<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, 2000
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 1, 2000
---------------------------------------- --------------------------------------
<S> <C>
Common Stock $0.01 par value 12,337,000 shares
</TABLE>
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VENUS EXPLORATION, INC. AND SUBSIDIARY
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
September 30, 2000 and December 31, 1999
(b) Consolidated Statements of Operations for 4
the three-month periods ended September 30,
2000 and 1999
(c) Consolidated Statements of Operations for 5
the nine-month periods ended September 30,
2000 and 1999
(d) Consolidated Statements of Cash Flows 6
for the nine-month periods ended
September 30, 2000 and 1999
(e) Notes to Consolidated Financial Statements 7
Item 2. - Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About 20
Market Risk
PART II. - OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds 20
Item 5. - Other Information 20
Item 6. - Exhibits and Reports on Form 8-K 21
Signatures 21
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 2,256 $ 236
Trade accounts receivable 1,573 718
Funds due from escrow agent -- 17,303
Assets held for sale -- 1,236
Prepaid expenses and other 83 90
------------- ------------
Total current assets 3,912 19,583
Oil and gas properties and equipment, at cost
under the successful efforts method, net 4,773 4,301
Other property and equipment, net 88 136
Deferred financing costs, at cost less accumulated amortization 66 20
Other assets, at cost less accumulated amortization 10 424
------------- ------------
$ 8,849 $ 24,464
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 3,503 $ 1,448
Other liabilities 381 1,139
Current notes payable 2,250 17,919
------------- ------------
Total current liabilities 6,134 20,506
Long-term debt -- 1,750
Other long-term liabilities 14 18
------------- ------------
Total liabilities 6,148 22,274
Shareholders' equity:
Preferred stock; par value of $0.01; 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock; par value of $.01; 30,000,000 shares
authorized; 12,315,430 and 11,055,285 shares issued
and outstanding in 2000 and 1999, respectively 123 110
Additional paid-in capital 18,676 17,336
Accumulated deficit (16,052) (15,194)
Accumulated other comprehensive income - net unrealized
appreciation on investment securities -- 69
Unearned compensation (46) (131)
------------- ------------
Total shareholders' equity 2,701 2,190
Commitments and contingencies
------------- ------------
$ 8,849 $ 24,464
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30, (in thousands
except per share data)
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Oil and gas revenues $ 931 $ 644
------------ ------------
Costs of operations:
Production expense 360 297
Exploration expenses, including dry holes 186 97
Depreciation, depletion and amortization 149 153
General and administrative 429 533
------------ ------------
Total expenses 1,124 1,080
------------ ------------
Operating loss (193) (436)
------------ ------------
Other income (expense):
Interest expense (55) (331)
Debt conversion expense (61) --
Equity in net earnings from EXUS Energy. LLC -- 278
Gain (loss) on sale of assets (33) (308)
Interest and other income (expense), net 9 2
------------ ------------
(140) (359)
------------ ------------
Net income (loss) $ (333) $ (795)
============ ============
Earnings (loss) per share,
Basic and diluted $ (.03) $ (.07)
============ ============
Common shares and equivalents outstanding,
Basic and diluted 12,121 11,026
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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VENUS EXPLORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, (in thousands
except per share data)
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Oil and gas revenues $ 2,751 $ 1,463
------------ ------------
Costs of operations:
Production expense 1,073 710
Exploration expenses, including dry holes 637 458
Depreciation, depletion and amortization 497 426
General and administrative 1,428 1,602
------------ ------------
Total expenses 3,635 3,196
------------ ------------
Operating loss (884) (1,733)
------------ ------------
Other income (expense):
Interest expense (105) (551)
Debt conversion expense (235) --
Equity in net earnings from EXUS Energy. LLC -- 278
Gain on sale of assets 599 496
Interest and other income (expense), net 17 10
------------ ------------
276 233
------------ ------------
Income (loss) before extraordinary item (608) (1,500)
Extraordinary loss on early extinguishment of debt 250 --
------------ ------------
Net income (loss) $ (858) $ (1,500)
============ ============
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ (.05) $ (0.14)
Extraordinary loss on early extinguishment of debt (.02) --
------------ ------------
Earnings (loss) $ (.07) $ (0.14)
============ ============
Common shares and equivalents outstanding:
Basic and diluted 11,440 10,997
============ ============
</TABLE>
See accompanying 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,
(in thousands)
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating Activities:
Net earnings (loss) $ (858) $ (1,500)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation, depletion and amortization of oil and gas
properties 497 549
Other depreciation and amortization 96 --
Dry hole costs 40 19
Gain on sale of property and equipment (400) (496)
Gain on sale of securities (199) --
Debt conversion expense 228 --
Extraordinary loss on early extinguishments of debt 250 --
Equity in net earnings from EXUS Energy. LLC -- (278)
Compensation expense for stock and stock options 155 150
Interest expense paid with common stock 52 27
Deferred interest expense on EXCO note (72) 35
Changes in operating assets and liabilities:
Trade accounts receivable (855) (329)
Prepaid expenses and other 7 --
Other assets (10) --
Trade accounts payable 2,055 314
Other liabilities (686) 85
------------ ------------
Net cash provided by (used in) operating activities 300 (1,424)
------------ ------------
Investing Activities:
Capital expenditures (1,163) (468)
Investment in EXUS -- (6,946)
Distributions from EXUS 250 --
Proceeds from sale of securities 304 --
Proceeds from sales of property and equipment 19,083 2,616
------------ ------------
Net cash provided by (used in) investing activities 18,474 (4,798)
------------ ------------
Financing Activities:
Net proceeds from issuance of long-term debt and notes payable 3,250 8,200
Principal payments on long-term debt and notes payable (19,673) (1,896)
Deferred financing costs (81) (21)
Prepayment penalty on early extinguishment of debt (250) --
------------ ------------
Net cash provided by (used in) financing activities (16,754) 6,283
------------ ------------
Increase (decrease) in cash and equivalents 2,020 61
Cash and equivalents, beginning of period 236 126
------------ ------------
Cash and equivalents, end of period $ 2,256 $ 187
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
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VENUS EXPLORATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months and Nine Months Ended September 30, 2000 and 1999
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 eight 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, 1999.
