<PAGE> 1
FORM 10-Q
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 September 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 November 12, 1999
----- --------------------------------
<S> <C>
Common Stock $.01 par value 11,055,285 shares
</TABLE>
<PAGE> 2
VENUS EXPLORATION, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
September 30, 1999 and December 31, 1998
(b) Consolidated Statements of Operations for 4
the three-month periods ended September 30,
1999 and 1998
(c) Consolidated Statements of Operations for 5
the nine-month periods ended September 30, 1999
and 1998
(d) Consolidated Statements of Cash Flows 6
for the nine-month periods ended
September 30, 1999 and 1998
(e) Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 23
Market Risk
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds 24
Item 5. - Other Information 24
Item 6. - Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 187 $ 126
Trade accounts receivable and other 822 492
-------- --------
TOTAL CURRENT ASSETS 1,009 618
OIL AND GAS PROPERTIES AND EQUIPMENT,
net (successful efforts method), at cost 4,454 6,399
OTHER PROPERTY AND EQUIPMENT, net 159 238
INVESTMENT IN EXUS Energy, LLC 7,224 --
DEFERRED FINANCING COSTS, at cost less
accumulated amortization 13 19
OTHER ASSETS, at cost less accumulated amortization 99 122
-------- --------
TOTAL ASSETS $ 12,958 $ 7,396
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 1,583 $ 1,269
Other liabilities 519 433
Revolving credit agreement 3,847 5,540
-------- --------
TOTAL CURRENT LIABILITIES 5,949 7,242
LONG-TERM DEBT 8,000 --
OTHER LONG-TERM LIABILITIES 55 23
-------- --------
TOTAL LIABILITIES 14,004 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;
11,042,823 and 10,971,325 shares
issued and outstanding as of September 30, 1999
and December 31,1998, respectively 110 110
Additional paid-in capital 17,301 17,209
Retained earnings (deficit) (18,298) (16,944)
Unearned compensation - restricted stock (159) (244)
-------- --------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (1,046) 131
-------- --------
$ 12,958 $ 7,396
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
-------- --------
(In thousands,
except per share data)
<S> <C> <C>
OIL AND GAS REVENUES $ 644 $ 659
-------- --------
EXPENSES
Production expense 297 311
Exploration expense, including dry holes 97 222
Depreciation, depletion and amortization 132 229
General and administrative 533 814
-------- --------
Total expenses 1,059 1,576
-------- --------
Operating profit (loss) (415) (917)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense (331) (184)
Equity in net earnings from EXUS Energy, LLC 278 --
Gain (loss) on sale of assets (220) (5)
Interest and other income, net 2 8
-------- --------
(271) (181)
-------- --------
Net earnings (loss) $ (686) $ (1,098)
======== ========
Earnings (loss) per share,
Basic and diluted $ ( 0.06) $ (0.11)
======== ========
Common shares and equivalents outstanding,
Basic and diluted 11,026 9,860
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------- --------
(In thousands,
except per share data)
<S> <C> <C>
OIL AND GAS REVENUES $ 1,463 $ 2,323
-------- --------
EXPENSES
Production expense 710 1,148
Exploration expense, including dry holes 458 1,037
Impairment of oil and gas properties -- 1,915
Depreciation, depletion and amortization 368 851
General and administrative 1,602 2,302
-------- --------
Total expenses 3,138 7,253
-------- --------
Operating profit (loss) (1,675) (4,930)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense (551) (411)
Equity in net earnings from EXUS Energy, LLC 278 --
Gain (loss) on sale of assets 584 5
Interest and other income, net 10 30
-------- --------
321 (376)
-------- --------
Net earnings (loss) $ (1,354) $ (5,306)
======== ========
Earnings (loss) per share
Basic and diluted $ (0.12) $ (0.54)
======== ========
Common shares and equivalents outstanding,
Basic and diluted 10,997 9,827
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $(1,354) $(5,306)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net earnings from EXUS Energy, LLC (278) --
Depreciation, depletion and amortization 491 1,018
Impairments, abandoned leases and dry hole costs 19 2,440
Gain on sale of property and equipment (584) (5)
Compensation expense for restricted stock,
stock options and stock granted 150 133
Interest expense paid with common stock 27 --
Deferred interest expense on EXCO Note 35 --
Change in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable and other (329) 1,539
Increase (decrease) in trade accounts payable 314 (2,054)
Increase in advances from interest
owners -- 8
Increase (decrease) in other liabilities 85 (141)
------- -------
Net cash (used in) operating activities (1,424) (2,368)
------- -------
INVESTING ACTIVITIES
Capital expenditures (468) (2,876)
Investment in EXUS Energy, LLC (6,946) --
Net proceeds from sales of property and equipment 2,616 51
------- -------
Net cash (used in) investing activities (4,798) (2,825)
------- -------
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt
and revolving credit agreement 8,200 4,812
Proceeds from options exercised -- 21
Principal payments on long-term debt (1,896) (68)
Deferred financing costs (21) (51)
------- -------
Net cash provided by financing activities 6,283 4,714
------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 61 (479)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 126 682
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 187 $ 203
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
VENUS EXPLORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months And Nine Months Ended September 30, 1999 and 1998
1. Organization
Venus Exploration, Inc. (the "Company") is a Delaware Corporation 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 September 30, 1999 and the results of its operations for the three
and nine months ended September 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 nine month periods ended
September 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.
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 Company's investment in EXUS and the related borrowings (see note 6) had
occurred on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
September 30,
-------------------------
1999 1998
---- ----
(In thousands, except
per share data)
(Unaudited)
<S> <C> <C>
Net loss $ (1,508) $ (5,206)
Basic and diluted loss per share $ (0.14) $ (0.53)
</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 September 30, 1999 and 1998
are calculated based on 11,026,048 and 9,859,815 weighted average shares
outstanding, respectively, and the nine month periods ended September 30, 1999
and 1998 are calculated based on 10,996,641 and 9,826,790 shares outstanding,
respectively.
8
<PAGE> 9
6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Wells Fargo Bank-Revolving Credit
Due June 30, 2000 $ 3,847 $ 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 --
------- -------
11,847 5,540
Less: Current maturities of long-term debt 3,847 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 September 30, 1999, the interest rate was
9.25 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 September
30, 1999, the borrowing base was $3,870,000 and the amount drawn by the Company
was $3,847,000 resulting in an unused borrowing base of $23,000.
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 (as defined) of at least
$5,250,000.
At September 30, 1999, the Company was not in compliance with these
covenants. The Company has obtained waivers of these events of non-compliance
from the lender through December 31, 1999; however, because of uncertainty
regarding the Company's ability to be in compliance with the covenants after
December 31, 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.
Under the current waiver the Company must apply any excess cash received in
the sale of its interest in EXUS (see note 11, Subsequent Events, Sale of
Investment in EXUS) to pay down the outstanding balance of the credit facility.
Excess cash would be any cash received in excess of paying all obligations
related to the Company's investment in EXUS including the EXCO Note (see below),
and repayment of the $750,000 Subordinated Debenture.
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 September 30, 1999 was paid with 13,440
shares of the Company's common stock.
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 rate 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.
10
<PAGE> 11
If an event of default occurs, the noteholders may demand immediate
repayment of the principal amount and any accrued but unpaid interest. They will
also have all other rights generally allowed by contract and applicable law.
Events of default include, 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 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 November 1, 1999, the Company was required to provide each stockholder
entitled to vote at the next annual meeting a proxy statement. 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 by December 31, 1999,
the Company would be required to prepay $3 million of the EXCO Note plus accrued
interest thereon. (The Company is
11
<PAGE> 12
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 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 Company was unable to meet the
November 1, 1999 deadline for providing stockholders with a proxy statement
because, as discussed in note 9, the Company's proxy statement is currently
being reviewed by the Securities and Exchange Commission. However, the Company
still expects to obtain stockholder approval by December 31, 1999.
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 December 31, 1999. If the Company fails to be in compliance by
December 31, 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.
12
<PAGE> 13
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.
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 two key employees are
geoscientists who are central to the Company's business of using advanced
geoscience technology to explore for oil and gas reserves. The Company believes
that these grants, issued during the first year it became publicly traded, is an
incentive that aligns the key employees' interest with that of the Company's
shareholders. 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 nine month period ended September 30, 1999, the Company expensed
$13,000 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.
During the fourth quarter of 1998, management expects to recommend to the
Compensation Committee of the Board of Directors that approximately 100,000
stock options be granted to fund employee salary reductions for the period
August 1, 1999 through September 30, 1999. In addition, management will
recommend granting, subject to shareholder approval, approximately 150,000 stock
options to fund employee salary reductions for the period October 1, 1999,
through December 31, 1999. Management's recommendation will be that (i) the
stock options would be granted at an exercise price equal to the market price of
the stock as of the date of grant, and (ii) the terms of the stock options will
be similar to the options granted on March 1, 1999.
8. Accounting for Income Taxes
No provision for income taxes has been recorded for the periods ended
September 30, 1999 and 1998 due to the losses recorded by the Company.
13
<PAGE> 14
9. Commitments and Contingencies
The Company is not involved in any claims or legal proceedings.
In connection with the Securities and Exchange Commission's review of the
Company's proxy statement previously discussed, the Commission is also reviewing
the Company's historical financial statements. Although the ultimate resolution
of the review is not known, it is not expected to have a material adverse impact
on its previously reported results of operations or its financial condition.
10. Liquidity
The Company has incurred significant losses over the past three years. In
addition, the Company has incurred significant indebtedness, and at September
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
December 31, 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 its
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
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
14
<PAGE> 15
EXUS, which acquired an interest in the Jackson Parish Properties. As discussed
in Note 11, on November 2, 1999, the Company signed a non-binding letter of
intent to sell its investment in EXUS. If the sale is completed in December
1999, the Company expects to record a gain in the fourth quarter of 1999. As
discussed in note 6, during the quarter ended June 30, 1999, the Company issued
Subordinated Notes in the principal amount of $1,000,000 for net proceeds of
$975,000, and it issued the EXCO Note. As discussed in note 11, in October 1999
the Company issued a $750,000 Subordinated Debenture. Finally, increases in oil
and gas prices, and the continuation of 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.
