<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 March 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14334
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Venus Exploration, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3299127
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(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
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(Address of principal executive offices) (Zip code)
(210) 930-4900
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(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.
Class Outstanding at May 14, 1999
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Common Stock $.01 par value 10,982,365 shares
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
(a) Consolidated Balance Sheets as of 3
March 31, 1999 and December 31, 1998
(b) Consolidated Statements of Operations for 4
the three-month periods ended March 31,
1999 and 1998
(c) Consolidated Statements of Cash Flows 5
for the three-month periods ended
March 31, 1999 and 1998
(d) Notes to Consolidated Financial Statements 6
Item 2. - Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 15
Market Risk
PART II. - OTHER INFORMATION
Item 5. - Other Information 16
Item 6. - Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
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<S> <C> <C>
(In thousands)
ASSETS
CURRENT ASSETS
Cash and equivalents $ 71 $ 126
Trade accounts receivable and other 515 492
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TOTAL CURRENT ASSETS 586 618
OIL AND GAS PROPERTIES AND EQUIPMENT,
net(successful efforts method), at cost 4,589 6,399
OTHER PROPERTY AND EQUIPMENT, net 212 238
DEFERRED FINANCING COSTS,
at cost less accumulated amortization 12 19
OTHER ASSETS, at cost less accumulated amortization 100 122
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TOTAL ASSETS $ 5,499 $ 7,396
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 1,350 $ 1,269
Other liabilities 243 433
Revolving credit agreement 3,810 5,540
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TOTAL CURRENT LIABILITIES 5,403 7,242
OTHER LONG-TERM LIABILITIES 22 23
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TOTAL LIABILITIES 5,425 7,265
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SHAREHOLDERS' EQUITY
Preferred stock, par value of $.01;
5,000,000 shares authorized; none issued -- --
Common stock, par value of $.01;
30,000,000 shares authorized; 10,982,365 and 10,971,325 shares issued
and outstanding as of March 31, 1999
and December 31, 1998, respectively 110 110
Additional paid-in capital 17,235 17,209
Retained earnings (deficit) (17,055) (16,944)
Unearned compensation - restricted stock (216) (244)
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TOTAL SHAREHOLDERS' EQUITY 74 131
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,499 $ 7,396
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
(In thousands, except per share data)
OIL AND GAS REVENUES $ 385 $ 941
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EXPENSES
Production expense 230 441
Exploration expense, including dry holes 239 140
Impairment of oil and gas properties -- 715
Depreciation, depletion and amortization 122 341
General and administrative 607 701
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Total expenses 1,198 2,338
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Operating profit (loss) (813) (1,397)
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OTHER INCOME (EXPENSE)
Interest expense (105) (82)
Gain on sale of assets 794 --
Interest and other income 13 13
------- -------
702 (69)
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Net earnings (loss) $ (111) $(1,466)
======= =======
Earnings (loss) per share,
Basic and diluted $ (0.01) $ (0.15)
======= =======
Common shares and equivalents outstanding,
Basic and diluted 10,981 9,771
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
(In thousands)
OPERATING ACTIVITIES
Net earnings (loss) $ (111) $(1,466)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, depletion and amortization 172 397
Impairments, abandoned leases and dry hole costs -- 715
Gain on sale of property and equipment (794) --
Compensation expense for restricted stock,
stock options and stock granted 54 9
Change in operating assets and liabilities:
Decrease (increase) in trade accounts receivable
and other (23) 885
Increase (decrease) in trade accounts payable 82 (474)
Increase (decrease) in advances from interest
owners -- 8
Decrease in other liabilities (191) (67)
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Net cash provided by (used in) operating activities (811) 7
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INVESTING ACTIVITIES
Capital expenditures (100) (1,185)
Net proceeds from sales of property and equipment 2,586 --
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Net cash provided by (used in) investing activities 2,486 (1,185)
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FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt
and revolving credit agreement 16 2,253
Principal payments on long-term debt (1,746) (28)
Deferred financing costs -- (20)
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Net cash provided by (used in) financing activities (1,730) 2,205
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INCREASE (DECREASE) IN CASH AND EQUIVALENTS (55) 1,027
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 126 682
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CASH AND EQUIVALENTS AT END OF PERIOD $ 71 $ 1,709
======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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VENUS EXPLORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31, 1999 and 1998
1. Business
Venus Exploration, Inc. (the "Company") is primarily engaged in the business
of exploring for, acquiring, developing and operating on-shore oil and gas
properties in the United States. The Company presently has oil and gas
properties and production in ten 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 March 31, 1999 and the results of its operations for the three
months ended March 31, 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 9 to the unaudited consolidated financial
statements, the Company has suffered recurring losses from operations and has an
accumulated deficit that raise substantial doubt about its ability to continue
as a going concern. 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-month period ended March 31, 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 report on Form 10-K.