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, 2000 and the results of its operations for the three
and nine month periods ended September 30, 2000 and 1999.
The results of operations for the three and nine month periods ended
September 30, 2000 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 1999 consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
4. Hedging Activities
As required by its bank lender, the Company enters into commodity derivative
contracts for non-trading purposes as a hedging strategy to manage commodity
prices associated with oil and gas sales and to reduce the impact of price
fluctuations.
The Company utilizes the hedge or deferral method of accounting for commodity
derivative financial instruments whereby gains and losses on these hedging
instruments are recognized and recorded as revenues on the statement of
operations when the related natural gas or oil has been produced, purchased or
delivered. As a result, gains and losses on commodity financial instruments are
generally offset by similar changes in the realized prices of natural gas and
crude oil. To qualify as hedging instruments, these instruments must be highly
correlated to anticipated future sales such that the Company's exposure to the
risks of commodity price changes is reduced. While commodity financial
instruments are intended to reduce the Company's exposure to declines in the
market price of natural gas and crude oil, the commodity financial instruments
may also limit the Company's gain from increases in the market price of natural
gas and crude oil.
On May 12, 2000, the Company entered into hedge contracts for 125 barrels of oil
per day for twelve months (or 45,625 barrels) and 500 mmbtu per day for twelve
months (or 182,500 mmbtu). The hedge term is June 2000 through May 2001. The oil
hedge is a costless collar with a floor of $24.00 per barrel and a cap of $27.50
per barrel. The natural gas hedge is a costless collar with a floor of $2.90 per
mmbtu and a cap of $3.65 per mmbtu. The reference price for oil is the New York
Mercantile Exchange West Texas Intermediate future contract. For natural gas
the index price is the Houston Ship Channel index for large packages as quoted
by Inside Ferc. As of September 30, 2000,
7
<PAGE> 8
the estimated fair value of the Company's positions was a net payable of
approximately $289,000 based upon an estimate of what the Company would owe if
the contracts were liquidated.
5. Investment in EXUS Energy, LLC
On June 30, 1999, EXUS Energy, LLC, (EXUS) a Delaware limited liability
company, owned 50% by EXCO Resources, Inc. (EXCO) and 50% by the Company,
completed the acquisition of oil and natural gas properties located in Jackson
Parish, Louisiana. The properties included 17 producing wells on 8,000 acres, of
which about 80% was developed.
The net purchase price was $27.6 million. EXUS funded the purchase with $14
million of equity capital and the balance from its bank credit facility.
Of the initial $14 million of EXUS equity capital, EXCO provided $7 million from
its cash on hand, and Venus provided $7 million from funds borrowed from EXCO
under the terms of an $8 million convertible promissory note. All borrowings
under the note were secured by a first priority lien providing a security
interest in the Company's membership interest in EXUS and in distribution and
income rights in EXUS.
On June 30, 1999, EXUS entered into a credit facility with NationsBank, N.A. as
administrative agent and lender. The credit facility provided for borrowings up
to $50 million. All borrowings under the credit facility were secured by a first
lien mortgage providing a security interest in substantially all assets owned by
EXUS, including all mineral interests.
On December 31, 1999, the Company sold its interest in the EXUS properties as
did EXCO. The gross purchase price for the Company's interest was $18.9 million,
and the Company recorded a pre-tax gain of $4.3 million in 1999, and $0.4
million in the quarter ended March 31, 2000, when contingencies related to part
of the properties sold were cleared.
To effect the sale, EXUS distributed the properties to EXCO and the Company, as
the owners of EXUS, in equal portions. EXCO and the Company then sold their
undivided interests effective December 31, 1999. The instruments of conveyance
were executed and delivered into escrow on December 31, 1999, and the cash
consideration was delivered to the escrow agent on January 6, 2000. The delay in
the payment was due to concerns about the potential for a Y2K disruption to the
banking system.
On January 6, 2000, the Company used $7.1 million of the net proceeds to repay
the Company's share of the EXUS Energy bank debt under the NationsBank credit
facility, $7 million to repay the convertible note to EXCO Resources, $250,000
to satisfy a prepayment penalty under the EXCO convertible note, and $3.7
million to reduce the Company's bank debt. The balance of the Company's bank
debt, $152,000 was paid on March 30, 2000.
6. Earnings (loss) Per Share
Basic net loss per common share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted income (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 period ended September 30, 2000 and 1999 are
calculated based on 12,121,144 and 11,026,048 weighted average shares
outstanding, respectively. Loss per share for the nine month period ended
September 30, 2000 and 1999 are calculated based on 11,440,081 and 10,996,641
weighted average shares outstanding, respectively. For both 2000 and 1999 the
Company reported net losses; therefore, diluted earnings per share is not
presented.
8
<PAGE> 9
7. Long-Term Debt
Long-term debt consists of the following at September 30, 2000 and December
31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
7% Convertible subordinated promissory notes $ -- $ 1,000,000
Subordinated debenture -- 750,000
------------- ------------
$ -- $ 1,750,000
============= ============
</TABLE>
Notes payable consists of the following at September 30, 2000, and December
31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Revolving credit $ 2,250,000 $ 3,819,716
EXCO Convertible Note -- 7,000,000
NationsBank, N. A. Credit Facility -- 7,100,000
------------- ------------
$ 2,250,000 $ 17,919,716
============= ============
</TABLE>
At December 31, 1999, Notes payable were classified as current because they
are required to be repaid from funds due from escrow agent and assets held for
sale, both of which were classified as current assets and relate to the sale of
the EXUS Properties. At September 30, 2000, the entire balance of the revolving
credit facility has been classified as a current liability because the agreement
terminates on May 8, 2001, which is within twelve months of the balance sheet
date. Although it is the Company's intent to refinance the outstanding balance,
at this point the Company has not yet obtained a commitment from a lender for
such re-financing.
