<PAGE> 1
FORM 10-Q/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------------
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
incorporation or organization) Identification No.)
1250 N.E. Loop 410, Suite 1000, San Antonio, Texas 78209
--------------------------------------------------------
(Address of principal executive offices) (Zip code)
(210) 930-4900
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at August 13, 1999
--------------------------- ------------------------------
<S> <C>
Common Stock $.01 par value 11,029,383 shares
</TABLE>
<PAGE> 2
VENUS EXPLORATION, INC. AND SUBSIDIARIES
THIS FIRST AMENDMENT ON FORM 10-Q/A TO THE REGISTRANT'S FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 1999 IS BEING FILED TO RESTATE THE UNAUDITED FINANCIAL
STATEMENTS IN RESPONSE TO COMMENTS RECEIVED FROM THE SEC STAFF IN CONNECTION
WITH VENUS EXPLORATION, INC.'S REGISTRATION STATEMENT ON FORM S-3 AND THE FIRST
AMENDMENT TO THE FORM S-3, FILED ON MARCH 5, 1999, AND SEPTEMBER 8, 1999,
RESPECTIVELY, AND PROXY STATEMENT FILED ON SEPTEMBER 8, 1999, AND AMENDMENTS
FILED ON NOVEMBER 19, 1999, AND DECEMBER 6, 1999. THE FINANCIAL STATEMENTS HAVE
BEEN RESTATED TO REFLECT REVISED NON-CASH IMPAIRMENT ESTIMATES FOR THE YEAR
ENDED DECEMBER 31, 1998, AND RELATED REVISED PROVISIONS FOR DEPRECIATION,
DEPLETION AND AMORTIZATION IN THE CURRENT PERIOD. IN ADDITION THE COMPANY IS
AMENDING THE FORM 10-Q TO REFLECT A CHANGE IN METHOD OF ACCOUNTING FOR THE
COMPANY'S INVESTMENT IN EXUS ENERGY, LLC FROM PROPORTIONAL CONSOLIDATED TO THE
EQUITY METHOD. THE STATEMENTS OF OPERATIONS ARE NOT AFFECTED BY THE CHANGE TO
THE EQUITY METHOD BECAUSE THE EFFECTIVE DATE OF THE ACQUISITION IS JUNE 30,
1999.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 3
(b) Consolidated Statements of Operations for
the three-month periods ended June 30,
1999 and 1998 4
(c) Consolidated Statements of Operations for
the six-month periods ended June 30, 1999
and 1998 5
(d) Consolidated Statements of Cash Flows
for the six month periods ended
June 30, 1999 and 1998 6
(e) Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 22
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds 23
Item 5. - Other Information 23
Item 6. - Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
----------- ------------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 228 $ 126
Trade accounts receivable and other 646 492
-------- --------
TOTAL CURRENT ASSETS 874 618
OIL AND GAS PROPERTIES AND EQUIPMENT,
net (successful efforts method), at cost 5,293 7,139
OTHER PROPERTY AND EQUIPMENT, net 185 238
INVESTMENT IN EXUS Energy, LLC 7,093 --
DEFERRED FINANCING COSTS, at cost less
Accumulated amortization 22 19
OTHER ASSETS, at cost less accumulated amortization 99 122
-------- --------
TOTAL ASSETS $ 13,566 $ 8,136
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 1,295 $ 1,269
Other liabilities 266 433
Revolving credit agreement 3,736 5,540
-------- --------
TOTAL CURRENT LIABILITIES 5,297 7,242
LONG-TERM DEBT 8,000 --
OTHER LONG-TERM LIABILITIES 20 23
-------- --------
TOTAL LIABILITIES 13,317 7,265
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value of $0.01;
5,000,000 shares authorized; none issued -- --
Common stock, par value of $0.01;
30,000,000 shares authorized; 10,982,365
and 10,971,325 shares issued and outstanding
as of June 30, 1999 and December 31,1998,
respectively 110 110
Additional paid-in capital 17,235 17,209
Retained earnings (deficit) (16,909) (16,204)
Unearned compensation - restricted stock (187) (244)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 249 871
-------- --------
$ 13,566 $ 8,136
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
-------- --------
(In thousands,
except per share data)
<S> <C> <C>
OIL AND GAS REVENUES $ 434 $ 723
-------- --------
EXPENSES
Production expense 183 396
Exploration expense, including dry holes 122 675
Impairment of oil and gas properties -- 1,200
Depreciation, depletion and amortization 132 281
General and administrative 462 787
-------- --------
Total expenses 899 3,339
-------- --------
Operating profit (loss) (465) (2,616)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense (115) (145)
Gain on sale of assets 10 10
Interest and other income (expense), net (5) 9
-------- --------
(110) (126)
-------- --------
Net earnings (loss) $ (575) $ (2,742)
======== ========
Earnings (loss) per share,
Basic and diluted $ (0.05) $ (0.28)
======== ========
Common shares and equivalents outstanding,
Basic and diluted 10,982 9,848
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
(In thousands,
except per share data)
<S> <C> <C>
OIL AND GAS REVENUES $ 819 $ 1,664
-------- --------
EXPENSES
Production expense 413 837
Exploration expense, including dry holes 361 815
Impairment of oil and gas properties -- 1,915
Depreciation, depletion and amortization 273 622
General and administrative 1,069 1,488
-------- --------
Total expenses 2,116 5,677
-------- --------
Operating profit (loss) (1,297) (4,013)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense (220) (227)
Gain (loss) on sale of assets 804 10
Interest and other income 8 22
-------- --------
592 (195)
-------- --------
Net earnings (loss) $ (705) $ (4,208)
======== ========
Earnings (loss) per share, Basic and diluted $ (0.06) $ (0.43)
======== ========
Common shares and equivalents outstanding,
Basic and diluted 10,982 9,810
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (705) $(4,208)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 360 732
Impairments, abandoned leases and dry hole costs 19 2,424
Gain on sale of property and equipment (804) --
Compensation expense for restricted stock,
Stock options and stock granted 82 85
Change in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable and other (154) 671
Increase (decrease) in trade accounts payable 26 (717)
Increase in advances from interest
Owners -- 213
Decrease in other liabilities (166) (212)
------- -------
Net cash (used in) operating activities (1,342) (1,012)
------- -------
INVESTING ACTIVITIES
Capital expenditures (233) (2,278)
Investment in EXUS Energy, LLC (7,093) --
Net proceeds from sales of property and equipment 2,597 11
------- -------
Net cash (used in) investing activities (4,729) (2,267)
------- -------
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt
and revolving credit agreement 8,025 3,286
Principal payments on long-term debt (1,831) (56)
Deferred financing costs (21) (26)
------- -------
Net cash provided by financing activities 6,173 3,204
------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 102 (75)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 126 682
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 228 $ 607
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
VENUS EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months And Six Months Ended June 30, 1999 and 1998
1. Organization
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 and production in nine states.
2. Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The consolidated financial statements presented
should be read in connection with the audited financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company as of June 30, 1999 and the results of its operations for the three and
six months ended June 30, 1999 and 1998. The accompanying consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in note 10 to the unaudited consolidated
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit that raises 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 this uncertainty.
The results of operations for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
3. Summary of Significant Accounting Policies
For a description of the accounting policies followed by the Company, refer
to the notes to the 1998 consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. The
Company had previously reported that it expected to account for its investment
in EXUS Energy, LLC (EXUS) under the proportional consolidation method of
accounting. Under proportional consolidation the Company would have reported
its 50% share of EXUS' assets, liabilities, revenues, and expenses. The Company
is now actually reporting its investment in EXUS under the equity method of
accounting. Under the equity method the Company reports its net investment in
EXUS on the Consolidated Balance Sheet, (the Company's share of EXUS assets are
netted with the Company's share of EXUS liabilities), and its share of the net
earnings of EXUS is reported in Other Income (Expense) in the Statement of
Operations. The statements of operations are not affected because the effective
date of the acquisition is June 30, 1999.
7
<PAGE> 8
4. Investment in EXUS Energy, LLC
On June 30, 1999, EXUS Energy, LLC, a Delaware limited liability company
("EXUS"), owned 50% by the Company and 50% by EXCO Resources, Inc. ("EXCO")
completed the acquisition from Apache Corporation of oil and natural gas
properties located in Jackson Parish, Louisiana (the "Jackson Parish
Properties"). EXCO is a publicly-held oil and gas company based in Dallas,
Texas. The Jackson Parish Properties include 17 gross (14.25 net) producing
wells. EXCO is the named operator of the Jackson Parish Properties and assumed
operations of all 17 wells acquired in the transaction. The Jackson Parish
Properties include 6,411 gross (5,672 net) developed acres and 1,532 gross
(1,148 net) undeveloped acres. As of April 1, 1999, the Jackson Parish
Properties were estimated to contain proved reserves of 2,815 barrels of oil
("Bbls") and 66.5 billion cubic feet ("Bcf") of gas. The purchase price, before
closing adjustments, was $28.5 million, and after adjustments (the adjustments
principally reflect production since March 1, 1999, the effective date of the
acquisition), was $27.6 million cash. The purchase price was funded with $14
million drawn under a new credit facility established by EXUS and $14 million of
EXUS equity capital. Of the initial $14 million of EXUS equity capital, $7
million was provided by EXCO from its cash on hand, and $7 million was provided
by Venus from borrowed funds. On June 30, 1999, Venus borrowed $7 million from
EXCO under the terms of an $8 million Convertible Promissory Note (see note 6).
The following table reflects the pro forma results of operations as though
the acquisition of the Jackson Parish Properties (described in the Company's
Form 8-K dated June 30, 1999) and the related borrowings (see note 6) had
occurred on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
June 30,
----------------------------------
1999 1998
---- ----
(In thousands, except
per share data)
(Unaudited)
<S> <C> <C>
Net Loss $ (859) $ (4,040)
Basic and diluted loss per share $ (.08) $ (.41)
</TABLE>
5. Earnings (loss) Per Share
Basic net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding. Diluted loss per share is
computed by assuming the issuance of common shares for all dilutive potential
common shares outstanding.
Loss per share for the three month periods ended June 30, 1999 and 1998 are
calculated based on 10,982,365 and 9,848,322 weighted average shares
outstanding, respectively, and the six month periods ended June 30, 1999 and
1998 are calculated based on 10,981,694 and 9,810,004 shares outstanding,
respectively.
8
<PAGE> 9
6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
(In thousands)
<S> <C> <C>
Wells Fargo Bank-Revolving Credit
Due June 30, 2000 $ 3,736 $ 5,540
EXCO Resources, Inc. Convertible Note
Due on July 1, 2004 7,000 -
7% Convertible Subordinated Notes
Due March through June 2004 1,000 -
-------- --------
11,736 5,540
Less: Current maturities of long-term debt 3,736 $ 5,540
-------- --------
Long-term debt excluding current installments $ 8,000 -
======== ========
</TABLE>
Wells Fargo Bank 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
a 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 pledged as
collateral for the loan. On August 19, 1998, the credit facility was amended
resulting in the applicable interest rate becoming the bank's prime lending
rate plus one percent. For balances outstanding at June 30, 1999, the interest
rate was 8.75 percent.
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 June
30, 1999, the borrowing base was $3,870,000 and the amount drawn by the Company
was $3,736,000 resulting in an unused borrowing base of $134,000.
Among other matters, the credit facility contains covenants, which limit the
Company's ability to incur additional indebtedness and restrict payments of
dividends. Under the terms of the credit facility, the Company is required to
maintain a current ratio of 1:1 and tangible net worth of at least $5,250,000.
