FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1997 or
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[ ] 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 0-18981
UNITED STATES EXPLORATION, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-1120323
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1901 New Street, Independence, Kansas 67301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (316) 331-8102
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Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.0001 par value
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Title of Class
Check whether the issuer (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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenues for the most recent fiscal year were $4,513,387.
The aggregate market value of the 3,826,215 Common Shares held by nonaffiliates
of the Company as of March 31, 1997, is approximately $12,435,199 based upon the
last reported sale of the Company's Common Shares as of July 1, 1997.
The total number of Common Shares outstanding as of March 31, 1997 was
8,312,358.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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TABLE OF CONTENTS
FORM 10-KSB ANNUAL REPORT - FOR FISCAL YEAR ENDED MARCH 31, 1997
UNITED STATES EXPLORATION, INC.
PART I Page
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Items 1 and 2. Business and Properties........................ 1
Item 3. Legal Proceedings.............................. 20
Item 4. Submission of Matters to a Vote of
Security Holders .............................. 20
Item 5. Market for Company Securities and Related
Shareholders Matters........................... 20
Item 6. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations..................................... 22
Item 7. Financial Statements and Supplementary Data.... 27
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 27
PART II
Item 9. Directors and Executive Officers............... 28
Item 10. Executive Compensation......................... 29
Item 11. Security Ownership of Certain Beneficial
Owners and Management.......................... 31
Item 12. Certain Relationships and Related Transactions. 33
PART IV
Item 13. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 34
Signature Page................................................... 36
Index to Financial Statements.................................... 37
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GLOSSARY OF TERMS
BBLS: Barrels.
BOPD: Barrels of oil per day.
BLANKET LEASE: The mineral lease between the Company and the
Osage Indian tribe covering approximately 64,000
acres in Osage County Oklahoma and including
provision for additional drilling obligations to
hold portions of the lease.
COMPLETION: The procedure used in finishing and equipping an
oil or gas well for production.
DEVELOPMENT WELL: A well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic
horizon known to be productive for the purpose of
extracting proved oil or gas reserves.
DRY HOLE: An exploratory or a development well found to be
incapable of producing either oil or gas in
sufficient quantities to justify completion as an
oil or gas well.
EXPLORATORY WELL: A well drilled to find and produce oil or gas in
an undeveloped area, to find a new reservoir in a
field previously found to be productive of oil or
gas in another reservoir or to extend a known
reservoir. Generally, an exploratory well is any
well that is not a development well.
FERC: Federal Energy Regulatory Commission.
GROSS ACRE: An acre in which a working interest is owned. The
number of gross acres is the total number of acres
in which working interests are owned.
GROSS WELL: An oil or gas well in which a working interest is
owned.
LEASES: Full or partial leasehold interests in oil and gas
prospects, authorizing the owner thereof to drill
for, reduce to possession and produce and sell oil
and gas, upon payment of rentals, bonuses and/or
royalties.
MMBTU: Million British Thermal Units. A British Thermal
Unit is the quantity of heat required to raise the
temperature of one pound of water 1(degree) F. at
or near its point of maximum density.
MCF: Thousand cubic feet.
MMCF: Million cubic feet.
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NGL: Natural gas liquids.
NET ACRES: One net acre is deemed to exist when the sum of
the fractional ownership of working interests in
gross acres equals one. The number of net acres is
the sum of the fractional working interests owned
in gross acres, expressed as whole numbers and
fractions thereof.
NET WELL: One net well is deemed to exist when the sum of
the fractional ownership interests in gross wells
equals one.
NET REVENUE An interest owner's pro rata share of total gross
INTERESTS ("NRI"): revenues, after deduction of royalties and other
burdens but before payment of operating expenses,
derived from the sale of oil and gas from a
specific property.
PROSPECT: An area believed to contain related geologic
features and thought to be productive of oil and
gas.