11. Subsequent Events
Subordinated Debenture
During October 1999, the chief executive officer of the Company advanced the
Company $750,000 in the exchange for a Subordinated Debenture (the "Debenture")
issued by the Company. The net proceeds to the Company were approximately
$730,000 after legal and other costs associated with the transaction. The
Company used the proceeds to fund working capital. The Company's obligations to
the debenture holder is unsecured and subordinated to the rights of the
Company's bank and other lenders (except for the subordinated note holders who
have equal priority) unless those lenders agree otherwise. Interest is payable
monthly, in cash, at a rate equal to Frost National Bank prime rate plus 1%. On
November 12, 1999, the interest rate was 9.25%.
If an event of default occurs, the Debenture holder may demand immediate
repayment of the principal amount and any accrued but unpaid interest. The
Debenture holder 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 Debenture matures in 2004, at which time all the unpaid principal is due
and payable. The Company is obligated to redeem the Debenture if it raises
enough cash to do so by either selling its investment in EXUS or selling equity
securities. The cash raised by selling EXUS is after repayment of all debt and
obligations incurred in connection with the acquisition of the interest.
The Subordinated Debenture was issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933. As a
result, the transfers of such securities are restricted.
Potential Sale of Investment in EXUS
On November 2, 1999, the Company signed a non-binding letter of intent to
sell its investment in EXUS. If the sale is completed in December 1999, the
Company expects to record a gain in the fourth quarter of 1999. On April 27,
1999 the Company was notified that it was not in compliance with NASDAQ SmallCap
Market listing requirements because the Company's tangible net assets are below
the minimum required for a NASDAQ SmallCap listing. On November 12, 1999, the
NASDAQ Hearing Review Panel granted the Company a conditional extension until
December 31, 1999, to achieve compliance with the tangible net worth
requirement. The panel granted the extension because Venus' anticipated gain
from selling its interest in EXUS, if realized, is
15
<PAGE> 16
expected to put the Company in compliance with the Nasdaq SmallCap tangible net
worth requirement.
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.
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
16
<PAGE> 17
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
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 September 30, 1999, the Company had a working capital deficit of $4.9
million compared with a deficit of $6.6 million at December 31, 1998, an
increase in working capital of $1.7 million. This increase in working capital is
due to an increase in long-term debt of $8.0 million plus $2.6 million in net
proceeds from the sale of oil and gas properties offset by capital expenditures
of $7.7 million and the operating deficit (before changes in operating assets
and liabilities) of $1.2 million.
Net cash used in operating activities during the nine months ended September
30, 1999, was $1,424,000, whereas $2,368,000 was used in operating activities
for the same nine-month period in 1998. Of the $944,000 decrease in net cash
used in operating activities, $718,000 is due to routine net changes in
operating assets and liabilities. The remaining $494,000 is due to a $422,000
reduction in revenue net of production expense, and a net increase in other
income and expense of $217,000 which were offset by reductions in general and
administrative expense of $699,000 (see "Results of Operations" below). During
the first nine months of 1999, the Company realized a net loss of $1,354,000.
This compares with a net loss of $5,306,000 for the first nine months of 1998.
These losses include non-cash expenses (impairments, depreciation, depletion and
amortization, compensation expense for restricted stock and stock options,
interest expense for common stock and deferred interest expense) totaling
$722,000 in 1999 and $3,591,000 in 1998. The 1999 loss is net of equity of net
earnings from EXUS, and a gain from the sale of long term assets of $584,000 in
1999 and $5,000 in 1998.
During the first nine months of 1999 the Company incurred capital
expenditures on oil and gas properties of $468,000, an investment in EXUS
Energy, LLC of $6,946,000 and received proceeds from the sale of property and
equipment of $2,616,000. During the same period in 1998, the Company had capital
expenditures of $2,876,000 and received proceeds of $51,000 from the sale of
property and equipment.
For the nine months ended September 30, 1999, $6,283,000 was provided by
financing activities consisting of $8,200,000 from issuance of long-term debt
less $1,917,000 of repayments and deferred financing costs. This compares with
$4,714,000 provided by financing activities for the nine-month period ended
September 30, 1998 from the issuance of $4,812,000 in long-term debt offset by
repayments and deferred financing costs of $119,000. Of the $8,200,000 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 September
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 December 31, 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
17
<PAGE> 18
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 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. On November 2, 1999, the Company signed a non-binding letter
of intent to sell its investment in EXUS. If the sale is completed in December
1999, the Company expects to record a gain in the fourth quarter 1999. If the
sale is completed, the Company expects the EXCO Note would be repaid in full,
and to the extent excess funds are available, they will be used to repay first,
the Subordinated Debenture and secondly, the Wells Fargo Bank credit facility.
To the extent the outstanding balance under the credit facility is reduced,
unused borrowing base could become available to fund the company's budget.
During the three month period ended September 30, 1999, the Company received
a $200,000 distribution from EXUS. Under the terms of the EXUS agreement with
its lender, EXUS may distribute an additional $100,000 ($50,000 net to Venus'
50% interest) by December 31, 1999 and during calendar year 2000, another
$1,050,000 ($525,000 net to Venus' 50% interest) provided funds are available.
On April 27, 1999 the Company was notified that it was not in compliance
with NASDAQ SmallCap Market listing requirements because the Company's tangible
net assets are below the minimum required for a NASDAQ SmallCap
18
<PAGE> 19
listing. On November 12, 1999, the NASDAQ Hearing Review Panel granted the
Company an extension until December 31, 1999, to achieve compliance with the
tangible net worth requirement. The panel granted the extension because Venus'
anticipated gain from selling its interest in EXUS, if completed, is expected to
put it in compliance with the Nasdaq SmallCap tangible net worth requirement.
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 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, have improved the
Company's cash flow.
(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 nine month period ended June 30, 2000, are budgeted at
approximately $1.5 million. Funding is not currently available for budgeted
expenditures, 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 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 September 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 or a sale of properties.
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 production, various cost cutting measures offset by increasing
oil and gas prices. The variances are addressed in the following paragraphs by
significant operating caption.
19
<PAGE> 20
As reflected in the following table, oil and gas volumes decreased while
average prices increased in 1999, compared with 1998. 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>
Nine Months Ended September 30,
Gas (Mcf) 236,902 $ 2.05 426,246 $ 2.20
Oil (Bbls) 63,410 $15.32 98,169 $13.77
Three Months Ended September 30,
Gas (Mcf) 77,908 $ 2.56 140,693 $ 2.12
Oil (Bbls) 22,981 $19.25 30,764 $11.51
</TABLE>
In addition to the above, Venus's share of production attributable to its
equity interest in EXUS totaled 279,217 mcf at an average price of $2.43 per mcf
for the three month and nine month periods ended September 30, 1999.
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 nine month period ended September
30, 1999 include 21,400 Mcf and 210 Barrels attributable to the properties sold
during the same period.
Three Months Ended September 30, 1999 and 1998
The Company reported a net loss of $686,000 for the quarter ended September
30, 1999, compared to a net loss of $1,098,000 in the same quarter in 1998. The
1999 loss reflects a $215,000 non-cash loss on the sales of oil and gas
properties. The decrease in the loss is due to decreases in production expense
($14,000), exploration expense ($125,000), depreciation, depletion, and
amortization (DDA) ($97,000), general and administrative expenses ($281,000),
reduced by an increase of interest expense ($147,000). Also contributing to the
decrease in the loss is income from EXUS Energy ($278,000) reduced by decreases
in oil and gas revenues ($15,000).
For the third quarter of 1999, oil and gas revenues decreased by $15,000.
The decrease is due to the sale of properties that resulted in a decrease in
revenue of $143,000, and a decline in production rates in the remaining
properties resulted in a decrease of $85,000. Improvement in oil and gas prices
had a $212,000 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 $14,000 due to the sale of properties
($36,000) offset by increased operating costs ($22,000) as a result of increased
severance taxes, due to higher prices, along with an increase in maintenance and
repair operations. Production expense average $1.38 per mcfe during the three
month period ended September 30, 1999, compared to $.96 per mcfe for the same
period in 1998.
Exploration expense decreased by $125,000. A decrease in dry holes expenses
accounted for $15,000 of the decrease, employee costs decreased by
20
<PAGE> 21
$13,000 due to reductions in staff, and the balance of the decrease ($97,000) is
due to reduced exploration activities.
Depreciation, depletion and amortization decreased by $97,000 due to the
sale of properties ($33,000), the decline in production rates ($44,000), and the
lower cost basis in the properties due to the impairments recorded in 1998
($20,000).
General and administrative expense decreased by $281,000. 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 $165,000 to the decrease. The reduction in office
personnel, originally estimated to reduce cost by $38,000 per month has actually
reduced cost by over $40,000 per month. Accounting services decreased by $73,000
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 increased by $147,000 due to a higher average loan balance
outstanding of $11,895,200 during the third quarter of 1999, as compared to
$6,299,800 during the third quarter of 1998. The higher debt is due to the
Company's investment in EXUS and the related EXCO Note. This was reduced by a
decrease in deferred loan costs $21,000 during the current quarter as a result
of the early extinguishment of debt during the fourth quarter of 1998.
Nine Months Ended September 30, 1999 and 1998
The Company reported a net loss of $1,354,000 for the nine months ended
September 30, 1999, compared to last year's net loss of $5,306,000. The
$3,952,000 decrease is attributable to the gain from the sale of properties
($579,000), increase in net income from EXUS Energy ($278,000), decreases in
production expense ($438,000), exploration expense ($579,000), oil and gas
impairments ($1,915,000), DDA ($483,000), general and administrative expenses
($700,000). These decreases in expenses were offset by a reduction in interest
and other income ($20,000), oil and gas revenues ($860,000) and an increase in
interest expense ($140,000).
For the first nine months of 1999, oil and gas revenues decreased by
$860,000. The decrease is due to the following: the decline in production rates
resulted in a decrease in revenue of $712,000 while the sale of properties
resulted in a decrease in revenue of $400,000. Improvement in oil and gas prices
had a $252,000 positive impact on revenue.
Production expense decreased by $438,000 due to the sale of properties
($194,000) and reduced operating costs ($224,000) 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 $1.15 per mcfe during the nine month period ended
September 30, 1999, compared to $1.13 per mcfe for the same period in 1998.