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 interest rate on the Subordinated Notes was 7% per annum, and at the option
of the Company the interest was payable in the Company's common stock. During
1999 the Company paid interest for the quarters ended June 30, 1999, and
September 30, 1999, with 21,424 shares of the Company's common stock. In January
2000 the Company issued 15,731 shares in payment of the interest due for the
quarter ended December 31, 1999, and the Company subsequently issued 43,257 in
payment of the interest due for the quarters ended March 31, 2000 and June 30,
2000.
The Subordinated Notes were to mature in 2004, and the noteholders had the
option to convert the debt into the Company's common stock at any time, at a
conversion price of $1.15 per share, the market value of the common stock on the
date the terms were agreed to. On June 30, 2000, five of the six noteholders
agreed to convert the original principal amount of their debt holdings,
$700,000, into 799,997 shares of the Company's common stock pursuant to an offer
by the Company to induce conversion. The Company offered the noteholders the
opportunity, until June 30, 2000, to convert the Subordinated Notes at a
conversion price of $0.875 per share. The lower conversion price of $0.875 per
share resulted in 191,303 additional shares being issued than would have been
issued under the original conversion price of $1.15 per share. During the
quarter ended June 30, 2000, the Company recorded $167,000 in non-cash debt
conversion expense related to the fair value of the 191,303 additional shares
issued. The Company also incurred $7,000 of legal cost related to the debt
conversion.
During the quarter ended September 30, 2000, the Company extended the inducement
to convert option to August 31, 2000. On August 22, 2000, the remaining
noteholder elected to convert his debt holdings, $300,000, into 342,857 shares
of the Company's common stock, which included 81,987 additional shares due to
the reduced conversion price. The Company recorded $61,491 in non-cash debt
conversion expense related to the fair value of the 81,987 additional shares
issued.
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<PAGE> 10
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 have been issued in the same manner. As a result, the
transfer of such securities is restricted.
Subordinated Debenture
During October 1999, the chief executive officer of the Company advanced the
Company $750,000 in 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. On May 12, 2000, the
Debenture was repaid in full from proceeds drawn from the new bank credit
facility. Under the credit facility, interest is payable monthly, in cash, at a
rate equal to Frost National Bank prime rate plus 1%. On May 12, 2000, the
interest rate was 10%.
Revolving Credit
In 1997, the Company entered into a loan agreement establishing a $20,000,000
revolving line of credit. In December 1997 this agreement was restated and
amended to increase the credit facility to $50,000,000 subject to borrowing base
determined by the bank based on the Company's oil and gas reserves which are
used as security for the loan. On August 19, 1998 the credit facility was
amended resulting in the interest rate on related borrowings becoming the bank's
prime lending rate plus 1%.
On January 6, 2000, as part of the cash settlement from the sale of the
Company's interest in the EXUS Properties, $3,716,000 was used to reduce the
outstanding balance under its then existing credit facility, resulting in an
outstanding loan balance of $152,000 as of January 6, 2000. At the same time the
bank lowered the borrowing base to $152,000. On March 30, 2000, the outstanding
balance under the credit facility was repaid.
On May 5, 2000, the Company entered into a loan agreement with a new bank
establishing a $15,000,000 revolving line of credit 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 used as security for the loan. The
interest rate is the bank's base rate plus 1%. The interest rate on September
30, 2000, was 10.5%. At September 30, 2000, the entire balance of the revolving
credit facility has been classified as a current liability because the agreement
terminates on May 8, 2001, which is within twelve months of the balance sheet
date. Although it is the Company's intent to refinance the outstanding balance,
at this point the Company has not yet obtained a commitment from a lender for
such refinancing.
The initial borrowing base was $2.45 million and it declined at the rate of
$50,000 per month beginning Jume 1, 2000. At September 30, 2000, the borrowing
base was $2.25 million. As of October 1, 2000, the lender determined the
borrowing base to be $2.2 million, and it declines at the rate of $50,000 per
month beginning November 1, 2000 until the next borrowing base redetermination
on April 1, 2001. The Company may request interim redeterminations. Changes in
the borrowing base are solely at the discretion of the lender based on the
lender's then current engineering standards and are subject to the lender's
credit approval process. Mandatory prepayment is required to the extent
outstanding amounts under the credit facility exceed the borrowing base.
A facility fee of 1% of the initial borrowing base was paid at closing. A 3/4%
facility fee will be due on all incremental increases in the borrowing base, and
a 3/8% per annum fee is due on the unused portion of the borrowing base. The
Company is also required to pay a $5,000 engineering fee for the initial
borrowing base determination and for each subsequent redetermination. The
facility is secured by all of the Company's oil and gas properties, and contains
usual and standard covenants such as: debt and lien restrictions; dividend and
distribution prohibitions; prohibitions against cash payments to other
debtholders; liquidity, leverage, net worth and debt service coverage ratios;
and financial statement reporting requirements. The credit facility also
requires that the Company hedge at least 50% of its oil and gas production for
twelve months. Although the Company believes that the new credit facility is
sufficient to fund its business plan for 2000, future availability of credit
will depend on the success of the Company's development program and its ability
to stay in compliance with credit facility debt covenants.
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EXCO 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") due July 1, 2004.
The Company drew $7 million under the EXCO Note to fund its capital contribution
to EXUS, and the entire amount was repaid on January 6, 2000, from proceeds from
the escrow account created on December 31, 1999, when the EXUS properties were
sold. There was no conversion of any part of the EXCO Note into common shares
before its termination, and interest during the actual term outstanding was 10%.
The EXCO Note contained a prepayment penalty provision of 3.57% of the principal
prepaid for any prepayment occurring on or before July 1, 2000. On January 6,
2000, the Company paid a $250,000 prepayment penalty when it prepaid the entire
$7 million outstanding balance. During the quarter ended March 31, 2000, the
Company recognized an extraordinary loss for the amount of the prepayment
penalty. In addition, the Company recorded a reversal of approximately $70,000
in accrued imputed interest that did not have to be paid because of the
prepayment.