PROVED DEVELOPED Reserves that can be expected to be recovered
BEHIND PIPE through existing wells with existing equipment and
RESERVES (PDBP) operating methods but behind the casing of
existing wells or at minor depths below the
present bottom of such wells and where the cost of
making such oil and gas is relatively small
compared to the cost of a new well.
PROVED DEVELOPED Quantities of oil and gas which geological and
PRODUCING(PDP): engineering data demonstrate with reasonable
certainty to be recoverable in future years from
known reservoirs under existing economic and
operating conditions at prices and costs as of the
date the estimate is made.
PROVED RESERVES: Those quantities of oil and gas which can be
expected with little doubt to be recoverable
commercially at current prices and costs, under
existing regulatory practices and with existing
conventional equipment and operating methods.
PROVED UNDEVELOPED Reserves that are expected to be recovered from
RESERVES (PUD): new wells on undrilled acreage or from existing
wells where a relatively major expenditure is
required for recompletion.
WORKING INTEREST The operating interests under an oil and gas lease
("WI"): entitling the holder at its expense to conduct
drilling and production operations on the leased
property and to receive the net revenues
attributable to such interest after payment of
royalty and overriding royalty interests and other
lease burdens.
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INDEX OF TABLES
Table Description Page
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I Average Production Costs and Sales Prices........... 3
II Average Daily Flow-Through ......................... 8
III Developed Properties ...................... ........ 10
IV Remaining Reserves, March 31, 1997.................. 12
V Remaining Reserves, March 31, 1996.................. 13
VI Remaining Reserves, March 31, 1995.................. 13
VII Future Net Revenues (non-escalated basis)........... 14
VIII Present Value of Estimated Future Net Revenues...... 15
(non-escalated basis)
Additional Information
Descriptions in this Report are qualified by reference to the contents of
any contract, agreement or other documents and are not necessarily complete.
Reference is made to each such contract, agreement or document filed as an
exhibit to this Report, or previously filed by the Company pursuant to
regulations of the Securities and Exchange Commission. (See "Item 13. Exhibits,
Financial Statements, Schedules and Reports on Form 8-K.")
Special Note Regarding Forward Looking Statements
Certain statements contained herein constitute "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements include, without limitation, statements regarding the
Company's need for working capital, future revenues and results of operations.
Factors that could cause actual results to differ materially include, among
others, the following: Market prices in the oil and gas industry, results of
drilling, recompletions and work-overs undertaken by the Company, future
acquisitions, competition with other regional suppliers of oil and gas products,
relationships with third parties regarding utilization of Company owned gas
gathering systems and the overall economic climate. Most of these factors are
outside the control of the Company. Investors are cautioned not to put undue
reliance on forward looking statements. The Company disclaims any intent or
obligation to update publicly these forward looking statements, whether as a
result of new information, future events or otherwise.
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ITEMS 1. AND 2. BUSINESS AND PROPERTIES
General Development of Business
United States Exploration, Inc. (the "Company") was incorporated under the
laws of the State of Colorado on January 9, 1989. The Company completed its
initial public offering in July of that year. Since that time, the Company's
Common Shares have traded in the over-the-counter market. The Company's Common
Shares are currently quoted in the NASDAQ Small Cap Market.
The Company commenced operation in the oil and gas industry in May, 1990 in
connection with the acquisition of oil and gas assets from a public Canadian
company, Cirque Energy, Ltd., formerly known as Petrolantic Ltd. At that time,
the Company acquired oil and gas assets consisting of producing and undeveloped
properties and interests in gas gathering systems, in exchange for the issuance
of its Common Stock. Subsequently, the Company reacquired and retired a majority
of that Common Stock in exchange of the issuance of convertible debentures. All
of those debentures were subsequently retired or converted. Since completion of
the acquisition from Cirque, the Company has operated as an independent producer
of oil and gas.