4. Earnings (loss) Per Share
Basic net earnings (loss) per common share is computed by dividing net loss
by the weighted average number of common shares outstanding. Diluted earnings
(loss) per share are computed by assuming the issuance of common shares for all
dilutive potential common shares outstanding.
Earnings (loss) per share for the three month periods ended March 31, 1999
and 1998 are calculated based on 10,981,016 and 9,771,254 weighted average
shares outstanding, respectively.
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5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
(In thousands)
Revolving credit due on June 30, 2000 $ 3,810* $ 5,540*
========= ============
</TABLE>
* Classified as a current liability.
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 1 percent.
For balances outstanding at March 31, 1999, the interest rate was 8.75 percent.
A commitment fee of 3/8 of one percent of the undrawn balance is payable
quarterly. Interest is payable monthly, and principal payments are required only
when the balance outstanding exceeds or is projected to exceed, prior to the
next borrowing base redetermination date, the borrowing base. As of March 31,
1999, the borrowing base was $3,870,000 and the amount drawn by the Company was
$3,810,000 resulting in an unused borrowing base of $60,000.
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 specified levels of current ratio and tangible net worth. At March 31,
1999, the Company was not in compliance with these covenants. The Company has
obtained waivers from the lender through May 31, 1999, however, because of
uncertainty regarding the Company's ability to be in compliance with the
covenants after May 31, 1999, or to obtain additional waivers, the outstanding
balance has been classified as a current liability in the accompanying
consolidated financial statements. 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.
The Company's ability to obtain future waivers will depend on progress
on its plans to raise additional capital through a placement of convertible debt
or issuance of equity securities. During April 1999, and through May 20, 1999,
the Company issued $700,000 in convertible debentures. These debentures contain
customary piggyback registration rights.
6. Shareholders' Equity
Effective March 1, 1998 the Company awarded, under its existing incentive
plan, qualified stock options and restricted stock grants that vest over a
three-year period. The qualified stock options were issued to all employees. The
restricted stock grants (100,000 shares) were issued at no charge to two key
employees who are not officers of the Company. The Company is
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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
to offset the impact of mandatory temporary salary reductions which took effect
on that date. The Company has granted approximately 250,000 stock options at
fair market value to offset the salary reductions through August 1, 1999. The
stock options vest ratably over the period March 15, 1999 through August 1,
1999.
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.
7. Accounting for Income Taxes
No provision for income taxes has been recorded for the periods ended March
31, 1999 and 1998 due to the losses recorded by the Company.
8. Commitments and Contingencies
The Company is not involved in any claims or legal actions.
9. Liquidity
The Company has incurred significant losses over the past three years.
Unless the Company is successful in raising capital to successfully develop
existing properties or acquire income producing properties, the Company expects
operating losses and negative cash flows to continue for the foreseeable future.
Given the Company's diminished cash resources and lack of borrowing capacity
under its credit agreement, the Company's ability to continue doing business as
a going concern is uncertain. In addition, the Company has incurred significant
indebtedness, and at March 31, 1999, was not in compliance with the tangible net
worth and current ratio requirements of the credit agreement. Those requirements
have been waived by the bank through May 31, 1999. The lender could elect,
subsequent to the period waived, to declare all amounts borrowed under the
Credit Agreement, together with accrued interest, to be due and payable. The
lender could then proceed to foreclose against any collateral securing the
payment of the debt. This collateral represents a significant portion, if not
all, of the Company's assets.