NationsBank, N. A. Credit Facility
In connection with EXUS' acquisition of the properties in Jackson Parish,
Louisiana, on June 30, 1999, EXUS entered into a credit facility with
NationsBank, N. A. as administrative agent and lender. Venus' share of the
outstanding balance under the credit facility at December 31, 1999, totaled $7.1
million, and the entire balance was repaid on January 6, 2000, from proceeds
from the escrow account created on December 31, 1999, when the oil and gas
properties were sold.
8. 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, are
incentives that align 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.
During 1999 the Company granted 257,457 options, and there were 34,611
options that expired or were surrendered. The options granted in 1999 were
issued under a salary reduction plan and vested each pay period that the
affected employees did not receive their full salary. All options granted in
1999 vested by December 31, 1999. The stock options granted in 1999 funded the
salary reduction plan from March 1, 1999, through August 1, 1999. The salary
reduction plan ended on March 31, 2000. On March 1, 2000, the Compensation
Committee granted approximately 358,000 stock options, subject to shareholder
approval, to fund the salary reduction plan from August 1, 1999, through March
31, 2000. Shareholder approval is required because the issuance of the 358,000
stock options would bring the total stock options issued under the plan over the
maximum number allowed under the incentive plan. The Company intends to fix the
exercise price at the fair market value on the date of grant. The date of grant
will be the date shareholders approve the grant.
9. Accounting for Income Taxes
No provision for income taxes has been recorded for the period ended
September 30, 2000, due to net operating losses in prior periods, for which a
valuation allowance was fully provided. No provision for income taxes was
recorded for the period ended September 30, 1999 due to the loss recorded for
that period.
10. Commitments and Contingencies
The Company is not involved in any claims or legal proceedings.
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<PAGE> 12
11. Liquidity and Subsequent Financing
The Company's assets are predominately real property rights and intellectual
information that it developed regarding those properties and other geographical
areas that the Company is studying for exploration and development. The market
for these 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 the Company's strategic plans, normal operations
and credit facilities.
As discussed above, upon maturity of the $15 million revolving line of credit,
the Company intends to renew and or refinance the then outstanding balance. At
this point, the Company has not yet obtained a commitment from a lender for such
refinancing. While there can be no assurances that the revolving line of credit
will be renewed or refinanced, the Company's management believes that a renewal
or refinancing is attainable, however, this is subject to the conditions of the
credit markets at the time of the renewal or refinancing.
The cash flow generated by current operations is only sufficient to fund general
and administrative expenses. The Company relies on bank and other financing to
implement its business plan.
12
<PAGE> 13
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 our Annual Report on Form 10-K for the
year ended December 31, 1999. Certain statements contained herein are "Forward
Looking Statements" and are thus prospective. As discussed in our Annual Report
on Form 10-K for the year ended December 31, 1999, 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
We apply advanced geoscience technology to the exploration for and
exploitation of undiscovered onshore oil and gas reserves in the United States.
In addition, our business plan includes the acquisition of producing properties.
We presently have oil and gas properties, acreage and production in eight
states. Our emphasis is on oil and gas exploration and development projects and
prospects in Texas, Louisiana, Oklahoma and Utah, with a current primary focus
being in the Expanded Yegua Trend of the Upper Texas Gulf Coast and the Cotton
Valley Trend of East Texas and Western Louisiana. Our management team has been
responsible for the discovery, development and exploitation of relatively
significant reserves of oil and gas for privately held predecessor companies
over the past 30 years.
Our strategy consists of:
o Exploration for oil and natural gas reserves in geographic areas where we
have expertise
o Exploitation and development drilling in existing oil and gas fields
o Strategic acquisitions of producing properties with upside potential
EXPLORATION - We conduct exploration programs for new oil and gas reserves and
undiscovered fields in geological trends that are considered to contain an
undiscovered resource base of oil and natural gas. We use advanced geoscience
technology to conduct these programs. We participate in high-risk exploration
because it provides the opportunity to participate in discovery of substantial
oil and gas reserves and the resultant rapid growth in asset values which can
occur. Because of the inherent uncertainty and high financial risk associated
with the outcome of individual drilling prospects, we attempt to maintain an
inventory of many exploratory prospect leads from which drilling prospects are
confirmed and generated. We have used this strategy successfully in the past. We
typically attempt to reduce our financial risk and to obtain financing for a
large portion of the exploration costs through sale to oil and gas industry
co-venturers of working interests in prospects we originate. Because of the
decline in oil prices in 1998 and the reduction of capital available for
exploration budgets, both for the oil and gas industry in general and for us
specifically, we reduced exploration activity and continue to work only selected
prospects we believe to have extraordinary merit during this period of low
availability of exploration capital. In order to add a greater degree of
certainty to our growth, exploration only represents one of three avenues of
potential growth. The other two important components of our growth plans are
exploitation of existing oil and gas fields and acquisition of producing
properties with enhanced potential.
The exploration team currently concentrates on two primary geographical focus
areas: the Yegua Trend of the Texas and Louisiana Gulf Coast and the Cotton
Valley Trend of East Texas and Western Louisiana. Secondary areas are the South
Midland Basin and select areas in the mid-continent. We have an inventory of
many exploration Prospects and Prospect Leads, and we are reactivating
exploratory drilling projects so that when, and if, industry drilling budgets
are restored for exploration, we will have drilling projects available in which
to offer participation to industry co-venturers. The primary geoscience
technologies we use to evaluate prospects and prospect leads are 2-D and 3-D
seismic surveys and the subsurface geological studies used to interpret the data
gathered by these seismic surveys. Considerable computer resources and
geophysical expertise are required to process and to interpret the 3-D survey
and to transform it into a useable product. Consequently, our in-house technical
capability is an important ingredient in our current and continuing ability to
conduct comprehensive exploration programs and in exploitation of existing
fields.