All of the Company's operations are currently located in southeast Kansas
and central and northeast Oklahoma. The Company owns high percentage working
interests and net revenue interests in both oil and gas properties, and
interests in numerous gas gathering systems. During fiscal 1997, a decision was
made to discontinue operation of a wholly-owned subsidiary which operated as a
drilling contractor. Accordingly, the Company's drilling activities are
currently conducted through independent drilling contractors. The Company owns
and manages most of its oil and gas interests through wholly-owned subsidiaries,
including Argas, Inc., Producers Service, Incorporated, Performance Petroleum
Corporation, U.S. Gas Gathering, Inc. and Pacific-Osage, Inc. All references in
this Report to the Company include United States Exploration, Inc. and its
wholly-owned subsidiaries.
Since inception, the Company has pursued a strategy of growth through
acquisition. During the fiscal year end March 31, 1997, the Company continued
that process by completing a number of acquisitions. Effective January 15, 1997,
the Company consummated the acquisition of all of the assets of Five Star
Petroleum, Inc., consisting of oil and gas leases located in northeast Oklahoma
and oil and gas production and storage equipment located in proximity to the
leases. Contemporaneously, the Company acquired all of the outstanding stock of
ZCA Gas Gathering, Inc., subsequently changed to U.S. Gas Gathering, Inc. ("US
Gas") a privately-held Delaware corporation. The assets of U.S. Gas consisted of
a fifty percent interest in a gas gathering system, stored natural gas,
producing natural gas wells and the Blanket Lease. Both of these acquisitions,
as well as smaller acquisitions consummated during the fiscal year, were
completed with affiliates of the Company. (See "Developments During Fiscal
1997").
As of the date of filing this Report, the Company is negotiating with Bruce
D. Benson and certain related entities, to acquire additional oil and gas
assets. Such assets consist of an additional gas gathering system, oil gathering
system, salt water disposal system, producing oil and gas leases in southeast
Kansas and northeast Oklahoma, a processing plant and related equipment and
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supplies. Negotiations with Mr. Benson, if successful, may result in him
assuming a management role with the Company. However, as of the date of filing
this Report, no agreement has been executed, and there is no assurance that such
acquisition will be completed.
Oil and Gas Operations
All of the Company's current operations are located in the United States,
in the States of Kansas and Oklahoma. The Company primarily holds high
percentage working and net revenue interests in oil and gas leases in
Montgomery, Cowley and Chautauqua Counties, Kansas and Osage, Kay, Noble and
Logan Counties, Oklahoma, as well as interests in certain gas gathering systems
located within the same geographic regions. The Company also operates a limited
number of wells for third parties. Prior to the acquisition of Performance
Petroleum Corporation ("Performance"), the Company's operations primarily
focused on natural gas. With the acquisition of Performance and the subsequent
acquisition of the Five Star Petroleum assets ("Five Star"), the Company
acquired a number of primarily oil producing properties. These acquisitions, in
addition to substantially increasing the Company's production, allowed it to
diversify such production into both natural gas and oil.
During the fiscal year ended March 31, 1997, the Company recompleted eight
wells in connection with management's efforts to increase production of gas on
certain of the Performance leases and commence production on the Blanket Lease
in Osage County, Oklahoma. The recompletion of one of these wells located in
proximity to the US Gas Gathering System was accomplished in conjunction with a
joint venture agreement between the Company and Thermal Energy Corporation of
Tulsa, Oklahoma, in which the Company holds a 50% interest. (See --
"Developments During Fiscal 1997"). Of the first six wells recompleted, four of
the wells were determined to be non-commercial, one is a producing gas well and
one is still in the process of being tested. In December of 1996, the Company
recompleted one additional well in Kay County, Oklahoma. The recompletion was
effected to take advantage of seasonally high gas prices which existed during
the 1996-97 winter and is currently producing. In addition, the Company
recompleted a formerly shut in oil well in an attempt to establish commercial
gas production. After testing, it was determined that insufficient commercial
gas existed and the well was returned to temporarily abandoned status. During
fiscal 1997, the Company expended an aggregate of $111,386 on these and other
development efforts.