The Company's assets are predominately real property rights and intellectual
information that the Company has developed regarding those properties and other
geographical areas that the Company is studying for exploration and development.
The market for those types of properties fluctuates and can be very small.
Therefore, the Company's assets can be very illiquid and not easily converted to
cash. Even if a sale can be arranged, the price may be significantly 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.
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<PAGE> 9
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 any of its efforts.
During April 1999, the Company issued convertible debentures in the
principal amount of $700,000 for net proceeds of $685,000. The debentures 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). The debentures mature on March 31, 2004.
On May 13, 1999, the Company executed a purchase and sale agreement to
acquire oil and gas properties from Apache Corporation for $28.5 million. The
contract has an effective date of March 1, 1999. For the period March 1, 1999
through the closing date, the net proceeds from oil and gas production on the
properties will be applied to reduce the $28.5 million purchase price.
The estimated closing date of the acquisition is June 30, 1999. The
agreement includes representations, warranties, covenants and closing conditions
customary for transactions of this type. The Company is in the process of
arranging financing to fund the purchase price. The Company has entered into an
engagement agreement with Sagestone Capital Partners to provide financial and
investment banking advisory services related to raising the capital to complete
the acquisition. Preliminary discussions and non-binding term sheets from
capital providers have been positive regarding the financing of this project,
however, the Company has not received any binding commitments from capital
providers.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
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 typically
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 risk but still high 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 in 9 of
the 10 active fields. During this period of reduced availability of capital, the
Company will concentrate its drilling budget on drilling field exploitation
wells.
The Company continues to seek strategic producing property acquisitions
that offer near-term production and longer-term development and exploration
opportunities that can be investigated through the application of advanced
technology by the Company's exploration team. The Company seeks to accomplish
strategic acquisitions of producing assets with development and exploratory
potential through strategic alliances with other oil and gas companies. The
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Company may also sell non-strategic properties as a part of its effort to
concentrate on our focus areas.
Liquidity and Capital Resources
(a) Liquidity
At March 31, 1999, the Company had a working capital deficit of $4,817,000
compared with a deficit of $6,624,000 at December 31, 1998, an increase in
working capital of $1,807,000. This increase is primarily attributable to the
$1,650,000 repayment of current debt with proceeds from the sale of long term
assets during the three-month period ended March 31, 1999.
Net cash used in operating activities during the three months ended March
31, 1999, was $811,000, whereas $7,000 was provided by operating activities for
the same three-month period in 1998. During the first three months of 1999, the
Company realized a net loss of $111,000. This compares with a net loss of
$1,466,000 for the first three months of 1998. These losses include non cash
expenses (impairments, depreciation, depletion and amortization, and
compensation expense for restricted stock and stock options) totaling $225,000
in 1999 and $1,121,000 in 1998. The 1999 loss reflects a gain of $794,000 from
the sale of long term assets.
During the first three months of 1999 the Company incurred capital
expenditures on oil and gas properties of $100,000 and received proceeds from
the sale of property and equipment of $2,586,000. During the same period in
1998, the Company had capital expenditures of $1,185,000.
For the three months ended March 31, 1999, $1,730,000 was used in financing
activities. This compares with $2,205,000 provided by financing activities for
the three-month period ended March 31, 1998. The reason for the decline in cash
provided by financing activities is due to the high level of borrowing in 1998
compared to the minimal amount in 1999 and the repayment of debt with proceeds
from the sale of long term assets in 1999.