At June 30, 1999, the Company was not in compliance with these covenants. Its
current ratio was .84 to 1, and its tangible net worth was $249,000. The Company
has obtained waivers of these events of non-compliance from the lender through
September 30, 1999; however, because of uncertainty regarding the Company's
ability to be in compliance with the covenants after September 30, 1999, or to
obtain additional waivers, the outstanding balance has been classified as a
current liability in the accompanying consolidated balance sheet. If the lender
elects, subsequent to the period waived, to declare all amounts borrowed under
the credit agreement to be due and payable, the Company's assets could be
adversely affected.
9
<PAGE> 10
7% Convertible Subordinated Promissory Notes
In the second quarter of 1999 the Company completed the private placement to
six investors(including one director of the Company and one person who was
later appointed a director of the Company) of six unsecured convertible
subordinated promissory notes (the "Subordinated Notes") totaling $1,000,000.
The net proceeds to the Company were $975,000 after legal fees associated with
the transaction. The Company used the proceeds to fund working capital. The
Company's obligations to the noteholders are unsecured and subordinated to the
rights of the Company's bank and other lenders unless those lenders agree
otherwise. Interest payments under the Subordinated Notes may be paid, at the
Company's election, with its common stock. The convertibility feature may be
invoked by the noteholders at any time and by the Company under circumstances
described below.
The Subordinated Notes bear interest at a rate of 7% per annum, or 10% in
the event of default. If interest is paid in common stock, the number of shares
to be issued is determined by dividing the interest payment due by the market
price of one share of the Company's common stock on the last trading day
preceding the interest payment date. Interest is payable quarterly beginning on
June 30, 1999. The interest due on June 30, 1999 was paid with 7,984 shares of
the Company's common stock in July 1999.
The Subordinated Notes mature in 2004, at which time all of the unpaid
principal is due and payable. The noteholders can convert the debt to the
Company's common stock at any time, at a conversion of $1.15 per share, the
market value of the common stock on the date the terms were agreed to. The
conversion price will be adjusted proportionately in cases where the number of
the outstanding shares of common stock is changed on a pro rata basis; e.g.,
stock dividends and stock splits. In addition, the conversion price will be
reduced if the Company issues common stock, or securities convertible into
common stock, at a price lower that the $1.15 conversion price, as adjusted. In
such a case the conversion price will be reduced to the conversion price of the
convertible security or the price of the common stock sold.
If the Company issues other subordinated notes or other similar securities
with superior terms to the new noteholders, the holders of the Subordinated
Notes also have the right to receive replacement notes that include those
superior terms, at least with regard to a higher stated interest rate, a higher
premium upon early redemption by the Company, a lower per-share conversion
price, or a longer period before the Company can cause a mandatory redemption.
The Company has a conditional option of converting the outstanding balance
of each Subordinated Note to shares of its common stock. That option does not
mature until thirty-six months after the original issuance of the Subordinated
Notes, and the condition to the Company's option to convert is that the closing
market price for the shares of the Company's common stock must have exceeded
$3.60 per share for at least 25 out of the preceding 30 trading days. The
conversion is based on the same $1.15 price per share.
The Subordinated Notes allow the Company to redeem them for cash and the
payment of a redemption premium. That right begins on the second anniversary of
the original issuance. The redemption premium begins at 18% and decreases 1%
per month after that, and there is a credit against the premium for all accrued
interest on the Subordinated Notes to the date of the redemption. The Company
also has a preferential right to buy the notes if the holders decide to sell
them.
If an event of default occurs, the noteholders may demand immediate
repayment of the principal amount and any accrued but unpaid interest. They
10
<PAGE> 11
will also have all other rights generally allowed by contract and applicable
law. Events of default include, among other conditions, a default under other
indebtedness or securities.
The Subordinated Notes were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. Common
stock issued on conversion or in lieu of cash interest payments under the
Subordinated Notes has been and will be issued in the same manner. As a result,
the transfers of such securities are restricted.
Concurrently with the execution of the Subordinated Notes, the Company
entered into a registration rights agreement with each noteholder that gives
that noteholder the option to register for resale under the Securities Act of
1933 any of their shares of the Company's common stock on a registration
statement otherwise being filed by the Company for sales on its own behalf. The
Company also agreed not to grant any new registration rights to third parties
if those rights would adversely impact the rights of the holders.
EXCO Resources, Inc. Convertible Note
On June 30, 1999, the Company borrowed $7 million from EXCO under the terms
of an $8 million convertible promissory note (the "EXCO Note") in conjunction
with the Company's investment in EXUS (see note 4). The EXCO Note provides for
borrowings up to $8 million subject to restrictions on the use of proceeds. The
Company drew $7 million under the EXCO Note to fund its capital contribution to
EXUS. The EXCO Note provides for additional draws beginning after January 1,
2000 not to exceed $1 million which may be used solely to fund additional
capital contributions to EXUS and/or to fund the expenses of one equity
issuance. The Company is not permitted to draw any of the $1 million until it
has obtained stockholder approval for the issuance of the EXCO Note. All
borrowings under the EXCO Note are secured by a first priority lien providing a
security interest in the membership interest of the Company in EXUS along with
distribution and income rights. The EXCO Note provides that advances will bear
interest, which can be paid in cash or, at the Company's election, the Company's
common stock, at a rate of 10% from June 30, 1999 through June 30, 2000, with
interest increasing 1% per year through June 30, 2004. Advances will bear
interest at a rate of 15% after in an event of default. If interest is paid in
the Company's common stock, the number of shares to be issued shall be
determined by dividing the interest payment due by the average market price of
one share of the Company's common stock for the twenty trading days immediately
preceding the interest payment date. Interest is payable semi-annually
commencing on January 1, 2000. The EXCO Note matures on July 1, 2004 at which
time all of the unpaid principal is due and payable.