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<PAGE> 14
Venus leverages the expertise of its technical team by managing exploration
joint ventures in which the Company's partners fund a portion of the overhead
and pay drilling costs on a promoted basis in exchange for participation rights.
As mentioned above, this reduces financial risk, while exposing the company to
significant growth from the discovery of new reserves. Our management team has
been highly successful in the past, and the company is actively pursuing this
strategy under two active exploration joint ventures in the Bossier/Cotton
Valley Trend of East Texas and in the Yegua or Cockfield Trend in Louisiana. The
company recently formed one of these joint ventures with a major oil company.
The terms of the joint venture provide for the Company to manage the exploration
of a prospective area covering more than 100 square miles in East Texas. We
acquired the right to utilize 3-D seismic data that had identified several
prospects, and the major oil company retained the right to participate in
drilling exploratory wells that our technical team proposes. Leasing is in
progress, and we expect to drill the first exploratory well for this joint
venture in 2001.
EXPLOITATION AND DEVELOPMENT OF PRODUCING FIELDS - In addition to
exploring for new oil and gas reserves in previously undiscovered fields, we
also use advanced geoscience technology to exploit and to develop oil and gas
reserves in currently producing fields. The fields being exploited or developed
consist of fields we discovered or fields discovered by others but that we
believe are not fully developed. We are conducting active exploitation and
development activities in 7 different fields in Texas, Oklahoma and Utah. Our
working interest in those fields varies in size from 2.5% to 100%, and we
operate in 4 of the 7 active fields. During 1999, due to the significant decline
in oil and natural gas prices during 1998 and shortage of capital available to
us, we emphasized acquiring and expanding reserves in existing oil and gas
fields rather than exploring for new reserves in unestablished areas.
In November 1999, we successfully restimulated our #1 Westbury Farms well in the
Constitution Field, Jefferson County, Texas. As a result of this successful
restimulation, our proved reserves in the field increased by 2.9 Bcfe. We
sucessfully completed a development well, the #1 Apache Gas Unit in the Westbury
Middle Yegua Sand, which was encountered between 14,229 and 14,289 feet. After
testing gas and condensate, the well was stimulated with a sand fracture
treatment on September 28, 2000, and the well was generating sales on October 2,
2000. The initial production rate was 3.682 million cubic feet of gas per day
(MMCF) and 312 barrels of condensate per day, with 168 barrels of water per day
flowing through 15/64 inch choke with 3,870 #psi flowing tubing pressure. The #1
Apache Gas Unit well was drilled to a total depth of 14,910 feet and encountered
three zones which appeared to be productive of gas and condensate. Evaluations
of the electric log in that well indicated that two primary objective zones in
the Middle Yegua Formation at 14,229 feet and 13,912 feet are expected to be
commercially productive. A deeper zone in the well at 14,545 feet was perforated
and stimulated with a sand fracture treatment. This deeper zone tested gas and
condensate, but because of mechanical problems, the zone was plugged off.
Ryder Scott & Company, independent engineering consultants, in its estimate of
our reserves at December 31, 1999, estimated that the Constitution Field
Project, operated by us, may have six proved undeveloped drill sites with 11 pay
zones on the project's 4,946 gross acres (4,538 net). We own a 15% working
interest in the project and expect to drill at least one additional well in the
Constitution Field during the year 2000.
Based on these factors, we have signed a two well drilling contract with Grey
Wolf, Inc. to commence the drilling of the third well in the Constitution Field
on or about November 14, 2000, and a fourth well to follow the drilling of the
third. This third well, the #1 Paggi, will be targeted for completion in
multi-productive reservoirs in the Yegua formation. It offsets an existing well
in which Venus owns no interest which was recompleted in June, 2000 at a rate of
of 6.0 million cubic of gas per day and 1000 barrels of condensate per day.
On August 3, 2000, we started drilling the #1 Flinn well in the East White Point
Field Area, San Patricio County, Texas. The well was drilled to a depth of
5,600' to develop bypassed Frio pay. The well is currently being tested. We
acquired this field during the second quarter. We are the operator and currently
own a 25% working interest.
ACQUISITIONS, STRATEGIC ALLIANCES AND DIVESTITURES OF SELECTED PROPERTIES - The
Company continues to seek strategic producing property acquisitions that offer
near-term production enhancement potential and longer-term development drilling
potential. These opportunities on properties the Company acquires can be
investigated through the application of advanced technology by the Company's
technical team. The Company also seeks to accomplish strategic acquisitions of
producing assets with development and exploratory potential through strategic
alliances with other oil and gas companies. The Company may also sell
non-strategic properties as a part of its effort to concentrate on its focus
areas. An example of the Company's execution of its acquisition strategy is the
Company's acquisition on June 30, 1999 of oil and natural gas producing
properties in Jackson Parish, Louisiana. This acquisition was a result of leads
generated by the Company's technical team.
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<PAGE> 15
Through an alliance with another oil and gas company, the Company was able to
acquire a 50% interest in the properties at virtually no cash outlay to the
Company. Six months later, on December 31, 1999, the Company sold its interest
in the properties for an after tax gain of approximately $4 million.
Liquidity and Capital Resources
(a) Liquidity
At September 30, 2000, we had a working capital deficit of $2,222,000
compared with a deficit of $923,000 at December 31, 1999, a decrease in working
capital of $1,299,000. Of this decrease, $2,250,000 is due to classifying our
bank debt as a current liability because the note matures in May 2001 which is
less than twelve months from September 30, 2000. Our intention is, on or before
maturity, to renew the credit facility or replace it with a new facility.
