
We have agreed to participate in drilling the subject well, and we have a 7.4%
Working Interest in the project. The well is an immediate offset to a new well
completed in the Strawn Formation by Enron Oil & Gas. That well had an average
initial production rate of 300 Bbls of oil per day and 2,200 Mcf gas per day.
Duson #1 Well. Hutchins-Kubela (Frio) Field, Wharton County, Texas. The
Company owns a 22.15% Working Interest in this well. The well was indefinitely
shut-in due to unfavorable economic conditions. The average daily rate before
shut-in was 25 Bbls oil per day and 297 Bbls saltwater per day. The well is
completed in the Frio Formation at a depth of 5,744 feet.
DIVESTITURE: H.E. White Unit, Freestone County, Texas. Venus sold its
25% Working Interest (non-operated) in the H.E. White Unit on February 12, 1999,
effective January 1, 1999. The properties included interests in 3 producing
wells and additional development potential. The net daily production from this
property was 385 Mcf at the effective date of the sale with an additional well,
the H.E. White #3, about to come on line. The proved reserves of the properties
sold were attributed with 17.5% of the Company's total proved reserves as of
December 31, 1998. The sales price was $1,150,000. Out of the proceeds, $650,000
was applied to reduce the Company's outstanding bank debt.
DIVESTITURE: State of West Virginia properties, Barbour County, West
Virginia. The Company sold its oil and gas properties in the State of West
Virginia on January 27, 1999. The properties included interest in 62 wells and a
pipeline gathering system that serviced many of these wells. Venus also sold its
interest in a limited partnership that owned property rights in oil and gas
wells in West Virginia. The average daily production from these properties was
the equivalent of 411 Mcf of gas per day during 1998. The proved reserves of the
properties sold were attributed with 10.9% of the Company's total proved
reserves as of December 31, 1998. The estimated net price after purchase price
adjustments was $1,088,511, of which $1,000,000 was used to reduce the Company's
outstanding bank debt.
FORWARD-LOOKING STATEMENTS - This Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Those
statements are contained under this Item 1 "-Business," under Item 7
"-Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-K. The forward-looking statements are
identified by language that speaks of future events. For example, words such as
"may," "could," "believe," "expect," "intend," "anticipate," "estimate,"
"continue," "projected," "future," "will," "seek," and "plan". The
forward-looking statements address such matters as geological estimates of oil
and gas reserves, exploratory and development drilling plans and schedules,
capital expenditures, availability of capital resources, financial projections,
present values of future production, financing assumptions and other statements
that are not historical facts. Although statements involving those matters are
based on information available at the time this Annual Report on Form 10-K was
prepared and although Venus believes that its statements are based on reasonable
assumptions, it can give no assurance that its goals will be achieved or that
the level of production or financial return expected can be achieved. Some of
the important factors that could cause actual results to differ materially from
those predicted in the forward-looking statements include (i) state and federal
regulatory developments and statutory changes, (ii) the timing and extent of
changes in commodity prices and markets, (iii) the timing and extent of success
in acquiring leasehold interests and in discovering, developing or acquiring oil
and gas reserves, (iv) the conditions of the capital and equity markets during
the periods covered by the forward-looking statements, (v) reliance on estimates
of reserves, (vi) drilling results, (vii) the Company's success in raising
additional capital to fund its operations and to fund the execution of its
strategy, and (viii) other matters beyond the control of the Company; e.g., the
risk factors listed below.
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RISK FACTORS
Effects of Debt Financing - Venus already has incurred significant
indebtedness, and we plan to incur additional indebtedness as we execute our
exploration, exploitation and acquisition strategy. Our ability to meet our debt
service obligations will depend on our future performance, and that will be
subject to oil and gas prices, the level of production of oil and gas, general
economic conditions, and financial, business and other factors affecting our
operations. Many of those factors we have no control over. Our future
performance could be adversely affected by any of those factors.
Our level of indebtedness will have several important effects on future
operations, including:
o a substantial portion of our cash flow from operations must be
dedicated to the payment of interest on indebtedness and will not
be available for other purposes,
o covenants contained in our debt obligations will require us to
meet certain financial tests,
o other restrictions will limit our ability to borrow additional
funds or to dispose of assets and may affect our flexibility in
planning for, and reacting to, changes in the energy industry,
including possible acquisition activities,
o our ability to obtain additional financing in the future may be
impaired, and
o since the interest on our indebtedness is calculated with a
variable rate, increases in that rate could affect our liquidity.
We have experienced financial covenant defaults under the Credit Agreement with
our principal lender. These defaults have been waived through May 31, 1999. We
are currently attempting to arrange additional subordinated capital to achieve a
longer term resolution of our defaults under the Credit Agreement. There can be
no assurance we will be successful in our efforts.
Events beyond our control may affect our ability to comply with the provisions
of the revised Credit Agreement or any other indebtedness. The breach of any
such provisions could result in a default under the Credit Agreement or any
other indebtedness. If that happens, our lenders could elect to declare all
amounts borrowed under the Credit Agreement or any other indebtedness, together
with accrued interest, to be due and payable. The lenders under the Credit
Agreement and any other secured indebtedness could then proceed to foreclose
against any collateral securing the payment of such indebtedness, which
collateral would constitute a significant portion, if not all, of our assets.
For example, lower oil and gas prices could result in a lower borrowing base,
and that could force us to pay down the outstanding debt at a time when we had
not planned to do so. If we do not make a sufficient payment to comply with the
Credit Agreement, the lender could declare a default. Even if the lender does
not declare a default before the debt matures, we can give no assurance that the
debt can be paid fully when it does mature. If that is the case, the lenders
would have the same remedies as if we do not comply with the financial
covenants.
Lack of Liquidity - The principal source for our capital has been our
revolving Credit Agreement with our commercial bank. At December 31, 1998, we
were not in compliance with the tangible net worth and current ratio
requirements of the Credit Agreement. These requirements were waived by the bank
through May 31, 1999. We are attempting to get an extension of that waiver
period. Cash flow from production and an increase in the borrowing base under
the loan agreement have not been sufficient for our current cash needs and we
have essentially no borrowing base to draw on. There is no assurance that we can
obtain the level of cash flow needed to fund current operations. For the medium
and longer terms, we are working on a number of alternatives that we believe
will address our future liquidity and financing needs if we successfully
complete various combinations of those alternatives. The alternatives include
sales of assets, farmouts or other partnering arrangements on selected
properties, and issuances of indebtedness or equity capital. There can be no
assurance that we will be successful in any of our efforts.
Our assets are predominately real property rights and intellectual information
that we have developed regarding those properties and other geographical areas
that we are studying for exploration and development. The market for those types
of properties fluctuates and can be very small. Therefore, our assets can be
very illiquid and not easily converted to cash. Even if a sale can be arranged,
the price may be significantly less than what we believe the properties are
worth. That lack of liquidity can have materially adverse effects on strategic
plans, normal operations and credit facilities. In addition, issuances
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of indebtedness or preferred stock could be very expensive. Furthermore,
issuance of equity capital could be dilutive to stockholders.
Lack of Profitable Operations - Since commencing operations in 1996, we
have not been profitable. The Company has incurred net losses of $2,006,818 for
the year ended December 31, 1996, $4,167,723 for the year ended December 31,
1997, and $9,410,329 for the year ended December 31, 1998. Unless the Company is
successful in raising capital to successfully develop existing properties or
acquire income producing properties, the Company expects operating losses and
negative cash flows to continue for the foreseeable future. The Company may
never generate sufficient revenues to achieve profitability. Even if the Company
does, we may not sustain or increase profitability on a quarterly or annual
basis in the future. At December 31, 1998, the Company had an accumulated
deficit of $16,943,980.
Our business plan is based on the development of large reserves through the
application of advanced geoscience techniques. To implement that plan, it takes
several years and a significant capital investment, and even if the plan is
successful, profits are not expected until several years into the
implementation. We have reported large annual losses since our net revenue from
production has not covered the large implementation cost. When or if that will
change is unknown.
Substantial Capital Requirements - Venus Exploration's strategy of
finding, developing and acquiring oil and gas reserves depends on our ability to
finance those expenditures. We plan to address our long-term liquidity and
capital needs through bank financing, the issuance of debt and equity
securities, when market conditions permit, and through the use of non-recourse
production-based financing. We also continue to examine alternative sources of
long-term capital. For example, the sale of net profits interest, sales of
non-strategic properties, prospects and technical information, and joint venture
financing are being considered.
The 1999 capital budget currently provides for approximately $2.6 million for
exploitation and development projects. The Credit Agreement with our principal
bank provides a credit limit that is determined by the lender in its sole
discretion. The credit limit is based on projected net revenues from our oil and
gas properties. As of December 31, 1998, we had borrowed the full credit limit
of $5,540,000 under the Credit Agreement, so, in the short-term at best, any
activity requiring financing will depend upon the Company's ability to raise
additional capital. Cash flow from current operations will not be sufficient to
fund any significant portion of the unfunded budget since most of the current
cash flow is used to pay general and administrative expenses and to service the
payment obligations under the Credit Agreement. We do not know if it will be
possible to raise the additional capital requirements or if we will agree to the
terms proposed by potential investors. The sale of properties during the first
quarter 1999 did provide some cash in excess of the amounts required to pay down
our lender.
Volatility of Oil and Gas Prices - Our financial condition, operating results
and future growth are substantially dependent upon commodity prices and demand
for oil and gas. Historically, the markets for oil and gas have been volatile,
and they are likely to continue to be volatile in the future. Prices for oil and
gas are subject to wide fluctuation in response to market uncertainty, changes
in supply and demand and a variety of additional factors, all of which are
beyond our control. Examples are:
o domestic and foreign political conditions,
o the overall supply of, and demand for, oil and gas,
o the price of imports of oil and gas,
o weather conditions,
o the price and availability of alternative fuels,
o overall economic conditions,
o exploration costs,
o drilling costs, and
o pipeline availability and transportation costs.
Our current production is slightly weighted toward oil, making earnings and cash
flow sensitive to fluctuations in both oil and gas prices. In fiscal 1998, we
estimate that a $0.10 per Mcf change in gas prices would have resulted in a
$55,000 difference in our earnings before interest, taxes, depreciation and
amortization ("EBITDA"), and a $1.00 per Bbl change in oil prices would have
resulted in a $130,000 difference in our EBITDA.
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As an example of the price declines we have seen in 1998 and especially in the
fourth quarter of 1998, the average prices that we received in January 1998 were
$2.43 per Mcf and $16.35 per Bbl; production sold in December of 1998 averaged
$2.06 per Mcf and $9.71 per Bbl.
Replacement and Expansion of Reserves - Our financial condition and
results of operations depend substantially upon our ability to acquire or find
and to successfully develop additional oil and gas reserves. Our proved reserves
will generally decline as reserves are produced, except to the extent that we
acquire properties containing proved reserves or we conduct successful
exploration, development or exploitation activities. The decline rate varies
depending upon reservoir characteristics and other factors. We cannot assure
that we will be able to economically find, develop or acquire additional
reserves to replace current and future production.
Acquisition Risks - We expect to continue to evaluate and pursue
acquisition opportunities, primarily in the southwest and Gulf Coast regions of
the United States. The successful acquisition of producing properties requires
an assessment of recoverable reserves, future oil and gas prices, operating
costs, potential environmental and other liabilities and other factors beyond
our control. This assessment is necessarily inexact, and its accuracy is
inherently uncertain. In connection with such an assessment, we perform a review
that we believe is generally consistent with industry practices.
This review, however, will not reveal all existing or potential problems, nor
will it permit us to become sufficiently familiar with the properties to fully
assess their deficiencies and capabilities. Inspections generally are not
performed on every well, and structural and environmental problems are not
necessarily observable even when an inspection is undertaken. Even when problems
are identified, the seller may not be willing or financially able to give
contractual protection against such problems, and we may decide to assume
environmental and other liabilities in connection with acquired properties.
There can be no assurance that our acquisitions will be financially successful.
Any unsuccessful acquisition could have a material adverse effect on our
financial condition and results of operations.
Drilling and Operating Risks - Drilling exploratory wells accentuates
many of the risks described below. Exploratory wells by their nature are drilled
into horizons about which little is known. Therefore, unexpected circumstances
are encountered more often, and the probability of success is lower. Since a
large part of our business plan involves exploration projects, these risks may
pose more of a danger to us than they would to a company that focuses on
drilling development wells and, therefore, drills in more known producing oil
and gas fields and horizons.
There are many operating risks associated with the drilling for, and production
of, oil and gas. Examples of those are uncontrollable flows of oil, gas, brine
or well fluids on the ground and into the air, surface water and groundwater.
Other examples are fires, explosions and pollution. Any of those could result in
substantial losses to the Company.
Drilling activities are subject to financial risks, including the risk that no
commercially productive oil or gas reservoirs will be encountered. We anticipate
drilling or participating in the drilling of six (6) wells during 1999. We do
not know if the new wells will be productive or if we will recover any of our
investment. Even if they do produce, the new wells may not produce sufficient
net revenues to return a profit after drilling, operating and other costs.
The cost of drilling, completing and operating wells is often uncertain. Our
drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, many of which are beyond our control. Those include:
o general economic or financial conditions,
o mechanical problems,
o pressure or irregularities in formations,
o land title problems,
o weather conditions,
o compliance with governmental requirements, and
o shortages or delays in the delivery of equipment and services.
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Other hazards are:
o unusual or unexpected geologic formations,
o unexpected pressures in underground formations,
o downhole fires,
o mechanical failures,
o blowouts,
o cratering,
o explosions,
o uncontrollable flows of oil, gas or wells fluids, and
o pollution and other environmental risks.
Any of these hazards could result in substantial losses due to injury and loss
of life, severe damage to, and destruction of, property and equipment, pollution
and other environmental damage and suspension of operations. We carry insurance
that we believe is in accordance with customary industry practices, but, as is
common in the oil and gas industry, we do not fully insure against all risks
associated with our business, either because such insurance is not available or
because the cost is considered prohibitive. The occurrence of an event that is
not covered, or not fully covered, by insurance could have a material adverse
effect on our financial condition and results of operations.
Markets - The availability of a ready market for any oil and gas that
we produce depends upon numerous factors that are beyond our control. These
factors include:
o federal and state regulatory developments and statutory
enactments,
o the timing and extent of changes in commodity prices,
o exploratory and development drilling success,
o the amount of oil and gas available for sale,
o the availability of professional expertise and operating
personnel,
o crude oil imports,
o access to adequate capital,
o the availability of adequate pipeline and other transportation
facilities, and
o the marketing of competitive fuels and other matters affecting the
availability of a ready market, such as fluctuating supply and
demand
Uncertainty of Estimates of Proved Reserves and Future Net Revenues -
Estimates by definition are imprecise. Estimates of future oil and gas
production are more so. Estimates of proved reserves and future rates of
production are based on many factors beyond our control. The reserve data that
we publish are only estimates, even when referred to as proved, and they are all
subject to those factors. Although we believe our estimates are reasonable, you
should expect that they will change as additional information becomes available.
Estimates of oil and gas reserves, of necessity, are projections based on
engineering data, and there are uncertainties inherent in the interpretation of
such data, as well as in the projection of future rates of production and the
timing of development expenditures. Reservoir engineering is a subjective
process of estimating underground accumulations of oil and gas that cannot be
exactly measured. Therefore, estimates of the economically recoverable
quantities of oil and gas attributable to any particular group of properties,
and the classifications of such reserves based on risk of recovery, are
functions of the quality of available data and of engineering and geological
interpretation and judgment and the future net cash flows. These estimates may
be prepared by different engineers or by the same engineers at different times
and may vary substantially.
We cannot assure that the reserve estimates will ever be produced or that the
proved, undeveloped reserves will be developed within the periods anticipated.
Actual production, revenues and expenditures related to our reserves will likely
vary from estimates, and such variances may be material. In addition, the
estimates of future net revenues from our proved reserves and the present value
of the revenue are based upon certain assumptions about future production
levels, prices and costs that may not be correct. The SEC PV-10 Values as
reported on this Annual Report on Form 10-K should not be considered as
representative of the fair market value of our proved oil and gas properties.
("SEC PV-10" refers to present value calculated using a 10% discount rate and
other conditions required by the Securities and Exchange Commission) The
discounted future net cash flows upon which they are based do not provide for
changes in oil and gas prices or for escalation of expenses and
9
<PAGE> 10
capital costs. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they are based. Actual future prices and
costs may differ materially from those estimated.
Sale and Abandonment of Properties - The owners of an oil and gas
property have the right to abandon any well or working interest. This often
happens if, in their opinion, such well or property has ceased to produce or is
not capable of producing in commercially paying quantities. We may not control
the timing of plugging and abandoning wells in wells in which we do not own a
majority working interest.
Financial Reporting Impact of Successful Efforts Method of Accounting -
We use the successful efforts method of accounting for our investment in oil and
gas properties. Under that method of accounting, we capitalize (a) the
acquisition costs of mineral interests in oil and gas properties, and (b) the
drilling and equipment costs for development wells and for exploratory wells
that result in proved reserves. The successful efforts method also requires us
to expense the costs to drill exploratory wells that do not result in proved
reserves, along with the costs of geological, geophysical and seismic data and
analysis and the costs of carrying and retaining unproved properties. For
purposes of this discussion a "development well" is one that is drilled in a
horizon known to be productive, and an "exploratory well" is one drilled in an
unproved area or horizon.
We depreciate capitalized costs of producing oil and gas properties, after
considering estimated abandonment costs and estimated salvage values, and we
account for the depletion of producing properties using the unit-of-production
method. For impairment of value purposes, we periodically review our unproved
oil and gas properties that are individually significant. We recognize an
impairment loss when the net carrying value of an oil and gas field is greater
than the estimated fair value of that field.