Exploration expense decreased by $579,000. Dry holes expenses accounted for
$509,000 of the decrease and the balance of the decrease ($70,000)is due to
reduced exploration activities.
Impairment of oil and gas properties decreased by $1,915,000. The decline is
a result of rising product prices during the current nine month period as
opposed to falling prices during the comparable 1998 period.
21
<PAGE> 22
Depreciation, depletion and amortization decreased by $483,000 due to the
sale of properties ($60,300), the decline in production rates ($273,400), and
the lower cost basis in the properties due to the impairments recorded in 1998
($149,300).
General and administrative expense decreased by $700,000. 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 $407,000 to the decrease. Accounting services decreased by
$144,000 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 increased by $140,000 due to increase in interest expense
of $201,000 as a result of a higher average loan balance outstanding of
$6,872,000 during the first nine months of 1999, as compared to $4,444,000
during the same period of 1998. The higher debt is due to the Company's
investment and the related EXCO Note. This was offset by a decrease in deferred
loan costs of $61,000 as the result of the early extinguishment of debt during
the fourth quarter 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 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, well operators, 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 has conducted an analysis of the operational issues that would result
from a failure caused by a Year 2000 event. Only one well has a
computer-operated flow meter that has not been certified as Year 2000 compliant.
However, the company has two independent, non-computer back-up systems on that
well, a chart device and a sales meter. If the computer flow meter were
22
<PAGE> 23
to fail, the company believes the back-up systems would continue to provide
necessary production and sales data.
(5) Worst Case Scenario - The failure of a material third party to
resolve critical Year 2000 issues could have a serious adverse impact on the
Company's ability to continue operations and meet obligations. The major issues
include: (i) the ability of customers to measure and pay for oil and gas
production delivered, (ii) the ability of vendors and suppliers to invoice for
services and products for payments received, (iii) the ability of non-operated
partners to process and pay their share of joint interest billings, and (iv) the
ability of operators to disburse net revenue and render joint interest billings
to the Company. The Company is developing a contingency plan to cover these
issues and expects to complete this plan prior to December 31, 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.
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, as amended.
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
23
<PAGE> 24
notes 4 and 6 in the accompanying unaudited financial statements, debt subject
to floating market interest rates has increased significantly.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
For discussion of the sale of certain 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. On November 12, 1999, the Company received from NASDAQ a conditional
extension To December 31, 1999 to achieve compliance. The NASDAQ Hearing Review
Panel granted the extension because the Company has entered into a non-binding
letter of intent to sell its investment in EXUS in December 1999, and if the
sale is completed Venus expects to report a gain which will increase its
tangible net assets above the minimum requirement. A condition to the extension
is the maintenance of the per-share bid price at $1.00 or higher.
(b) Increase in Number of Directors
The Board of Directors adopted a resolution in conformance with the bylaws
of the Company that increased the number of members of the Board of Directors to
eight (8). Subsequently the Board of Directors elected Mr. Michael E. Little to
fill the vacancy created by the increase in the size of the board.
Mr. Little, 44, has been employed as Chairman and Chief Executive Officer
of South Texas Drilling and Exploration, Inc., an oil and gas drilling company
based in San Antonio, Texas, since 1999. From 1982 until 1999 he was President
and Chairman of the Board of Dawson Production Services, Inc., a well servicing
company based in San Antonio, Texas. He has more than 23 years of experience in
oil and gas operations management, including six years as a drilling foreman and
engineer. He is a graduate of Texas Tech University with a B.S. Degree in
Petroleum Engineering. He became a director of Venus Exploration in 1999. Venus
Exploration also retains him as a consultant.
(c) Employment Agreement with Chairman of the Board
Eugene L. Ames, Jr., executed an employment agreement effective July 1,
1999. It is for a two-year term and is similar to his previous employment
agreement, which expired in the second quarter of 1999. His annual salary under
the agreement is $190,000 per year and other compensation, including the use of
an automobile. Since May 1998, Eugene L. Ames, Jr., has declined the use of the
automobile under his previous employment agreement and under the present one.
The employment agreement also included agreements by Eugene L. Ames, Jr. with
regard to confidentiality and noncompetition in order to protect Venus
Exploration's proprietary information.
Beginning on March 1, 1999, Mr. Ames, Jr. agreed to take a 21.5% salary
reduction, and on May 1, 1999, the salary reduction was increased to 35%. In
return for the salary reduction, Venus Exploration granted Mr. Ames, Jr.,
52,074 options to buy shares of Venus Exploration's common stock. The exercise
price is $1.28, which was 110% of the fair market value of a share of the common
stock on the date of grant of the option. The options expire on February 28,
2004, and they vested in semi-monthly increments beginning March 1, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Executive Employment Agreement dated July 1, 1999, between
Venus Exploration, Inc. and E. L. Ames, Jr.
10.2 Eighth Amendment to Second Amended and Restated Loan Agreement
dated effective September 30, 1999, between Venus Exploration,
Inc. and Wells Fargo Bank (Texas), N.A.
10.3 Subordinated Debenture Agreement dated October 26, 1999,
between Venus Exploration, Inc. and E. L. Ames, Jr.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
24
<PAGE> 25
SIGNATURES
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: November 22, 1999 BY: /S/ EUGENE L. AMES, JR.
----------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)
Dated: November 22, 1999 BY: /S/ PATRICK A. GARCIA
---------------------------------
Patrick A. Garcia
(Principal Accounting Officer)
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.1 Executive Employment Agreement dated July 1, 1999, between Venus
Exploration, Inc. and E. L. Ames, Jr.
10.2 Eighth Amendment to Second Amended and Restated Loan Agreement dated
effective September 30, 1999, between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A.
10.3 Subordinated Debenture Agreement dated October 26, 1999, between
Venus Exploration, Inc. and E. L. Ames, Jr.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered effective
as of the 1st day of July, 1999, by and between VENUS EXPLORATION, INC., a
company organized and existing under the laws of the State of Delaware
("Company"), and E. L. AMES, JR., an individual residing in San Antonio, Bexar
County, Texas ("Employee").
FOR AND IN CONSIDERATION of the mutual covenants herein contained and
the mutual benefits to be gained by the performance thereof and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. EMPLOYMENT, Company hereby employs Employee and Employee hereby
accepts employment with Company on the terms and conditions herein set forth. In
consideration of Employee's employment by Company, Employee agrees to the terms,
conditions and covenants of this Agreement.
2. TERM OF EMPLOYMENT. Employment of Employee by Company shall be for a
term of two (2) years.
3. DUTIES AND RESPONSIBILITIES. Employee shall serve as Chief Executive
Officer and, if elected by the Board of Directors of the Company, Chairman of
the Board of Directors of the Company.
3.01 EXTENT OF SERVICES. Employee shall devote his efforts to
the advancement of the interests of the company's business, and he
shall pursue no new business interests other than passive investments,
without the prior written approval of the Company, which approval shall
not be unreasonably withheld. Employee shall minimize the interference
any such activities have on the conduct of the Company's business.
3.02 APPROVED OTHER BUSINESS INTERESTS. The Company
understands and accepts the facts that the Employee owns certain
interests in oil and gas properties in his own right and that the
Employee may develop those interests and the surrounding Areas of
Mutual Interest without offering same to, or in any way involving, the
Company. However, Employee agrees that he will not acquire any new
interests outside of such Areas of Mutual Interests and that all new
oil and gas projects in which he is involved outside of such Areas of
Mutual Interest will be considered a Company project.
4. COMPENSATION AND BENEFITS. The compensation and other benefits
listed below as payable to or accruing to Employee shall constitute the full
consideration to be paid to Employee for all services to be rendered by Employee
to Company and all other agreements of Employee hereunder.
4.01 BASE SALARY. As compensation for all services of whatever
type rendered by Employee in the performance of his duties under this
Agreement and for all other agreements and undertakings of Employee
hereunder, Company shall pay to Employee a base salary to be determined
from time to time and approved by the Board of Directors; however, in
no event will such salary be less than $190,000.00 per year without the
written consent of Employee. Such salary shall be payable in equal
regular installments in accordance with Company's customary
-1-
<PAGE> 2
payroll payment policy. It is specifically understood and agreed that a
portion of Employee's annual base salary hereunder is attributable to
Employee's agreement, pursuant to Section 8 hereof, to maintain the
confidentiality of "Confidential Information" (as herein defined), both
during and after the term of this Agreement, and that Employee's salary
would be reduced significantly if Employee did not agree to be bound by
the terms of Section 8. It is further understood and agreed that a
portion of Employee's annual base salary is attributable to Employee's
agreement, pursuant to Section 9 hereof, not to compete with Company
either during or for a specified period of time after the expiration or
termination of this Agreement and that Employee's annual salary would
be reduced significantly if Employee did not agree to be bound by the
terms of Section 9 hereof . Employee agrees that he is being fairly and
reasonably compensated for the agreements undertaken by Employee
pursuant to Sections 8 and 9 hereof.
4.02 BENEFITS. Employee shall be entitled to four weeks paid
vacation each year, subject to the times for such vacation being
mutually agreed upon by Employee and Company. Employee shall be
entitled to participate in the Company benefit programs designed for
Company employees with similar salaries, duties and responsibilities.
4.03 EXPENSES. Company shall pay or reimburse Employee for all
reasonable and necessary expenses actually incurred or paid by Employee
during the term of this Agreement in the performance of Employee's
services under this Agreement, upon presentation of expense statements
or vouchers or such other supporting documents as Company may
reasonably require.
4.04 AUTOMOBILE. The Company shall provide Employee an
automobile of class, style and age that are commensurate with the
position he holds and the needs of Employee in that position.
5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Employee represents,
warrants and agrees that: (i) Employee is not currently bound by any employment
agreement, restriction or other obligation of any kind that would in any way
materially interfere with or be inconsistent with the services to be provided by
Employee to Company hereunder; and (ii) Employee is free to enter into this
Agreement and the services and work product provided by Employee to Company
hereunder will be original works of Employee.
6. REGULATIONS AND POLICIES. Employee shall, during the term of this
Agreement, comply with all Company regulations and policies, including, without
limitation, security regulations.