Beginning on July 1, 2000 and continuing until the payment in full of the
EXCO Note, EXCO, at its option, may convert all or any portion of the
outstanding principal balance and accrued interest into shares of the Company's
common stock for $1.50 per share, subject to adjustment in certain events. On
or before December 15, 1999, the Company is required to obtain approval of its
stockholders (as required by the rules of the Nasdaq SmallCap Market) of the
issuance of the Company's common stock which may be issued upon the conversion
of principal or accrued interest under the terms of the EXCO Note. In the event
the Company is unable to obtain such stockholder approval, the Company would be
required to prepay $3 million of the EXCO Note plus accrued interest thereon.
(The Company is currently authorized to issue shares of its common stock upon
conversion of up to $4 million of the principal of the EXCO Note without such
stockholder approval; accordingly the $3 million mandatory prepayment equates
to the principal amount EXCO would not be able to convert to the Company's
common stock if stockholder approval
11
<PAGE> 12
was not obtained.) Alternatively, the Company may elect to transfer membership
interests in EXUS held by the Company equal to 21.43% of the aggregate
outstanding interests of EXUS (this approximates 3/7 of the Company's equity
interest in EXUS) in exchange for a cancellation of $3 million of principal
owed under the EXCO Note.
The EXCO Note also requires a mandatory prepayment of principal equal to 50%
of the net proceeds of each equity issuance by the Company on or after June 30,
1999 (excluding the first $5 million of aggregate net proceeds of all equity
issuances after June 30, 1999). The Company may also voluntarily prepay any or
all of the EXCO Note (subject to a prepayment penalty of 3.57% of the principal
prepaid for any prepayment occurring on or prior to July 1, 2000).
The EXCO Note contains other customary terms including certain
representations, affirmative covenants (such as conduct of the Company
business, reports to EXCO, compliance with laws), negative covenants (including
no purchase or redemption of the Company's common stock and no sale, transfer,
mortgage or pledge of the collateral securing the EXCO Note), and events of
default (including failure to pay principal or interest as required, violation
of covenants in the EXCO Note, bankruptcy, change of control of the Company or
default under the Company's secured credit facility). An event of default would
also occur if the Company is unable to obtain stockholder approval, and if the
Company is in default under its revolving credit agreement. As discussed above
under Wells Fargo Bank Revolving Credit, the Company is not in compliance with
two financial covenants under the revolving credit agreement but has received a
waiver to September 30, 1999. If the Company fails to be in compliance by
September 30, 1999, or fails to obtain an extension of the waiver, it would
constitute an event of default under the EXCO note.
The shares which may be issued under the terms of the EXCO Note are subject
to a Registration Rights Agreement dated June 30, 1999. The Registration Rights
Agreement requires the Company to register with the Securities and Exchange
Commission 10,133,333 shares of the Company's common stock that may be issuable
to EXCO under the EXCO Note for resale by EXCO from time to time. The
10,133,333 shares represent (i) 5,333,333 shares that would be issued if EXCO
were to convert $8 million of principal under the EXCO Note at $1.50 per share
and (ii) 4,800,000 shares assuming the Company were to elect to pay all
interest accruing on $8 million principal of the EXCO Note at an assumed market
price of $1.00 per share. The Registration Rights Agreement provides that a
registration statement must be filed with the SEC by September 28, 1999 and
effective on or prior to the 120th day following the first issuance of any
shares under the EXCO Note (which 120 day period may be extended to 210 days if
the Company has timely complied with its covenants under the Registration
Rights Agreement, but the registration statement is still under review by the
Securities and Exchange Commission). The Registration Rights Agreement contains
other customary terms and provisions including indemnification for certain
liabilities under applicable securities laws. A breach of the agreement would
constitute an event of default under the EXCO Note.
The EXCO Note was issued in a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. Common stock issued on
conversion or in lieu of cash interest payments under the Subordinated Notes has
been and will be issued in the same manner. As a result, the transfers of such
securities are restricted.
12
<PAGE> 13
7. Shareholders' Equity
Effective March 1, 1998 the Company awarded, under its existing incentive
plan, qualified stock options and restricted stock grants that vest over a
three-year period. The qualified stock options were issued to all employees.
The restricted stock grants (100,000 shares) were issued at no charge to two
key employees who are not officers of the Company. The Company is recognizing
compensation expense of $9,375 per month for the value of the restricted stock
grants over the vesting period.
Effective March 1, 1999, the Compensation Committee of the Board of
Directors of the Company approved the issuance of stock options to all
employees and certain consultants to offset the impact of mandatory temporary
salary reductions which took effect on that date. The Company has granted
250,000 stock options at fair market value exercise price to offset the salary
reductions through August 1, 1999. The stock options vest ratably over the
period March 15, 1999 through August 1, 1999. Employees and consultants have
vested in 248,262 options through August 1, 1999. The terms of these stock
options are the same as the terms of the stock options granted on March 1,
1998, except for the exercise price, which is equal to the fair value of the
Company's stock on date of grant. During the six month period ended June 30,
1999, the Company expensed $5,000 related to stock options granted
consultants.
With certain exceptions, the exercise price for the options is $1.1191, and
the term of the options is ten years. The exceptions apply to 91,888 options
granted to E. L. Ames, Jr., John Y. Ames, and Eugene L. Ames III, and the
exercise price for their options is $1.231, and their term is five years.
8. Accounting for Income Taxes
No provision for income taxes has been recorded for the periods ended June
30, 1999 and 1998 due to the losses recorded by the Company.
9. Commitments and Contingencies
The Company is not involved in any claims or legal proceedings.