Competition - The oil and gas industry is highly competitive in all of
its phases and in particular in the acquisition of unexplored acreage,
undeveloped acreage and existing production. There are a large number of
operators engaged in oil and gas property acquisition and development, and
Venus's competitive position depends on its geological, geophysical and
engineering expertise, on its financial resources and on its ability to find, to
acquire and to prove new oil and gas reserves. We encounter strong competition
in acquiring economically desirable properties and in obtaining equipment and
labor to operate and to maintain our properties. That competition is from major
and independent oil and gas companies, many of which possess greater financial
resources and larger staffs than we do. Labor and equipment markets have shown
much volatility recently, and we cannot be certain that they will be available
at the prices we have budgeted.
Government Laws and Regulations - Political developments and federal
and state laws and regulations affect our operations. The significance of that
effect varies, but it can be substantial. For example, price controls, taxes and
other laws relating to the oil and gas industry can have large effects on our
business. We cannot predict how governmental agencies or the courts will
interpret existing laws and regulations. Neither can we predict whether
additional laws and regulations will be adopted or what their effect will be on
our business or financial condition. See "-- Regulations -- General Federal and
State Regulation."
Our operations are subject to complex and constantly changing environmental laws
and regulations adopted by federal, state and local governmental authorities. We
believe that our compliance with such laws has not had any material adverse
effect upon our operations. We also believe that the cost of our compliance has
not been material. Nevertheless, the discharge of oil, natural gas or other
pollutants into the air, soil or water may give rise to liabilities to the
government and third parties and may require us to incur considerable costs of
remediation.
Additionally, from time to time we have agreed to indemnify both buyers and
sellers of oil and gas properties against certain liabilities for environmental
claims associated with those properties. Existing environmental laws or
regulations, as currently interpreted or reinterpreted in the future, or future
laws or regulations, could materially and adversely affect our operations and
financial condition. Likewise, material indemnity claims may arise against us
from the properties we have previously acquired or sold. See "-- Regulations --
Environmental Regulation."
Control by Certain Stockholders - As of December 31, 1998, the current
officers and directors of the Company and Range Resources Corporation (of which
one of our directors is the President) as a group beneficially own forty-seven
percent (47%) of the undiluted voting power of the Company's voting equity.
Consequently, if they act together, these shareholders are in a position to
effectively control the affairs of the Company, including the election of all of
our directors and the approval or prevention of certain corporate transactions
that require majority stockholder approval.
10
<PAGE> 11
There is a Stockholders Agreement among certain of the directors, their
affiliates and certain other stockholders. Pursuant to that agreement, in the
election of directors of the Company at the 1999 annual stockholder meeting and
subsequent annual stockholder meetings at which time the agreement is still in
effect with regard to those parties, the parties to that agreement will vote
their shares for the four nominees nominated by a stockholder group led by the
Chairman of the Board and one nominee nominated by Range Resources Corporation.
This agreement may be considered to increase the control by those stockholders.
Dependence on Key Personnel - The Company is dependent upon Eugene L.
Ames, Jr., Chairman of the Board and Chief Executive Officer, John Y. Ames,
President and Chief Operating Officer, Eugene L. Ames, III, Vice President, and
Patrick A. Garcia, Treasurer and Chief Financial Officer. It is also dependent
on other key personnel, including Thomas E. Ewing and Bonnie Weise, both of whom
are actively involved in the technical application of the geoscience methods
that are one of the strengths of the Company. The loss of any one of these
individuals for any reason may adversely affect the Company. The Company has
employment agreements with Messrs. Ames, Jr., Ewing, and Ms. Weise.
REGULATIONS
General Federal and State Regulation - Our business is subject to
extensive federal rules and regulations. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on the
oil and gas industry increases our cost of doing business and affects our
profitability. Because such rules and regulations are frequently amended or
reinterpreted, we are unable to predict the future cost or impact of complying
with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural gas.
Many states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells, and the regulation
of spacing, plugging and abandonment of such wells. Many states restrict
production to the market demand for oil and gas. Some states have enacted
statutes prescribing ceiling prices for gas sold within their boundaries.
Also, from time to time regulatory agencies impose price controls and
limitations on production by restricting the rate of flow of oil and gas wells
below natural production capacity in order to conserve supplies of oil and gas.
Environmental Regulation - The exploration, development and production
of oil and gas, including the operation of saltwater injection and disposal
wells, are subject to various federal, state and local environmental laws and
regulations. Such laws and regulations can increase the costs of planning,
designing, installing and operating oil and gas wells. Our domestic activities
are subject to a variety of environmental laws and regulations. A partial list
of those are:
o Oil Pollution Act of 1990,
o Clean Water Act,
o Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"),
o Resource Conservation and Recovery Act ("RCRA"), and
o Clean Air Act.
Civil and criminal fines and penalties may be imposed for non-compliance with
these environmental laws and regulations. Additionally, these laws and
regulations require the acquisition of permits or other governmental
authorizations before undertaking certain activities.
Under the Oil Pollution Act, a release of oil into water or other areas
designated by the statute can result in us being held responsible for the costs
of remediating such a release, certain damages specified in the Act and the
damage to natural resources. That liability can be extensive, depending on the
nature of the release.
CERCLA and comparable state statutes, also known as "Superfund" laws, can impose
joint and several retroactive liabilities, without regard to fault or the
legality of the original conduct. In practice, cleanup costs are usually
allocated among various responsible parties. Although CERCLA currently exempts
most petroleum products like crude oil, gas and natural gas liquids from the
definition of "hazardous substance," our operations may involve the use or
handling of other materials that may be classified as hazardous substances under
CERCLA. Of course, we are unsure if the exemption will be preserved in future
amendments of the act.
11
<PAGE> 12
RCRA and comparable state and local requirements impose standards for the
management, including treatment, storage and disposal, of both hazardous and
non-hazardous solid wastes. We generate hazardous and non-hazardous solid waste
in connection with routine operations. From time to time, proposals have been
made that would reclassify certain oil and gas wastes, including wastes
generated during pipeline, drilling, and production operations, as "hazardous
wastes" under RCRA. While state laws vary on this issue, state initiatives to
further regulate oil and gas wastes could have a similar impact.
SALES AND MAJOR CUSTOMERS
Our production is generally sold at the wellhead to various oil and natural gas
purchasing companies, typically those that are in the areas where the oil or
natural gas is produced. Crude oil and condensate are typically sold at prices
that are based on posted field prices. Natural gas is generally sold month to
month on the spot market. For example, in the month of December 1998, about 94%
of natural gas production from wells operated by us was sold at the wellhead at
spot market prices. The term "spot market" refers to contracts with a term of
six months or less or contracts that call for a redetermination of sales prices
every six months or more often. We do not believe that the loss of one or more
of its current natural gas spot purchasers would have a material adverse effect
on the our business because any individual spot purchaser could be readily
replaced by another spot purchaser who would pay a similar sales price. However,
although we believe that there will be a spot market available, that market is
highly sensitive to changes in current market prices, and a downward trend in
spot market prices can have a significant impact on our cash flow.
Three customers each accounted for approximately 10% or more of consolidated
revenues in 1998. Those are Stephens & Johnson Operating Company (16%), Flying J
Oil & Gas, Inc. (13%) and Columbia Energy Systems Corporation (12%). In 1997,
three customers accounted for approximately 10% or more of consolidated
revenues. Those are Dow Hydrocarbons & Resources, Inc. (22%), Stephens & Johnson
Operating Company (10%) and Flying J Oil & Gas, Inc. (10%).
OIL AND NATURAL GAS RESERVES
At December 31, 1998, independent petroleum engineers evaluated properties
representing 100% of PV-10 Value. The PV-10 Values shown in this Annual Report
on Form 10-K are not intended to represent the current market value of the
estimated net Proved Reserves of oil and natural gas owned by Venus. Neither
prices nor costs have been escalated in the reserve estimates.
We have not filed any estimate of oil or gas reserve information with any
federal authority or agency other than the U.S. Securities and Exchange
Commission (SEC). The following table summarizes our estimates of our net Proved
Reserves and their PV-10 Value as of December 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PROVED RESERVES (1)
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------------------------------------
PDP PDNP PUD TOTAL
--- ---- --- -----
<S> <C> <C> <C> <C>
Oil and Condensate (Mbbls). . . . . . . . . . 335.10 113.50 240.10 708.70
Natural Gas (Bcf) . . . . . . . . . . . . . . 5.13 1.04 2.69 8.87
Combined Equivalent BCF (Bcfe). . . . . . . . 7.14 1.84 4.14 13.12
PV-10 Value (in thousands). . . . . . . . . . $ 5,503 $ 979 $ 2,156 $ 8,138
===============================================================================================================
</TABLE>
(1) During the first quarter of 1999, the Company sold a
significant portion of its non-strategic Proved Reserves.
12
<PAGE> 13
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PROVED RESERVES BY STATE
(AS OF DECEMBER 31, 1998)
- ----------------------------------------------------------------------------------------------------------------
STATE TOTAL GAS PERCENT OF PV-10 PERCENT
GROSS OIL GAS EQUIV. TOTAL VALUE OF PV-10
WELLS (MBBL) (BCF) (BCFE) (BCFE) ($1,000) VALUE
- ---------------- --------- ------------ ------------ ---------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Texas .......... 56 232 6.93 8.33 63.46% 5,419 66.59%
Oklahoma ....... 97 146 0.27 1.14 8.72% 727 8.93%
West Virginia .. 62 1 1.42 1.43 10.89% 1,088 13.37%
Other(1) ....... 21 330 0.24 2.22 16.93% 904 11.11%
- ---------------- ---- ---- ----- ------ ------ ------ ------
TOTAL .......... 236 709 8.87 13.12 100% 8,138 100%
==== ==== ===== ====== ====== ====== ======
</TABLE>
(1) Other states are Michigan, Alabama, Utah, Louisiana, Colorado, Kansas and
California.
During the first quarter 1999, the Company sold its West Virginia properties and
two producing Texas wells. As of December 31, 1998, Proved Reserves attributable
to the properties sold were approximately 1,000 barrels of oil and 3,716,000 Mcf
of gas, or approximately 3.7 Bcfe, with a PV-10 Value of $2.5 million, of which
2 Bcfe, with a PV-10 Value of approximately $1.6 million, were classified as
Proved Developed Producing.
The foregoing table represents a decrease in value and an increase in amount of
Proved Reserves as compared with December 31, 1997. See Note 12 of Notes to
Consolidated Financial Statements (Supplementary Oil and Gas Disclosures) for
further information.
The reserve data presented in the Annual Report on Form 10-K are present
estimates only. In general, estimates of economically recoverable oil and gas
reserves and of the future net revenues therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and gas prices and future operating costs, all
of which may vary considerably from actual results. All reserves are evaluated
based on the assumption that all reported data are stated at standard
temperature and pressure. If that assumption proves to be incorrect, there can
be a substantial effect on estimated gas reserves. All such estimates are to
some degree speculative, and classifications of reserves are only attempts to
define the degree of speculation involved. For these reasons, estimates of the
economically recoverable oil and gas reserves attributable to any particular
group of properties, classifications of such reserves based on risk of recovery,
and estimates of the future net revenues expected therefrom prepared by
different engineers or by the same engineers at different times may vary
substantially. The Company, therefore, emphasizes that the actual production,
revenues, severance and excise taxes, development and operating expenditures
with respect to its reserves will likely vary from such estimates, and such
variances could be material.
Estimates with respect to Proved Reserves that may be developed and produced in
the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations in the initially estimated
reserves, and those variations may be substantial.
In accordance with applicable requirements of the SEC, the estimated discounted
future net revenues from estimated Proved Reserves are based on prices and costs
as of the date of the estimate unless such prices or costs are contractually
determined at such date. Actual future prices and costs may be materially higher
or lower. Actual future net revenues also will be affected by factors such as
actual production, supply and demand for oil and natural gas, curtailments or
increases in consumption by natural gas purchasers, changes in governmental
regulations or taxation and the impact of inflation on costs.
13
<PAGE> 14
DRILLING ACTIVITY
The Company drilled or participated in 12 Development Wells and 5 Exploratory
Wells during the three years ended December 31, 1998. The following table sets
forth the Company's drilling activity over the last 3 years.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DEVELOPMENT WELLS
- ---------------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- ------------- ---------------------------------------------- --------------------------------------------
YEAR PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- ------------- --------------- ---------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1996....... 2.00 -- 2.00 0.40 -- 0.40
1997....... 5.00 -- 5.00 2.90 -- 2.90
1998....... 4.00 1 5.00 1.44 1 2.44
----- --- ----- ---- --- ----
TOTALS..... 11.00 1 12.00 4.74 1 5.74
===== === ===== ==== === ====
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
EXPLORATORY WELLS
- ------------------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- ------------- ----------------------------------------------- ----------------------------------------------
YEAR PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- ------------- --------------- ---------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1996....... 2.00 0.00 2.00 0.10 0.00 0.10
1997....... 3.00 1.00 4.00 2.00 0.30 2.30
1998....... 1.00 2.00 3.00 0.26 0.873 1.13
---- ---- ---- ---- ----- ----
TOTALS..... 6.00 3.00 9.00 2.36 1.173 3.53
==== ==== ==== ==== ===== ====
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PRODUCTIVE WELLS
(AS OF DECEMBER 31, 1998)
- --------------------------------------------------------------------------------------------------------------
GROSS WELLS NET WELLS
- -------------------------------------------------------------- -----------------------------------------------
STATE OIL GAS TOTAL OIL GAS TOTAL
- --------------- ------------- --------------- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Texas............ 14.00 38.00 52.00 3.49 7.04 10.53
Oklahoma......... 84.00 17.00 101.00 9.58 0.63 10.20
West Virginia.... 0.00 62.00 62.00 0.00 58.09 58.09
Other(1)......... 15.00 6.00 21.00 3.63 1.06 4.69
------ ------ ------ ----- ----- -----
TOTALS........... 113.00 123.00 236.00 16.70 66.82 83.52
====== ====== ====== ===== ===== =====
</TABLE>
(1) Other states are Michigan, Alabama, Utah, Louisiana, Colorado, Kansas and
California.
During the first quarter 1999, the Company sold its West Virginia properties and
two producing Texas wells. On December 31, 1998, one non-operated well was
waiting on completion. That well was sold in February 1999.
14
<PAGE> 15
ACREAGE
The following table sets forth the Developed and Undeveloped Acreage of the
Company as of December 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
DEVELOPED AND UNDEVELOPED ACREAGE
- -----------------------------------------------------------------------------------------------------
GROSS ACRES NET ACRES
STATE DEVELOPED UNDEVELOPED DEVELOPED UNDEVELOPED
- ---------------- --------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Oklahoma........ 13,655 219 432 187
Texas........... 8,122 18,702 1,341 3,994
Utah............ 4,943 -- 1,536 --
West Virginia... 2,239 -- 2,042 --
Louisiana....... 820 1,476 40 364
Alabama......... 400 -- 136 --
California...... 400 -- 26 --
Kansas.......... 80 880 40 400
Michigan........ 240 -- 108 --
------ ------ ----- -----
TOTALS.......... 30,899 21,277 5,701 4,945
====== ====== ===== =====
</TABLE>
During the first quarter 1999, the Company sold its West Virginia properties and
two producing Texas wells. Acreage attributable to the properties sold totaled
2,943 gross acres and 2,218 net acres.
PRODUCTION
The following table summarizes the net oil and gas production, weighted average
sales prices and average production (lifting) costs per unit of production for
the Company for the periods indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
UNITS OF PRODUCTION AVERAGE SALES PRICE
DECEMBER 31, OIL GAS OIL GAS AVERAGE LIFTING COST
- -------------------- ---------------- ---------------- ---------------- ------------------- -----------------------
(MBLS) (BCF) $/BBL $/MCF $/MCFE
<S> <C> <C> <C> <C> <C>
1996............... 23 0.069 18.80 2.55 1.39
1997............... 81 0.410 17.72 2.44 1.08
1998............... 119 0.572 12.84 2.15 1.25
</TABLE>
During the first quarter 1999, the Company sold its West Virginia properties and
two producing Texas wells. Production for 1998 attributable to the properties
sold totaled 1,566 barrels of oil and 177,830 Mcf of gas.
PRODUCTS AND MARKETS
We currently produce oil and natural gas. We do not refine or process the oil or
natural gas that we produce. We sell the oil we produce under short-term
contracts at market prices for the areas in which the producing properties are
located, generally at FOB field prices posted by the principal purchaser of oil
in the area. We sell natural gas produced from our properties under short-term
contracts to entities that have pipelines in the vicinity of the production or
that will build short gathering lines to such properties. In some instances, we
own the gathering line. Typically, the contracts for natural gas sales are for
terms less than six months. We are not obligated to provide a fixed and
determinable quantity of oil or natural gas under any existing contract or
agreement.
REGULATION AND ENVIRONMENTAL MATTERS
See "-Risk Factors - Regulations" for a discussion of various laws and
regulations that affect the Company and its business.
15
<PAGE> 16
EMPLOYEES
As of March 31, 1999, the Company had 18 employees.
EXECUTIVE OFFICERS OF VENUS EXPLORATION, INC.
At March 31, 1999, the executive officers of the Company were Eugene L. Ames,
Jr., John Y. Ames, Eugene L. Ames III, and Patrick A. Garcia.
Eugene L. Ames, Jr., age 65, became Chairman, Chief Executive Officer and a
director of the Company in 1997. He has been in the oil and gas business since
1954 and has been associated with New Venus and its predecessor entities since
1962 and chief executive officer of those predecessor entities since 1991. Ames
received a B.S. degree in Geology from the University of Texas at Austin in
1955. He served as Chairman of the Independent Petroleum Association of America
from 1991 to 1993 and currently serves as a member of the management committee
of the American Petroleum Institute.
John Y. Ames, age 43, became President, Chief Operating Officer and a director
of the Company in 1997. He is a graduate of the University of Texas at Austin
with a BBA degree in Petroleum Land Management. He had eight years of experience
in the energy business before becoming associated with New Venus and its
predecessor entities as a Vice President in 1984. He became Executive Vice
President of those predecessor entities in 1995 and President and Chief
Operating Officer in 1996.