7. CONFIDENTIAL INFORMATION. The term "Confidential Information," as
used herein, shall mean and include any and all documents, knowledge, data or
information (in whatever medium) known, communicated, provided or made available
to Employee, whether before or after the execution of this Agreement, which are
marked with a confidentiality legend by Company or which Employee knows or
reasonably should know constitute trade secrets of Company or information
belonging to third parties to whom Company may have an obligation of
confidentiality; provided, however, that Confidential Information shall not
include any information or materials which are or become generally available to
the public other than as a result of any breach of the provisions of this
Agreement or any other agreement between Employee and Company (or their
respective successors, assigns or affiliates).
8. CONFIDENTIALITY. Employee acknowledges and agrees that in his
employment by Company he occupies a position of trust and confidence and that
during the term of his employment
-2-
<PAGE> 3
under this Agreement he will have access to and will become familiar with
Company's Confidential Information. Employee further acknowledges and agrees
that the Confidential Information, including any and all copies thereof,
constitutes trade secrets of Company and is confidential and proprietary
information of Company. Employee further acknowledges and agrees that he has no
right, title, interest or claim in or to any of the Confidential Information or
any copies thereof. Employee agrees to maintain the confidentiality of the
Confidential Information and agrees that he will not take, or permit to be
taken, any action with respect to the Confidential information (or any portion
thereof) which is inconsistent with the confidential and proprietary nature of
such information. Without limiting the generality of the foregoing, Employee
agrees that he will not, directly or indirectly, without the prior specific
written consent of Company, except as specifically required in the course of his
employment,
(i) communicate, divulge, transmit or otherwise disclose any
Confidential Information to any person, firm, partnership,
corporation or other entity, or
(ii) use any Confidential Information in any manner except as
specifically required in connection with the performance of
services hereunder.
Employee agrees to take any and all steps reasonably necessary to
protect the confidentiality of the Confidential Information. Employee shall,
upon termination of this Agreement, immediately return to Company all
Confidential Information in Employee's control or possession, including, without
limitation, any and all copies thereof. This Section shall survive the
expiration or termination of this Agreement for a period of two (2) years.
9. RESTRICTIVE COVENANT AND NON-COMPETITION.
9.01 UPON TERMINATION. As an independent covenant, Employee
agrees that, for a period of two (2) years commencing upon the
termination of this Agreement by expiration of its term or by the
Company for cause, as provided in Section 12 of this Agreement,
Employee will not, unless granted express written permission by the
Board of Directors of Company, develop, work on or in any way advance,
directly or indirectly, as an officer, director, stockholder, employee,
advisor, consultant, partner, owner, agent, representative or in any
other capacity, any competitor of Company or any other third party, any
oil, gas and mineral exploration or production from the geographic
areas, horizons, plays, formations or trends that the Company was
studying to any significant extent during his employment; provided,
however, that the foregoing shall not prohibit Employee from becoming a
passive shareholder owning less than five percent (5%) of the shares of
another corporation whose shares are publicly traded.
9.02 COMPANY EMPLOYEES. As an independent covenant, Employee
agrees, during the term of this Agreement and, upon termination or
expiration of this Agreement for any reason, for a period of eighteen
(18) months thereafter, not to induce or attempt to influence any
employee of Company to terminate his or her employment with Company.
9.03 REASONABLENESS. Employee acknowledges and agrees that the
covenants and agreements set forth in this Section are made to protect
the legitimate business interests of Company, including Company's
interest in Confidential Information, and not to restrict his mobility
or to prevent him from utilizing his skills. Employee recognizes and
acknowledges the necessarily national and scope of the market served by
Company and agrees that the restrictions set forth in this Section are
reasonable.
9.04 SURVIVAL. This Section 9 shall survive the expiration or
termination of this Agreement.
-3-
<PAGE> 4
10. PERFORMANCE BY EMPLOYEE. Employee acknowledges and agrees that the
value of the Confidential Information and the success and long-term viability of
Company depends largely upon Employee's performance of his obligations under
Sections 8 and 9 of this Agreement.
11. INJUNCTIVE RELIEF. Employee acknowledges and agrees that in the
event of any unauthorized use or disclosure of Confidential Information in
violation of the terms and conditions of Section 8 of this Agreement by
employee, or any breach of any of the terms and conditions of Section 9 of this
Agreement by Employee, Company will suffer irreparable injury not compensable by
money damages and, therefore, will not have an adequate remedy available at law.
Accordingly, if Company institutes an action or proceeding to enforce the
provisions of Section 8 or 9 of this Agreement, Company shall be entitled to
obtain such injunctive relief or other equitable remedy from a court of
competent jurisdiction as may be necessary or appropriate to prevent or curtail
any such breach, threatened or actual. The foregoing shall be in addition to and
without prejudice to such other rights as Company may have at law or in equity.
12. TERMINATION.
12.01 TERMINATION. Employee's employment hereunder is
terminable, with cause, at the will of either Company or Employee upon
the giving of 30 days' prior written notice by either party; otherwise,
it shall continue for the term of the Agreement as specified in section
2, at which time it shall terminate. If Employee's employment is
terminated for cause by the Company before the expiration of the term
of the Agreement, Company shall discontinue Employee's compensation as
of the effective date of the termination of Employee's employment. If
Employee's employment is terminated for cause by the Employee, is
terminated involuntarily, including, without limitation, termination
resulting from the death or mental or physical disability of Employee,
or is terminated without cause by the Company, Employee's regular
compensation shall continue for the remainder of the term of the
Agreement. For purposes of this Agreement, "for cause" shall mean:
(a) Any willful or intentional act of either Employee
or the Company that has or will have the effect of injuring
the reputation or business relationships of the other party or
its affiliates;
(b) The non-terminating party's conviction of or
entering a plea of nolo contendere to a charge of felony or a
misdemeanor involving dishonesty or fraud;
(c) The non-terminating party's material breach of
any of the terms, covenants or conditions contained in this
Agreement; provided, however, that with respect to any breach
that can be effectively cured by some act of a party,
termination of this Agreement shall be revoked if, within ten
(10) days after receipt of notice of such breach from the
non-breaching party, the breaching party cures such breach to
the reasonable satisfaction of the other party or, if such
cure cannot reasonably be accomplished within such ten (10)
day period, if the breaching party initiates efforts to cure
such breach within such ten (10) day period and diligently
pursues such cure efforts thereafter until such cure is
accomplished; or
(d) The non-terminating party's repeated or
continuous failure, neglect or refusal to perform its duties
under this Agreement.
-4-
<PAGE> 5
Until the effective date of termination, Employee, if requested to do
so by Company, shall continue to render services to Company.
12.02 NO DUTY TO MITIGATE. Employee shall not be required to
mitigate the amount of any post-employment payment or benefit paid or
provided to Employee under this Agreement by seeking other employment
or otherwise, nor shall the amount of any such payment or benefit paid
or provided to Employee under this Agreement be reduced or offset by
any compensation earned by Employee as the result of employment by
another employer or otherwise.
13. EFFECT OF TERMINATION. Upon the termination or expiration of this
Agreement: (i) Employee shall immediately return to Company any and all
Confidential Information in his possession or control (including, without
limitation, all copies thereof and all materials incorporating such Confidential
Information), (ii) Employee shall have no further obligation to perform services
for Company hereunder, provided, however, that Employee shall continue to be
bound by the terms of Sections 8 and 9 hereof, and (iii) except to the extent
specifically provided in Section 12 above, Company shall have no further
obligation to compensate or provide benefits to Employee hereunder.
14. BUSINESS KNOWLEDGE AND EXPERIENCE. Notwithstanding anything to the
contrary contained in this Agreement, it is specifically understood and agreed
that Employee has, prior to entering into this Agreement, developed significant
business expertise, ideas and experience (collectively "Business Experience")
that such Business Experience, to the extent it applies to business operations
generally and not to the specific operations, technologies or trade secrets of
Company, shall not be deemed to constitute Confidential Information, and nothing
contained in Section 8 of this Agreement shall be deemed to prevent Employee
from using such general Business Experience in such a manner as does not violate
any of the other terms and conditions of this Agreement.
15. GENERAL.
15.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
All representations, warranties and covenants contained herein shall
survive the execution of this Agreement and the consummation of the
transactions contemplated hereby.
15.02 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
respective heirs, successors, assigns and legal representatives, but it
shall not be assignable by Employee. Any purported assignment in
violation of the foregoing shall be invalid and of no force and effect.
No assignment of this Agreement shall relieve the assigning party of
any obligation or liability hereunder.
15.03 NOTICES. Any notice, demand, payment, request, response
or other communication provided for herein or given hereunder to a
party hereto shall be in writing and shall be deemed to have been duly
given if signed by the party giving it. Notice shall be deemed
effective upon delivery by hand, or on the third business day after it
is deposited in the United States mail, postage prepaid (registered or
certified mail) or on the business day after it is sent by federal
express or similar overnight service to the address of the parties
listed below:
-5-
<PAGE> 6
If to Company: John Y. Ames,
President
1250 N.E. Loop 410, Suite 1000
San Antonio, Texas 78209
If to Employee: E. L. Ames, Jr.
1250 N.E. Loop 410, Suite 1000
San Antonio, Texas 78205
or to such other address as the party to receive such communication has
last designated by notice delivered to the other party in accordance
with the foregoing provisions.
15.04 WAIVER. Failure to delay in insisting upon strict
compliance with any provision hereof shall not be deemed a waiver of
such provision or any other provision hereof with respect to prior,
contemporaneous or subsequent occurrences. No waiver by either party of
any right hereunder or of any default shall be binding upon such party
unless such waiver is in writing and signed by Employee (in the case of
Employee) or a duly authorized officer of Company in the case of
Company.
15.05 GOVERNING LAW; VENUE. This Agreement shall be governed
by and construed in accordance with the laws of the State of Texas.
Employee and Company hereby agreed that the sole and exclusive place of
jurisdiction and venue for resolution of any disputes arising hereunder
or relating hereto shall be San Antonio, Bexar County, Texas, and
Employee hereby specifically consents to personal jurisdiction in such
location.
15.06 ENTIRE AGREEMENT. This Agreement, as may be amended from
time to time, shall represent the sole and entire agreement between
Employee and Company respecting the employment relationship between
Company and Employee. There are no representations, agreements,
arrangements or understandings, oral or written, between the parties
hereto relating to the employment relationship between Company and
Employee that are not fully expressed in this Agreement. This Agreement
may be amended only by a writing signed by both parties.