10. Liquidity
The Company has incurred significant losses over the past three years. In
addition, the Company has incurred significant indebtedness, and at June 30,
1999, was not in compliance with the tangible net worth and current ratio
requirements of the revolving credit agreement (see "Wells Fargo Bank Revolving
Credit" under note 6). Those requirements have been waived by the lender
through September 30, 1999. If those events of non-compliance are not cured,
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(excluding the Company's equity
interest in EXUS, which interest secures the EXCO note; EXUS assets secures
EXUS' credit facility). Given the Company's diminished cash resources, lack of
borrowing capacity under its credit agreement, losses incurred over the past
three years, and non-compliance with the financial covenants of the revolving
credit agreement, there is doubt about the Company's ability to continue as a
going concern. The Company's independent auditors' report dated April 7, 1999,
on the Company's year-end financial statements for 1998 indicated that there
was
13
<PAGE> 14
substantial doubt about the Company's ability to continue as a going concern;
however, the accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The financial statements do not
include adjustments that might result from the outcome of this uncertainty.
The Company's assets, whether owned directly or indirectly, 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 oil and gas 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 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 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 its efforts.
The Company has made some progress in pursuing these alternatives. During
the first quarter of 1999 the Company sold non-core properties for $2,597,000
in cash, which allowed the Company to repay debt of $1,670,000. As discussed in
note 4, on June 30, 1999 the Company acquired a 50% interest in EXUS, which
acquired an interest in the Jackson Parish Properties. As discussed in note 6,
during the quarter ending June 30, 1999, the Company issued Subordinated Notes
in the principal amount of $1,000,000 for net proceeds of $975,000 and the EXCO
Note. Finally, increases in oil and gas prices subsequent to June 30, 1999, and
cost reduction measures, which are discussed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, are expected to improve the
Company's cash flow after June 30, 1999.
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<PAGE> 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the related notes thereto included
elsewhere and with Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. Certain statements contained herein are
"Forward Looking Statements" and are thus prospective. As discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998, such
forward-looking statements are subject to risks, uncertainties and other
factors that could cause actual results to differ materially from future
results expressed or implied by such forward-looking statements.
The financial statements as of and for the three and six months ended
June 30, 1999, have been restated to give effect to revised impairment
provisions as of December 31, 1998, and the related revised provisions for
depreciation, depletion and amortization and gain and loss on sale of assets in
the current periods.
Overview
The Company explores for oil and gas reserves in horizons that have no
history of production, and uses advanced geoscience technology to do so. The
Company participates in such high-risk projects because they provide
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,
the Company attempts to maintain an inventory of many exploratory prospect
leads from which drilling prospects are confirmed and generated. The Company
obtains 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 the Company.
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 the Company specifically, the Company has reduced exploration activity
and will work only selected prospects believed to have extraordinary merit
(lower degree of geological and engineering risk relative to the net expected
value) during this period of low availability of exploration capital.
In addition to exploring for new oil and gas reserves in previously
undiscovered fields, the Company also uses 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 the Company
or fields discovered by others but that the Company believes are not fully
developed. The Company conducts active exploitation and development activities
in 10 different fields in Texas and Oklahoma. The Company's working interest in
those fields varies in size from 2.5% to 100%, and the Company operates the
wells in 9 of the 10 active fields. During this period of reduced availability
of capital, the Company will concentrate its drilling budget on drilling field
exploitation wells.
The Company continues 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 the Company's exploration team. The Company seeks to accomplish
strategic acquisitions of producing assets with development and exploratory
potential through strategic alliances with other oil and gas companies. An
example of such an alliance is the Company's origination and participation in
15
<PAGE> 16
the recent acquisition by EXUS of the properties in Jackson Parish, Louisiana
"Jackson Parish Properties". The Company may also sell non-strategic properties
as a part of its effort to concentrate on its focus areas.
Liquidity and Capital Resources
(a) Liquidity
At June 30, 1999, the Company had a working capital deficit of $4,423,000
compared with a deficit of $6,624,000 at December 31, 1998, an increase in
working capital of $2,201,000. This increase is primarily attributable to the
$1,670,000 repayment of current debt with proceeds from the sale of long term
assets during the six-month period ended June 30, 1999. Net proceeds of
$975,000 from the issuance of the Subordinated Notes also contributed to the
increase in working capital.
Net cash used in operating activities during the six months ended June 30,
1999, was $1,342,000, whereas $1,012,000 was used in operating activities for
the same six-month period in 1998. Of the $330,000 increase in net cash used in
operating activities, $249,000 is due to routine net changes in operating
assets and liabilities. The remaining $81,000 is due to a $421,000 reduction in
revenue net of production expense, net increase in other income and expenses of
$79,000 which were offset by reductions in general and administrative expense
of $419,000 (see "Results of Operations" below). During the first six months of
1999, the Company realized a net loss of $705,000. This compares with a net
loss of $4,208,000 for the first six months of 1998. These losses include
non-cash expenses (impairments, depreciation, depletion and amortization, and
compensation expense for restricted stock and stock options) totaling $461,000
in 1999 and $3,241,000 in 1998. The 1999 loss reflects a gain of $804,000 from
the sale of long term assets.
During the first six months of 1999 the Company incurred capital
expenditures on oil and gas properties of $233,000, an investment in EXUS
Energy, LLC of $7,093,000 and received proceeds from the sale of property and
equipment of $2,597,000. During the same period in 1998, the Company had
capital expenditures of $2,278,000 and received proceeds of $11,000 from the
sale of property and equipment.
For the six months ended June 30, 1999, $6,173,000 was provided by financing
activities consisting of $8,025,000 from issuance of long-term debt less
$1,852,000 of repayments and deferred financing costs. This compares with
$3,204,000 provided by financing activities for the six-month period ended June
30, 1998 from the issuance of $3,286,000 in long-term debt offset by repayments
and deferred financing costs of $82,000. Of the $8,025,000 issuance of
long-term debt, $7,000,000 is attributable to the Company's investment in EXUS
Energy, LLC.