Increases in oil and gas prices subsequent to March 31, 1999, and cost
reduction measures, which are discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, are expected to improve the Company's
cash flow after March 31, 1999. However, unless the Company is successful in
raising capital to successfully develop existing properties or acquire income
producing properties, the Company expects operating losses and negative cash
flows to continue for the foreseeable future unless costs are significantly
reduced. Given the Company's diminished cash resources and lack of borrowing
capacity under its Credit Agreement, the Company's ability to continue doing
business as a going concern is uncertain. In addition, the Company has incurred
significant indebtedness, and at March 31, 1999, was not in compliance with the
tangible net worth and current ratio requirements of the Credit Agreement. Those
requirements have been waived by the bank through May 31, 1999. The lender could
elect, subsequent to the period waived, to declare all amounts borrowed under
the Credit Agreement, together with accrued interest, to be due and payable. The
lender could then proceed to foreclose against any collateral securing the
payment of the debt. This collateral represents a significant portion, if not
all, of the Company's assets.
The Company's assets are predominately real property rights and
intellectual information that the Company has developed regarding those
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properties and other geographical areas that the Company is studying for
exploration and development. The market for those types of properties fluctuates
and can be very small. Therefore, the Company's assets can be very illiquid and
not easily converted to cash.
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 any of its efforts.
During April 1999, the Company issued convertible debentures in the
principal amount of $700,000 for net proceeds of $685,000. The debentures 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). The debentures mature on March 31, 2004.
On May 13, 1999, the Company executed a Purchase and Sale Agreement to
acquire oil and gas properties from Apache Corporation for $28.5 million. The
properties include 19 producing wells, and the wells are currently producing,
net to the interest to be acquired, approximately 9,000 Mcf of gas per day and
45 barrels of oil per day. The Company is in the process of arranging financing
to fund the purchase price. The Company has entered into an engagement agreement
with Sagestone Capital Partners to provide financial and investment banking
advisory services related to raising the capital to complete the acquisition.
Preliminary discussions and non-binding term sheets from capital providers have
been positive regarding the financing of this project, however, the Company has
not received any binding commitments from capital providers.
If the Company fails to close the pending acquisition, the Company
plans to further reduce the number of employees and reduce other related office
costs, and attempt to raise enough capital to develop cash flow from two
existing development fields.
(b) Capital Resources
The Company's capital expenditure budget is continually reviewed and
revised as necessary, based on perceived opportunities and business conditions.
Capital expenditures for the remainder of 1999 are budgeted at approximately
$2.5 million. Funding is not currently available for the 1999 budget and, as a
result, the Company may elect to reduce its interest through sales, farmouts or
other transactions in certain wells or seismic projects or to include those
wells or projects in a joint venture with industry participants, in which event
the Company's capital investment and upside potential would be lower.
The Company's credit facility, among other matters, contains covenants
which limit the Company's ability to incur additional indebtedness and 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 March 31, 1999, the Company was not in compliance
with these two covenants. The Company has obtained a waiver through May 31,
1999. The Company's ability to obtain future waivers will depend on progress on
its plans to raise additional capital through a
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placement of convertible debt or issuance of equity securities. During April
1999, the Company issued convertible debentures in the principal amount of
$700,000 for net proceeds of $685,000. The debentures 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). The
debentures mature on March 31, 2004. It is the Company's intention to use part
of the proceeds raised to pay trade payables and the remaining amount to fund
development drilling. As discussed above, 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.
(c) Results of Operations
Revenues and expenses were lower during 1999 due to the sale of
properties, lower oil and gas prices and various cost cutting measures. The
variances are addressed in the following paragraphs by significant operating
caption.
As reflected in the following table, oil and gas volumes and average
prices decreased in 1999, compared with 1998. The lower prices, the divestiture
of properties and decline in production from existing wells significantly
impacted the first quarter 1999.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
1999 1998
------------------- --------------------
Sales Average Sales Average
Volume Prices Volume Prices
------ -------- ------- --------
<S> <C> <C> <C> <C>
Gas (MCF) 87,862 $ 1.74 144,580 $ 2.39
Oil (BBLS) 21,160 $ 10.90 37,161 $ 15.55
</TABLE>
For 1998 average oil and gas prices reflect the effect of price hedging. The
Company only hedged oil and gas volumes as required under a term loan agreement,
which is no longer in effect. Volumes for the three month period ended March 31,
1999 include 15,850 Mcf attributable to the properties sold during the same
period.