The Company has not conducted extensive exploration or development on its
own, due to previous limitations on working capital. Rather, management has
focused efforts on obtaining currently producing oil and gas assets and on
recompleting existing wells located on Company owned properties. This allows the
Company to increase its revenues without expending large amounts of capital for
exploration or development. The acquisitions of Five Star Petroleum, US Gas,
Argas and additional leases during fiscal 1997 and the corresponding
recompletion work on these properties were part of this strategy. During the
fiscal year ended March 31, 1997, the Company expended approximately $2,220,000
on these acquisitions. (See "-Developments for Fiscal 1997").
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The assets of the Company consist generally of interests in various gas
gathering systems and oil and gas leaseholds covering approximately 79,000 gross
acres, located in proximity to such systems and to gas gathering systems owned
by third parties. All of the assets are located in Chautauqua, Cowley and
Montgomery Counties, in Southeast Kansas, Osage and Kay, Noble and Logan
Counties in north central and northeast Oklahoma. All of the leases in which the
Company owns an interest are currently held by production. The Company intends
to continue operation of the gas gathering systems and oil and gas leaseholds,
alone and in conjunction with industry participants. The Company is also
exploring opportunities to acquire additional producing reserves, although no
definitive agreements have been executed to date. Management estimates that the
Company's assets were producing at the rate of approximately 1,206 mcf of
natural gas per day and 255 BOPD at March 31, 1997 from 220 producing oil and
gas wells.
Net oil and gas production (after royalties), average production costs and
average sales prices for the Company's products for the years ended March 31,
1997, 1996 and 1995 are shown in the table below:
<TABLE>
<CAPTION>
TABLE I
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Net Oil and Gas Production,
Average Production Costs and Sales Prices
Net Production
Year Ended Production Cost Per Average Sales Price
March 31, Oil (bbl) Gas(mmcf) Equivalent Unit(1) Oil (bbl) Gas (mcf)
- --------- --------- --------- --------------- --------- ---------
<C> <C> <C> <C> <C> <C>
1997 88,114 318 $9.42 (2) $20.25 $2.57
1996 59,177 186 7.23 16.48 1.74
1995 1120 78 6.23 (3) 14.47 1.84
</TABLE>
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(1) Production costs per equivalent unit is calculated at the rate of 6 mcf
natural gas per bbl of oil.
(2) The increase in the Cost per Equivalent Unit of production during the
fiscal year ended March 31, 1997 is attributable to an increase in oil
production, relative to the production of natural gas, and the higher costs
generally associated with producing oil.
(3) Does not include the Company's net revenue interests in certain coal bed
gas wells operated for third parties. If such interests were included, the
Cost per Unit would be $4.63 for 1995.
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The substantial increase in production of oil and gas during fiscal 1996
and 1997 shown in the above table was the result of acquiring Performance
Petroleum, and the assets included in that acquisition. (See "--Properties").
Industry Segment
The Company operates exclusively in one industry, the oil and gas industry.
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Exploration, Development and Acquisition of Oil and Gas Properties
Management and consultants of the Company are continually involved in
reviewing Company owned properties and other prospects to determine the
desirability of exploration, development and acquisition of reserves. Due to
limited working capital, the Company has drilled no new wells in the last three
fiscal years. As of the date of filing this Report, the Company has recently
recompleted one gas well and one oil well, both of which are producing. During
the three years ended March 31, 1997, the Company expended the following net
amounts for exploration, development and acquisition of oil and gas properties.
Year Ended
March 31, Investment
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1997 $2,093,216
1996 5,598,686
1995 56,684
Developments for Fiscal 1997
The major developments during fiscal year 1997 were a change in the
Company's management and the acquisitions of additional oil and gas assets.
Effective September 17, 1996, the Company experienced a change in control. Mr.
Demetrie D. Carone was elected to serve as the President, Chief Executive
Officer and member of the Board of Directors, replacing Terry L. Carroll. Prior
to his election as an officer and director, Mr. Carone was an investor in the
Company who beneficially owned more than 5% of the Company's outstanding Common
Stock. Mr. Carone did not acquire any additional shares of the Company's Common
Stock as a result of his election as an officer and director. Mr. Carone serves
in the positions to which he was elected at the will of the Board of Directors.