15.07 SEVERABILITY. The provisions of this Agreement are
severable and the invalidity or unenforceability of any provision
hereof shall not affect the validity or enforceability of any other
provision. In addition, in the event that any provision of this
Agreement (or portion thereof) is determined by a court to be
unenforceable as drafted by virtue of the scope, duration, extent or
character of any obligation contained therein, the parties acknowledge
that it is their intention that such provision (or portion thereof)
shall be construed in a manner designed to effectuate the purposes of
such provision to the maximum extent enforceable under applicable law.
15.08 ATTORNEYS' FEES. If any legal action or other proceeding
is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default or misrepresentation in connection
with any of the provisions of this Agreement, the prevailing party
shall be entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief
to which it may be entitled.
15.09 REMEDIES CUMULATIVE. All remedies provided for in this
Agreement shall be cumulative and in addition to, and not in lieu of,
any other remedies available to either party under this or any other
agreement between the parties or at law, in equity or otherwise.
-6-
<PAGE> 7
15.10 LANGUAGE. The language used in this Agreement shall be
deemed to be language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction against any party
shall apply to any term or condition of this Agreement.
15.11 MEDIATION AND ARBITRATION. THE PARTIES HEREBY AGREE THAT
ANY CONTROVERSY ARISING BETWEEN THE PARTIES TO THIS AGREEMENT,
INCLUDING BUT NOT LIMITED TO COMMON LAW, STATUTORY, TORT OR CONTRACT
CLAIMS OR OTHER CLAIMS IN ANY MANNER WHATSOEVER PERTAINING TO THIS
AGREEMENT OR ANY OTHER DISPUTE BETWEEN THE PARTIES (OR ANY AGENT,
OFFICER, DIRECTOR OR AFFILIATE OF ANY PARTY) ("DISPUTE") SHALL BE
SUBMITTED TO MEDIATION AND, FAILING TO REACH A SETTLEMENT IN MEDIATION,
TO BINDING ARBITRATION IN ACCORDANCE WITH THE RULES OF THE CPR
INSTITUTE FOR DISPUTE RESOLUTION.
Notwithstanding anything to the contrary in this Agreement, this
arbitration provision shall be governed by the provisions of the
Federal Arbitration Act, 9 U.S.C. Section 1 et seq. Judgment upon the
arbitration award may be entered in any court having jurisdiction
thereof.
15.12 HEADINGS. The descriptive headings of the sections,
paragraphs and subparagraphs hereof are inserted for convenience only
and do not constitute a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
August ___, 1999.
COMPANY:
VENUS EXPLORATION, INC.
By: /s/ John Y. Ames
----------------
John Y. Ames,
President
EMPLOYEE:
/s/ E.L. Ames, Jr.
------------------
E. L. Ames, Jr.
<PAGE> 1
EXHIBIT 10.2
EIGHTH AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT
This EIGHTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT
(the "Eighth Amendment") dated effective September 30, 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) Except as provided below, unless the context hereof
indicates otherwise, all capitalized terms used herein shall
have the same meaning as set forth in the Loan Agreement. The
definitions contained in Section 1.1 of the Loan Agreement
shall be and are hereby amended or supplemented as follows:
(i) The definition for Transaction is hereby deleted
in its entirety and the following substituted therefor:
"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, which shall
be applied by Borrower to the Obligations; (ii) the
acquisition by Borrower of Oil and Gas Properties
which involve the offering and placement of equity
securities of Borrower which generates at least
$15,000,000 in net proceeds available to Borrower; or
(iii) the sale by Borrower of Oil and Gas Properties
known as the Vernon Field originally acquired as part
of the Apache Acquisition located in Jackson Parish,
Louisiana, which sale will generate at least
$4,000,000 in net proceeds available to Borrower, of
which, in each case, the lesser of the net proceeds
or the outstanding balance due under the Borrowing
Base are to be immediately paid to Bank."
(b) 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 December 31, 1999,
Borrower shall have consummated a Transaction in form
and substance acceptable to Bank."
(c) Section 7.1, Default, to the Loan Agreement is hereby
amended by adding the following:
"(n) The failure or refusal of Borrower to remit
prompt payment to the Bank of the net sales proceeds
from a Transaction as permanent payment reduction on
the Obligation."
<PAGE> 2
2. Ratifications. The terms and provisions as set forth in this Eighth
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 Eighth 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.
3. Representations and Warranties. Borrower hereby represents and
warrants to Bank that (i) the execution, delivery and performance of this Eighth
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 Eighth 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 Eighth Amendment, no Event of
Default or Potential Default has occurred and is continuing.
4. Covenant Deviation and Waiver. Without giving effect to this Eighth
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 December 31, 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 Eighth 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 Eighth Amendment. This
Eighth Amendment shall become effective and be deemed effective upon receipt by
Bank of the following:
(i) counterparts of this Eighth 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 to Bank of a $5,000.00 waiver
extension fee;
(iv) payment by Borrower of the fees and expenses of counsel
to Bank in connection with the preparation and negotiation of this
Eighth Amendment and all documents and instruments contemplated hereby;
(v) delivery by Borrower to Bank of true and correct copies of
the documents and instruments contemplated in Paragraph 2 of this
Eighth Amendment; and
<PAGE> 3
(vi) the execution and delivery by Borrower of such additional
documents and instruments that Bank and its counsel may deem necessary
to effectuate this Eighth Amendment or any document executed and
delivered to Bank in connection herewith or therewith.
7. Execution Counterparts. This Eighth 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 Eighth Amendment shall be governed by and
construed in accordance with the internal laws of the State of Texas.
9. Successors and Assigns. This Eighth 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
Eighth Amendment are for convenience only and shall not effect the
interpretation of this Eighth Amendment.
11. NO ORAL AGREEMENTS. THIS EIGHTH 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.
"BORROWER"
VENUS EXPLORATION, INC.
By: /s/ E.L. Ames, Jr.
---------------------------------
Name: E.L. Ames, Jr.
---------------------------
Title: Chief Executive Officer
--------------------------
"BANK"
WELLS FARGO BANK (TEXAS) N.A.
By: /s/ Danny Oliver
---------------------------------
Name: Danny Oliver
---------------------------
Title: Relationship Manager
--------------------------
<PAGE> 1
EXHIBIT 10.3
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
(THE "ACT"), AS AMENDED, NOR UNDER THE SECURITIES LAWS OF ANY STATE. IT
MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR TRANSFERRED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR THOSE LAWS OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT AN
EXEMPTION FROM REGISTRATION THEREUNDER IS AVAILABLE.
PRIME + 1% SUBORDINATED DEBENTURE
(the "DEBENTURE")
October 26, 1999 $750,000.00
FOR VALUE RECEIVED, Venus Exploration, Inc., a Delaware corporation
(the "COMPANY"), hereby promises to pay to the order of Eugene L. Ames, Jr., or
his heirs or assigns (the "DEBENTURE HOLDER") at 1250 N.E. Loop 410, Suite 1000,
San Antonio, Texas 78209 the principal amount of $750,000.00, together with
interest thereon calculated from the date shown above (the "ORIGINAL ISSUE
DATE"), in accordance with the provisions of this Debenture.
1. Payment of Interest.
(a) Interest on the unpaid principal amount of this Debenture
outstanding from time to time before maturity will accrue at the rate of the
lower of (a) Prime plus one percent (1.0%) per annum, with said rate to be
adjusted to reflect any change in the Prime rate at the time of such change, or
(b) the highest rate permitted by applicable law, but in no event shall interest
contracted for, charged or received hereunder plus any other charges in
connection herewith that constitute interest exceed the maximum interest
permitted by applicable law. "Prime" shall be defined as the prime rate of
interest charged by The Frost National Bank as established from time to time.
Mature unpaid principal and interest shall bear interest from the date of
maturity until paid at (a) the highest rate permitted by applicable law, or (b)
if no such maximum rate is established by applicable law, at the rate stated
above plus five percent (5%) per annum. Any accrued interest that for any reason
has not theretofore been paid will be paid in full on the date on which the
final principal payment under this Debenture is paid. Interest will accrue on
any principal payment outstanding from time to time under this Debenture, until
such time as payment thereof is actually delivered to the Debenture Holder.
Interest shall be payable in cash only. If any payment is due on a day other
than a day on which banks in Texas are open for banking business (a "BUSINESS
<PAGE> 2
DAY"), the Company shall be entitled to delay such payment until the next
Business Day, but interest shall continue to accrue until the payment is in fact
made. Each payment or prepayment hereunder must be paid at the office of
Debenture Holder at the address set forth herein.
(b) On November 1, 1999 and on the first day of each calendar
month until April 1, 2004, (all of which dates, together with the date specified
in Part 2(a) hereof, are "PAYMENT DATES"), all interest that has accrued on the
unpaid principal amount of this Debenture or on any past due interest on this
Debenture will become due and payable.
(c) All agreements and transactions between the Company and
the Debenture Holder, whether now existing or hereafter arising, whether
contained herein or in any other instrument, and whether written or oral, are
hereby expressly limited so that in no contingency or event whatsoever, whether
by reason of acceleration of the maturity hereof, prepayment, demand for
prepayment or otherwise, shall the amount contracted for, charged or received by
the Debenture Holder from the Company for the use, forbearance or detention of
the principal indebtedness or interest hereof, that remains unpaid from time to
time, exceed the maximum amount permissible under applicable law, it
particularly being the intention of the parties hereto to conform strictly to
the applicable law of usury. Any interest payable hereunder or under any other
instrument relating to the indebtedness evidenced hereby that is in excess of
the legal maximum, shall, in the event of acceleration of maturity, prepayment,
demand for prepayment or otherwise, be automatically, as of the date of such
acceleration, prepayment, demand or otherwise, applied to a reduction of the
principal indebtedness hereof and not to the payment of interest, or if such
excessive interest exceeds the unpaid balance of such principal, such excess
shall be refunded to the Company. To the extent not prohibited by law,
determination of the legal maximum rate of interest shall at all times be made
by amortizing, prorating, allocating and spreading in equal parts during the
period of the full stated term of the indebtedness, all interest at any time
contracted for, charged or received from the Company in connection with the
indebtedness, so that the actual rate of interest on account of such
indebtedness is uniform throughout the term hereof.