The Company has incurred significant losses over the past three years. In
addition, the Company has incurred significant indebtedness, and at June 30,
1999, was not in compliance with the tangible net worth and current ratio
requirements of the revolving credit agreement (see "Wells Fargo Bank Revolving
Credit" in note 6 to Item 1). Those requirements have been waived by the lender
through September 30, 1999. If the Company is unable to cure the waived
defaults by that time, the lender could elect, subsequent to the period waived,
to declare all amounts borrowed under the revolving 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,
16
<PAGE> 17
of the Company's assets (excluding the Company's equity interest in EXUS, which
interest secures the EXCO Note; EXUS' assets secure EXUS' credit facility).
Given the Company's diminished cash resources, lack of borrowing capacity under
its credit agreement, losses incurred over the past three years, and non-
compliance with the financial covenants of the credit agreement, there is doubt
about the Company's ability to continue as a going concern. The Company's
independent auditors' report dated April 7, 1999, on the Company's year-end
financial statements for 1998 indicates that there was substantial doubt about
the Company's ability to continue as a going concern; however, the accompanying
financial statements have been prepared assuming the Company will continue as a
going concern. The financial statements do not include adjustments that might
result from the outcome of this uncertainty.
The Company's assets, whether owned directly or indirectly, 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 oil and gas 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 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 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 its efforts.
The Company has made some progress in pursuing these alternatives. During
the first quarter of 1999 the Company sold non-core properties for $2,586,000
in cash, which allowed the Company to repay debt of $1,670,000. As discussed in
the overview of this Item 2, on June 30, 1999 the Company acquired an equity
interest in EXUS. During the quarter ended June 30, 1999, the Company issued 7%
convertible subordinated notes in the principal amount of $1,000,000 for net
proceeds of $975,000. Finally, increases in oil and gas prices subsequent to
June 30, 1999, and cost reduction measures (see "Results of Operations" below),
which are discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are expected to improve the Company's cash flow after
June 30, 1999.
(b) Capital Resources
The Company's capital expenditure budget is continually reviewed and revised
as necessary, based on perceived opportunities and business conditions. Capital
expenditures for the remainder of 1999 are budgeted at approximately $2.2
million. Funding is not currently available for the 1999 budget, and as a
result, the Company may elect to reduce its 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
the Company's capital investment and upside potential would be lower.
The Company's credit facility, among other matters, contains covenants which
limit the Company's ability to incur additional indebtedness and
17
<PAGE> 18
restrict payments of dividends. Under the terms of the credit facility, the
Company is required to maintain specified levels of current ratio and tangible
net worth, and as mentioned above, as of June 30, 1999, the Company was not in
compliance with these two covenants. The Company has obtained a waiver through
September 30, 1999. The Company's ability to obtain future waivers will depend
on progress on its plans to raise additional capital through a placement of
convertible debt or issuance of equity securities. During the quarter ended
June 30, 1999, the Company issued 7% Convertible Subordinated Promissory Notes
in the principal amount of $1,000,000 for net proceeds of $975,000. The notes
bear interest at 7 percent per annum and are convertible into the Company's
common stock at a rate of $1.15 per share (870 shares of common stock for each
$1,000 principal amount). For a more detailed description of the Promissory
Notes see note 6 to the accompanying financial statements.
The EXCO Note and the EXUS credit facility, both discussed in note 6 to
Item 1, also provide direct and indirect capital resources.
(c) Results of Operations
Revenues and expenses were lower during 1999 due to the sale of properties,
lower oil and gas prices and various cost cutting measures. The variances are
addressed in the following paragraphs by significant operating caption.
As reflected in the following table, oil and gas volumes and average prices
decreased in 1999, compared with 1998. The lower prices, the divestiture of
properties and decline in production from existing wells significantly impacted
the 1999 periods.
<TABLE>
<CAPTION>
1999 1998
---- ----
Sales Average Sales Average
Volume Prices Volume Prices
------- ------- ------- -------
<S> <C> <C> <C> <C>
Six Months Ended June 30,
Gas (Mcf) 158,994 $ 1.81 285,553 $ 2.25
Oil (Bbls) 40,429 $13.09 67,405 $14.80
Three Months Ended June 30,
Gas (Mcf) 71,133 $ 1.88 140,973 $ 2.10
Oil (Bbls) 19,266 $15.50 30,244 $13.88
</TABLE>
For 1998 average oil and gas prices reflect the effect of price hedging. The
Company only hedged oil and gas volumes as required under a term loan
agreement, which is no longer in effect. Volumes for the six month period ended
June 30, 1999 include 21,400 Mcf attributable to the properties sold during the
same period.
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<PAGE> 19
Three Months Ended June 30, 1999 and 1998
The Company reported a net loss of $575,000 for the quarter ended June 30,
1999, compared to a net loss of $2,742,000 in the same quarter in 1998. The
decrease in the loss is due to decreases in production expense ($213,000),
exploration expense ($553,000), oil and gas impairments ($1,200,000),
depreciation, depletion, and amortization (DDA) ($149,000), general and
administrative expenses ($325,000), and interest expense ($30,000). These
decreases in expenses were slightly offset by decreases in oil and gas revenues
($289,000).
For the second quarter of 1999, oil and gas revenues decreased by $289,000.
The decrease is due to the sale of properties which resulted in a decrease in
revenue of $88,000, and a decline in production rates in the remaining
properties resulted in a decrease of $217,000. Improvement in oil prices had a
$16,000 positive impact on revenues. The decline in production rates was caused
by normal depletion and falling production on marginal wells as maintenance and
repair operations were deferred.
Production expense decreased by $213,000 due to the sale of properties
($34,000) and reduced operating costs ($179,000) as a result of reduced
maintenance and repair operations on marginal wells and lower workover
operations (plugging back wells in an attempt to establish production in a
shallower zone, stimulating formations, and repairing down hole equipment).