Three Months Ended March 31, 1999 and 1998
The Company reported a net loss of $111,000 for the quarter ended March 31,
1999, compared to last year's net loss of $1,466,000 for the same period. This
$1,355,000 decrease in loss is primarily attributable to the gain from the sale
of properties ($794,000) and the reduction in oil and gas impairments
($715,000).
For the first quarter of 1999, oil and gas revenues decreased by $556,000.
The decrease is due to the following: the decline in product prices resulted in
a decrease in revenue of $156,000, the sale of properties resulted in a decrease
in revenue of $50,000 and a decline in production rates resulted in a decrease
in revenue of $350,000.
Production expenses decreased by $211,000 due to the sale of properties and
the shutting in of wells. Also contributing to the decrease were lower operating
costs.
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Exploration expense increased by $99,000. The increase is due to the
acquisition of 3-D seismic data of $37,500, severance cost for terminated
employees of $27,015 and the balance of the increase is due to reduced recovery
from joint ventures due to reduced exploration activities.
Impairment of oil and gas properties decreased by $715,000. The decline is a
result of rising product prices during the current quarter as opposed to falling
prices during the 1998 period.
Depreciation, depletion and amortization decreased by $219,000 due to the
sale of properties ($10,300), the decline in production rates ($131,140), and
the lower cost basis in the properties due to the impairments recorded in 1998
($77,560).
General and administrative expense decreased by $94,000. The decrease was
due to reduction of office personnel in the fourth quarter of 1998 and
initiation of other cost reduction measures during the first quarter of 1999.
Interest expense increased by $23,000 due to the higher average loan balance
outstanding of $4,349,400 during the first quarter of 1999, as compared to
$2,370,900 during the first quarter of 1998. The effect of the higher average
loan balance in 1999 was offset by lower deferred loan cost amortization of
$7,600 in 1999 compared to $22,000 in 1998. The decline in deferred loan cost in
1999 is the result of 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 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.
STATEMENT OF READINESS
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.
Computers used at the Company's headquarters have been certified by an
outside consultant as being Y2K complaint. The Company also conducted an
internal survey of its software and information systems critical to the
Company's operations. The Company has upgraded its network server to be Year
2000 compliant. Based on certifications by its other software information
vendors, the Company believes that the Year 2000 issues directly related to
computers, software and information systems at the Company's headquarters will
not have a material impact on the Company's business or financial position.
With respect to its major vendors, purchasers of products, customers and
service providers, the Company mailed more than 500 questionnaires to assist in
an assessment of whether they will be Year 2000 compliant. The Company is
14
<PAGE> 15
evaluating those questionnaires and that evaluation should be complete by June
30, 1999. Preliminary evaluations indicate the third parties are, or will be,
compliant by the end of the year.
At this time, however, the Company cannot determine what effect, if any, the
Year 2000 issues will affect those who did not respond to the survey, or the
numerous local, state and federal governmental entities with which it conducts
business or by which it is regulated or governed or taxed will have on its
business or financial position.
If they are not compliant, such failure, in a worst case scenario, could
affect the ability of the Company to sell its oil and gas and receive payments
therefrom and the ability to get vendors and service providers to provide
products and services in support of the Company's operations.
As an operator of oil and gas properties, the Company plans to conduct an
analysis of the operational problems and costs that would result from a failure
caused by a Year 2000 event. A contingency plan has not been developed for
dealing with the worst case scenario. The Company plans to complete such
analysis and contingency planning by September 30, 1999.
The Company is expensing as incurred all costs related to the assessment and
remediation of the Year 2000 issue. These costs are being funded through
operating cash flow and are not expected to exceed $25,000 and are not material
to the Company's consolidated financial condition or results of operations.