2. Payment of Principal on Debenture.
The unpaid principal amount hereof shall be due and payable in
one lump sum payment, together with any remaining accrued but unpaid interest,
on the Maturity Date of this Debenture. The term "MATURITY DATE" shall be
defined as April 1, 2004; provided, however, upon (i) the acceleration of any
Senior Indebtedness (as herein defined); (ii) any action by the Company causing
it to cease to be subject to the reporting requirements of Sections 12 or 15(d)
of the Securities Exchange Act of 1934; or (iii) incurring any Senior
Indebtedness except in conformity with the requirements of Part 9, the Debenture
Holder, in any such event, may by written notice to the Company, declare that
the Maturity Date shall be the date of the consummation or closing or occurrence
of such transaction or event.
3. Security and Subordination.
(a) This Debenture shall be unsecured.
2
<PAGE> 3
(b) The Company irrevocably covenants and agrees, and the
Debenture Holder, by his acceptance of the Debenture, likewise irrevocably
covenants and agrees, that the payment of the principal of and interest on this
Debenture is hereby expressly subordinated, to the extent and in the manner
hereinafter set forth, to the prior indefeasible payment and/or cancellation (as
shall be appropriate) in full of all Senior Indebtedness (as hereinafter
defined). The provisions of this Part Three are made for the benefit of the
holders of Senior Indebtedness, and such holders shall, at any time, be entitled
to enforce such provisions against the Company or Debenture Holder. No holder of
any Senior Indebtedness shall be deemed to owe any fiduciary duty or any other
obligation to the Company or any holder of this Debenture now or at any time
hereafter.
(c) No payment on account of principal, premium, if any, or
interest on this Debenture shall be made if, at the time of such payment or
immediately after giving effect thereto, (i) there shall exist a default in the
payment of principal, premium, if any, or interest with respect to any Senior
Indebtedness, or (ii) there shall have occurred an event of default (other than
a default in the payment of principal, premium, if any, or interest) with
respect to any Senior Indebtedness or in the instrument under which the same is
outstanding, permitting the holders thereof to accelerate the maturity thereof,
and such event of default shall not have been cured or waived or shall not have
ceased to exist within the terms of any such Senior Indebtedness.
Notwithstanding the immediately preceding sentence, at such time as any event of
default therein described shall have been cured or waived, all payments due
under this Debenture that were held in abeyance by reason of such sentence shall
be paid within five business days thereafter, and all future payments called for
under other applicable provisions of this Debenture shall be payable in
accordance with their terms.
(d)(i) In the event of:
(a) any acceleration of the payment amount due on
this Debenture;
(b) any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities of the
Company upon any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relative
to the Company or its creditors or its property;
(c) any proceeding for voluntary liquidation,
dissolution or other winding up of the Company whether or not involving
insolvency or bankruptcy proceedings; or
(d) any assignment for the benefit of creditors or
any marshaling of the assets of the Company, then and in any such event,
(A) all Senior Indebtedness
(including interest accruing on such Senior Indebtedness after the date of
filing a petition or other action commencing any such proceeding) shall first be
paid in full, or have provision made for payment and/or cancellation (as shall
be appropriate) in full to the reasonable satisfaction of the holder of any
Senior Indebtedness, before the holder of this Debenture is entitled to receive
any payment on account of the principal of or premium, if any, or interest on
the indebtedness evidenced by this Debenture, and
3
<PAGE> 4
(B) any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities (other than securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, provided the rights of
the holders of Senior Indebtedness are not altered by such reorganization or
readjustment, the payment of which is subordinate, at least to the extent
provided in this Article Three with respect to this Debenture, to the payment of
all Senior Indebtedness at the time outstanding and to the payment of all
securities issued in exchange therefor to the holders of Senior Indebtedness at
the time outstanding), to which the holder of this Debenture would be entitled
except for the provisions of this Part 3, shall be paid by the liquidating
trustee or agent or other person making such payment or distribution, whether a
trustee in bankruptcy, a receiver or liquidating trustee or other trustee or
agent, directly to the holders of Senior Indebtedness or their representative or
representatives or to the trustee or trustees under any indenture under which
any instruments evidencing any of such Senior Indebtedness may have been issued,
ratably according to the aggregate amounts remaining unpaid on account of the
principal of and premium, if any, and interest on, the Senior Indebtedness held
or represented by each, to the extent necessary to make payment of and/or to
cancel (as may be appropriate) in full all Senior Indebtedness remaining unpaid
and/or outstanding (as the case may be), after giving effect to any concurrent
payment or distribution, or provision therefor, to the holders of such Senior
Indebtedness.
(ii) No payments on account of principal of or
interest on this Debenture shall be made unless full payment of amounts then due
for principal of (including any sinking fund payment), premium, if any, and
interest on all Senior Indebtedness has been made and/or canceled (as may be
appropriate) or otherwise duly provided for to the reasonable satisfaction of
each holder of any Senior Indebtedness.
(iii) In the event and during the continuation of any
default or event of default in respect of any Senior Indebtedness or under any
agreement under which any Senior Indebtedness was issued continuing beyond the
period of grace, if any, specified in such agreement, then, unless and until
such default shall have been cured or waived or shall have ceased to exist, no
payment shall be made by the Company and no application of funds shall be made
with respect to the principal of, or interest on, this Debenture.
(iv) In the event that, notwithstanding the
foregoing, any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (other than securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment, provided that the rights of the holders of Senior Indebtedness are
not altered by such reorganization or readjustment, the payment of which is
subordinate, at least to the extent provided in this Part 3 with respect to this
Debenture, to the payment of all Senior Indebtedness at the time outstanding and
to the payment of all securities issued in exchange therefor to the holders of
Senior Indebtedness at the time outstanding), shall be received by the Debenture
Holder during the continuance of any event specified in this Part 3(c)
prohibiting such payment and before all Senior Indebtedness is paid in full
and/or canceled (as may be appropriate), or provision made for its payment to
the reasonable satisfaction of each holder of any Senior Indebtedness, such
payment or distribution subject to Part 3(c) shall be immediately paid by the
holder hereof over to the holders of Senior Indebtedness (or their
representative or representatives or to the trustee or trustees under any
indenture under which any instruments evidencing any of
4
<PAGE> 5
such Senior Indebtedness may have been issued), upon their written request
remaining unpaid or unprovided for as provided in the foregoing provisions of
Part 3(c), for application to the payment of such Senior Indebtedness until all
such Senior Indebtedness shall have been paid in full, after giving effect to
any concurrent payment or distribution, or provision therefor, to the holders of
such Senior Indebtedness.
(v) Subject to the payment in full and/or
cancellation (as may be appropriate) of all Senior Indebtedness and the
irrevocable and complete termination of all commitments and obligations to issue
or fund any Senior Indebtedness (and not before such time), the Debenture Holder
shall be subrogated equally and ratably with the holders of all Pari Passu Debt
to all rights of the holders of Senior Indebtedness to receive payments or
distributions of cash, property or securities of the Company applicable to the
Senior Indebtedness until the principal of and interest on this Debenture shall
be paid in full; and, for purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness of cash, property or
securities distributable or paid over to the holders of Senior Indebtedness
under the provisions hereof to which the Debenture Holder or a holder of Pari
Passu Debt, or any trustee of Pari Passu Debt, would be entitled except for the
provisions of this Part Three shall, as between the Company, its creditors other
than the holders of Senior Indebtedness, and the Debenture Holder or a holder of
Pari Passu Debt, be deemed to be a payment by the Company to or on account of
the Senior Indebtedness, it being understood that the provisions of this Part
Three are and are intended solely for the purpose of defining the relative
rights of the Debenture Holder, the holders of Pari Passu Debt and the holders
of the Senior Indebtedness.
(vi) Nothing contained in this Part 3 or elsewhere in
this Debenture is intended to or shall impair, as between the Company, its
creditors other than the holders of Senior Indebtedness (and the persons and
entities committed or obligated to issue or fund any Senior Indebtedness), and
the Debenture Holder, the obligation of the Company, which is absolute and
unconditional, to pay to the Debenture Holder hereof the principal and premium,
if any, and interest hereon, as and when the same shall become due and payable
in accordance with the terms hereof, or is intended to or shall affect the
relative rights of the Debenture Holder hereof and other creditors of the
Company other than the holders of the Senior Indebtedness (and the persons and
entities committed or obligated to issue or fund any Senior Indebtedness), nor
shall anything in this Debenture prevent the Debenture Holder from exercising
all remedies otherwise permitted by applicable law upon the happening of any
Event of Default under this Debenture, subject to the rights, if any, under this
Part 3 of the holders of Senior Indebtedness (and the persons and entities
committed or obligated to issue or fund any Senior Indebtedness) in respect of
cash, property or securities of the Company received upon the exercise of any
such remedy.
(vii) The Company shall give prompt written notice to
the Debenture Holder of any event of default under any Senior Indebtedness or
any insolvency, bankruptcy, liquidation, reorganization, readjustment,
composition, dissolution, assignment, marshaling of assets or similar
proceedings of the Company within the meaning of this Part 3(d). Upon any
payment or distribution of assets of the Company referred to in this Part 3, the
Debenture Holder shall be entitled to rely upon any order or decree made by any
court of competent jurisdiction in which such dissolution, winding up,
liquidation or reorganization proceedings are pending or a certificate of the
liquidating trustee or agent or other person making any distribution to the
holder
5
<PAGE> 6
of this Debenture for the purpose of ascertaining the persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article Three. If the Debenture Holder determines, in its
sole discretion, that further evidence is required with respect to the right of
any person as a holder of Senior Indebtedness to participate in any payment or
distribution pursuant to this Part 3(d), such Debenture Holder may request such
person to furnish evidence to the reasonable satisfaction of such Debenture
Holder as to the amount of Senior Indebtedness held by such person, as to the
extent to which such person is entitled to participate in such payment or
distribution, and as to other facts pertinent to the rights of such person under
this Part 3, and if such evidence is not furnished, such Debenture Holder may
defer any payment to such person pending judicial determination as to the right
of such person to receive such payment. Such Debenture Holder shall be entitled
to rely on the delivery to it of a written notice by a person representing
himself, herself or itself, to be a holder of Senior Indebtedness (or a trustee
on behalf of such holder) to establish that notice has been given by a holder of
Senior Indebtedness or a trustee on behalf of any such holder. With respect to
the holders of Senior Indebtedness, the Debenture Holder undertakes to perform
or to observe only such of its covenants and obligations as are set forth in
this Part 3, and no implied covenants or obligations with respect to the holders
of Senior Indebtedness shall be read into this Debenture against the Debenture
Holder. The Debenture Holder shall not be deemed to owe any fiduciary duty to
the holders of Senior Indebtedness and in the absence of receipt of written
request as provided for herein shall not be liable to any such holder if it
shall retain or pay over to any other person, money or assets to which any
holder of Senior Indebtedness shall be entitled pursuant to this Part 3 or
otherwise.