Eugene L. Ames, III, age 39, became Vice President-Exploration in 1997. He held
similar positions with the Venus predecessor entities since 1991. He is a
graduate of Trinity University with BS degrees in both Geology and Business
Administration. He has 13 years of experience in operations and petroleum
exploration.
Patrick A. Garcia, age 42, became Treasurer of the Company in 1997 and was
appointed as Chief Financial Officer in June of 1997. He held similar positions
with the Venus predecessor entities since 1980. He is a graduate of Texas A&M
University with a BBA degree in Accounting. He worked with Peat, Marwick,
Mitchell & Company (now KPMG LLP) for three years before becoming associated
with New Venus and its predecessor entities in 1980.
DEFINITIONS OF CERTAIN OIL AND GAS TERMS
The terms defined in this section are used throughout this Annual Report on Form
10-K.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet of natural gas and related compounds at standard
conditions.
Bcfe. Equivalent of one billion cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. One British thermal unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit at standard conditions.
Completion. The installation of permanent equipment for the production of oil or
gas, or, in the case of a dry hole, the reporting of abandonment to the
appropriate authority.
Developed Acreage. The number of acres that are allocated or assignable to
producing wells or wells capable of production.
Development Well. A well drilled or to be drilled within the proved area of an
oil or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry Hole or Dry Well. A well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as a producing oil or gas
well.
16
<PAGE> 17
Exploitation. The process whereby the value of a property is attempted to be
increased by working over existing wells, by making new completions in existing
wells and by conducting other similar operations intended to increase production
from existing wells in a developed area.
Exploratory Well. A well drilled to find and to produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir
beyond the currently expected limits of the known reservoir. These wells involve
a high degree of risk, given the unknown nature of the horizons being tested.
Gross Acres or Gross Wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Mbbl. One thousand barrels of crude oil or other liquid hydrocarbons.
Mmbtu. One million Btu's.
Mcf. One thousand cubic feet of natural gas and related compounds at standard
conditions.
Mcfe. The equivalent of one thousand cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Mmcfe. The equivalent of one million cubic feet of natural gas. In reference to
natural gas, natural gas equivalents are determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net Acres or Net Wells. The sum of the fractional Working Interests owned in
Gross Acres or Gross Wells.
Production Cost. Also referred to as lifting cost, the cost of operation and
maintenance of wells, related equipment and facilities that are expensed as
incurred as a part of the cost of oil and gas produced; e.g., labor to operate
the wells and facilities, repair and maintenance expenses, materials and
supplies consumed, taxes and insurance on property, and severance taxes.
PV-10 Value, or Present Value of Estimated Future Net Revenues. The present
value of estimated future net revenues as of a specified date, after deducting
estimated production and ad valorem taxes, future capital costs and operating
expenses, but before deducting federal income taxes. The estimated future net
revenues are discounted at an annual rate of 10% to determine their "present
value." The present value is shown to indicate the effect of time on the value
of the revenue stream and should not be construed as being the fair market value
of the properties. Estimates have been made using constant oil and natural gas
prices and operating costs at the specified date.
Productive Well. A well that is producing oil or gas or that is capable of
production.
Prospect. An area that has been interpreted to be prospective for commercial
hydrocarbon accumulation based on seismic evaluations; leases may or may not
have been acquired in the area of the Prospect.
Prospect Lead. An area that preliminary evaluations suggest may be prospective
for commercial hydrocarbon accumulation; usually no seismic studies will have
been conducted on such an area, nor will have any leases been acquired in it.
Proved Developed Producing Reserves, or PDP. Proved Reserves to be produced by
existing wells from completion intervals open to production.
17
<PAGE> 18
Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
Proved Developed Non-Producing Reserves, or PDNP. Proved Reserves to be produced
from existing wells but that are now behind the casing or at minor depths below
the bottom of the hole. The cost of opening up such reserves are expected to be
relatively minor.
Proved Reserves. The estimated quantities of crude oil, natural gas and natural
gas liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved Undeveloped Reserves, or PUD. Proved Reserves that are under undeveloped
spacing units that are so close and so related to developed spacing units that
they may be assumed with confidence to become commercially productive when
drilled.
Royalty Interest. An interest in an oil and gas property entitling the owner to
a share of the oil and gas produced, free of costs of production.
Seismic Data. Geophysical information collected by transmitting sound waves into
the earth from a transmitter, or source, and measuring, with appropriate
receivers, the time of the sound waves' arrival and their intensity when they
are reflected or refracted back to the surface.
2-D seismic data is collected along a surface line of sources and receivers,
giving a section representing a slice through the earth.
3-D seismic data is collected by distributing sources and receivers over an
area, yielding a volume of information representing the 3-dimensional section of
earth beneath the area being studied. The improved imaging of 3-D data makes it
the preferred advanced technological method of attempting to determine the
location, extent and properties of hydrocarbon accumulations.
Undeveloped Acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains Proved Reserves.
Working Interest, or WI. The cost-bearing operating interest that gives the
owner the right to drill, to produce and to conduct operating activities on the
property and to share a proportionate part of production.
ITEM 2. PROPERTIES
TITLE TO PROPERTIES
Substantially all of our properties are Working Interests derived from oil and
gas leases on property owned by third parties. Very little of our property is
mineral or fee ownership. We usually perform title research before acquiring
leases or interests in leases, and we believe that we have satisfactory title to
our producing properties. The degree of research varies depending on the value
initially assessed to the property, whether the property is producing at the
time of acquisition, and other factors. The properties are usually subject to
the rights of lessors to be paid a Royalty Interest out of production. They are
also often subject to overriding royalties and other burdens, none of which we
believe to be a material burden on the value of our interest. Substantially all
of our properties are and will continue to be subject to liens and mortgages to
secure borrowings under our credit facility.
Substantially all of the properties that we own are subject to exploration or
development agreements with third parties. The exploration and development
agreements are subject to "Area of Mutual Interest," or "AMI," provisions that
give the third party participants certain limited rights of first refusal on
interests acquired within the AMI. If the third party elects not to acquire such
interest, we usually will have the right to acquire the third party's
proportionate part of the interest. Once interests are acquired, the parties to
the agreements usually also have an election before a well is drilled. If a
party elects not to drill, we usually have the right to acquire certain
interests from the non-drilling party, but depending upon the size of the
interest and the cost of the proposed well, we may or may not elect to acquire
that interest. In several of the exploration and
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<PAGE> 19
development projects in which we are involved, the election not to participate
or not to drill by a third party owner of a large part of the project could
materially affect the value of our interest in that project.
In May 1997, our executive and operating offices were relocated to San Antonio,
Texas, where we occupy premises of approximately 12,570 useable square feet
pursuant to a lease that expires on December 31, 2002. We also lease an office
in Houston, Texas. The Houston office address is 363 W. Sam Houston Parkway
East, Suite 490, Houston, Texas 77060. That lease terminates on August 26, 2001.
We no longer have employees in Houston and we are currently in the process of
sub-leasing this office space. Our annual rental expense is approximately
$254,000. The lease of the San Antonio office space provides for increased rents
at stated amounts and intervals and an adjustment for variations in utility
costs.
See "Item 1 - BUSINESS" for additional information concerning the Company's oil
and gas properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party in any lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last three months of the year ended December 31, 1998, the Company
did not submit any matter to a vote by its shareholders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Stock Market(TM)
under the symbol "VENX." The following table sets forth the range of high and
low closing bid prices for each quarterly period during the two most recent
fiscal years as reported by the NASDAQ SmallCap Stock Market(TM). All SmallCap
quotations represent inter-dealer quotations, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1998 HIGH LOW
- ----------------------------------------------------- --------- ----------
<S> <C> <C>
First Quarter................................... $ 3 7/8 $ 3 1/4
Second Quarter.................................. 4 3
Third Quarter................................... 3 7/8 3 1/4
Fourth Quarter.................................. 3 1 1/4
- ----------------------------------------------------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1997(1) HIGH LOW
- ----------------------------------------------------- --------- ----------
<S> <C> <C>
First Quarter................................... $ 6 1/4 $ 2 1/8
Second Quarter.................................. 5 5/2 3 7/8
Third Quarter................................... 5 9/16 3
Fourth Quarter.................................. 5 3 1/2
- ----------------------------------------------------- --------- ----------
</TABLE>
(1) Stock prices shown for dates prior to May 21, 1997, are attributable to
Xplor Corporation (NASDAQ SmallCap Stock Market(TM):XPLR), and its
financial history is not contained in this Annual Report on Form 10-K.
Therefore, comparisons of the stock price history with other historical
financial data shown herein for the period before May 21, 1997, would be
misleading.
On April 12, 1999, the closing bid price for the Company's Common Stock was
$1.1875 per share.
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<PAGE> 20
The Company had 985 stockholders of record as of March 31, 1999 (not including
nominee holders such as banks and brokerage firms that hold shares for
beneficial owners). The Company has not paid dividends in recent periods and
has no present intention to resume payment of dividends. It presently intends
to reinvest its net revenues in its ongoing business.
The Company entered into a Second Amended and Restated Loan Agreement dated
December 19, 1997. Under that credit agreement, the Company is not permitted to
declare or to pay any dividend on any of its shares or to make any distribution
to its stockholders.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the period indicated selected historical
financial data for the Company. The selected historical financial data as of and
for each of the years in the five-year period ended December 31, 1998, have been
derived from our audited historical financial statements. We acquired
significant producing oil and gas properties in all the periods presented. Those
acquisitions affect the comparability of the historical financial and operating
data for the periods presented. The information below should be read in
conjunction with Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Historical Financial Statements of
the Company and the notes thereto included elsewhere in this Annual Report on
Form 10-K, including the reference to reverse acquisition accounting treatment
given to the 1997 Acquisition.
SELECTED FINANCIAL DATA
AS OF AND FOR THE FIVE-YEAR PERIOD ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total revenues .............................. $ 2,805 $ 2,476 $ 543 $ 798 $ 841
Dividends paid (1) .......................... -- -- 35 72 20
Income (loss) before
extraordinary items ....................... (9,064) (4,168) (2,007) (696) 337
Net income (loss) ........................... $ (9,410) (4,168) (2,007) (696) 337
Net income (loss) per common share .......... (.95) (.57) (.60) (1) (1)
Long term debt .............................. -- 2,005 -- -- 72
Other long-term liabilities ................. 23 27 -- -- --
Convertible redeemable preference
shares .................................... -- -- 4,955 -- --
Total assets ................................ 7,396 12,931 4,343 3,031 5,939
-------- -------- -------- -------- --------
</TABLE>
(1) The Company's predecessor was a privately-held S Corporation. Dividends
paid in 1994, 1995 and 1996 were paid by the S Corporation.
Fiscal 1997 includes revenues, beginning in May 1997, from properties acquired
in the Acquisition transaction. Fiscal 1998 revenues include twelve months of
such revenues.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K (particularly this Item 7) contains statements
that are considered "forward-looking statements," as defined in the Private
Securities Litigation Reform Act of 1995. As discussed in Item 1 - "BUSINESS"
under "-Forward-Looking Statements" and "-Risk Factors," actual results may
differ materially from those contemplated by those forward-looking statements.
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<PAGE> 21
GENERAL
In 1997, we went through a major transformation as a result of the Acquisition
discussed in Item 1 "BUSINESS" above. Legally, Xplor Corporation acquired the
assets of New Venus. However, accounting principles require that this
transaction be treated as a reverse acquisition of the Company by New Venus.
After the transaction, the Company's name was changed from Xplor Corporation to
Venus Exploration, Inc. Under the reverse acquisition accounting principles, the
results of operations and financial information for prior years shown in this
report are those of the predecessor Venus entities, not Xplor Corporation.
Moreover, operational data shown herein for periods prior to May 21, 1997; e.g.,
production information, reflect the operations of New Venus and its
predecessors. Accordingly, comparison of information in this report with prior
Xplor Corporation corporate reports previously filed under the Securities
Exchange Act of 1934 is not an appropriate performance measure.
We completed 5 (gross) new wells in our 1998 drilling program, and, as a result,
increased our Proved Reserves, net of 1998 production and revisions of previous
estimates, by 6%. Proved Reserves increased from 12.4 Bcfe on December 31, 1997,
to 13.1 Bcfe on December 31, 1998. During the first quarter 1999, we sold
properties estimated to contain 3.7 Bcfe of Proved Reserves as of December 31,
1998. Although reserves increased 6% during 1998, their PV-10 Value decreased
29% due to lower prices. The PV-10 Value of the oil and gas properties at
December 31, 1998, $8.1 million, is $2.2 million higher than their book value of
$5.9 million.
In 1998, the production obtained and the revisions of previous estimates of
reserves that were incurred together resulted in a reduction of reserves of
approximately 1.7 Bcfe, so the gross increase in Proved Reserves was 2.4 Bcfe.
In 1998 we drilled 6 wells and participated in 2 additional wells. Three of the
8 wells were Exploratory Wells and 5 were Development wells. Two of the wells
were completed as oil wells, 3 as gas wells, and 3 were plugged and abandoned.
Due to market conditions, our business plan for 1999 focuses primarily on
development drilling and field exploitation of existing projects. The 1999
budget provides for capital expenditures of approximately $2.6 million for
projects that include the drilling of 2 development wells, 2 exploitation wells,
a 3-D seismic acquisition for the development of an existing field, acreage
acquisition and the participation in 2 non-operated development wells. The cost
of the 3-D seismic acquisition included in the 1999 plan is estimated at $
115,000. Because funding is currently not available for our 1999 budget, we may
elect to reduce our interest through sales, farmouts or other transactions in
certain wells or seismic projects or to include those wells or projects in a
joint venture with industry participants, in which event our capital investment
and upside potential would be lower. The actual timing of the drilling of the
wells is dependent upon many unpredictable factors and the availability of
capital, which could postpone expenditures because there are no contractual
commitments to incur any of the budgeted costs.
Our general and administrative expense increased significantly from 1996 to
1998. This increase is due primarily to two factors; i.e., significantly
expanded exploration activities and various corporate restructurings during 1996
and 1997 with the increased cost continuing into 1998. The corporate
restructurings included (i) the incorporation of a United Kingdom public limited
company, (ii) the repatriation of the United Kingdom company, (iii) the Xplor -
Lomak - New Venus transaction in 1997, and (iv) legal and accounting costs
related to first-year SEC filing costs. All contributed to the significant
increase in the Company's general and administrative costs.
The 1997 Acquisition and the corporate restructuring in 1996 affected the
reported financial results in various ways. The historical financial statements
of the Company are that of a predecessor entity for all of 1995 and the first
six months of 1996. On July 1, 1996, that predecessor entity transferred most
but not all of its interest in the oil and gas properties to another predecessor
entity of the Company. Comparisons of revenues and expenses between 1997 and
1996 are affected by the inclusion in the first half of 1996 of the revenues and
expenses attributable to oil and gas properties and other assets and liabilities
that were, for accounting purposes, deemed distributed on July 1, 1996.
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<PAGE> 22
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997
We reported a net loss of $9.4 million for 1998 versus a net loss of $4.2
million for 1997. Due to low oil prices, the Company reported impairment losses
of $3.5 million in 1998 compared to $1.1 million in 1997. Low oil prices also
resulted in higher depreciation, depletion and amortization expense and
negatively impacted revenues. In 1998, we reported an extraordinary loss of
$345,905 due to the early extinguishment of debt.
Oil and gas production was 1,285 Mmcfe in 1998 compared to 896 Mmcfe in 1997, an
increase of 43%. This increase is due to new wells brought into production
during 1997 and 1998 and a full year of production from the wells acquired in
the May 1997 Acquisition. Average oil prices declined from $17.72 per barrel in
1997 to $12.84 in 1998, a 28% decrease. Average natural gas prices declined from
$2.44 per Mcf to $2.15, a 12% decrease. Despite the decrease in average product
prices, oil and gas revenue increased by $0.3 million to $2.8 million in 1998
from $2.5 million in 1997 primarily due to new wells drilled and brought into
production and the 1997 Acquisition.
Oil and gas production costs in 1998 were $1,609,733 ($1.25 per Mcfe) compared
with $963,822 in 1997 ($1.08 per Mcfe). The increase in total production expense
is due primarily to the increase in reported sales volume. In addition,
approximately 54% of 1998 production costs are attributable to older,
non-operated wells that were acquired in the business combination on May 21,
1997. As a group, these wells are the highest production cost wells ($1.55 per
Mcfe in 1998 and $1.45 per Mcfe in 1997), and 1997 reflects only seven months of
production while 1998 reflects twelve months from these wells. Workover
operations on three operated properties also contributed to the increase in
cost. 1998 production or lifting cost as a percentage of oil and gas sales,
increased to 57%, compared with 39% in 1997. This increase was due mostly to the
decrease in oil and gas prices, which resulted in lower revenues to compare to
production cost.
During the first quarter 1999, we sold our West Virginia properties and two
producing Texas wells. Production for 1998 attributable to the properties sold
totaled 1,566 barrels of oil and 177,830 Mcf of gas. Fiscal 1998 revenues less
operating expenses of the properties sold totaled $213,784.
During 1998, we recorded impairment expense of $3.5 million as compared to $1.1
million recorded in 1997. Impairment expenses for both 1998 and 1997 relate
primarily to the cost, initially capitalized, of acquiring and drilling
Exploratory and Development Wells that were completed but that failed to
establish enough reserve value to justify their carrying value. In such cases,
an impairment is recognized to reduce the capitalized cost to the estimated fair
market value. The comparison of carrying cost to estimated fair market value is
on a field by field basis. Costs of Exploratory Wells that are not completed,
but are plugged and abandoned, are charged directly to dry hole expense.
Exploration expense, including geological, geophysical and seismic data
acquisition and analysis and dry hole expenses, was $1,261,557 in 1998, compared
to $504,983 in 1997. The increase is due mainly to dry hole costs of $530,358
attributable to a well drilled in West Texas.