Net cash provided by operating activities during the nine month period ended
September 30, 2000, was $300,000, whereas $1,424,000 was used in operating
activities for the same period in 1999. Net changes in operating assets and
liabilities accounted for $511,000 of the cash flow provided by operating
activities. During the nine-month period ended September 30, 2000, the Company
realized a net loss of $858,000. This compares with a net loss of $1.5 million
for the same period in 1999. The 2000 loss reflects a gain of $599,000 ($421,000
after including related early extinguishment of debt cost and reversal of
imputed interest) from the sale of long-term assets as compared to a gain of
$496,000 reflected in the 1999 loss.
During the first nine months of 2000 the Company incurred capital
expenditures of $1,163,000 and received proceeds from its equity investment in
EXUS of $250,000 and proceeds from the sale of securities, property and
equipment of $19.1 million. During the same period in 1999, the Company had
capital expenditures of $468,000 and received proceeds from the sale of property
and equipment of $2.6 million.
For the nine month period ended September 30, 2000, $16.8 million was used
in financing activities. This compares with $6.3 million provided by financing
activities for the same period in 1999.
(b) Capital Resources
The Company's capital expenditure budget is continually reviewed and revised
as necessary, based on perceived opportunities and business conditions. Capital
expenditures for the last three months of 2000 are budgeted at approximately
$1.0 million for projects that include the drilling and completion of 3
development wells, a 3-D seismic acquisition for an exploration project, and
acreage acquisition. The actual timing of the drilling of the wells is dependent
upon many unpredictable factors and the availability of capital, which could
postpone expenditures because there are no contractual commitments to incur any
of the budgeted costs. In addition, depending on the level of success of the
development wells and exploitation wells, the Company may drill additional wells
during 2000.
On May 5, 2000, the Company entered into a loan agreement establishing a
$15,000,000 revolving line of credit 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 used as security for the loan. The interest rate is
the bank's base rate plus 1%. The interest rate on September 30, 2000, was
10.5%.
The initial borrowing base was $2.45 million and it declined at the rate of
$50,000 per month beginning June 1, 2000. At September 30, 2000, the borrowing
base was $2.25 million. As of October 1, 2000, the lender determined the
borrowing base to be $2.2 million, and it declines at the rate of $50,000 per
month beginning November 1, 2000 until the next borrowing base redetermination
on April 1, 2001. The Company may request interim redeterminations. Changes in
the borrowing base are solely at the discretion of the lender based on the
lender's then current engineering standards and are subject to the lender's
credit approval process. Mandatory prepayment is required to the extent
outstanding amounts under the credit facility exceed the borrowing base.
A facility fee of 1% of the initial borrowing base was paid at closing. A 0.5%
facility fee will be due on all incremental increases in the borrowing base, and
a 3/8% per annum fee is due on the unused portion of the borrowing base. The
Company is also required to pay a $5,000 engineering fee for the initial
borrowing base determination and for each subsequent redetermination. The
facility is secured by all of the Company's oil and gas properties, and contains
the following financial covenants:
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<PAGE> 16
(1) Consolidated tangible net worth cannot be less than 85% of consolidated
tangible net worth reported as of December 31, 1999, plus the sum of
70% of the Company's positive quarterly net income, and plus 100% of
any increase in shareholder's equity from the sale of stock in the
Company subsequent to December 31, 1999.
(2) The Company will not pay or incur, or otherwise become obligated to pay
general and administrative expenses which exceed $350,000 during any
quarter beginning with the quarter ended September 30, 2000. Non-cash
charges to general and administrative expense are excluded.
(3) The Company will maintain a current ratio of at least 1:1, with initial
calculation of such ratio to be made as of June 30, 2000. For purposes
of computing the current ratio, current maturities under the credit
facility are excluded.
(4) The Company will maintain a debt service coverage ratio of at least
1.2:1.0 with the initial calculation of such ratio to be made as of
September 30, 2000. Debt service coverage ratio is defined as the ratio
from dividing earnings before interest, taxes, depreciation, depletion
and amortization, and other non-cash charges (EBITDA) for any quarter
by debt service for such quarter.
The facility contains other usual and standard covenants such as: debt and lien
restrictions; dividend and distribution prohibitions; and financial statement
reporting requirements. The credit facility also requires that the Company hedge
at least 50% of its oil and gas production for twelve months. Although the
Company believes that the new credit facility is sufficient to fund its business
plan for 2000, future availability of credit will depend on the success of the
Company's development program and its ability to stay in compliance with credit
facility debt covenants.
Effective September 18, 2000, the Executive Committee of the Board of Directors
approved a plan for the repurchase of up to 300,000 of the Company's shares of
common stock. With the consent and approval of the Company's bank, the Company
has the authority to purchase $100,000 worth of the Company's stock in open
market transactions at prices related to the independent market for common
stock, all in accordance with the terms and provisions of Rule 10b-18 ("Rule
10b-18") under the Securities and Exchange Act of 1934, as amended. Unless
renewed by action of the Board of Directors, the repurchase plan shall terminate
on the earlier of the purchase of the 300,000 shares or December 31, 2000.
(c) Results of Operations
Revenues were higher during 2000 due to increased oil and natural gas
prices. As shown below, oil volumes increased by 18.5% while natural gas
volumes decreased by 4.8% during the nine month period ended September 30, and
3.7% and 17.9%, respectively, for the three month period. The period ended
September 30, 1999, includes 15,800 mcf of natural gas production from
properties that were sold during the first quarter of 1999. Excluding those
volumes from the prior period results indicates a 2.0% increase in natural gas
production in the current period as compared to the same period in 1999. The
increase is mainly due to the successful restimulation of the #1 Westbury Farms
(discussed above under "Overview") offset by normal depletion of existing
production.