(viii) Without notice to or the consent of the
Debenture Holder, the holders of the Senior Indebtedness or the persons or
entities committed or obligated to issue or fund any Senior Indebtedness may at
any time and from time to time, without impairing or releasing the subordination
herein made, change the manner, place or terms of payment, or change or extend
the time of payment of or renew or alter the Senior Indebtedness or the
commitment or obligation to issue or fund any Senior Indebtedness, or amend or
supplement in any manner any instrument evidencing the Senior Indebtedness or
the commitment or obligation to issue or fund any Senior Indebtedness, any
agreement pursuant to which the Senior Indebtedness was issued or incurred or
any instrument securing or relating to the Senior Indebtedness or the commitment
or obligation to issue or fund any Senior Indebtedness; release any person
liable in any manner for the payment or collection of the Senior Indebtedness;
exercise or refrain from exercising any rights in respect of the Senior
Indebtedness against the Company or any other person, apply any money or other
property paid by any person or released in any manner to the Senior
Indebtedness; accept or release any security for the Senior Indebtedness; sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; or exercise or refrain from exercising
any rights against the Company or any other person; all without thereby
impairing in any respect the rights of such holders of Senior Indebtedness as
provided in this Part 3.
(e) In the event that, notwithstanding the provisions of this
Part 3, any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, shall be received by the
Debenture Holder, which payment or distribution the Debenture Holder is not
entitled to receive pursuant to this Part 3, such payment or distribution
6
<PAGE> 7
shall be held in trust for the benefit of, and shall be paid over or delivered
to, the holders of such Senior Indebtedness or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any of such Senior Indebtedness may have been
issued, as their respective interests may appear, for application to the payment
of all Senior Indebtedness remaining unpaid to the extent necessary to pay all
Senior Indebtedness in full in accordance with its terms, after giving effect to
any prior or concurrent payment on or distribution to or for the holder of such
Senior Indebtedness.
(f) No right of any present or future holder of any Senior
Indebtedness of the Company to enforce subordination, as herein provided, shall
at any time in any way be prejudiced or impaired by any act or failure to act on
the part of the Company or by any act or failure to act, in good faith, by any
such holder, or by any noncompliance by the Company with the terms, provisions
and covenants of this Debenture, regardless of any knowledge thereof any such
holder may have or be otherwise charged with.
(g) Subject to the payment in full of all Senior Indebtedness
after an event of default with respect to Senior Indebtedness, the Debenture
Holder (together with the holders of any other indebtedness of the Company which
is not subordinate in right of payment to this Debenture and by its terms grants
such right of subrogation to the holders thereof) shall be subrogated to the
rights of the holders of Senior Indebtedness to receive payments or distribution
of assets of the Company made on the Senior Indebtedness until the principal,
premium, if any, and interest on this Debenture shall be paid in full; and for
the purposes of such subrogation, no payments or distributions to the holders of
Senior Indebtedness of any cash, property or securities to which the Debenture
Holder would be entitled except for these provisions shall, as between the
Company, its creditors other than the holders of Senior Indebtedness, and the
Debenture Holder, be deemed to be a payment by the Company to or on account of
Senior Indebtedness, it being understood that these provisions are intended
solely for the purpose of defining the relative rights of the Debenture Holder,
on the one hand, and the holders of Senior Indebtedness, on the other hand.
(h) Nothing contained in these provisions is intended to or
shall impair, as between the Company, its creditors other than the holders of
Senior Indebtedness, and the Debenture Holder, the obligation of the Company,
which shall be absolute and unconditional, to pay to the Debenture Holder the
principal, premium, if any, and interest on this Debenture, as and when the same
shall become due and payable in accordance with its terms, or to affect the
relative rights of the Debenture Holder and creditors of the Company other than
the holders of Senior Indebtedness, nor shall anything herein or therein prevent
the Debenture Holder from exercising all remedies otherwise permitted by
applicable law, upon default, subject to the rights, if any, under these
provisions of the holders of Senior Indebtedness in respect of cash, property or
securities of the Company received upon the exercise of any such remedy.
(i) Nothing contained in this Part 3 or elsewhere in this
Debenture, shall, however, affect the obligation of the Company to make, or
prevent the Company from making, at any time, except as provided in this Part 3,
payments of principal of or premium, if any, or interest on this Debenture.
7
<PAGE> 8
(j) The Debenture Holder by his acceptance hereof irrevocably
authorizes and directs the Company on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this Part 3
and appoints the Company his attorney-in-fact for such purpose.
(k) Notwithstanding anything herein contained to the contrary,
all the provisions of this Debenture shall, except as otherwise provided herein,
be subject to the provisions of this Part 3, so far as the same may be
applicable thereto.
(l) (i) The term "PARI PASSU DEBT" shall mean any
indebtedness of the Company heretofore or hereafter created which, by the terms
of the instrument by which such indebtedness is created or evidenced, ranks pari
passu in right of payment with this Debenture and is entitled to like rights of
subrogation. The debt to the six note holders of the 7.0% Convertible
Subordinated Notes with an aggregate principal amount of $1,000,000 that were
issued by the Company in the first half of 1999 is expressly agreed to be Pari
Passu Debt.
(ii) The term "SENIOR INDEBTEDNESS" shall mean the
following, whether outstanding on the date hereof or hereafter created,
incurred, assumed or guaranteed, (a) the principal of, premium if any, and
interest on (i) indebtedness of the Company for money borrowed (other than this
Debenture, but including any indebtedness owed to the Senior Bank Lenders), (ii)
indebtedness of the Company evidenced by bonds, notes, debentures or similar
obligations (other than this Debenture and any other unsecured note issued in
connection with the acquisition of substantially all of the assets or stock of
an ongoing business by the Company to the sellers of such assets or stock),
(iii) capitalized lease obligations, (iv) indebtedness or obligations incurred,
assumed or guaranteed by the Company in connection with the acquisition or
improvement of any property or asset or the acquisition by it or by a Subsidiary
or any business, (v) indebtedness of others of the kinds described in the
clauses (i), (ii), (iii), and (iv) above, assumed or guaranteed by the Company
or in effect guaranteed by the Company through an agreement to purchase or
otherwise, (vi) obligations which would be classified as liabilities on the
balance sheet of the Company in accordance with generally accepted accounting
principles, evidencing the purchase price for the acquisition of assets of any
kind, tangible or intangible, by the Company, except in the ordinary course of
business; unless in each case referred to in clauses (i), (ii), (iii), (iv), (v)
and (vi) above, by the terms of the instruments creating or evidencing the
indebtedness or obligation it is expressly provided that such indebtedness is
Pari Passu Debt or Junior Indebtedness under this Debenture, (b) any other
indebtedness, liability or obligation, contingent or otherwise other than that
arising pursuant to this Debenture, of the Company (any such indebtedness,
liability or obligation being hereinafter in this definition referred to as an
"Obligation"), and any guaranty, endorsement or other contingent obligation in
respect of any Obligation of another, which is created, assumed or incurred by
the Company after the date of this Debenture and which, when created, assumed or
incurred, is specifically designated by the Company as Senior Indebtedness for
the purposes hereof in the instrument creating or evidencing the Company's
liability with respect to the Obligations of another, and (c) any increases,
refundings, renewals, rearrangements or extensions of and amendments,
modifications and supplements to any indebtedness, liability or obligation
described in clauses (a) or (b) above.
8
<PAGE> 9
(iii) The term "SENIOR BANK LENDERS" means any
commercial lending institution or group of commercial lending institutions that
are or become parties to the Company's principal working capital, acquisition
financing or long-term debt credit facilities.
(iv) "JUNIOR INDEBTEDNESS" means any indebtedness
expressly subordinated to this Debenture.
4. Exchange.
(a) If, at any time during the term of this Debenture, the
Company issues a Preferred Term Security (as that term is defined in Part 4(b)
below), the Company shall promptly notify the Debenture Holder thereof, and the
Debenture Holder shall have the right, at his option, exercisable within 10 days
of notice of such issuance, to exchange this Debenture for a new Debenture
representing all unpaid principal and accrued but unpaid interest under this
Debenture, but having such other terms and conditions as are at least as
favorable to the Debenture Holder as those set forth in the Preferred Term
Security.
(b) A "PREFERRED TERM SECURITY" shall be defined as a
subordinated debenture or other similar security bearing any of the following
terms and conditions when compared with this Debenture: (i) a higher stated
interest rate; or (ii) a higher premium upon early redemption by the Company.
5. Redemption.
(a) Beginning on the Original Issue Date, the Company shall
have the right, at its option, to redeem this Debenture for cash. The redemption
price shall be the principal amount of this Debenture outstanding upon
redemption, plus accrued but unpaid interest.
(b) Redemption shall be effective under this Part 5 thirty
(30) days following the date the Company provides written notice to the
Debenture Holder of its election to redeem the Debenture.
(c) The Company shall also redeem the Debenture for cash upon
notice from the Debenture Holder if the following condition has been met. That
condition is that, after the Original Issue Date, the Company has received net
proceeds sufficient to pay all obligations under this Debenture from (i) the
sale of substantially all of its properties in Jackson Parish, Louisiana (those
properties are referred to as the "Vernon Field assets"), or (ii) the sale of
equity securities. In the first case; i.e., the sale of the Vernon Field assets,
it is specifically agreed that the determination of net proceeds is after the
repayment of all debt and obligations incurred in connection with the
acquisition of the interest. Since the interest in the Vernon Field assets is
currently owned by EXUS Energy, LLC, of which the Company owns 50%, those debts
and obligations include those that are incurred under the $8 million convertible
promissory note payable by the Company to EXCO Resources, Inc., and those that
are incurred under the EXUS credit facility with NationsBank, N.A., to the
extent that they burden the Company's interest in the Vernon Field assets.