Depreciation, depletion and amortization expense of $1,774,999 in 1998 increased
by $696,057 from $1,078,942 in 1997. This increase is primarily due to the 43%
increase in sales volume and the decline in reserves on many individual
properties as a result of the low period end prices used to compute remaining
reserves.
During 1998, general and administrative expense of $3,174,156 increased $250,392
from $2,923,764 in 1997. This increase was primarily due to a significant
decrease in overhead reimbursement from a joint venture that we manage. In
addition, rent expense increased due to the increase, in late 1997, in the
amount of square footage that we rent. The 1998 amount also includes $161,198 of
non-cash compensation expense related to stock options granted to directors in
lieu of fees and restricted stock granted two key employees.
Our 1998 interest and other income of $32,502 decreased by $45,156 from 1997 due
primarily to significantly lower cash available for interest bearing investment.
22
<PAGE> 23
Interest expense was $568,085 in 1998, compared to $203,213 in 1997. The
$364,872 increase is primarily due to increased borrowings. Interest expense
includes amortization of deferred financing cost of $103,260 in 1998 and $81,535
in 1997. The average daily balances of interest-bearing debt was $4,831,341 in
1998, compared to $1,030,000 in 1997.
YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996
We experienced a net loss of $4.2 million for 1997 versus a net loss of $2.0
million for 1996. We reported impairment losses in 1997 and 1996 of $1.1 million
and $1 million, respectively. General and administrative cost increased by
$1,549,223, or over 100%.
Oil and gas production was 896 Mmcfe in 1997 compared to 207 Mmcfe in 1996, an
increase of over 300%. Of the 689 Mmcfe increase, approximately 285 Mmcfe was
due to successful drilling activities. The remainder, 404 Mmcfe, was due to
production from the properties acquired from Xplor and Lomak. Average oil prices
declined from $18.80 per barrel in 1996 to $17.72 in 1997, a 6% decrease.
Average natural gas prices declined from $2.55 per Mcf to $2.44, a 4% decrease.
Despite the decrease in average product prices, oil and gas revenue of $2.5
million for 1997 increased by $2.0 million over 1996 revenue of $0.5 million,
primarily due to successful drilling and the Acquisition.
Oil and gas production costs in 1997 were $963,822 ($1.08 per Mcfe) compared
with $286,030 in 1996 ($1.38 per Mcfe). This decrease is due mainly to the lower
operating cost of new properties acquired through successful drilling and the
Acquisition. The 1997 production or lifting cost as a percentage of oil and gas
sales decreased to 39%, compared with 53% in 1996.
During 1997 we recorded impairment expense of $1.1 million as compared to the
$1.0 million recorded in 1996. Impairment expenses for both 1997 and 1996 relate
primarily to the cost, initially capitalized, of acquiring and drilling
Exploratory and Development Wells that were completed but that failed to
establish enough reserve value to justify their carrying value. In such cases an
impairment is recognized to reduce the capitalized cost to the estimated fair
market value. The comparison of capitalized cost to fair market value is on a
field by field basis. Costs of Exploratory Wells that are not completed, but are
plugged and abandoned, are charged directly to dry hole expense.
Exploration expense, including geological, geophysical and seismic data
acquisition and analysis and dry hole expenses, was $504,983 in 1997, compared
to $116,905 in 1996. The increase is due mainly to the drilling of one
Exploratory Well dry hole during the year and increased activity in exploration
joint ventures we operate.
During 1997, general and administrative expense of $2,923,764 increased
$1,549,223 from $1,374,541 in 1996. This increase was primarily due to the
significant increase in exploration activity and the Acquisition. The 1997
exploration activities led to the creation of 12 new employee positions and the
increased use of third-party engineering services and other professional
consultants. The 1997 amount also includes $252,002 of non-cash compensation
expense related to stock options granted to directors and costs in connection
with the corporate restructuring.
Our 1997 interest income of $77,658 increased by $22,230 over 1996 due primarily
to interest received from the investment of cash acquired in the Acquisition.
Interest expense was $203,213 in 1997, compared to $10,331 in 1996. The $192,882
increase is primarily due to increased borrowings by Venus Development, Inc.
Approximately $81,535 of the interest expense reported by Venus Development,
Inc., represents amortization of deferred financing cost, not a current or
future cash expense. The average balances of interest-bearing debt was
$1,030,000 in 1997, compared to $70,000 in 1996.
ACCOUNTING POLICIES
On January 1, 1998, we adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Account Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and displaying
of comprehensive income and its components. This statement requires a separate
statement to report the components of
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<PAGE> 24
comprehensive income for each period reported. The provisions of this statement
are effective for fiscal years beginning after December 15, 1997. Adoption of
SFAS No. 130 did not have an impact on our financial presentation of income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes standards of accounting
and reporting for derivative instruments and for hedging activities. It requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and measures these instruments at fair value.
This statement is effective for financial statements for periods beginning after
June 15, 1999. We believe that SFAS No. 133 will not have a material impact on
our financial statements and disclosures.
Effective December 31, 1998, we adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 established
standards for the way in which publicly-held companies report financial and
descriptive information about their operating segments in financial statements
for both interim and annual periods, and require additional disclosures with
respect to products and services, geographic areas of operations and major
customers.
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that costs of start-up activities, including
organizational costs, be expensed as incurred. This SOP will be effective for
the Company's 1999 consolidated financial statements. In our opinion the
adoption of SOP 98-5 will not have a material effect on our consolidated
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had a working capital deficit of $6,624,472 compared
with a working capital deficit of $768,939 at December 31, 1997, a decrease in
working capital of $5,855,533. Of this decrease, $5,040,000 is due to
classifying the entire amount of outstanding bank debt at December 31, 1998, as
a current liability. In connection with the asset sales subsequent to December
31, 1998, the borrowing base was reduced to $3,870,000, of which $3,809,956 had
been drawn at that date.
Net cash used in operating activities during 1998 was $2,527,560, whereas
$1,276,042 was used during 1997. Cash and equivalents decreased by $556,604
principally due to capital expenditures related to exploration and development
and the cost of administrative services required to support the increased
exploration activities and corporate restructurings. The decrease of $1,853,803
in accounts receivable was primarily the result of the timing of revenue
receipts and joint interest receivables. The decrease in trade accounts payable
of $1,811,457 is attributable to our decreased level of drilling.
We have incurred net losses of approximately $2,006,818 for the year ended
December 31, 1996, $4,167,723 for the year ended December 31, 1997, and
$9,410,329 for the year ended December 31, 1998. Unless we are successful in
raising capital to successfully develop existing properties or acquire income
producing properties, we expect operating losses and negative cash flows to
continue for the foreseeable future. We may never generate sufficient revenues
to achieve profitability. Even if we do, we may not sustain or increase
profitability on a quarterly or annual basis in the future. At December 31,
1998, we had an accumulated deficit of approximately $16,943,980.
To fund our business activities, we had previously relied on bank financing,
cash flow from operations, sales of properties and joint ventures with industry
participants. In 1996, the decision was made to sell equity interests and to use
limited recourse financing under a credit facility with a non-bank lender. In
1997, a more conventional bank line of credit facility was set up. In the
future, we intend to finance our drilling plans and other operations with cash
flow from operations, borrowings from the bank credit facility, sales of
non-strategic properties, and public and private equity sales.
The prices paid to us and other producers during 1998 and the first three months
of 1999 have been considerably below the average price received in 1997. That
diminished revenue could have a material effect on the number of wells we drill
in 1999. Cash flow from existing properties will not fund our 1999 drilling
plan; therefore, the number of wells we drill will depend on a number of
external factors, the most important of which is the availability of debt and
equity capital in public and private capital markets. In addition, if we are
unable to generate sufficient cash flow from operations to service our debt, we
may be required to refinance all or some of our debt, to sell certain assets or
to obtain additional debt or
24
<PAGE> 25
equity financing. There is no assurance that any such additional funding will
be available. Any major property acquisitions are also dependent upon receiving
adequate financing to fund the purchase; therefore, any such transaction will be
subject to the same factors. The capital resources and liquidity needed to run
the business in prior years have been provided in large part from cash sales of
properties that were the result of Venus's past exploratory successes and debt
and equity financing. There is no assurance that such sources of capital will be
available in the future.
While we regularly evaluate and discuss possible acquisitions, we have no
present agreements or commitments with regard to any specific such acquisition.
Any acquisition outside of current exploration and development programs would
require additional financing and would be dependent upon financing options
available at that time.
Venus's cash flow stream is dependent upon the various factors that generally
affect the domestic oil and gas markets. For example, price, government
regulation and normal oil and gas operational events. Lower oil and gas prices
during 1998 had a negative effect on cash flow from current production, the line
of credit that is supported by reserve value, and the availability of the new
capital resources needed to explore and develop the extensive portfolio of
projects and prospects that we have under study. Increases in our borrowing base
are directly dependent upon continued successes in drilling productive wells and
the prices paid for oil and natural gas production at any given time.
Indirectly, those continued successes would help in any efforts to raise
additional capital resources. At December 31, 1998, we were not in compliance
with two financial maintenance covenants of our existing credit facility, the
tangible net worth and the current ratio requirements. We have obtained a waiver
through May 31, 1999, however because of the uncertainty regarding our ability
to either obtain future waivers or to come into compliance with the covenants
through the end of 1999, the outstanding loan balance has been classified as a
current liability.
The lender could elect, subsequent to the period waived, to declare all amounts
borrowed under the Credit Agreement, together with accrued interest, to be due
and payable. The lender could then proceed to foreclose against any collateral
securing the payment of the debt. This collateral represents a significant
portion, if not all, of our assets. Our assets are predominately real property
rights and intellectual information that we have developed regarding those
properties and other geographical areas that we are studying for exploration and
development. The market for those types of properties fluctuates and can be very
small. Therefore, our assets can be very illiquid and not easily converted to
cash. Even if a sale can be arranged, the price may be significantly less than
what the we believe the properties are worth. That lack of liquidity can have
materially adverse effects on strategic plans, normal operations and credit
facilities. In addition, issuance of indebtedness or preferred stock could be
costly and dilutive to stockholders.
Due to our current working capital deficit, not being in compliance with our
credit facility covenants, and lack of profitability, we are taking the
following steps:
1. During the first quarter 1999 we sold our interest in two non-core,
non-operated properties for $2,320,000. The Company used $1,650,000
to repay bank debt. Outstanding bank debt at December 31, 1998,
totaled $5,540,000 and $3,809,956 at March 31, 1999. During the
fourth quarter 1998 the properties sold generated net proceeds
(revenues less operating expense) of approximately $75,000. At
March 31, 1999, the borrowing base totaled $3,870,000 leaving an
unused borrowing base of $60,044.
2. During the fourth quarter 1998 and the first quarter 1999 we
reduced office personnel from 28 employees to 18 employees, a
reduction in staff of 36%. We expect that these reductions, plus
other general and administrative cost reductions, will
significantly reduce overall costs. Due to severance packages and
related costs, the cost savings will not begin to appear until the
second quarter 1999.
3. We reduced planned exploration activity for 1999 to selected
prospects we believe to have extraordinary merit.
4. In March 1999 we retained an investment banking firm to provide
services related to a possible placement of private equity to be
used to finance the acquisition of oil and gas properties. We are
currently in negotiations with two parties for the acquisition of
producing oil and gas reserves, primarily gas. Both packages are
located in geological trends where our management and geoscience
team has experience and
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<PAGE> 26
which we have targeted for reserve growth. There can be no
assurance that we will be successful in raising any capital or
completing any acquisitions.
5. We plan to continue to sell non-core properties.
6. Depending on our success with raising private equity, we may be in
a better position to amend or renegotiate our credit facility so
that we can be in compliance with all covenants; however, there is
no assurance that we will be successful at raising private equity
or that the credit facility can be amended or renegotiated.
DEBT FACILITIES
Wells Fargo Facility
In May 1997, we entered into a loan agreement establishing a $20,000,000
revolving line of credit. In December 1997 this agreement was restated and
amended to increase the credit facility to $50,000,000 subject to a borrowing
base determined every six months by the bank based on our oil and gas reserves
that secure the loan. On August 19, 1998, the credit facility was amended
resulting in the interest on related borrowings becoming the bank's prime
lending rate plus 1%. On December 3, 1998, the credit facility was amended to
increase the borrowing base from $5,240,000 to $5,540,000 and waive certain
financial covenant defaults to January 15, 1999. On January 16, 1999, the credit
facility was amended to extend the waivers on the covenant defaults to March 15,
1999. The bank has agreed to again amend the credit facility to extend the
waivers through May 31, 1999.
A commitment fee of 3/8 of one percent of the undrawn balance of the borrowing
base is payable quarterly. Interest is payable monthly, and principal payments
are required only when the balance outstanding exceeds or is projected to
exceed, prior to the next borrowing base redetermination date, the borrowing
base. As of December 31, 1998, the borrowing base was $5,540,000, and the amount
we had drawn was $5,540,000, resulting in no unused borrowing base. The
borrowing base as of March 31, 1998, was $3,870,000, of which $3,809,956 had
been drawn at that date. The Facility terminates on June 30, 2000.
Negative restrictions imposed upon us by the Wells Fargo agreement include our
agreement to: not declare a dividend; not enter into any hedging agreement
covering more than 90% of our projected monthly production or for periods beyond
the current calendar year; not allow gas balancing, take-or-pay contracts or
other similar situations to exist to the extent that we would not be entitled to
receive the full value of delivered production; not merge or consolidate with
anyone else unless we are the survivor; not change control or management; and
not allow other liens to be placed on our properties.
Stratum Facility
During the fourth quarter 1998, we acquired Stratum's rights and interests in
Venus Development, Venus Development's Term Loan, and Venus Development's oil
and gas properties in exchange for 1,100,000 shares of the Company's common
stock. Accordingly, the Stratum Facility has been terminated. The acquisition of
the Stratum's interest includes the overriding royalties that they had
originally acquired pursuant to the agreement and certain warrants they held to
acquire Venus Exploration, Inc. shares held by certain of its shareholders. We
recorded, in the fourth quarter of 1998, a non-cash loss of $345,905 due to the
early extinguishment of debt as a result of writing off deferred financing costs
related to this loan.
HEDGING ACTIVITIES
On certain properties, we used commodity derivative contracts to protect and to
ensure cash flow levels. Those properties were limited to those that were owned
by Venus Development and that were subject to the financing facility provided by
Stratum. Under the terms of the exchange of Venus shares for the Stratum note
and other agreements, all commodity derivative contracts were terminated, and
there were no quantities hedged as of December 31, 1998.
26
<PAGE> 27
IMPACT OF YEAR 2000
The "Year 2000 problem" arises because many computer systems and programs were
designed to handle only a two-digit year, not a four-digit year. When the year
2000 begins, these computers may interpret "00" as the year 1900 (e.g., 1998 is
seen as "98") and either stop processing date-related computations, or will
process them incorrectly.
In 1998, we hired an outside computer consultant to test our computers. The
computers that we currently use have been certified as being compliant. We also
conducted an internal survey of the software and information systems critical to
the Company's operations at its corporate headquarters. As a result, we are
upgrading the network server to be Year 2000 compliant. Based on certifications
by its other software information vendors, we believe that the Year 2000 issues
directly related to computers, software and information systems at the Company's
headquarters will not have a material impact on our business or financial
position.
We have mailed more than 500 questionnaires to our major vendors, purchasers of
products, customers and service providers, to assist in an assessment of whether
they will be Year 2000 compliant. We are currently evaluating those
questionnaires, and that evaluation should be complete by June 30, 1999.
At this time, however, we cannot determine what effect, if any, the Year 2000
issues affecting our vendors, customers, other businesses and the numerous
local, state, federal and other governmental entities with which we conduct
business or by which we are regulated or governed or taxed, will have on our
business or financial position. If they are not, such failure could affect our
ability to sell oil and gas, and receive payments therefrom, and could affect
the ability to get vendors and service providers to provide products and
services in support of our operations.
We are expensing, as incurred, all costs related to the assessment and
remediation of the Year 2000 issue. These costs are being funded through
operating cash flow and are not expected to exceed $25,000 and are not material
to the our consolidated financial condition or results of operations.
As an operator of oil and gas properties, we plan to conduct an analysis of the
operational problems and costs that would result from failure caused by a Year
2000-related event. A contingency plan has not been developed for dealing with
the most reasonably likely worst-case scenario, and such a scenario has not been
clearly identified. We plan to complete such analysis and contingency planning
by September 30, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk due to fluctuations in the price of natural gas
and crude oil, as well as changes in interest rates.
Natural gas and crude oil prices fluctuate widely in response to changing market
forces, which are beyond our control. Substantially all of our revenue is from
the sale of natural gas and crude oil, so these fluctuations can have a
significant affect on our revenue.
Changes in product prices can also have a significant affect on the value of our
oil and gas properties for purposes of determining whether an impairment
write-down must be recorded. We reported a non-cash impairment charge in the
fourth quarter 1998 of $1.6 million primarily due to this sudden, and apparently
temporary, drop in oil prices during the fourth quarter 1998. The impairment
charge during the first nine months of 1998 of $1.9 million was primarily due to
the decline in prices during that period. Although these write-downs do not
affect cash flow, they do reduce our tangible net worth, which in turn affects
our ability to meet our tangible net worth requirement under our credit
facility.
Our earnings are also affected by changes in interest rates because our bank
debt ($5,540,000 at December 31, 1998) is subject to a floating prime rate plus
1%. Fluctuations in these rates directly impact our interest expense.
27
<PAGE> 28
Historically, except when required by a lender, we have not used financial
instruments such as futures contracts or interest rate swaps to mitigate the
affect of changes in commodity prices or interest rates. We had no existing
contracts at December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information appears in a separate section of this report following Part IV.
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 3, 1997, the Company replaced Arthur Andersen LLP ("AA") with
KPMG LLP as the Company's independent accountant at the recommendation of the
Board of Directors of the Company.