Information Regarding Forward Looking Statements
The information contained in this Form 10-Q includes certain forward-looking
statements. When used in this document, such words as "expect", "believes",
"potential", and similar expressions are intended to identify forward-looking
statements. Although the Company believes that its expectations are based on
reasonable assumptions, it is important to note that actual results could differ
materially from those projected by such forward-looking statements. Important
factors that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, the timing and
extent of changes in commodity prices for oil and gas, the need to develop and
replace reserves, environmental risk, the substantial capital expenditures
required to fund its operations, drilling and operating risks, risks related to
exploration and development, uncertainties about the estimates of reserves,
competition, government regulation and the ability of the Company to implement
its business strategy and to raise the necessary capital for such
implementation. Also see "FORWARD-LOOKING STATEMENTS" under "Item 1. BUSINESS"
of the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding the Company's quantitative and qualitative disclosures
about market risk is contained in "Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT THE MARKET RISK" in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and reference is made to the information
contained there. There has been no material change since that information was
disclosed.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 5. OTHER INFORMATION
(a) Purchase and Sale Agreement
On May 13, 1999, the Company executed a Purchase and Sale Agreement to
acquire oil and gas properties from Apache Corporation for $28.5 million. The
properties are located in the Vernon Field, Jackson Parish, Louisiana. The
properties include 19 producing wells, approximately 10,000 gross acres (8,400
net acres). The wells are currently producing, net to the interest to be
acquired, approximately 9,000 Mcf of gas pr day and 45 barrels of oil per day.
The contract has an effective date of March 1, 1999. For the period March 1,
1999 through the closing date, the net proceeds from oil and gas production on
the properties will be applied to reduce the $28.5 million purchase price.
The estimated closing date of the acquisition is June 30, 1999. The
agreement includes representations, warranties, covenants and closing conditions
customary for transactions of this type. The Company is in the process of
arranging financing to fund the purchase price. The Company has entered into an
engagement agreement with Sagestone Capital Partners to provide financial and
investment banking advisory services related to raising the capital to complete
the acquisition. Preliminary discussions and non-binding term sheets from
capital providers have been positive regarding the financing of this project,
however, the Company has not received any binding commitments from capital
providers.
(b) NASDAQ Market Listing
The Company was notified that it is not in compliance with NASDAQ stock
market listing requirements because the Company's tangible assets are below the
$2 million minimum. The Company was asked to submit a plan for achieving
compliance. The Company submitted such a plan on May 11, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Asset Purchase Agreement among Venus Exploration, Inc. and
Allegheny Interests, Inc., et al., dated January 26, 1999, filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K dated
January 27, 1999, as amended, and incorporated herein by
reference.
2.2 Letter Agreement, dated February 4, 1999, between Venus
Exploration, Inc. and Petroleum Development Corporation, filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
February 12, 1999, as amended, and incorporated herein by
reference.
2.3 Amendment to Letter Agreement dated February 11, 1999, between
Venus Exploration, Inc. and Petroleum Development Corporation,
filed as Exhibit 2.3 to the Company's Current Report on Form 8-K,
16
<PAGE> 17
dated February 12, 1999, and amended and incorporated herein by
reference.
10.1 Sixth Amendment to Second Amended and Restate Loan Agreement
dated March 15, 1999 by and between Venus Exploration, Inc. and
Wells Fargo Bank (Texas), N.A.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated January 27, 1999, as amended by Form 8 K/A No. 1 dated
April 12, 1999, regarding the sale of oil and gas properties located in West
Virginia.
Form 8-K dated February 12, 1999, as amended by Form 8 K/A No. 1 dated
April 15, 1999, regarding the sale of oil and gas properties located in
Freestone County, Texas.
17
<PAGE> 18
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENUS EXPLORATION, INC.
Dated: May 24, 1999 BY: /s/ Eugene L. Ames, Jr.
------------------------------
Eugene L. Ames, Jr.
(Chief Executive Officer)
Dated: May 24, 1999 BY: /s/ Patrick A. Garcia
------------------------------
Patrick A. Garcia
(Principal Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Asset Purchase Agreement among Venus Exploration, Inc. and
Allegheny Interests, Inc., et al., dated January 26, 1999,
filed as Exhibit 2.1 to the Company's Current Report on Form
8-K dated January 27, 1999, as amended, and incorporated
herein by reference.