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
Sales Average Sales Average
Volume Prices Volume Prices
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Nine Months Ended Sept. 30,
Gas (MCF) 225,445 $ 3.49 236,902 $ 2.05
Oil (BBLS) 75,141 $ 27.49 63,410 $ 15.32
Three Months Ended Sept. 30,
Gas (MCF) 63,967 $ 4.57 77,908 $ 2.56
Oil (BBLS) 23,824 $ 29.99 22,981 $ 19.25
</TABLE>
Average daily production of oil was 259 barrels for the three month period
ended September 30, 2000, and 250 for the same period in 1999. Average daily
production of natural gas was 695 mcf for the three month period ended September
30, 2000, and 847 mcf for the same period in 1999. There were no price hedges in
place during the three months ended September 30, 1999. On May 12, 2000, the
Company entered into hedge contracts for 125 barrels of
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<PAGE> 17
oil per day for twelve months and 500 mmbtu per day for twelve months. The
hedged volumes represent approximately 50% of estimated production for the
twelve month period ended May 2001. The Company entered into the hedge contracts
to comply with the terms of its new bank credit facility (discussed above under
"Capital Resources"). The hedge term is June 2000 through May 2001. The oil
hedge is a costless collar with a floor of $24.00 per barrel and a cap of $27.50
per barrel. If the average NYMEX price is less than $24.00 for any month, the
Company receives the difference between $24.00 and the average NYMEX price for
that particular month. If the average NYMEX price is greater than $27.50 for any
month, the Company pays the difference between $27.50 and the average NYMEX
price for that particular month. The natural gas hedge is a costless collar with
a floor of $2.90 per mmbtu and a cap of $3.65 per mmbtu. If the indexed price of
natural gas is less than $2.90 per mmbtu for any month, the Company receives the
difference between $2.90 and the indexed price for that particular month. If the
indexed price of natural gas is greater than $3.65 per mmbtu for any month, the
Company pays the difference between $3.65 and the indexed price for that
particular month. The reference price for natural gas is the Houston Ship
Channel index for large packages as quoted by Inside Ferc.
For the three month period ended September 30, 2000, the effect of the hedge
would be to lower the average price by $1.95 per barrel for oil and $.46 per mcf
for natural gas. As of September 30, 2000, the estimated fair value of our hedge
positions was a net payable of approximately $289,000 based upon an estimate of
what we would owe if the contracts were liquidated. (See Note 4 to the
accompanying financial statements for additional information about the Company's
hedging activities.)
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<PAGE> 18
Three Months Ended September 30, 2000 and 1999
The Company reported a net loss of $333,000 for the quarter ended September
30, 2000, compared to a net loss of $795,000 in the same quarter in 1999. The
2000 loss reflects non-cash debt conversion expense of $61,000 related to the
conversion of $300,000 of Subordinated Notes into our common stock. Oil and gas
revenues increased by $287,000 and interest expense decreased by $276,000.
Depreciation, depletion and amortization decreased by $4,000 and general and
administrative expense decreased by $104,000. These improvements were partially
offset by increases in production expense of $63,000 and exploration expense of
$89,000.
Oil and gas revenues increased by $287,000 as compared to the same period in
1999. Approximately 134% of this increase is due to the significant increase in
product prices, and the balance is due to higher production in the case of oil
and reduced production in the case of gas, during the current period. The
reduction in production, in the case of gas, is due to the sales of certain
wells and normal decline in production of the remaining properties.
Production expense increased by $63,000 as compared to the same period in
1999. Approximately 65% of the increase is due to higher severance taxes as a
result of increased prices. The balance of the increase is due to increased
operating cost due to an increase in workover costs. Production expense averaged
$1.74 per mcfe during the three month period ended September 30, 2000, compared
to $1.38 per mcfe for the same period in 1999.
Exploration expense increased by $89,000 due to increased exploration
activity during the quarter as compared to the same quarter in the prior year.
Depreciation, depletion and amortization decreased by $4,000 due to lower
volumes. Depreciation, depletion and amortization averaged $0.72 per mcfe in
2000 as compared to $0.71 per mcfe for the same period in 1999.
General and administrative expense decreased by $104,000 due to the reduction
in the number of employees.
Interest expense decreased by $276,000, from $331,000 in 1999 to $55,000 in
2000. The decrease is due to lower outstanding interest bearing balances. As
discussed in Note 5 to the accompanying unaudited financial statements, most of
the funds we received on the sale of the EXUS properties was used to repay debt.
The average outstanding balance in 1999 was $11.9 million as compared to an
average outstanding balance of $1 million in the current period.
Nine Months Ended September 30, 2000 and 1999
The Company reported a net loss of $858,000 for the nine month period ended
September 30, 2000, compared to a net loss of $1.5 million in the same period in
1999. The 2000 loss reflects debt conversion expense of $235,000 related to the
conversion of $1,000,000 of Subordinated Notes into our common stock, of which
$228,000 is a non-cash charge. Also included in the nine month period loss is a
non-cash charge of $250,000 for early extinguishments of debt. Oil and gas
revenues increased by $1,288,000, interest expense decreased by $446,000, and
general and administrative expense decreased by $174,000 and higher gain on sale
of assets of $103,000. These improvements were partially offset by increases in
production expense of $363,000, exploration expense of $179,000 and
depreciation, depletion and amortization of $71,000.
Oil and gas revenues increased by $1,288,000 as compared to the same period
in 1999. Approximately 126% of this increase is due to the significant increase
in product prices, and the balance is due to higher production in the case of
oil and reduced production in the case of gas during the current period. The
reduction in production, in the case of gas, is due to the sales of certain
wells and normal decline in production of the remaining properties.
Production expense increased by $363,000 as compared to the same period in
1999. Approximately 43% of the increase is due to higher severance taxes as a
result of increased prices The balance of the increase is due to higher volumes
produced during the current period and an increase in workover costs
(stimulations, adding perforations and recompletions), which has resulted in the
increased production discussed above. Production expense averaged $1.58 per mcfe
during the nine month period ended September 30, 2000, compared to $1.15 per
mcfe for the same period in 1999. This increase is due to the higher workover
cost and severance taxes discussed above. Although we plan further workover
operations in the fourth quarter, we expect per unit costs to start declining.
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<PAGE> 19
Exploration expense increased by $179,000. In the current period we recorded
dry hole expense of $40,000 and approximately $131,000 in employee severance
cost. Other exploration costs were lower during the nine month period as
compared to the same period in the prior year.