AA's report on the financial statements of the Company (then known as "Xplor
Corporation") for 1996 (not included herein) did not contain an adverse opinion
or a disclaimer of uncertainty, audit scope or accounting principles. During
1996 and the interim period since the end of the Company's fiscal 1996 year and
June 3, 1997, there were no disagreements with AA on any matter of accounting
principles or practices, financial statements or disclosure, or auditing or
scope of procedure, which disagreement(s), if not resolved to the satisfaction
of AA, would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be set forth under the captions
"Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Executive Officers" of our proxy statement for our 1997 Annual
Meeting of Shareholders (the "Proxy Statement"), which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference. The Proxy Statement is expected to be filed prior to April
30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption "Executive
Compensation" of Venus's Proxy Statement, which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" of Venus's Proxy
Statement, which will be filed with the Commission pursuant to Regulation 14A
under the Exchange Act and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions "Executive
Compensation -- Director Compensation and Certain Relationships and Related
Party Transactions" of Venus's Proxy Statement, which will be filed with the
Commission pursuant to Regulation 14A under the Exchange Act and is incorporated
herein by reference.
28
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
1. FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1 to this Annual Report on Form
10-K.
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because the information is not required under the
related instructions or is inapplicable or because the information is
included in the Financial Statements or related Notes.
3. EXHIBITS
2.1(10) Letter Agreement dated February 4, 1999, between Venus
Exploration, Inc., and Petroleum Development
Corporation.
2.2(10) Amendment to Letter Agreement dated February 11, 1999,
between Venus Exploration, Inc., and Petroleum
Development Corporation.
2.3(11) Asset Purchase Agreement among Venus Exploration, Inc.
and Allegheny Interests, Inc., et al., dated January
26,
3.1(1) Articles of Incorporation of Venus Exploration, Inc.
3.2(1) Bylaws of Venus Exploration, Inc., as amended
4.1(2) Warrant to purchase Common Stock issued to Kinder
Investments, L.P.
4.1(1) Warrant to purchase Common Stock issued to Martin A.
Bell
4.2(1) Form of Warrant to purchase Common Stock issued as
partial consideration in acquisition of the assets of
The New Venus Exploration, Inc., and from Lomak
Production I L.P., and Lomak Resources LLC.
9.(1) Voting Trust Agreement dated effective March 31, 1997,
among E. L. Ames, Jr., et al.
10.1(3) Registrant's 1985 Incentive Stock Option Plan
10.2(4) Term Loan and Security Master Agreement dated October
8, 1996, between Venus Development, Inc., and Stratum
Group Energy Partners, L.P.
10.3(7) First Amendment to second Amended and Restated Loan
Agreement dated May 19, 1998 between Venus
Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
10.4(8) Second Amendment to Second Amended and Restated Loan
Agreement dated July 8, 1998 by and between Venus
Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
10.5(8) Third Amendment to Second Amended and Restated Loan
Agreement dated August 18, 1998 by and between Venus
Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
10.6 Fourth Amendment to Second Amended and Restated Loan
Agreement dated December 3, 1998 by and between Venus
Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
29
<PAGE> 30
10.7(2) Registrant's 1995 Stock Option Plan
10.8(2) Note and Warrant Agreement with Kinder Investments,
L.P.
10.9(5) 1997 Incentive Plan
10.10(1) Second Amended and Restated Loan Agreement dated
December 19, 1997, between Venus Exploration, Inc.,
and Wells Fargo Bank (Texas) N.A.
10.11(1) Executive Employment Agreement dated June 1, 1996, for
E.L. Ames, Jr.
10.12(9) Settlement Agreement dated November 19, 1998 between
Stratum Group, L.P. and Venus Exploration, Inc.
10.13(9) Registration Rights Agreement dated November 30, 1998
between Venus Exploration, Inc. and Stratum Group,
L.P.
10.15 Fifth Amendment to Second Amended and Restated Loan
Agreement dated January 16, 1999 by and between Venus
Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
16.1(6) Letter from Arthur Andersen LLP regarding change in
certifying account dated June 5, 1997
21.(1) List of Subsidiaries
23.1 Consent of KPMG LLP regarding incorporation by
reference.
23.2 Consent of Pollard, Gore and Harrison regarding
incorporation by reference.
27.1 Financial Data Schedule
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(3) Filed as an exhibit to Form S-4 (File No. 33-1903) declared
effective January 8, 1986, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference.
(5) Filed as an appendix to the Company's Proxy Statement for a
Special Meeting of Stockholders (in lieu of its Annual Meeting)
held on October 27, 1997, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K
dated May 21, 1997, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998, and incorporated
herein by reference.
30
<PAGE> 31
(9) Filed as an exhibit to the Company's Registration Statement to
Form S-3 (file no. 333-73457) with the Commission on March 5,
1999, and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K
dated February 12, 1999, as amended, and incorporated herein by
reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K
dated January 27, 1999, and incorporated herein by reference.
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of San Antonio,
Texas, on the 15th day of April, 1999.
VENUS EXPLORATION, INC.
By: /s/ EUGENE L. AMES, JR.
---------------------------------
Eugene L. Ames, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
April 15, 1999
/s/ EUGENE L. AMES, JR.
---------------------------------------
Eugene L. Ames, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
April 15, 1999
/s/ JOHN Y. AMES
---------------------------------------
John Y. Ames
President, Director and Chief
Operating Officer
April 15, 1999
/s/ J. C. ANDERSON
---------------------------------------
J. C. Anderson
Director
April 15, 1999
/s/ MARTIN A. BELL
---------------------------------------
Martin A. Bell
Director
31
<PAGE> 32
April 15, 1999
/s/ JAMES W. GORMAN
---------------------------------------
James W. Gorman
Director
April 15, 1999
/s/ JERE W. MCKENNY
---------------------------------------
Jere W. McKenny
Director
April 15, 1999
/s/ JOHN H. PINKERTON
---------------------------------------
John H. Pinkerton
Director
April 15, 1999
/s/ PATRICK A GARCIA
---------------------------------------
Patrick A. Garcia
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
32
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM
----------- ----
<S> <C>
2.1(10) Letter Agreement dated February 4, 1999, between Venus Exploration, Inc., and Petroleum Development
Corporation.
2.2(10) Amendment to Letter Agreement dated February 11, 1999, between Venus Exploration, Inc., and Petroleum
Development Corporation.
2.3(11) Asset Purchase Agreement among Venus Exploration, Inc. and Allegheny Interests, Inc., et al., dated
January 26,
3.1(1) Articles of Incorporation of Venus Exploration, Inc.
3.2(1) Bylaws of Venus Exploration, Inc., as amended
4.1(2) Warrant to purchase Common Stock issued to Kinder Investments, L.P.
4.1(1) Warrant to purchase Common Stock issued to Martin A. Bell
4.2(1) Form of Warrant to purchase Common Stock issued as partial consideration in acquisition of the assets
of The New Venus Exploration, Inc., and from Lomak Production I L.P., and Lomak Resources LLC.
9.(1) Voting Trust Agreement dated effective March 31, 1997, among E. L. Ames, Jr., et al.
10.1(3) Registrant's 1985 Incentive Stock Option Plan
10.2(4) Term Loan and Security Master Agreement dated October 8, 1996, between Venus Development, Inc., and
Stratum Group Energy Partners, L.P.
10.3(7) First Amendment to second Amended and Restated Loan Agreement dated May 19, 1998 between Venus
Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
10.4(8) Second Amendment to Second Amended and Restated Loan Agreement dated July 8, 1998 by and between
Venus Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
10.5(8) Third Amendment to Second Amended and Restated Loan Agreement dated August 18, 1998 by and between
Venus Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
10.6 Fourth Amendment to Second Amended and Restated Loan Agreement dated December 3, 1998 by and between
Venus Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
10.7(2) Registrant's 1995 Stock Option Plan
10.8(2) Note and Warrant Agreement with Kinder Investments, L.P.
10.9(5) 1997 Incentive Plan
10.10(1) Second Amended and Restated Loan Agreement dated December 19, 1997, between Venus Exploration, Inc.,
and Wells Fargo Bank (Texas) N.A.
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
10.11(1) Executive Employment Agreement dated June 1, 1996, for E.L. Ames, Jr.
10.12(9) Settlement Agreement dated November 19, 1998 between Stratum Group, L.P. and Venus Exploration, Inc.
10.13(9) Registration Rights Agreement dated November 30, 1998 between Venus Exploration, Inc. and Stratum
Group, L.P.
10.15 Fifth Amendment to Second Amended and Restated Loan Agreement dated January 16, 1999 by and between
Venus Exploration, Inc. and Wells Fargo Bank (Texas), N.A.
16.1(6) Letter from Arthur Andersen LLP regarding change in certifying account dated June 5, 1997
21.(1) List of Subsidiaries
23.1 Consent of KPMG LLP regarding incorporation by reference.
23.2 Consent of Pollard, Gore and Harrison regarding incorporation by reference.
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(3) Filed as an exhibit to Form S-4 (File No. 33-1903) declared effective
January 8, 1986, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, and incorporated herein by reference.
(5) Filed as an appendix to the Company's Proxy Statement for a Special
Meeting of Stockholders (in lieu of its Annual Meeting) held on October
27, 1997, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K dated May
21, 1997, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Registration Statement to Form S-3
(file no. 333-73457) with the Commission on March 5, 1999, and
incorporated herein by reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K dated
February 12, 1999, as amended, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K dated
January 27, 1999, and incorporated herein by reference.
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VENUS EXPLORATION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of
December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for
each of the years in the three-year period
ended December 31, 1998 F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for each of the years in the three-year period
ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Venus Exploration, Inc.:
We have audited the accompanying consolidated balance sheets of Venus
Exploration, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Venus Exploration,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 15 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 15. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
April 7, 1999
San Antonio, Texas
F-2
<PAGE> 37
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 125,832 682,436
Trade accounts receivable 414,695 2,268,498
Prepaid expenses and other 77,299 104,967
------------ ------------
Total current assets 617,826 3,055,901
Oil and gas properties and equipment, at cost
under the successful efforts method, net 6,398,690 9,100,955
Other property and equipment, net 238,598 273,392
Deferred financing costs, at cost less
accumulated amortization 19,226 377,187
Other assets, at cost less accumulated amortization 121,574 123,164
------------ ------------
$ 7,395,914 12,930,599
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 1,268,743 3,080,200
Advances from interest owners -- 17,862
Other liabilities 433,555 226,778
Revolving credit agreement 5,540,000 500,000
------------ ------------
Total current liabilities 7,242,298 3,824,840
Long-term debt -- 1,505,329
Other long-term liabilities 22,591 26,524
------------ ------------
Total liabilities 7,264,889 5,356,693
------------ ------------
Shareholders' equity:
Preferred stock; par value of $0.01; 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock; par value of $.01; 30,000,000 shares
authorized; 10,971,325 and 9,736,815 shares issued
and outstanding in 1998 and 1997, respectively 109,713 97,368
Additional paid-in capital 17,209,042 15,010,189
Accumulated deficit (16,943,980) (7,533,651)
Unearned compensation (243,750) --
------------ ------------
Total shareholders' equity 131,025 7,573,906
Commitments and contingencies
------------ ------------
$ 7,395,914 $ 12,930,599
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 38
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Oil and gas revenues $ 2,804,749 2,476,040 543,233
------------ ------------ ------------
Costs of operations:
Production expense 1,609,733 963,822 286,030
Exploration expenses, including dry holes 1,261,557 504,983 116,905
Impairment of oil and gas properties 3,543,152 1,051,617 981,178
Depreciation, depletion and amortization 1,774,999 1,078,942 76,286
General and administrative 3,174,156 2,923,764 1,374,541
------------ ------------ ------------
Total expenses 11,363,597 6,523,128 2,834,940
------------ ------------ ------------
Operating profit (loss) (8,558,848) (4,047,088) (2,291,707)
------------ ------------ ------------
Other income (expense):
Interest expense (568,085) (203,213) (10,331)
Gain on sale of assets 30,007 4,920 239,792
Interest and other income 32,502 77,658 55,428
------------ ------------ ------------
(505,576) (120,635) 284,889
------------ ------------ ------------
Loss before extraordinary item (9,064,424) (4,167,723) (2,006,818)
Extraordinary loss on early extinguishment of debt 345,905 -- --
------------ ------------ ------------
Net loss $ (9,410,329) (4,167,723) (2,006,818)
============ ============ ============
Basic and diluted earnings (loss) per share:
Loss before extraordinary item $ (0.91) (0.57) (0.60)
Extraordinary loss on early extinguishment of debt $ (0.04) -- --
------------ ------------ ------------
Net loss $ (0.95) (0.57) (0.60)
============ ============ ============
Common shares and equivalents outstanding:
Basic 9,934,251 7,270,357 3,322,121
============ ============ ============
Diluted 9,934,251 7,270,357 3,322,121
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 39
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------------------------------
VENUS VENUS
OIL EXPLORATION, ADDITIONAL
ISSUED COMPANY INC. PAID-IN
SHARES AMOUNTS AMOUNTS CAPITAL
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995 3,215 $ 3,215 $ -- $ --
Net loss -- -- -- --
Cash distribution -- -- -- --
Distributions of assets not
transferred to Venus Energy PLC
and purchase price of properties
transferred (3,215) (3,215) -- --
Stock issued by Venus
Energy PLC 3,322,121 -- 33,221 993,519
Compensation costs for stock
options -- -- -- 283,430
Warrants to acquire shares
issued under financing
arrangements -- -- -- 25,000
------------ ------------ ------------ ------------
Balances, December 31, 1996 3,322,121 -- 33,221 1,301,949
Net loss -- -- -- --
Conversion of preference shares 2,041,674 -- 20,417 4,934,583
Compensation costs for stock options -- -- -- 252,002
Stock options exercised 298,678 -- 2,987 58,083
Acquisition of Xplor and Lomak 4,074,342 -- 40,743 8,463,572
------------ ------------ ------------ ------------
Balances, December 31, 1997 9,736,815 -- 97,368 15,010,189
Net loss -- -- -- --
Stock issued:
Stratum settlement 1,100,000 -- 11,000 1,756,500
Other 134,510 -- 1,345 442,353
Earned compensation -- -- -- --
------------ ------------ ------------ ------------
Balances, December 31, 1998 10,971,325 $ -- $ 109,713 $ 17,209,042
============ ============ ============ ============
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS UNEARNED EQUITY
(DEFICIT) COMPENSATION (DEFICIT)
-------------- ------------ -------------
<S> <C> <C> <C>
Balances, December 31, 1995 $ 2,237,858 $ -- $ 2,241,073
Net loss (2,006,818) -- (2,006,818)
Cash distribution (35,220) -- (35,220)
Distributions of assets not
transferred to Venus Energy PLC
and purchase price of properties
transferred (3,561,748) -- (3,564,963)
Stock issued by Venus
Energy PLC -- -- 1,026,740
Compensation costs for stock
options -- -- 283,430
Warrants to acquire shares
issued under financing
arrangements -- -- 25,000
------------ ------------ ------------
Balances, December 31, 1996 (3,365,928) -- (2,030,758)
Net loss (4,167,723) -- (4,167,723)
Conversion of preference shares -- -- 4,955,000
Compensation costs for stock options -- -- 252,002
Stock options exercised -- -- 61,070
Acquisition of Xplor and Lomak -- -- 8,504,315
------------ ------------ ------------
Balances, December 31, 1997 (7,533,651) -- 7,573,906
Net loss (9,410,329) -- (9,410,329)
Stock issued:
Stratum settlement -- -- 1,767,500
Other -- (337,500) 106,198
Earned compensation -- (93,750) (93,750)
------------ ------------ ------------
Balances, December 31, 1998 $(16,943,980) $ (243,750) $ 131,025
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 40
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997
----------- ----------
<S> <C> <C>
Operating Activities:
Net earnings (loss) $(9,410,329) (4,167,723)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization of oil and gas properties 1,774,999 1,078,942
Other depreciation and amortization 263,985 241,198
Impairments, abandoned leases, and dry hole costs 4,090,260 1,113,335
Gain on sale of property and equipment (30,007) (4,920)
Gain on investment transactions -- --
Loss on early extinguishment of debt 345,905 --
Compensation expense for stock and stock options 161,198 252,002
Changes in operating assets and liabilities:
Trade accounts receivable 1,853,803 (1,181,821)
Prepaid expenses and other 27,668 (71,277)
Trade accounts payable (1,793,957) 1,564,483
Advances from interest owners (17,862) (327,039)
Other liabilities 206,777 226,778
----------- -----------
Net cash used in operating activities (2,527,560) (1,276,042)
----------- -----------
Investing Activities:
Capital expenditures (3,271,352) (4,394,687)
Cash acquired in business combination -- 2,920,630
Net proceeds on sale of investment securities -- --
Proceeds from sales of property and equipment 160,733 97,908
----------- -----------
Net cash used in investing activities (3,110,619) (1,376,149)
----------- -----------
Financing Activities:
Net proceeds from issuance of long-term debt and revolving credit agreement 7,492,202 2,277,824
Principal payments on long-term debt (2,355,832) (272,495)
Distributions -- --
Deferred financing costs (76,045) (35,689)
Proceeds from issuance of stock 21,250 --
Proceeds from options exercised -- 61,070
----------- -----------
Net cash provided by financing activities 5,081,575 2,030,710
----------- -----------
Increase (decrease) in cash and equivalents (556,604) (621,481)
Cash and equivalents, beginning of year 682,436 1,303,917
----------- -----------
Cash and equivalents, end of year $ 125,832 682,436
=========== ===========
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996
--------------------------
<S> <C>
Operating Activities:
Net earnings (loss) (2,006,818)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization of oil and gas properties 76,286
Other depreciation and amortization 59,635
Impairments, abandoned leases, and dry hole costs 981,178
Gain on sale of property and equipment (124,369)
Gain on investment transactions (115,423)
Loss on early extinguishment of debt --
Compensation expense for stock and stock options 283,430
Changes in operating assets and liabilities:
Trade accounts receivable (332,691)
Prepaid expenses and other 68,138
Trade accounts payable 516,708
Advances from interest owners 187,493
Other liabilities --
-----------
Net cash used in operating activities (406,433)
-----------
Investing Activities:
Capital expenditures (2,401,351)
Cash acquired in business combination --
Net proceeds on sale of investment securities 165,423
Proceeds from sales of property and equipment 331,620
-----------
Net cash used in investing activities (1,904,308)
-----------
Financing Activities:
Net proceeds from issuance of long-term debt and revolving credit agreement 150,000
Principal payments on long-term debt (150,000)
Distributions (2,650,908)
Deferred financing costs (289,267)
Proceeds from issuance of stock 5,981,740
Proceeds from options exercised --
-----------
Net cash provided by financing activities 3,041,565
-----------
Increase (decrease) in cash and equivalents 730,824
Cash and equivalents, beginning of year 573,093
-----------
Cash and equivalents, end of year 1,303,917
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 41
VENUS EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) ORGANIZATION AND BUSINESS COMBINATION
Venus Exploration, Inc. (the Company) is primarily engaged in the business
of exploring for, acquiring, developing and operating on-shore oil and gas
properties in the United States. The Company presently has oil and gas
properties, acreage and production in ten states.