His term as director will continue until the next annual meeting of shareholders
and until his successor is duly elected and qualified.
In connection with the change in control of the Company and also effective
September 17, 1996, the Company accepted the resignation of Terry L. Carroll,
the Company's former President, from all positions held by him with the Company,
its subsidiaries and affiliates. In connection with the acceptance by the
Company of Mr. Carroll's resignation, Mr. Carroll released and relinquished any
and all claims for wages, salary, employee benefits or other compensation which
may have been due him from the Company for past services rendered. The Company
agreed to enter into a lease agreement with Mr. Carroll covering the business
premises of the Company and a residential lease covering a residential property
used by the Company's operations manager. The Company and Mr. Carroll each
agreed to indemnify and hold the other harmless from any and all claims, suits
or causes of action whether known or unknown arising from the past relationship.
Effective October 1, 1996, the Company completed the acquisition of all of
the outstanding stock of Argas, Inc. ("Argas"), a Kansas corporation for the
purchase price of $160,000. The primary asset held by Argas was its interest in
the USX-Argas 1996 Joint Venture (the "Joint Venture"). The Company participated
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in the Joint Venture as a 49% owner with Argas owning the remaining 51%. The
Joint Venture owned and operated four gas gathering systems, known as
Chautauqua, Havana, Cowley and Elgin and operated a fifth for another joint
venture in which the Company previously owned a 50% interest. Subsequent to the
acquisition of Argas, the Company holds a 100% interest in the Joint Venture.
Argas was controlled by a former affiliate of the Company, Terry L. Carroll, and
his wife, Violet M. Carroll. The acquisition price was negotiated by the Company
directly with Mr. Carroll and no appraisal was received from an independent
party.
Effective November 1, 1996, the Company completed the acquisition of all of
the assets of Five Star Petroleum, Inc. ("Five Star"), a Colorado corporation,
for the purchase price of $1,300,000, paid in cash. The assets purchased by the
Company included all of Five Star's interest in and to certain oil and gas
leases located in Logan and Noble counties, Oklahoma, covering approximately 560
acres and upon which are located 10 oil wells and 1 salt water disposal well,
along with related equipment. The purchase price for this acquisition was
provided from the Company's available working capital. The Company's President,
Demetrie D. Carone, is also the President of Five Star. The Company did not
obtain any independent appraisal of the acquired assets.
Effective January 15, 1997, the Company completed the acquisition of US Gas
Gathering, Inc. ("US Gas"), a Delaware corporation for a net cash purchase price
of $560,000. The purchase price for this acquisition was also provided from the
Company's available working capital. Upon completion of the transaction, US Gas
became a wholly owned subsidiary of the Company. US Gas owns a 50% interest and
operates a gas gathering system located in Osage county, Oklahoma which is
approximately ninety (90) miles in length. In addition, US Gas is the Lessee
under the Blanket Lease covering approximately 64,100 acres of land located in
Osage county, Oklahoma upon which are located approximately 30 producing oil and
gas wells.
By resolution of the Osage Tribal Council, the Lease was amended to make
provisions for the release of the undeveloped portions of the Lease. Under the
terms and conditions of the Amendment to the Lease, US Gas must nominate 10,080
acres or 63 non-producing or undeveloped quarter sections for release back to
the Osage Indian tribe each year. Once nominated, US Gas, as the lease owner,
will then have one year from the date of nomination within which to either drill
a new US Gas gas well on the quarter section or recomplete an existing well on
the quarter as a gas well. In the event that US Gas drills a dry hole, it will
get a second chance on that quarter section whereby US Gas has the option to
attempt another well located in another portion of the quarter section. In the
event the second well is also a dry hole or it fails to meet any of the other
aforementioned conditions, then the quarter section will revert back to the
lessor.
The Company currently operates the Blanket Lease under a joint venture
agreement with Thermal Energy Corporation which essentially provides that each
party owns an equal interest in any new wells and each pays an equal portion of
the costs to drill those wells.