Depreciation, depletion and amortization increased by $71,000. Depreciation,
depletion and amortization averaged $.73 per mcfe in 2000 as compared to $0.69
per mcfe for the same period in 1999.
General and administrative expense decreased by $174,000 as a result of a
reduction in office personnel during 1999. These reductions were partially
offset by reinstatement of temporary salary reductions. As discussed in Note 8
in the accompanying unaudited financial statements, the temporary salary
reductions were implemented effective March 1, 1999, and ended on March 31,
2000.
Interest expense decreased by $446,000, from $551,000 in 1999 to $105,000 in
2000. Some of the decrease is due to the reversal of $72,000 in accrued imputed
interest that did not have to be paid because of the prepayment of the related
debt. In addition, as a result of the sale of the Company's interest in the EXUS
properties discussed in Note 5 to the accompanying unaudited financial
statements, our interest bearing debt was significantly lower during the nine
month period ended September 30, 2000 as compared to the same period in 1999.
The average outstanding balance in 1999 was $6.9 million as compared to an
average outstanding balance of $1.6 million in the current period.
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 the Company's fiscal year beginning January 1,
2001. The Company is currently reviewing the effects this Statement will have on
the financial statements in relation to the Company's hedging positions and
expects that it's derivative positions will qualify for hedge accounting
treatment.
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,
1999.
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<PAGE> 20
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, 1999 and reference is made to the information
contained there. On May 12, 2000 the Company entered into commodity hedge
contracts for 125 barrels of oil per day (approximately 11,250 barrels per
quarter) for 12 months and 500 mmbtu per day (approximately 45,000 mmbtu per
quarter) for 12 months, which approximates at least 50% of estimated production
from existing wells for the 12 month period June 2000 through May 2001. The
hedging arrangements have the effect of locking in the effective prices the
Company receives for the volumes hedged. For these volumes the Company's
exposure to a significant decline in product prices is significantly reduced;
however, they also limit the benefit the Company might have received if prices
increased above the cap. For every $1 the NYMEX average for a month is above the
$27.50 per barrel cap, the Company's net income would decrease by approximately
$4,000 for the month. For every $0.10 per mmbtu the indexed price of natural gas
is above $3.65 per mmbtu for a month, the Company's net income would decrease by
approximately $2,000 for the month.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Under the terms of the Company's new bank loan agreement (see Note 7 to
the accompanying unaudited financial statements), the Company is
prohibited from paying cash interest to the Subordinated Noteholders
during the term of the bank loan agreement.
(b) During 1999, the Company issued $1,000,000 original principal amount
of notes in a private placement. The notes are convertible into the
Company's common stock and interest on the notes is payable, at the
Company's election, in cash or shares of the Company's common stock.
The Company issued an aggregate of 37,107 shares of common stock in
payment of the interest due on the Notes due or accrued during 1999
(including 15,683 shares issued in January 2000 for interest due for
the quarter ended December 31, 1999). These shares were issued in lieu
of cash interest payments accrued of $44,471 through December 31,
1999. In 2000, the Company issued 43,257 shares of common stock for
interest accrued through June 30, 2000. These shares were issued in
lieu of cash interest payments accrued of $35,000. The shares were
issued pursuant to Sections 3(a)(9) and 4(2) of the Securities Act o
1933.
(c) On June 30, 2000, five of the six noteholders, of the notes referenced
in (b) above, agreed to convert their original principal amount of
their debt holdings of $700,000, into 799,997 shares of the Company's
common stock pursuant to an offer by the Company to induce conversion.
The Company offered the noteholders the opportunity, until June 30,
2000, to convert the Subordinated Notes at a conversion rate of $0.875
per share. The lower conversion price of $0.875 per share resulted in
191,303 additional shares being issued than would have been issued
under the original conversion price of $1.15 per share. During the
quarter ended June 30, 2000, the Company recorded $167,000 in non-cash
debt conversion expense related to the fair value of the 191,303
additional shares issued. The Company also incurred $7,000 of legal
cost related to the debt conversion.
(d) During the quarter ended September 30, 2000, the Company extended the
inducement to convert option, on the notes referenced in (b) and (c)
above, to August 31, 2000. On August 22, 2000, the remaining noteholder
elected to convert his debt holdings of $300,000, into 342,857 shares
of the Company's common stock, which included 81,987 additional shares
due to the reduced conversion price. The Company recorded $61,491 in
non-cash debt conversion expense related to the fair value of the
81,987 additional shares issued.
(e) The Company had 1,044,706 warrants outstanding for the purchase of its
common stock at an average purchase price of $3.00 per share. These
warrants were due to expire on October 23, 2000. The Company's Board of
Directors deemed that it was in the best interest of the Company to
extend the term of the warrants to January 23, 2001 and took the action
to extend the term of said warrants to the January 23, 2001 date.
Item 5. OTHER INFORMATION
Patrick A. Garcia became the Company's Treasurer and Chief Financial
Officer on May 21, 1997. As disclosed in Form 14A, filed on November 6,
2000, Mr. Garcia resigned effective August 16, 2000.
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<PAGE> 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment to the Loan Agreement Dated May 5, 2000 By and
Among Venus Exploration, Inc. and Bank One, Texas, N.A.
27.1 Financial Data Schedule
99.1 Audit Committee Charter
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 14, 2000 BY: /s/ JOHN Y. AMES
-----------------------------------
John Y. Ames
(Chief Operating Officer)
Dated November 14, 2000 BY: /s/ TERRY F. HARDEMAN
-----------------------------------
(Principal Accounting Officer &
Secretary)
<PAGE> 22
INDEX OF EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 First Amendment to the Loan Agreement Dated May 5, 2000 By and Among
Venus Exploration, Inc. and Bank One, Texas, N.A.
27.1 Financial Data Schedule
99.1 Venus Exploration, Inc. Audit Committee Charter
</TABLE>