On May 21, 1997, Venus Exploration, Inc. (the Company), then known as Xplor
Corporation ("Xplor"), acquired substantially all of the assets and
liabilities of The New Venus Exploration, Inc. ("New Venus"), a Texas
corporation, in exchange for 5,626,473 shares of the Company's previously
authorized and unissued shares of common stock and warrants to purchase
272,353 additional shares of common stock. Simultaneously, the Company
acquired certain oil and gas properties of two wholly-owned affiliates of
Lomak Petroleum, Inc. (together, "Lomak") in exchange for 2,037,171 shares
of the Company's previously authorized and unissued shares of common stock
and warrants to purchase 272,353 additional shares of common stock. At the
same time, Lomak acquired from existing stockholders of the Company 97,008
shares of common stock. As a result of these transactions (collectively,
the "Acquisition") the former stockholders of New Venus acquired, as of the
effective date of the Acquisition, 58% of the Company's outstanding stock
and thus voting control, and Lomak acquired 22%, while the preexisting
stockholders of the Company owned 20%. On June 4, 1997 Xplor changed its
name to Venus Exploration, Inc.
For financial reporting purposes, the transactions described above have
been accounted for as a reverse acquisition whereby New Venus is deemed to
be the acquirer. Accordingly, the historical consolidated financial
statements of the Company and predecessor entities are presented as the
historical consolidated financial statements of the Company and the assets
acquired and liabilities assumed from Xplor and Lomak have been recorded at
fair value as of the date of the combination as required under purchase
accounting. The consolidated financial statements reflect the operations
solely of the Company for the periods prior to May 21, 1997, whereas such
financial statements reflect the operations of the combined entities for
the period subsequent to May 21, 1997.
The effect of the combination transactions was primarily the recording of
the assets and liabilities of Xplor and Lomak at their fair value. The
combined amounts for Lomak and Xplor were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Cash $ 2,880
Oil and gas properties 5,613
Trade accounts receivable and other 303
Equity securities and investments 151
Trade accounts payable and other liabilities 443
</TABLE>
Selected results of operations (in thousands, except per share data) on a
pro forma basis as if the Acquisition had occurred on January 1, 1996 are
as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
-------- -------
<S> <C> <C>
Revenues $ 3,347 $ 3,039
======= =======
Net income (loss) $(4,133) $ 1,736
======= =======
Net earnings (loss) per share
(basic and diluted) $ (0.43) $ (0.18)
======= =======
Number of shares used in calculation 9,717 9,701
======= =======
</TABLE>
The above pro forma financial information does not necessarily reflect the
results of operations that would have occurred had New Venus, Xplor and
Lomak constituted a single entity during such periods.
F-7
<PAGE> 42
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the financial statements
of Venus Exploration, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(b) Cash and Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased and money market
accounts to be cash equivalents.
(c) Oil and Gas Properties
The Company uses the successful efforts method of accounting for its
oil and gas operations. Under this method, the costs of unproved leases
and exploratory wells are initially capitalized pending the results of
exploration efforts. The costs of unproved properties are assessed
periodically for impairment, on a field-by-field basis, and a loss is
recognized to the extent, if any, that the cost of a property has been
impaired.
Exploration expenses, including geological and geophysical costs, delay
rentals, and dry hole costs are charged to expense as incurred.
Exploratory drilling costs are initially capitalized, but are charged
to expense if and when the well is determined to be unsuccessful.
As unproved properties are determined to be productive, the property
acquisition costs and related exploratory drilling costs of successful
wells are transferred to proved properties. Development costs of proved
properties, including producing wells and related facilities and any
development dry holes, are capitalized. Depletion of the costs of
proved properties are provided by the unit-of-production method based
upon estimates of proved oil and gas reserves on a field-by-field
basis.
Capitalized costs of proved properties are periodically reviewed for
impairment on a field-by-field basis, and, if necessary, an impairment
provision is recognized to reduce the net carrying amount of such
properties to their estimated fair values generally determined on a
discounted cash flow basis.
(d) Other Property and Equipment
Depreciation and amortization of transportation equipment and office
furniture, fixtures, equipment, and leasehold improvements are computed
using the straight-line method over the respective estimated useful
lives. Maintenance, repairs and renewals are charged to operations,
except that renewals which extend the life of the property are
capitalized.
(e) Income Taxes
The Company follows the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the estimated future tax effects of temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax laws or rates is recognized in
income in the period that includes the enactment date.
New Venus' predecessor, Venus Oil Company, elected Subchapter S
Corporation status for U.S. federal income tax purposes. Under the
Subchapter S provisions, the stockholders of Venus Oil Company are
liable for any U.S. federal income taxes related to taxable income of
Venus Oil Company. Accordingly, no U.S. federal income taxes related to
the operations of Venus Oil Company are reflected in the accompanying
consolidated financial statements.
F-8
<PAGE> 43
(f) Revenue Recognition
The Company records revenue following the entitlement method of
accounting for gas imbalances. As of December 31, 1998 and 1997, there
were no significant imbalances. Three customers accounted for
approximately 16%, 13% and 12% of total consolidated revenues for the
year ended December 31, 1998. Three customers accounted for
approximately 22%, 10% and 10% of total consolidated revenues for the
year ended December 31, 1997. Three customers accounted for
approximately 31%, 17% and 10% of total consolidated revenues for the
year ended December 31, 1996.
(g) Deferred Financing Costs
Deferred financing costs consist of costs associated with obtaining the
Company's debt agreements , as discussed in Note 5, which are amortized
over the expected term of the related borrowings.
(h) Other Assets
Other assets include organizational costs which are amortized over five
years, a certificate of deposit and investments in equity securities.
(i) Hedging Transactions
The Company has entered into commodity derivative contracts for
non-trading purposes as a hedging strategy to manage commodity prices
associated with certain oil and gas sales and to reduce the impact of
price fluctuations. The Company primarily used price swaps for
production on properties pledged under the loan agreement discussed in
note 5.
The Company utilizes the hedge or deferral method of accounting for
commodity derivative financial instruments whereby gains and losses on
these hedging instruments are recognized and recorded as revenues on
the statement of operations when the related natural gas or oil has
been produced, purchased or delivered. As a result, gains and losses on
commodity financial instruments are generally offset by similar changes
in the realized prices of natural gas and crude oil. To qualify as
hedging instruments, these instruments must be highly correlated to
anticipated future sales such that the Company's exposure to the risks
of commodity price changes is reduced. While commodity financial
instruments are intended to reduce the Company's exposure to declines
in the market price of natural gas and crude oil, the commodity
financial instruments may also limit the Company's gain from increases
in the market price of natural gas and crude oil.
On December 2, 1996, the Company entered into a financial swap, as
required under one of the loan agreements discussed in note 5, whereby
the counterparty agreed to pay the Company the difference between the
floating price and the fixed price for certain volumes of production in
future months (commencing with January 1997 production) if the floating
price was below the negotiated fixed price of $2.0497 per mmbtu for
natural gas or $19.045 per barrel for oil, respectively. If the
floating price exceeded the fixed price for natural gas or oil, the
Company was required to remit the difference to the counterparty. As
discussed in Note 5, the financial swap was terminated during the
fourth quarter, 1998.
(j) Stock-Based Compensation
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, allows companies to adopt a fair value based
method of accounting for stock-based employee compensation plans or to
continue to use the intrinsic-value based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has elected to
continue to account for stock-based compensation under the
intrinsic-value method under the provisions of APB Opinion No. 25 and
related interpretations. Under this method, compensation expense is
recognized for stock options when the exercise price of the options is
less than the current market value of the underlying stock on the date
of grant.
F-9
<PAGE> 44
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(l) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines, and penalties are recorded when it is probable that
a liability has been incurred and that the related amount can be
reasonably estimated.
(m) Fair Values of Financial Instruments
The Company's financial instruments consist primarily of short-term
trade receivables or payables or issued debt instruments with floating
interest rates for which management believes fair value approximates
carrying value in addition to those noted in Note 2(i).
(n) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash
investments and trade receivables. The Company places its temporary
cash investments in U.S. Government securities and in other high
quality financial instruments. The Company's customer base consists
primarily of independent oil and natural gas producers and purchasers
of oil and gas products.
(o) Earnings (loss) per share
In 1997, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 128, "Earnings Per Share" which changed the
calculation and financial statement presentation of earnings per share.
Basic net earnings (loss) per common share is computed by dividing net
loss by the weighted average number of common shares outstanding.
Diluted earnings (loss) per share is computed by assuming the issuance
of common shares for all dilutive potential common shares outstanding.
The 3,322,121 shares of common stock issued in 1996 by Venus Energy PLC
to capitalize Venus Exploration, Inc. have been treated as outstanding
for all of 1996 for purposes of calculating earnings per share.
(3) OIL AND GAS PROPERTIES
Oil and gas properties consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------------ --------
<S> <C> <C>
Proved properties $ 9,650,206 10,207,906
Unproved property 484,877 871,151
------------ -----------
10,135,083 11,079,057
Less accumulated depreciation, depletion, and amortization (3,736,393) (1,978,102)
------------ -----------
$ 6,398,690 9,100,955
============ ===========
</TABLE>
The impairment of oil and gas properties recognized in 1998 and 1997
includes a write-down of proved properties of approximately $3,543,000 and
$1,052,000, respectively. Impairment is recognized only if the carrying
amount of a property is greater than its expected future cash flows. The
amount of the impairment is based on the estimated fair value of the
property.
Subsequent to December 31, 1998, the Company sold certain oil and gas
properties for approximately $2,238,000. The carrying value of these
properties at December 31, 1998 was adjusted to their subsequent sales
price. Approximately $1,650,000 of the sales proceeds was used to pay down
the Company's bank debt.
F-10
<PAGE> 45
(4) OTHER PROPERTY AND EQUIPMENT
Other property and equipment consists of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Transportation equipment $ 6,293 72,573
Furniture, fixtures and office equipment 521,631 452,236
Geophysical interpretation system 118,516 118,516
--------- ---------
646,440 643,325
Less accumulated depreciation (407,842) (369,933)
--------- ---------
$ 238,598 273,392
========= =========
</TABLE>
(5) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revolving credit due on June 30, 2000 (classified as a current liability) $5,540,000 500,000
Subsidiary term loan -- 1,505,329
---------- ----------
$5,540,000 2,005,329
========== ==========
</TABLE>
Revolving Credit
In 1997, the Company entered into a loan agreement establishing a
$20,000,000 revolving line of credit. In December 1997 this agreement was
restated and amended to increase the credit facility to $50,000,000 subject
to borrowing base determined every six months (April 1 and October 1) by
the bank based on the Company's oil and gas reserves which are used as
security for the loan. On August 19, 1998 the credit facility was amended
resulting in the interest on related borrowings becoming the bank's prime
lending rate plus 1%. The interest rate at December 31, 1998 and 1997 was
8.75% and 8.5%, respectively.
A commitment fee of 3/8 of one percent of the undrawn balance is payable
quarterly. Interest is payable monthly and principal payments are required
only when the balance outstanding exceeds or is projected to exceed, prior
to the next borrowing base redetermination date, the borrowing base. As of
December 31, 1998, the borrowing base was $5,540,000 and it was fully drawn
by the Company resulting in no unused borrowing base. In connection with
the asset sales subsequent to December 31, 1998, the borrowing base was
reduced to $3,870,000.
Under the terms of the credit facility, the Company is required to maintain
minimum current ratio and specific tangible net worth amounts. Among other
matters, the credit facility contains covenants which limit the incurrence
of additional indebtedness and restrict payments of dividends. At December
31, 1998, the Company was not in compliance with the tangible net worth and
the current ratio requirements. The Company has obtained waivers from the
lender through May 31, 1999 which include a reduction in the tangible net
worth requirement. However, because of uncertainty regarding the Company's
ability to remain in compliance with these covenants, the outstanding
balance has been classified as a current liability in the accompanying
financial statements.
Subsidiary Term Loan
In October 1996, Venus Development, Inc. (Development) entered into a term
loan and security agreement with a lender to finance the acquisition and
development of oil and gas properties. The borrowings for the specified
properties were to be repaid over a period not to exceed five years from
the date of closing of the agreement.
F-11
<PAGE> 46
Under the agreement, Development was required to assign an overriding
royalty interest equal to five percent of the Company's net revenue
interest in the secured properties. The lender had the right to convert the
value of its overriding royalty interests into equity interests of Venus
Energy PLC, subject to certain limitations. Development also granted
warrants to the lender to purchase equity interests in Venus Energy PLC,
subject to certain limitations.
During the fourth quarter of 1998, the Company issued 1,100,000 shares of
the Company's common stock in full payment of the $1,505,329 outstanding
under the term loan. The Company also acquired the lender's rights and
interests in Development, Development's oil and gas properties, and the
overriding royalty interests described above. The Company recorded a
$345,905 extraordinary loss on the early extinguishment of debt for the
write-off of deferred loan costs.
(6) INCOME TAXES
No provision for income taxes has been recorded for the years ended
December 31, 1998 and 1997 due to the losses recorded by the Company. The
Company's predecessor, Venus Oil Company, elected Subchapter S Corporation
status for U.S. federal income tax purposes. Under the Subchapter S
provisions, the stockholders of Venus Oil Company are liable for any U.S.
federal income taxes related to taxable income of Venus Oil Company.
Accordingly, no U.S. federal income taxes related to the operations of
Venus Oil Company are reflected in the accompanying consolidated financial
statements.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
----------- -----------
Deferred tax assets:
Oil and gas and other property and
equipment, principally due to differences
in depreciation, depletion, and amortization $ 1,112,000 $ --
Stock and stock option expense recorded for
financial reporting purposes 35,000 198,000
Net operating loss carryforwards 3,879,000 1,595,000
Depletion carryforwards 97,000 --
Other 38,000 --
----------- -----------
Total gross deferred tax assets 5,161,000 1,793,000
Less valuation allowance (5,161,000) (1,697,000)
----------- -----------
Net deferred tax assets -- 96,000
Deferred tax liabilities:
Deferred financing costs,
principally due to
differences in amortization -- (53,000)
Oil and gas and other property
and equipment, principally
due to differences in
depreciation, depletion, and amortization -- (43,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1998 and
1997 was $1,697,000 and $1,271,000, respectively. The net change in the
total valuation allowance for the years ended December 31, 1998 and 1997
was an increase of $3,464,000 and $426,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. The net deferred
tax asset at December 31, 1998 and 1997 has been offset entirely by a
valuation allowance due to the uncertainty of the ultimate realization of
such benefits.
F-12
<PAGE> 47
As of December 31, 1998, the Company had an estimated net operating loss
carryforward for U.S. federal income tax purposes of approximately
$10,483,000 which is available to offset future taxable income, if any,
through 2013. The utilization of the Company's net operating loss
carryforwards may be limited as a result of the transactions referred to in
note 1.
(7) SHAREHOLDERS' EQUITY
The New Venus Exploration, Inc. ("New Venus") was formed to be the
successor entity to certain oil and gas exploration, development, and
production operations of Venus Energy PLC and Venus Oil Company as
described below. Venus Energy PLC and subsidiaries were organized in 1996
to acquire certain oil and gas exploration, development, and production
operations of Venus Oil Company. Venus Energy PLC and subsidiaries
commenced operations effective July 1, 1996 upon the transfer of certain
oil and gas properties from Venus Oil Company.
All share and per share information related to shares issued to effect the
original organization transactions described herein (the "convertible
shares") have been restated to present their equivalent number of shares of
the Company's common stock.
Venus Exploration, Inc. ("Old Venus") was incorporated in the state of
Texas on May 16, 1996 as a wholly-owned subsidiary of Venus Energy PLC.
Upon formation, Old Venus paid $22,500 to Venus Oil Company for an option
that would allow Old Venus to acquire certain oil and gas properties from
Venus Oil Company for $2,000,000.
Venus Energy PLC raised $4,955,000 from the sale of 247,750 convertible
redeemable preference shares through a private offering to new investors.
Venus Energy PLC contributed substantially all of the proceeds of the
private offering to Old Venus. Effective July 1, 1996, Old Venus exercised
its option to acquire certain oil and gas properties from Venus Oil Company
for $2,000,000. Venus Oil Company then paid $1,000,000 to acquire 412,044
convertible shares of Venus Energy PLC. Venus Energy PLC subsequently
contributed substantially all of the proceeds from the sale of the shares
to Old Venus.
In September 1996, Venus Development, Inc. was incorporated in the State of
Texas as a wholly-owned subsidiary of Old Venus. Certain oil and gas
properties were transferred from Old Venus to Venus Development, Inc. The
oil and gas properties and the stock of Venus Development, Inc. were
pledged as security for borrowings under one of the debt agreements
described in note 5.
Old Venus acquired oil and gas properties with a net financial statement
carrying amount of $532,820 from Venus Oil Company for $2,022,500 in 1996.