The Company's President, Demetrie D. Carone and the beneficial owner of
more than 5% of its outstanding stock, Dale R. Jensen, were the only
shareholders of ZCA. The Company did not obtain an independent appraisal of the
value of ZCA and its related assets prior to this acquisition.
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Finally, effective December 1, 1996, the Company acquired certain oil and
gas leases (the "Hull Leases") located in Osage County, Oklahoma for a purchase
price of $200,000, paid from the Company's working capital. The Hull leases
cover approximately 320 acres and contain 5 oil wells, four of which are
currently producing and one of which is shut in. The Hull leases were acquired
from a group of individuals including the Company's President, Demetrie D.
Carone, who owned or controlled the largest single interest in and to the Hull
leases. The Company did not obtain an independent appraisal of the value of the
Hull leases. However, management of the Company believes that the purchase price
for these assets, as well as the other acquisitions discussed above, were no
less favorable than could be obtained from an independent third party. The
Company intends to continue operation of all of these assets in the oil and gas
industry.
The Company also completed a private placement of Preferred Stock during
the fiscal year, resulting in gross proceeds to the Company of $24,000,000. For
a further discussion of the private placement, see Item 6. Management's
Discussion and Analysis of Financial Condition.
Marketing
Production from the Company's properties is sold to various purchasers in
the geographic area of the properties. Gas is gathered through gas gathering
systems owned or operated by the Company and certain independent third parties
and sold to larger gas purchasers or end users. Oil is collected from tanks
located near the wells and hauled by trucks to third party purchasers. The
Company also acquires natural gas from third party producers, transports the gas
through its gas gathering systems and resells to purchasers in conjunction with
production from its own properties. The principal markets for oil and gas
consumption are industrial and consumer use for heat, manufacturing, power,
transportation and residential use.
During fiscal 1997, there were two customers which accounted for more than
10% of the Company's revenues from oil and gas sales. These customers were:
Conoco, Inc. which purchased all of the Company's oil production in Osage and
Kay Counties, Oklahoma and a substantial portion of the Company's oil and gas
production in Logan County, Oklahoma; and Woodward Marketing, LLC which
purchased all gas production associated with the Company's PSI Pipeline. Loss of
either of these customers would temporarily affect revenues to the Company,
although management believes the Company will continue to have a market for its
products for the foreseeable future.
The availability of a ready market for the Company's oil and gas will
depend upon numerous factors beyond its control, including the extent of
domestic production and importation of oil and gas, relative status of the
domestic and international economy, the proximity of the Company's properties to
gas gathering systems, the capacity of such systems, the marketing of other
competitive fuels, fluctuation in seasonal demands and governmental regulation
of production, refining, transportation and pricing of oil, natural gas and
other fuels.
Natural gas produced by the Company and third party producers is
transported through gas gathering systems owned or operated by the Company or by
third parties to larger gas pipelines owned by third parties. Natural gas
gathered by the Company is sold at a spot price determined on a monthly basis by
reference to the national market for gas. At March 31, 1997 the Company received
an average of $2.57 per mcf for its natural gas. Oil is also sold at prevailing
spot prices, which averaged $20.25 at fiscal year end 1997.
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Properties
Ingelside Refinery
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Effective July 18, 1994, the Company completed the acquisition of a crude
oil refinery from Tipperary Corporation, a publicly-traded Texas corporation.
The refinery has an estimated processing capacity of approximately 10,400 BOPD
and miscellaneous storage tanks with capacities of approximately 125,000
barrels. Included within the acquisition were approximately 100 acres of real
estate, 80 of which are presently undeveloped and the balance of which contain
the refinery. The refinery has been out of operation since the early 1980's due
to the prevailing economic conditions of the industry as a whole. The Company is
presently attempting to market these assets to a third party.
Gas Gathering Systems.