Production expense average $0.98 per mcfe during the three month period ended
June 30, 1999, compared to $1.23 per mcfe for the same period in 1998.
Exploration expense decreased by $553,000. A decrease in dry holes expenses
accounted for $494,000 of the decrease, employee costs decreased by $43,000 due
to terminated employees, and the balance of the decrease is due to reduced
exploration activities.
Impairment of oil and gas properties decreased by $1,200,000. The decline
is a result of rising product prices during the current quarter as opposed to
falling prices during the 1998 period.
Depreciation, depletion and amortization decreased by $149,000 due to
the sale of properties ($17,600), the decline in production rates ($101,100),
and the lower cost basis in the properties due to the impairments recorded in
1998 ($30,300).
General and administrative expense decreased by $325,000. The reduction of
office personnel in the fourth quarter of 1998 and the first quarter of 1999,
along with mandatory temporary salary reductions that were in force during the
quarter, contributed $145,000 to the decrease. Accounting services decreased by
$58,000 due to the accounting function being performed entirely in-house whereas
a portion had been outsourced in the prior year. Other expense reductions
resulted from the cost reductions instituted in the first quarter.
Interest expense decreased by $30,000 due to a lower average loan balance
outstanding of $4,238,100 during the second quarter of 1999, as compared to
$4,617,971 during the second quarter of 1998 which resulted in a savings of
$11,000. In addition, deferred loan costs decreased by $19,000 during the
current quarter as a result of the early extinguishment of debt during the
fourth quarter of 1998.
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<PAGE> 20
Six Months Ended June 30, 1999 and 1998
The Company reported a net loss of $705,000 for the six months ended
June 30, 1999, compared to last year's net loss of $4,208,000. The $3,503,000
decrease is attributable to the gain from the sale of properties ($794,000),
decreases in production expense ($424,000), exploration expense ($454,000), oil
and gas impairments ($1,915,000), DDA ($349,000), general and administrative
expenses ($419,000), interest expense ($7,000). These decreases in expenses
were offset by a reduction in interest and other income ($14,000) and oil and
gas revenues ($845,000). The decline in production rates was caused by normal
depletion and falling production on marginal wells as maintenance and repair
operations were deferred.
For the first six months of 1999, oil and gas revenues decreased by
$845,000. The decrease is due to the following: the decline in product prices
resulted in a decrease in revenue of $139,000, while the sale of properties
resulted in a decrease in revenue of $144,000 and a decline in production rates
resulted in a decrease in revenue of $562,000.
Production expense decreased by $424,000 due to the sale of properties
($59,000) and reduced operating costs ($365,000) as a result of reduced
maintenance and repair operations on marginal wells and lower workover
operations (plugging back wells in an attempt to establish production in a
shallower zone, stimulating formations, and repairing down hole equipment).
Production expense average $1.03 per mcfe during the six month period ended
June 30, 1999, compared to $1.21 per mcfe for the same period in 1998.
Exploration expense decreased by $454,000. Dry holes expenses accounted for
$494,000 of the decrease offset by the acquisition of 3-D seismic
data of $37,500.
Impairment of oil and gas properties decreased by $1,915,000. The decline
is a result of rising product prices during the current quarter as opposed to
falling prices during the comparable 1998 period.
Depreciation, depletion and amortization decreased by $349,000 due to
the sale of properties ($27,600), the decline in production rates ($232,600),
and the lower cost basis in the properties due to the impairments recorded in
1998 ($88,800).
General and administrative expense decreased by $419,000. The reduction of
office personnel in the fourth quarter of 1998 and the first quarter of 1999,
along with mandatory temporary salary reductions that were in force during the
quarter, contributed $242,000 to the decrease. Accounting services decreased by
$71,000 due to the accounting function being performed entirely in-house. Other
expense reductions resulted from the cost reductions instituted in the first
quarter.
Interest expense decreased by $7,000 due to a decrease in deferred loan
costs of $39,000 as the result of the early extinguishment of debt during the
fourth quarter of 1998. This was offset by an increase in interest expense of
$32,000 as a result of a higher average loan balance outstanding of $4,319,000
during the first six months of 1999, as compared to $3,965,000 during the same
period of 1998.
YEAR 2000 COMPLIANCE
The following information on Year 2000 compliance contains forward-looking
statements and should be read in conjunction with the Company's disclosures
under the heading "Forward-Looking Statements." The disclosures also
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<PAGE> 21
constitute a "Year 2000 Readiness Disclosure" and "Year 2000 Statement" within
the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998.
The "Year 2000 problem" arises because some 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.
The potential issues include:
(1) Hardware -- An outside computer consultant has certified computers
at the Company's headquarters as being Y2K complaint.
(2) Software -- An internal survey has been conducted of the Company's
software and information systems critical to the Company's operations. Based on
certifications by its software information vendors, the Company believes that
the Year 2000 issues directly related to computers, software and information
systems will not have a material impact on the Company's business or financial
position.
(3) Third parties -- With respect to its major vendors, purchasers of
products, customers and service providers, the Company mailed more than 500
questionnaires to assist in an assessment of whether they will be Year 2000
compliant. The Company has evaluated those questionnaires, and that evaluation
indicates the third parties are, or will be, compliant by the end of the year.
(4) Field Operations -- As an operator of oil and gas properties, the
Company is conducting an analysis of the operational issues and costs that
would result from a failure caused by a Year 2000 event. A contingency plan has
not been developed for dealing with the worst case scenario. The Company plans
to complete such analysis and contingency planning by September 30, 1999.
The Company is 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 Company's consolidated financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
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, 2000. The Company believes that SFAS No. 133 will not
have a material impact on its financial statements and disclosures.