In addition, Old Venus paid Venus Oil Company $111,908 for certain other
assets with a net financial statement carrying amount of $67,704. The
properties and other assets transferred from Venus Oil Company have been
recorded by Old Venus at the net carrying amounts of such properties and
other assets in the financial statements of Venus Oil Company at the time
of transfer. The amounts paid to Venus Oil Company for the properties and
other assets and the remaining net assets of Venus Oil Company which were
not transferred to Venus Energy PLC or its subsidiaries of $1,430,555,
including cash of $481,280, have been recorded as distributions in the 1996
statement of shareholders' equity.
As described in Note 1, in a series of related transactions in 1997, the
shareholders of Venus Energy PLC, became the shareholders of New Venus, and
New Venus succeeded to the assets of Old Venus. The shareholders of Venus
Energy PLC exchanged their shares for the outstanding shares of New Venus,
and the assets and liabilities of Old Venus were transferred to the New
Venus. In conjunction with the Acquisition described below the 247,750
convertible redeemable preference shares were converted into 2,041,674
common shares.
As described in Note 1, on May 21, 1997, the Company, then known as Xplor
Corporation ("Xplor"), acquired substantially all of the assets and
liabilities of The New Venus Exploration, Inc. ("New Venus"), a Texas
corporation, in exchange for 5,626,473 shares of Xplor's previously
authorized and unissued shares of common stock and warrants to purchase
272,353 additional shares of common stock. Simultaneously, Xplor acquired
certain oil and gas properties of
F-13
<PAGE> 48
two wholly-owned affiliates of Lomak Petroleum, Inc. (together, "Lomak") in
exchange for 2,037,171 shares of Xplor's previously authorized and unissued
shares of common stock and warrants to purchase 272,353 additional shares
of common stock. At the same time, Lomak acquired from an existing
stockholder of Xplor 97,008 shares of common stock. On June 4, 1997 Xplor
changed its name to Venus Exploration, Inc.
(8) RELATED PARTY TRANSACTIONS
Certain officers and shareholders of the Company have working interests in
certain properties operated by the Company. In addition, they participate
with the Company in developing certain properties. Management believes
these transactions are conducted on a basis similar to transactions with
third parties.
The Company receives $2,500 per month from Venus Oil Company, which is
owned by certain shareholders of the Company, for overhead reimbursement of
certain administrative costs. Prior to 1997, the Company had a program
whereby certain officers and employees were awarded overriding royalty
interests in certain properties prior to their development. The value of
such interests at the time of award was not significant.
Included in trade accounts payable at December 31, 1998 and 1997 is $1,805
and $68,762 due to Venus Oil Company.
(9) STOCK OPTIONS
The Company has adopted an incentive plan that authorizes the grant of
awards to employees, consultants, contractors and non-employee directors.
The awards to employees, consultants and contractors can be in the form of
options, stock appreciation rights, stock or cash. The awards to
non-employee directors are limited to grants for shares of the Company's
common stock. The Company issued 24,510 shares of the Company's common
stock in 1998 to non-employee directors. The plan is administered by the
compensation committee of the Company's board of directors.
In 1998, the Company issued 100,000 shares of restricted stock to two
employees for services provided. The stock vests over three years. The
Company recorded the transaction at fair market value of the stock on the
date of the transaction, $337,500, and is amortizing the cost straight-line
over the vesting period.
The number of shares of the Company's common stock that is subject to the
incentive plan is 10% of the Company's outstanding shares up to a maximum
of 1,500,000 shares, less the number of shares that were subject to
previous plans of the Company and that are not assumed by the current
incentive plan. As of December 31, 1998, the Company had reserved 629,000
shares out of the 1,097,133 shares available for the incentive plan.
The Company granted 218,000 options and there were 79,000 options
surrendered in 1998. The options vest over three years. No awards were
issued in 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- -------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of period 390,000 $ 1.782 262,678 $ 0.389
Cancelled (79,000) $ 1.500 -- --
Granted 218,000 $ 3.373 -- --
Assumed from Xplor -- -- 426,000 1.770
Exercised (10,000) $ 2.125 (298,678) 0.204
-------- -------- -------- ------
Options outstanding,
end of period 519,000 $ 2.382 390,000 1.782
======== ======== ======== ======
Options exercisable,
end of period 344,500 $ 1.756 350,415 1.814
======== ======== ======== ======
</TABLE>
F-14
<PAGE> 49
The following summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING LIFE EXERCISE PRICE
--------------- ----------- --------------------- ----------------
<S> <C> <C> <C> <C>
$1.25 - $1.49 120,000 5.36 years $ 1.30
$1.50 - $1.99 130,000 6.52 years $ 1.56
$2.00 - $2.99 38,000 8.89 years $ 2.07
$3.00 - $3.71 231,000 5.29 years $ 3.46
</TABLE>
The Company applies APB No. 25 in accounting for its stock option plan,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based upon the fair value at the date of grant for its stock options under
SFAS No. 123, the Company's net income wold have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998
<S> <C>
Net loss:
As reported $(9,410,329)
Pro forma (9,521,919)
Earnings (loss) per
share:
As reported $(0.95)
Pro forma (0.96)
Expected life (years) 4-9 years
Interest rate 4.44%-5.03%
Volatility 72.85%
Dividend yield None
</TABLE>
The difference in compensation cost under SFAS No. 123 would have been
insignificant in 1997 and 1996.
(10) EMPLOYEE BENEFIT PLAN
The Company has a Profit Sharing 401(k) Plan (the Plan). Benefits under the
Plan are based on the participants vested interests in the value of their
respective accounts at the time the benefits become payable as a result of
retirement, separation from service, or other events. Eligible participants
include all Company employees who have reached age 21 and have completed
three months of service with the Company. Employees may elect to contribute
a portion of their base compensation to the Plan. The Company may make
matching contributions on behalf of the participants based on actual
participant contributions. Employer contributions are discretionary. The
Company made contributions to the plan of $12,764, $7,734, and $4,643 for
1998, 1997, and 1996, respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain automobiles under noncancelable
operating leases. The following is a schedule of future minimum lease
payments under noncancelable operating leases with initial or remaining
lease terms in excess of one year as of December 31, 1998:
<TABLE>
<S> <C>
YEARS ENDING DECEMBER 31,
1999 $ 301,128
2000 299,300
2001 287,535
2002 255,580
-----------
Total future minimum lease payments $ 1,151,100
===========
</TABLE>
Rental expense under operating leases was $335,860, $201,057, and $101,524
for the years ended December 31, 1998, 1997, and 1996, respectively.
F-15
<PAGE> 50
(12) SUPPLEMENTAL OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
(a) Costs Incurred in Oil and Gas Property Acquisition, Exploration and
Development Activities
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Property acquisition costs:
Proved $ 189,053 $5,640,955 --
Unproved 130,686 224,650 569,906
Exploration costs 1,791,454 1,340,081 92,287
Development costs 2,589,804 2,612,224 1,614,881
</TABLE>
The proved property acquisition costs for 1997 includes the properties
acquired from Lomak and Xplor.
(b) Results of Operations for Oil and Gas Producing Properties
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ----------- --------
<S> <C> <C> <C>
Oil and gas revenues $ 2,804,749 $ 2,476,040 543,233
Production expense (1,609,733) (963,822) (286,030)
Exploration expenses, including dry holes (1,261,557) (504,983) (116,905)
Impairment of oil and gas properties (3,543,152) (1,051,617) (981,178)
Depreciation, depletion and amortization (1,774,999) (1,078,942) (76,286)
------------ ----------- ---------
Operating loss (5,384,692) (1,123,324) (917,166)
Income tax expense -- -- --
----------- ----------- ---------
Results of operations from producing activities $(5,384,692) $(1,123,324) (917,166)
============ =========== =========
</TABLE>
(c) Reserve Quantity Information
The following table presents the Company's estimate of its proved oil
and gas reserves, all of which are located in the United States. The
Company emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available. The
estimates have been prepared by independent petroleum reservoir
engineers, in conjunction with the Company's internal petroleum
reservoir engineers.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ---------------------
OIL GAS OIL GAS OIL GAS
(mbbl) (mmcf) (mbbl) (mmcf) (mbbl) (mmcf)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PROVED DEVELOPED AND
UNDEVELOPED RESERVES:
Beginning of the year 977 6,491 225 1,460 446 2,326
Revision of previous
estimates (154) 483 (9) (159) (198) (797)
Extensions, discoveries and
additions 4 2,467 251 1,838 -- --
Purchases -- -- 591 3,762 -- --
Production (119) (572) (81) (410) (23) (69)
------ ------ ------ ------ ------ ------
End of year 708 8,869 977 6,491 225 1,460
====== ====== ====== ====== ====== ======
PROVED DEVELOPED RESERVES:
Beginning of the year 634 5,337 107 523 125 356
====== ====== ====== ====== ====== ======
End of the year 468 6,174 634 5,337 107 523
====== ====== ====== ====== ====== ======
</TABLE>
F-16
<PAGE> 51
(d) Standardized Measure of Discounted Future Net Cash Flows
The Company's standardized measures of discounted future net cash flows
and changes therein as of December 31, 1998, 1997 and 1996 are provided
based on present values of future net revenues from proved oil and gas
reserves estimated by independent petroleum engineers in conjunction
with the Company's internal petroleum reservoir engineers in accordance
with guidelines established by the Securities and Exchange Commission.
These estimates were computed by applying appropriate current oil and
natural gas prices to estimated future production of proved oil and gas
reserves over the economic lives of the reserves and assuming
continuation of existing economic conditions. Year ended 1998
calculations were made utilizing average prices for oil and natural gas
that existed at December 31, 1998 of $10.31 per barrel and $2.14 per
Mcf, respectively. Income taxes are computed by applying the statutory
federal income tax rate to the net cash inflows relating to proved oil
and gas reserves less the tax bases of the properties involved and
giving effect to net operating loss carryforwards, tax credits and
allowances relating to such properties. The reserve volumes provided by
the independent petroleum engineers are estimates only and should not
be construed as exact quantities. These reserves may or may not be
recovered and may increase or decrease as result of future operations
of the Company and changes in market conditions.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
1998 1997 1996
------------- ------------- --------
<S> <C> <C> <C>
Future cash inflow $ 24,477 33,097 7,955
Future development costs (2,051) (2,840) (889)
Future production costs (7,405) (11,421) (2,481)
----------- -------- -------
Future net cash flows before
income taxes 15,021 18,836 4,585
10 % annual discount (6,883) (7,439) (1,633)
Discounted income taxes * * *
----------- -------- -------
Standardized measure of
discounted future net cash flows $ 8,138 11,397 2,952
=========== ======== =======
</TABLE>
(*) No income tax expense has been reflected as the operations were
conducted by Venus Oil Company, the New Venus' predecessor which is an
S Corporation, and the Company had operating loss carryforwards from
oil and gas operations and sufficient tax basis in oil and gas
properties to offset the future net cash flows before income taxes.
(e) Principal Sources of Changes in the Standardized Measure of Discounted
Future Net Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
1998 1997 1996
----------- ------------ ---------
<S> <C> <C> <C>
Standardized measure of discounted
future net cash flows, beginning of year $ 11,397 2,952 4,336
Revisions of previous quantity estimates (2,719) (649) (3,937)
Net changes in prices and production costs (4,220) (800) 589
Changes in estimated future development costs 1,585 314 208
Development costs incurred during period that
reduced future development costs 524 494 1,200
Purchases -- 6,115 --
Extensions or discoveries 1,580 4,188 --
Sales of oil and gas produced during period,
net of production costs (1,149) (1,512) (257)
Accretion of discount 1,140 295 434
Other (changes in production rates, timing and other) -- -- 379
---------- ------ -------
Standardized measure of discounted
future net cash flows, end of year $ 8,138 11,397 2,952
========== ====== =======
</TABLE>
The above information includes the reserve information attributable to
certain oil and gas properties that were sold subsequent to December 31,
1998. Reserves as of December 31, 1998, attributable to the properties
sold, were approximately 1,000 barrels of oil and 3,716,000 Mcf of gas and
had a net discounted present value of approximately $2.5 million.
F-17
<PAGE> 52
(13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 (in thousands, except
per share data) are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
1998
----
<S> <C> <C> <C> <C> <C>
Oil and gas revenues $ 941 723 659 482 2,805
Operating profit (loss) (1,397) (2,616) (917) (3,628) (8,558)
Net income (loss) (1,466) (2,742) (1,098) (4,104) (9,410)
Earnings (loss) per share -
basic and diluted (0.15) (0.28) (0.11) (0.40) (0.95)
1997
----
Oil and gas revenues $ 135 624 1,174 543 2,476
Operating profit (loss) (1,092) (556) (431) (1,968) (4,047)
Net income (loss) (1,121) (579) (456) (2,012) (4,168)
Earnings (loss) per share -
basic and diluted (0.34) (0.09) (0.05) (0.21) (0.57)
</TABLE>
The fourth quarters of 1998 and 1997 include adjustments to reflect the
impairment of oil and gas properties of approximately $1,628,000 and
$620,000, respectively. Also included in the fourth quarter of 1997 is an
adjustment of approximately $425,000 to record reversals of oil and gas
revenues which had been estimated through the third quarter principally
related to the properties from the Acquisition. The sum of the quarterly
earnings per share will not necessarily equal earnings per share for the
entire year.
(14) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid $464,825, $203,213, and $10,331 for interest in 1998, 1997
and 1996, respectively. The Company assigned overriding royalty interests
to a lender totaling $30,605, $88,718 and $57,500 for 1998, 1997 and 1996,
respectively. In addition, the Company received overriding royalty
interests valued at $96,737 and stock warrants valued at $20,000. In
connection with the Acquisition, the convertible redeemable preference
shares outstanding at December 31, 1996 were converted to 2,041,674 common
shares. In 1997 the Company issued 4,074,342 shares of common stock to
acquire the assets and liabilities of Xplor and Lomak totaling $8,504,315.
In 1998, the Company issued 1,100,000 shares of Common Stock in exchange
for outstanding long-term debt of the Company totaling $1,605,632.
(15) LIQUIDITY
The Company incurred net losses of $2,006,818 for the year ended December
31, 1996, $4,167,723 for the year ended December 31, 1997, and $9,410,329
for the year ended December 31, 1998. Unless the Company is successful in
raising capital to successfully develop existing properties or acquire
income producing properties the Company expects operating losses and
negative cash flows to continue for the foreseeable future. At December 31,
1998, the Company had an accumulated deficit of $16,943,980. In addition,
the Company has incurred significant indebtedness, and at December 31,
1998, was not in compliance with the tangible net worth and current ratio
requirements of the Credit Agreement. Those requirements have been waived
by the bank through May 31, 1999. The lender could elect, subsequent to the
period waived, to declare all amounts borrowed under the Credit Agreement,
together with accrued interest, to be due and payable. The lender could
then proceed to foreclose against any collateral securing the payment of
the debt. This collateral represents a significant portion, if not all, of
the Company's assets.
The Company's assets are predominately real property rights and
intellectual information that the Company has developed regarding those
properties and other geographical areas that the Company is studying for
exploration and development. The market for those types of properties
fluctuates and can be very small. Therefore, the Company's assets can be
very illiquid and not easily converted to cash. Even if a sale can be
arranged, the price may be significantly
F-18
<PAGE> 53
less than what the Company believes the properties are worth. That lack of
liquidity can have materially adverse effects on strategic plans, normal
operations and credit facilities. In addition, issuance of indebtedness or
preferred stock could be costly and dilutive to stockholders.
For the medium and longer terms, the Company is working on a number of
alternatives that it believes will address its credit agreement
requirements and future liquidity and financing needs if it successfully
completes various combinations of those alternatives. The alternatives
include a merger, sales of assets, farmouts or other partnering
arrangements on selected properties, and issuance of indebtedness or equity
capital. There can be no assurance that the Company will be successful in
any of its efforts.
F-19
<PAGE> 1
EXHIBIT 10.6
FOURTH AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT
This FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(the "Fourth Amendment") dated December 3, 1998, is by and between VENUS
EXPLORATION, INC., a Delaware corporation, formerly known as XPLOR CORPORATION,
a Delaware corporation (the "Borrower"), and WELLS FARGO BANK (TEXAS), N.A., a
national banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, Bank and Borrower entered into that certain Second Amended and
Restated Loan Agreement dated December 22, 1997 (as the same has been previously
amended through the date hereof is herein called the "Loan Agreement"), pursuant
to which Borrower obtained a credit facility in the amount of up to the lesser
of the Borrowing Base (as defined in the Loan Agreement) or the Commitment (as
defined in the Loan Agreement); and
WHEREAS, Bank and Borrower now desire to further amend that Loan
Agreement as herein set forth to, among other things, increase the Borrowing
Base from $5,240,000 to $5,540,000, and waive certain financial covenant
defaults.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Definitions. Except as otherwise provided, unless the context hereof
indicates otherwise, all capitalized terms used herein shall have the same
meaning as such capitalized terms are defined in the Loan Agreement.
(a) A new definition of "Transaction" is hereby added to the
Loan Agreement as follows:
"Transaction shall mean the closing and funding of either (i)
a merger with another oil and gas company, with Borrower as
the successor thereto, the result of which will be that
Borrower having an increase in net annual cash flow of at
least $3,000,000; or (ii) the sale of certain Oil and Gas
Properties which generates at least $2,400,000 in net
proceeds, all of which shall be applied by Borrower to the
Obligations."
2. Borrowing Base. Section 2.2(b) of the Loan Agreement is hereby
amended by deleting the reference to "$5,240,000" and substituting "$5,540,000"
therefor.
3. Transaction. A new Section 6.34 "Transaction" is hereby added to the
Loan Agreement as follows:
<PAGE> 2
"6.34 Transaction. On or before January 15, 1999, Borrower
shall have either consummated a Transaction or have entered
into a binding letter of intent, in form and substance
acceptable to Bank, to consummate a Transaction within thirty
(30) days thereafter."
4. Stratum and Stratum Documents. The Loan Agreement is hereby further
amended to delete any and all references to either Stratum and/or the Stratum
Documents.