----------------------
The gas gathering systems in which the Company owns interests provide
facilities for gathering natural gas from remote leases and smaller gathering
systems and delivering the gas to larger pipelines for ultimate delivery to end
users and other wholesalers. A gathering system is a system of pipelines that
extend through or over a series of easements and rights-of-way with various
permits or licenses to operate the gathering system, a compressor and a
dehydrator. Included in the gathering system are site leases for compressors and
dehydrators which are necessary to operate the pipeline. The gathering systems
are utilized to transport the Company's natural gas to market, as well as
providing the Company with revenue from gathering charges and from reselling
natural gas produced by third parties.
The terms of the rights-of-way and site leases sometimes vary so that the
term of one right-of-way may not be co-extensive with another connecting
right-of-way. Most rights-of-way and leases will terminate if the pipelines are
abandoned. Rentals vary but are generally not significant. Some of the property
on which the Company's rights-of-way are located may be subject to land
mortgages. Further, as a general rule, there is no nondisturbance agreement
between the Company and any mortgage holders. Accordingly, should the land owner
default with regard to any requisite mortgage payment, the holder of the
mortgage could foreclose and extinguish the Company's interest in that
particular right-of-way. In such event, the Company may be forced to renegotiate
its rights or consider alternative rights of way.
The following are the gas gathering systems in which the Company currently
owns interests.
1. PSI. The PSI Gathering System consists of approximately 72 miles of
four-inch steel gathering line located in southeast Kansas and traversing the
counties of Chautauqua, Cowley and Montgomery. The PSI line generally extends
from east to west and collects gas from the three county area for resale to end
users under contract with the Company. Prior to acquisition by the Company in
February, 1994, PSI purchased a majority of natural gas produced by the Company
and gathered through other Company systems.
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PSI is leased from an independent third party pursuant to a 10-year
agreement which expires in 1998, with an additional 10-year option in the
Company's discretion. (See Note "J" to the Financial Statements). PSI sells to
larger gathering systems and end users in proximity to the system.
2. Peru-Hale Gathering System, Chautauqua County, Kansas. The Peru-Hale
Gathering System is approximately 12 miles in length and extends generally north
and south from the PSI Line in Chautauqua County, Kansas. This gas gathering
system consists of approximately 19 separate rights-of-way, including site
leases for a compressor necessary to operate the system. The duration of the
different rights of way vary between 10 and 25 years and are generally renewable
at the option of the Company. Rentals to land owners are generally not
significant, totaling in the aggregate less than $1,000 per year. The Company
owns a 100% working interest in this system, which was constructed in 1987. This
System presently delivers all gas gathered by it to the PSI Line.
3. Independence Gas System. The Company owns a 100% interest in the
Independence Gas Gathering System. The Gathering System is located approximately
17 miles east of the Peru-Hale Pipeline, in Montgomery County and delivers gas
to the PSI Pipeline. The gathering system consists of polyethylene pipe and is
approximately 16 miles in length.
4. Pacific Gas Gathering System. The Company owns a 100% interest in the
Pacific gas gathering system located in Osage county, Oklahoma, which was
acquired in connection with the Pacific acquisition. The 32 mile gathering
system collects gas primarily from leases owned by the Company and which were
acquired in connection with the Performance acquisition. The system is
constructed primarily of 3" and 4" polyethylene piping. However, approximately 4
miles of the pipeline is constructed of 2-7/8" OD steel pipe.
5. Cowley I Pipeline. In connection with the Company's acquisition of
Argas, Inc. the Company acquired all of Argas' interest in the Cowley I Pipeline
located in eastern Cowley county, Kansas. The pipeline consists of approximately
2.5 miles of 4 inch polyethylene plastic piping and 1/2 mile of 3" steel line.
The pipeline is located near the western end of the PSI Pipeline and gathers gas
from three leases operated by independent third parties for ultimate delivery to
the PSI pipeline.