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<PAGE> 22
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The information contained in this Form 10-Q includes certain forward-looking
statements. When used in this document, such words as "expect", "believes",
"potential", and similar expressions are intended to identify forward-looking
statements. Although the Company believes that its expectations are based on
reasonable assumptions, it is important to note that actual results could
differ materially from those projected by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, the
timing and extent of changes in commodity prices for oil and gas, the need to
develop and replace reserves, environmental risk, the substantial capital
expenditures required to fund its operations, drilling and operating risks,
risks related to exploration and development, uncertainties about the estimates
of reserves, competition, government regulation and the ability of the Company
to implement its business strategy and to raise the necessary capital for such
implementation. Also see "FORWARD-LOOKING STATEMENTS" under "Item 1. BUSINESS"
of the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding the Company's quantitative and qualitative disclosures
about market risk is contained in "Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT THE MARKET RISK" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and reference is made to the information
contained there. Since December 31, 1998, as discussed in notes 4 and 6 in the
accompanying unaudited financial statements, debt subject to floating market
interest rates has increased significantly.
22
<PAGE> 23
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
For discussion of the sale of promissory notes that are convertible into
the Company's common stock see note 6 to the unaudited consolidated
financial statements.
Item 5. OTHER INFORMATION
(a) NASDAQ Market Listing
The Company was notified that it is not in compliance with NASDAQ SmallCap
Market listing requirements because the Company's tangible net assets are below
the $2 million minimum. Failure to achieve compliance would result in the
Company's common stock being delisted and no longer eligible to trade on that
market. The Company is currently in discussions with NASDAQ about its plans to
achieve compliance, and the Company is taking actions that, if successful, the
Company believes will bring it into compliance before an actual delisting
occurs.
(b) Delay in Annual Meeting
We expect the 1999 Annual Meeting of Shareholders to be held in November of
this year. Since that will be later in the year than the 1998 annual
shareholder meeting was held, we will allow shareholder proposals for inclusion
into the proxy statement for the 1999 annual meeting to be submitted through
August 27, 1999.
Proposals submitted after that date will be considered to be untimely.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Form of Salary Reduction Stock Option Agreement, previously
filed as an exhibit to the Company's form 10-Q filed August
23, 1999 and incorporated by reference herein.
10.1 Seventh Amendment to Second Amended and Restate Loan Agreement
dated June 30, 1999 by and between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A., previously filed as an exhibit
to the Company's form 10-Q filed August 23, 1999 and
incorporated by reference herein.
10.2 Subordination Agreement dated June 30, 1999, between Wells
Fargo Bank (Texas), N.A. and EXCO Resources, Inc., previously
filed as an exhibit to the Company's form 10-Q filed August
23, 1999 and incorporated by reference herein.
10.3 Intercreditor and Subordination Agreement dated June 30, 1999,
between NationsBank, N.A. and Wells Fargo Bank (Texas), N.A.,
previously filed as an exhibit to the Company's form 10-Q
filed August 23, 1999 and incorporated by reference herein.
10.4 Form of 7% Convertible Subordinated Note and list of
purchasers, previously filed as an exhibit to the Company's
form 10-Q filed August 23, 1999 and incorporated by reference
herein.
10.5 Form of Registration Rights Agreement executed in conjunction
with 7% Convertible Subordinated Notes, previously filed as an
exhibit to the Company's form 10-Q filed August 23, 1999 and
incorporated by reference herein.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated June 30, 1999, regarding the acquisition of the Jackson
Parish Properties.
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<PAGE> 24
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENUS EXPLORATION, INC.
Dated: December 20, 1999 BY: /s/ EUGENE L. AMES, JR.
--------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)
Dated: December 20, 1999 BY: /s/ PATRICK A. GARCIA
---------------------------------
Patrick A. Garcia
(Principal Accounting Officer)
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -----------
<S> <C>
4.1 Form of Salary Reduction Stock Option Agreement, previously filed as
an exhibit to the Company's Form 10-Q filed August 23, 1999 and
incorporated by reference herein.
10.1 Seventh Amendment to Second Amended and Restate Loan Agreement dated
June 30, 1999 by and between Venus Exploration, Inc. and Wells Fargo
Bank (Texas), N.A., previously filed as an exhibit to the Company's
Form 10-Q filed August 23, 1999 and incorporated by reference herein.
10.2 Subordination Agreement dated June 30, 1999, between Wells Fargo Bank
(Texas), N.A. and EXCO Resources, Inc., previously filed as an
exhibit to the Company's Form 10-Q filed August 23, 1999 and
incorporated by reference herein.
10.3 Intercreditor and Subordination Agreement dated June 30, 1999,
between NationsBank, N.A. and Wells Fargo Bank (Texas), N.A.,
previously filed as an exhibit to the Company's Form 10-Q filed
August 23, 1999 and incorporated by reference herein.
10.4 Form of 7% Convertible Subordinated Note and list of purchasers,
previously filed as an exhibit to the Company's Form 10-Q filed
August 23, 1999 and incorporated by reference herein.
10.5 Form of Registration Rights Agreement executed in conjunction with 7%
Convertible Subordinated Notes, previously filed as an exhibit to the
Company's Form 10-Q filed August 23, 1999 and incorporated by
reference herein.
27.1 Financial Data Schedule
</TABLE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 228
<SECURITIES> 55
<RECEIVABLES> 646
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 874
<PP&E> 9,659
<DEPRECIATION> 4,181
<TOTAL-ASSETS> 13,566
<CURRENT-LIABILITIES> 5,297
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> 139
<TOTAL-LIABILITY-AND-EQUITY> 13,566
<SALES> 819
<TOTAL-REVENUES> 1,631
<CGS> 0
<TOTAL-COSTS> 2,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220
<INCOME-PRETAX> (705)
<INCOME-TAX> 0
<INCOME-CONTINUING> (705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (705)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
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