5. Ratifications. The terms and provisions as set forth in this Fourth
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Loan Agreement, and except as expressly modified and superseded by
this Fourth Amendment, the terms of the Note and any and all other Loan
Documents executed in connection therewith or hereunto are hereby ratified and
confirmed and shall continue in full force and effect. Borrower and Bank agree
that the Loan Agreement, as amended hereby, the Note and the other Loan
Documents shall continue to be the legal, valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms.
6. Representations and Warranties. Borrower hereby represents and
warrants to Bank that (i) the execution, delivery and performance of this Fourth
Amendment, and the other documents to be executed and delivered as required
hereby have been duly authorized by all requisite action on the part of
Borrower; (ii) after giving effect to this Fourth Amendment, the representations
and warranties contained in the Loan Agreement, as amended hereby, and any other
Loan Document executed in connection herewith or therewith are true, correct and
complete on and as of the date hereof as though made on and as of the date
hereof; and (iii) after giving effect to this Fourth Amendment, no Event of
Default or Potential Default has occurred and is continuing.
7. Covenant Deviation and Waiver. As of the date hereof, Borrower
failed to observe or maintain compliance with the Current Ratio covenant set
forth in Section 6.16 of the Loan Agreement and the Tangible Net Worth covenant
set forth in Section 6.17 of the Loan Agreement. Borrower has requested, and
Bank has approved, a deviation from such compliance with respect to the
aforementioned covenants for a period from the date hereof through January 15,
1999, at which time Borrower must be in compliance therewith. It is understood
and agreed that Bank's consent to such deviation shall in no way act as a waiver
of any covenants, restrictions, rights or remedies with respect to the Loan
Agreement, but that such deviation shall apply only to the specific matter and
instance set forth hereinabove.
8. Status of Claims. Borrower hereby represents and warrants to Bank
that no facts, events, status or conditions presently exist which, either now or
with the passage of time or the giving of notice or both, presently constitute
or will constitute a basis for any claim or cause of action against Bank, or any
defense to the payment of any of the Obligations. Borrower hereby releases,
relinquishes and forever discharges Bank, its successors, assigns, agents,
officers, directors, employees and representatives, of and from any and all
claims, demands, actions and causes of action of any and every kind or
character, whether known or unknown, present or future, which Borrower may have
against Bank, its successors, assigns, agents, officers, directors,
<PAGE> 3
employees and representatives, arising out of or with respect to any and all
transactions relating to the Loan Agreement, this Fourth Amendment, or any Loan
Document, including any loss, cost or damage, of any kind or character, arising
out of or in any way connected with or in any way resulting from the acts,
actions or omissions of Bank, its successors, assigns, agents, officers,
directors, employees or representatives.
9. Letters In Lieu. As a condition to the effectiveness of this Fourth
Amendment, Borrower shall execute and deliver to Bank certain Letters-in-Lieu of
Transfer Orders in form and substance acceptable to Bank instructing the
purchasers of oil and gas production from the Oil and Gas Properties which are
part of the Collateral to remit proceeds payable by such purchaser to Borrower
to an account designated by Bank. Bank may at any time forward such
Letters-in-Lieu of Transfer Orders to the aforementioned purchasers and
thereafter upon an Event of Default, apply up to one hundred percent (100%) of
the balances in such account attributable to the Oil and Gas Properties to
reduce the Obligations of Borrower to Bank. Borrower shall provide Bank with a
true and accurate list including the name and address of all such purchasers and
hereby covenants and agrees to notify Bank at least ten (10) days prior to
changing any such purchasers.
10. Conditions Precedent to Effectiveness of Fourth Amendment. This
Fourth Amendment shall become effective and be deemed effective upon receipt by
Bank of the following:
(i) counterparts of this Fourth Amendment duly executed by
Borrower and Bank;
(ii) a copy of resolutions approving this Fourth Amendment,
and authorizing the transactions contemplated herein or therein duly
adopted by the Executive Committee of the Board of Directors of
Borrower, accompanied by a certificate of the duly authorized Secretary
of Borrower, that such copy is a true and correct copy of resolutions
duly adopted by the Executive Committee of the Board of Directors of
Borrower, and that such resolutions constitute all the resolutions
adopted with respect to such Fourth Amendment and the transactions
contemplated herein, and have not been amended, modified or revoked in
any respect and are in full force and effect as of the date hereof;
(iii) there shall not have been, in the sole judgment of Bank,
any material adverse change in the financial condition, business or
operations of Borrower;
(iv) the execution and delivery by Borrower of one or more new
Mortgage, Deed of Trust, Assignment of Production, Security Agreement
and Financing Statements covering the interests of Borrower in the oil
and gas properties set forth on Exhibit A to this Fourth Amendment;
(v) the Letters-in-Lieu of Transfer Orders required by Section
8 above, relating to the interests of Borrower in the Collateral;
(vi) the Stratum Settlement Documents, including, but not
limited to, the following: Full and Final Mutual Release; Registration
Rights Agreement; Reassignment to Venus Development, Inc. of all
overriding royalty interests assigned to Stratum Group
<PAGE> 4
Energy Partners, L.P.; cancellation of Natural Gas and Crude Oil
Purchase and Sale Option Agreements; releases of liens created by the
Mortgage(s) and Deed(s) of Trust; UCC-3's for all states and counties;
Letters in Lieu of Transfer Orders; Release of Assignment of Proceeds;
Termination of Energy Risk Management Association Master Energy Price
Swap Agreement and of individual Swap Agreements; Assignment of Amended
and Restated Equity Conversion Agreement dated May 21, 1997, between
The New Venus Exploration, Inc. and Stratum Group, L.P.; Assignment of
Rights under Escrow Agreement dated May 21, 1997, among Frost National
Bank, Stratum Group, L.P., The New Venus Exploration, Inc. and Venus
Oil Company; and Cancellation of Stock Pledge and Security Agreement;
(vii) payment by Borrower of the fees and expenses of counsel
to Bank in connection with the preparation and negotiation of this
Fourth Amendment and all documents and instruments contemplated hereby;
(viii) the execution and delivery by Borrower of such
additional documents and instruments that Bank and its counsel may deem
necessary to effectuate this Fourth Amendment or any document executed
and delivered to Bank in connection herewith or therewith.
11. Execution Counterparts. This Fourth Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which when taken together shall constitute but one and
the same instrument.
12. Governing Law. This Fourth Amendment shall be governed by and
construed in accordance with the internal Laws of the State of Texas.
13. Successors and Assigns. This Fourth Amendment is binding upon and
shall inure to the benefit of Borrower and Bank and their respective successors
and assigns; provided, however, Borrower may not assign or transfer any of their
rights or obligations hereunder without the prior written consent of Bank.
14. Headings. The headings, captions and arrangements used in this
Fourth Amendment are for convenience only and shall not effect the
interpretation of this Fourth Amendment.
15. NO ORAL AGREEMENTS. THIS FOURTH AMENDMENT, TAKEN TOGETHER WITH THE
OTHER LOAN DOCUMENTS AND ALL SCHEDULES AND EXHIBITS THERETO, REPRESENTS THE
FINAL AGREEMENT OF THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
<PAGE> 5
16. AGREEMENT FOR BINDING ARBITRATION. THE PARTIES AGREE TO BE BOUND BY
THE TERMS AND PROVISIONS OF THE CURRENT ARBITRATION PROGRAM OF WELLS FARGO BANK
(TEXAS), N.A., WHICH IS INCORPORATED BY REFERENCE HEREIN AND IS ACKNOWLEDGED AS
RECEIVED BY THE PARTIES, PURSUANT TO WHICH ANY AND ALL DISPUTES SHALL BE
RESOLVED BY MANDATORY BINDING ARBITRATION UPON THE REQUEST OF EITHER PARTY.
"BORROWER"
VENUS EXPLORATION, INC.
By: /s/ JOHN Y. AMES
--------------------------------------
Name: John Y. Ames
------------------------------------
Title: President
-----------------------------------
"BANK"
WELLS FARGO BANK (TEXAS) N.A.
By: /s/ ANDREW MOY
--------------------------------------
Andrew A. Moy, Vice President
<PAGE> 6
EXHIBIT A
1. The Leases described in said M.H. Griffith No. 1 and No. 2 Leases, and
the Non-Producing Lease (oil, gas and minerals) dated September 1,
1993, between Mary Hobbs Griffith, et.al., as Lessor, and Venus Oil
Company, as Lessee, all situated in Crane and Upton Counties, Texas
2. The Chambers Lease and Leases described in said Designation of Unit,
all situated in Crockett County, Texas
3. The Archer Trusts No. 1 Lease and Leases described in said Designation
of Unit, all situated in Hansford County, Texas
4. The Swanson No. 1 and No. 3 Lease, the Leases described in said Swanson
Acres Lease, and the Leases in the Kainer Gas Unit, all situated in
Wharton County, Texas
5. The Smith No. 1, et.al. Lease, and the Non-Producing Lease (oil and
gas) dated May 1, 1995, by and between Mary Carol Sheets, as Lessor,
and Patricia O. Stanley, as Lessee, all situated in Atascosa County,
Texas
6. The Reed East Lease, and the Reed "C" Lease (a/k/a Reed Louisiana
Lease), all situated in Seminole County, Oklahoma
<PAGE> 1
EXHIBIT 10.15
FIFTH AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT
This FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT (the
"Fifth Amendment") dated effective January 16, 1999, is by and between VENUS
EXPLORATION, INC., a Delaware corporation, formerly known as XPLOR CORPORATION,
a Delaware corporation (the "Borrower"), and WELLS FARGO BANK (TEXAS), N.A., a
national banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, Bank and Borrower entered into that certain Second Amended and
Restated Loan Agreement dated December 22, 1997 (as the same has been previously
amended through the date hereof is herein called the "Loan Agreement"), pursuant
to which Borrower obtained a credit facility in the amount of up to the lesser
of the Borrowing Base (as defined in the Loan Agreement) or the Commitment (as
defined in the Loan Agreement); and
WHEREAS, Bank and Borrower now desire to further amend that Loan
Agreement as herein set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Amendments to the Loan Agreement. The Loan Agreement is, effective
the date hereof, and subject to the satisfaction of the conditions precedent set
forth in Section 6 hereof, hereby amended as follows:
(a) Section 6.34, Transaction, to the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"6.34 Transaction. On or before March 15, 1999, Borrower shall
have either consummated a Transaction or have entered into a
binding letter of intent, in form and substance acceptable to
Bank, to consummate a Transaction within thirty (30) days
thereafter."
2. Ratifications. The terms and provisions as set forth in this Fifth
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Loan Agreement, and except as expressly modified and superseded by
this Fifth Amendment, the terms of the Note and any and all other Loan Documents
executed in connection therewith or hereunto are hereby ratified and confirmed
and shall continue in full force and effect. Borrower and Bank agree that the
Loan
<PAGE> 2
Agreement, as amended hereby, the Note and the other Loan Documents shall
continue to be the legal, valid and binding obligations of Borrower, enforceable
against Borrower in accordance with their respective terms.
3. Representations and Warranties. Borrower hereby represents and
warrants to Bank that (i) the execution, delivery and performance of this Fifth
Amendment, and the other documents to be executed and delivered as required
hereby have been duly authorized by all requisite action on the part of
Borrower; (ii) after giving effect to this Fifth Amendment, the representations
and warranties contained in the Loan Agreement, as amended hereby, and any other
Loan Document executed in connection herewith or therewith are true, correct and
complete on and as of the date hereof as though made on and as of the date
hereof; and (iii) after giving effect to this Fifth Amendment, no Event of
Default or Potential Default has occurred and is continuing.
4. Covenant Deviation and Waiver. Without giving effect to this Fifth
Amendment, Borrower would have failed to observe or maintain compliance with the
Current Ratio covenant set forth in Section 6.16 of the Loan Agreement and the
Tangible Net Worth covenant set forth in Section 6.17 of the Loan Agreement.
Borrower has requested, and Bank has approved, a deviation from such compliance
with respect to the aforementioned covenants for a period from the date hereof
through March 15, 1999, at which time Borrower must be in compliance therewith.
It is understood and agreed that Bank's consent to such deviation shall in no
way act as a waiver of any covenants, restrictions, rights or remedies with
respect to the Loan Agreement, but that such deviation shall apply only to the
specific matter and instance set forth hereinabove.
5. Status of Claims. Borrower hereby represents and warrants to Bank
that no facts, events, status or conditions presently exist which, either now or
with the passage of time or the giving of notice or both, presently constitute
or will constitute a basis for any claim or cause of action against Bank, or any
defense to the payment of any of the Obligations. Borrower hereby releases,
relinquishes and forever discharges Bank, its successors, assigns, agents,
officers, directors, employees and representatives, of and from any and all
claims, demands, actions and causes of action of any and every kind or
character, whether known or unknown, present or future, which Borrower may have
against Bank, its successors, assigns, agents, officers, directors, employees
and representatives, arising out of or with respect to any and all transactions
relating to the Loan Agreement, this Fifth Amendment, or any Loan Document,
including any loss, cost or damage, of any kind or character, arising out of or
in any way connected with or in any way resulting from the acts, actions or
omissions of Bank, its successors, assigns, agents, officers, directors,
employees or representatives.
6. Conditions Precedent to Effectiveness of Fifth Amendment. This Fifth
Amendment shall become effective and be deemed effective upon receipt by Bank of
the following:
(i) counterparts of this Fifth Amendment duly executed by
Borrower and Bank;
(ii) there shall not have been, in the sole judgment of
Bank, any material adverse change in the financial condition, business
or operations of Borrower;
(iii) payment by Borrower of the fees and expenses of
counsel to Bank in
<PAGE> 3
connection with the preparation and negotiation of this Fifth Amendment
and all documents and instruments contemplated hereby; and
(iv) the execution and delivery by Borrower of such
additional documents and instruments that Bank and its counsel may deem
necessary to effectuate this Fifth Amendment or any document executed
and delivered to Bank in connection herewith or therewith.
7. Execution Counterparts. This Fifth Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which when taken together shall constitute but one and the same
instrument.
8. Governing Law. This Fifth Amendment shall be governed by and
construed in accordance with the internal Laws of the State of Texas.
9. Successors and Assigns. This Fifth Amendment is binding upon and
shall inure to the benefit of Borrower and Bank and its respective successors
and assigns; provided, however, Borrower may not assign or transfer any of their
rights or obligations hereunder without the prior written consent of Bank.
10. Headings. The headings, captions and arrangements used in this
Fifth Amendment are for convenience only and shall not effect the interpretation
of this Fifth Amendment.
11. NO ORAL AGREEMENTS. THIS FIFTH AMENDMENT, TAKEN TOGETHER WITH THE
OTHER LOAN DOCUMENTS AND ALL SCHEDULES AND EXHIBITS THERETO, REPRESENTS THE
FINAL AGREEMENT OF THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
12. AGREEMENT FOR BINDING ARBITRATION. THE PARTIES AGREE TO BE BOUND BY
THE TERMS AND PROVISIONS OF THE CURRENT ARBITRATION PROGRAM OF WELLS FARGO BANK
(TEXAS), N.A., WHICH IS INCORPORATED BY REFERENCE HEREIN AND IS ACKNOWLEDGED AS
RECEIVED BY THE PARTIES, PURSUANT TO WHICH ANY AND ALL DISPUTES SHALL BE
RESOLVED BY MANDATORY BINDING ARBITRATION UPON THE REQUEST OF EITHER PARTY.
<PAGE> 4
"BORROWER"
VENUS EXPLORATION, INC.
By: /s/ JOHN Y. AMES
--------------------------------------
Name: John Y. Ames
------------------------------------
Title: President
-----------------------------------
"BANK"
WELLS FARGO BANK (TEXAS) N.A.
By: /s/ ANDREW A. MOY
--------------------------------------
Andrew A. Moy, Vice President
<PAGE> 1
EXHIBIT 23.1
The Board of Directors and Shareholders
Venus Exploration, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-61193) on Form S-8 and registration statement (No. 33-73457) on Form S-3 of
Venus Exploration, Inc. of our report dated April 7, 1999, relating to the
consolidated balance sheets of Venus Exploration, Inc. and subsidiaries as of
December 31, 1998, and 1997, and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for each of the
years in the three-year period ended December 31, 1998 which report appears in
the December 31, 1998 annual report on Form 10-K of Venus Exploration, Inc.
Our report dated April 7, 1998, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has an
accumulated deficit, which raise substantial doubt about its ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
KPMG LLP
San Antonio, Texas
April 13, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ENGINEERS
Pollard, Gore and Harrison (PGH) hereby consents to the reference to PGH and our
report entitled "Venus Exploration, Inc. SEC Pricing, Estimates of Proved
Reserves & Revenues", in the Venus Exploration, Inc. (the "Company") Annual
Report on Form 10-K (Form 10-K) for the fiscal year ended December 31, 1998, and
the incorporation of our report by reference to the Form 10-K in the Company's
(i) Registration Statement on Form S-8 (file no. 333-61193) and (ii)
Registration Statement on Form S-3 (file no. 333-73457).
POLLARD, GORE AND HARRISON
Austin, Texas
April 15, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 125,832
<SECURITIES> 55,000
<RECEIVABLES> 414,695
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 617,826
<PP&E> 10,781,523
<DEPRECIATION> 4,144,235
<TOTAL-ASSETS> 7,395,914
<CURRENT-LIABILITIES> 7,242,298
<BONDS> 0
0
0
<COMMON> 109,713
<OTHER-SE> 21,312
<TOTAL-LIABILITY-AND-EQUITY> 7,395,914
<SALES> 2,804,749
<TOTAL-REVENUES> 2,867,258
<CGS> 0
<TOTAL-COSTS> 11,931,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 568,085
<INCOME-PRETAX> (9,064,424)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,064,424)
<DISCONTINUED> 0
<EXTRAORDINARY> (345,905)
<CHANGES> 0
<NET-INCOME> (9,410,329)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)
</TABLE>