9
<PAGE> 10
6. Use of Proceeds. The Company may use the proceeds of this Debenture
for general corporate purposes or any other purpose that it may deem appropriate
or necessary.
7. Right of First Offer.
(a) Except as authorized by Part 7(c) below, whenever the
Debenture Holder desires to sell the Debenture, the Debenture Holder shall first
give written notice (the "ROFO NOTICE") to the Company to such effect,
specifying that the Debenture Holder wishes to sell the Debenture and the terms
(including the consideration) upon which the Debenture Holder proposes to agree
to sell the Debenture. Upon receipt of the ROFO Notice, the Company (pursuant to
the vote of a majority of the disinterested members of the Board of Directors)
shall have the first right and option to purchase the Debenture for cash at the
price specified in the ROFO Notice, exercisable for 15 business days after
receipt of the ROFO Notice. Failure of the Company to respond to the ROFO Notice
within such 15-day period shall be deemed to constitute a notification to the
Debenture Holder of the Company's decision not to exercise its right and option
to purchase the Debenture under this Part 7(a). If the Company elects not to
purchase the Debenture, the Debenture Holder may sell the Debenture within 90
days to any person on substantially the same terms and for the same or greater
consideration as the Debenture Holder offered the Company in the ROFO Notice.
(b) If the consideration for the sale of the Debenture
includes non-cash consideration, the dollar value of such non-cash consideration
shall be its Fair Market Value as determined by a majority of the disinterested
members of the Board of Directors of the Company (the "FAIR MARKET VALUE"). For
the purpose of determining the Fair Market Value, the Company and the Debenture
Holder shall each select a qualified appraiser as soon as possible after the end
of the 30-day period to appraise the Fair Market Value. Each of the two
appraisers shall, as soon as reasonably possible thereafter select a third
appraiser and the average of the two appraised values closest in value shall be
the Fair Market Value. All costs of the appraisal shall be paid by the Company.
(c) Notwithstanding the preceding provisions of this Part 7,
the Debenture Holder may transfer the Debenture free of any restrictions and
requirements of this Part 7 to his spouse or children, or to a trust,
partnership or other business entity for the exclusive benefit of the Debenture
Holder or the Debenture Holder's spouse or children; provided, however, that the
provisions of this Part 7 shall remain in full effect in respect of any
disposition by such successor Debenture Holder.
8. Events of Default.
For purposes of this Debenture, an Event of Default will be deemed to
have occurred if:
(a) the Company fails to pay when due the full amount of any
principal or interest on the Debenture at maturity or by acceleration or
otherwise and such failure continues for more than three business days;
10
<PAGE> 11
(b) the Company fails to perform or observe any other material
covenant or agreement set forth herein;
(c) the Company fails to make any payment when due on any
other indebtedness or security or any event shall occur or any condition shall
exist in respect of any such indebtedness or security, or under any agreement
securing or relating to any such indebtedness or security, the affect of which
is to cause any holder of such indebtedness or security or a trustee to cause
the acceleration of any such indebtedness or security. As used herein, the term
"SECURITY" as the meaning given such term under the Securities Act of 1933;
(d) any representation or warranty contained in this
Debenture, or any information contained in filings made as of the Original Issue
Date by the Company with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, is false or misleading in any material respect
on the date made or furnished;
(e) the Company makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts generally as they
become due; or an order, judgment or decree is entered adjudicating the Company
bankrupt or insolvent; or the Company petitions or applies to any tribunal for
the appointment of a trustee, receiver or liquidator of the Company or of any
substantial part of the assets of the Company, or commences any proceeding under
any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or any such petition or
application is filed, or any such proceeding is commenced against the Company
and either (X) the Company takes any action indicating its approval thereof,
consent thereto, or acquiescence therein or (Y) such petition, application or
proceeding is not dismissed within 45 days;
(f) a judgment not covered by insurance, which, with other
outstanding judgments undischarged against the Company, exceeds in the aggregate
$25,000, is rendered against the Company and, within ten days after entry
thereof, such judgment is not discharged or satisfied or execution thereof
stayed pending appeal, or within ten days after the expiration of any such stay,
such judgment is not discharged or satisfied; or
If an Event of Default of the type described in Part 8(b) above has
occurred and continues for a period of 15 days, or if any other Event of Default
has occurred, the Debenture Holder may demand (by written notice delivered to
the Company) immediate repayment of all or any portion of the principal amount
hereof and payment of all accrued and unpaid interest hereon. If any Event of
Default exists, the Debenture Holder will also have any other rights that such
holder may have been afforded under any contract or agreement at any time and
any other rights that such holder may have pursuant to applicable law.
9. Indebtedness. The Company warrants and represents to the Debenture
Holder that as of the Original Issue Date, the Company is not in default under
any indebtedness, including without limitation any Senior Indebtedness. Without
the prior written consent of the Debenture Holder, the Company agrees after the
Original Issue Date and continuing until this Debenture is paid in full not to
incur any Senior Indebtedness other than indebtedness incurred from time to time
under the Company's senior secured credit facility with Wells Fargo Bank
(Texas), N.A. or
11
<PAGE> 12
any successor facility thereto; provided, however, any such successor facility
shall not provide for maximum draws in excess of the maximum amount provided as
of the Original Issue Date under the Wells Fargo Bank (Texas), N.A. facility.
10. Debenture Holder's Representations and Warranties.
(a) Investment Purpose. Debenture Holder is acquiring the
Debenture to be issued (the "Securities") for its own account for investment
only and not with a view towards, or for resale in connection with, the public
sale or distribution thereof, except pursuant to sales registered or exempted
under the Act; provided, however, that by making the representations herein,
such Debenture Holder does not agree to hold any of the Securities for any
minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the Act.
(b) Accredited Investor Status. Debenture Holder is an
"accredited investor" as that term is defined in Rule 501(a) of Regulation D
promulgated under the Act.
(c) Reliance on Exemptions. Debenture Holder understands that
the Securities are being offered and sold to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying in part upon the truth and
accuracy of, and Debenture Holder's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of Debenture Holder
set forth herein in order to determine the availability of such exemptions and
the eligibility of Debenture Holder to acquire the Securities.
(d) Information. Debenture Holder and its advisors, if any,
have been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities that have been requested by Debenture Holder. Debenture Holder and
its advisors, if any, have been afforded the opportunity to ask questions of the
Company. Neither such inquiries nor any other due diligence investigations
conducted by Debenture Holder or its advisors, if any, or its representatives
shall modify, amend or affect Debenture Holder's right to rely on the
completeness and accuracy of the materials provided to Debenture Holder by or on
behalf of the Company with respect to the transactions contemplated hereby or on
the Company's representations and warranties contained in this Agreement.
Debenture Holder understands that its investment in the Securities involves a
high degree of risk. Debenture Holder has sought such accounting, legal and tax
advice as it has considered necessary to make an informed investment decision
with respect to its acquisition of the Securities.
(e) No Governmental Review. Debenture Holder understands that
no United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the Securities
or the fairness or suitability of the
12
<PAGE> 13
investment in the Securities, nor have such authorities passed upon or endorsed
the merits of the offering of the Securities.
(f) Transfer or Resale. Debenture Holder understands that: (i)
the Securities have not been and are not being registered under the Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) Debenture Holder
shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that the Securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration, (C) Debenture Holder provides the Company with reasonable
assurance that the Securities can be sold, assigned or transferred pursuant to
Rule 144 promulgated under the Act (or a successor rule thereto) ("RULE 144");
(ii) any sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the person through whom the sale is made) may be deemed to be an underwriter
(as that term is defined in the Act) may require compliance with some other
exemption under the Act or the rules and regulations of the SEC thereunder; and
(iii) neither the Company nor any other person is under any obligation to
register such Securities under the Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder, or (D) such
transferee or assignee is an affiliate controlled by Debenture Holder.
(g) Residency. Debenture Holder is a resident of Texas.
11. Amendment. This Debenture may be amended by the Company only if the
Company has obtained the written consent of the Debenture Holder.
12. Cancellation. After all principal and accrued interest at any time
owed on this Debenture has been paid in full, this Debenture will be surrendered
to the Company for cancellation and will not be reissued.
13. Waiver of Notice, etc. The Company hereby waives presentment,
demand, notice, protest and all other demands and notice in connection with the
delivery, acceptance, performance and enforcement of this Debenture and assents
to extension of the time of payment or forbearance or other indulgence without
notice.
14. Collection Costs. In addition to and not in limitation of the
foregoing, the Company further agrees, subject only to any limitation imposed by
applicable law, to pay all reasonable expenses, including reasonable attorneys'
fees and legal expenses, incurred by the Debenture Holder upon the collection of
this Debenture and any amounts payable hereunder which are not paid when due.
15. Governing Law; Venue. All questions concerning the construction,
validity and interpretations of this Debenture will be governed by the internal
laws, and not the law of conflicts, of the State of Texas. It is the intention
of the parties that proper venue for any action, suit or proceeding arising
pursuant to this Agreement or any exhibit hereto or in connection with the
transactions contemplated herein or therein shall be in Bexar County, Texas.
Each party agrees that any such action, suit or proceeding shall be brought
before a state or federal court
13
<PAGE> 14
sitting in the City of San Antonio, Bexar County, Texas and waives any objection
to venue in such court. Each party waives the right to demand a jury in any
action, suit or proceeding arising pursuant to this Agreement or any exhibit
hereto or in connection with the transactions contemplated herein or therein.
IN WITNESS WHEREOF, the Company has executed and delivered this
Debenture on October 26, 1999.
VENUS EXPLORATION, INC.
By: /s/ John Y. Ames
--------------------------------
John Y. Ames, President
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 187
<SECURITIES> 7,279
<RECEIVABLES> 822
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,009
<PP&E> 8,844
<DEPRECIATION> 4,231
<TOTAL-ASSETS> 12,958
<CURRENT-LIABILITIES> 5,949
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> (1,156)
<TOTAL-LIABILITY-AND-EQUITY> 12,958
<SALES> 1,463
<TOTAL-REVENUES> 2,335
<CGS> 0
<TOTAL-COSTS> 3,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 551
<INCOME-PRETAX> (1,354)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,354)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