2.2 Letter Agreement, dated February 4, 1999, between Venus
Exploration, Inc. and Petroleum Development Corporation, filed
as Exhibit 2.1 to the Company's Current Report on Form 8-K,
dated February 12, 1999, as amended, and incorporated herein
by reference.
2.3 Amendment to Letter Agreement dated February 11, 1999, between
Venus Exploration, Inc. and Petroleum Development Corporation,
filed as Exhibit 2.3 to the Company's Current Report on Form
8-K, dated February 12, 1999, and amended and incorporated
herein by reference.
10.1 Sixth Amendment to Second Amended and Restate Loan Agreement
dated March 15, 1999 by and between Venus Exploration, Inc.
and Wells Fargo Bank (Texas), N.A.
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.1
SIXTH AMENDMENT TO SECOND
AMENDED AND RESTATED LOAN AGREEMENT
This SIXTH AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AGREEMENT (the
"Sixth Amendment") dated effective March 15, 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) The definition of "Transaction" is hereby deleted in its
entirety and the following substituted for:
"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; and (ii) Borrower engages in the acquisition of
oil and gas properties which involves the offering and
placement of equity securities of the Borrower which generates
at least $15,000,000 in net proceeds."
(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 May 31, 1999, Borrower shall
have consummated a Transaction in form and substance
acceptable to Bank."
2. Ratifications. The terms and provisions as set forth in this Sixth
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 Sixth 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.
<PAGE> 2
3. Representations and Warranties. Borrower hereby represents and
warrants to Bank that (i) the execution, delivery and performance of this Sixth
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 Sixth 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 Sixth Amendment, no Event of
Default or Potential Default has occurred and is continuing.
4. Covenant Deviation and Waiver. Without giving effect to this Sixth
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 May 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 Sixth 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 Sixth Amendment. This Sixth
Amendment shall become effective and be deemed effective upon receipt by Bank of
the following:
(i) counterparts of this Sixth 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 $10,000.00 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
Sixth Amendment and all documents and instruments contemplated hereby;
and
(v) the execution and delivery by Borrower of such additional
documents and instruments that Bank and its counsel may deem necessary
to effectuate this Sixth Amendment or any document executed and
delivered to Bank in connection herewith or therewith.
7. Execution Counterparts. This Sixth 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.
<PAGE> 3
8. Governing Law. This Sixth Amendment shall be governed by and
construed in accordance with the internal laws of the State of Texas.
9. Successors and Assigns. This Sixth 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
Sixth Amendment are for convenience only and shall not effect the interpretation
of this Sixth Amendment.
11. NO ORAL AGREEMENTS. THIS SIXTH AMENDMENT, TAKEN TOGETHER WITH THE
OTHER LOAN DOCUMENTS AND ALL SCHEDULES AND EXHIBITS THERETO, REPRESENTS THE
FINAL AGREEMENT OF THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
12. AGREEMENT FOR BINDING ARBITRATION. THE PARTIES AGREE TO BE BOUND BY
THE TERMS AND PROVISIONS OF THE CURRENT ARBITRATION PROGRAM OF WELLS FARGO BANK
(TEXAS), N.A., WHICH IS INCORPORATED BY REFERENCE HEREIN AND IS ACKNOWLEDGED AS
RECEIVED BY THE PARTIES, PURSUANT TO WHICH ANY AND ALL DISPUTES SHALL BE
RESOLVED BY MANDATORY BINDING ARBITRATION UPON THE REQUEST OF EITHER PARTY.
<PAGE> 4
"BORROWER"
VENUS EXPLORATION, INC.
By: /s/ JOHN Y. AMES
-----------------------------
Name: John Y. Ames
---------------------------
Title: President
--------------------------
"BANK"
WELLS FARGO BANK (TEXAS) N.A.
By: /s/ ANDREW A. MOY
-----------------------------
Andrew A. Moy, Vice President
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