6. Cowley II Pipeline. In connection with the Company's acquisition of
Argas, Inc. the Company acquired all of Argas' interest in and to the Cowley II
Pipeline located in extreme eastern Cowley county, Kansas. This pipeline has
been shut in without a commercial gas supply for approximately 4 years. The
pipeline consists of approximately 4 miles of above ground 6" steel pipe and 1/2
mile of buried 2.5 inch steel pipe. The Company anticipates salvaging
approximately 3 miles of the above ground pipe for future use. Approximately 1
mile of the pipeline will remain in place and will be utilized by an independent
third party for gas sales into the PSI pipeline starting in late 1997.
8
<PAGE>
7. Havana-Chautauqua Gathering System. The Company owns the
Havana-Chautauqua Gas Gathering System located in Montgomery and Chautauqua
counties, Kansas. This system serves an area of approximately 70 square miles
and consists of approximately 22 miles of 4" and 6" polyethylene plastic
pipeline and extends 4 miles south and 13 miles north of the PSI pipeline. The
system gathers gas from nine Company owned leases and from several leases
controlled by independent third parties. The system currently gathers
approximately 413,000 cubic feet of gas per day for ultimate delivery to the PSI
pipeline.
8. Elgin Pipeline. The Elgin Pipeline is located in Chautauqua County,
Kansas. It has been shut in without a commercial supply of gas since
approximately 1995. The pipeline consists of approximately 14 miles of 4 and 6
inch steel pipe and 3 miles of 2 and 3 inch buried polyethylene pipe. The
Company anticipates using portions of the pipeline along with the SEK pipeline,
to which it is adjacent, to transport low-BTU gas into Oklahoma where the low
BTU gas can then be blended with higher quality gas.
9. US Gas Gathering. The US Gas Gathering System ("US Gas") in which the
Company owns a 50% interest, consists of approximately 90 miles of pipeline
ranging in size from 2 to 12 inches in diameter. US Gas serves a 6 township (216
square miles) area of eastern Osage County, Oklahoma. The primary source of gas
for US Gas is the Blanket Lease covering approximately 64,160 acres on which are
located approximately 30 producing oil and gas wells. The pipeline also
purchases gas from several independently operated properties located both on and
off the Blanket lease. The primary source of gas sales from US Gas is the
smelting facility owned by the Zinc Corporation of America located in
Bartlesville, Oklahoma. Sales are also made to local rural residential gas
customers. Excess produced gas is transported to the Company owned Pacific Gas
Gathering System which in turn sells gas to Williams Natural Gas Company.
10. SEK Gathering System, Chautauqua County, Kansas. The Company owns a
100% working interest in the Southeast Kansas ("SEK") Gathering System, also
located in Chautauqua County. This gathering system extends approximately 10
miles south from the PSI Line and is constructed of 4-inch steel and 6-inch
polyethylene material. This system is currently shut down due to lack of
production in the surrounding area.
9
<PAGE>
<TABLE>
<CAPTION>
TABLE II
AVERAGE DAILY FLOW-THROUGH
PIPELINE YEAR ENDED CURRENT MAXIMUM
- -------- MARCH 31, 1997 CAPACITY CAPACITY (2)
-------------- -------- --------
<S> <C> <C> <C>
PSI 1,250mcfd (3) 3,000 mcfd 10,000 mcfd
PERU-HALE 732 1,200 6,000
INDEPENDENCE (1) 144 1,200 2,500
PACIFIC 263 1,250 5,000
COWLEY I (1) 28 200 1,000
COWLEY II (4) 0 0 1,000
ELGIN (5) 0 0 2,000
HAVANA-
CHAUTAUQUA (1) 413 1,200 2,500
US GAS GATHERING (1)(6) 256 2,500 4,000
SEK 0 0 1,500
</TABLE>
- -------------
1 The figures contained herein represent partial year results as the pipeline
was only operated by the Company for a period of six months.
2 Subject to available supply and demand, maximum capacity can be achieved by
increasing the size of the compressor on the gas gathering system.
3. Includes all gas gathered through Peru-Hale, Independence, Cowley I and
Havana-Chautauqua, which is delivered to the PSI Pipeline.
4. The Cowley II pipeline has been shut down since November 30, 1992 due to
the lack of producing wells within the vicinity which this pipeline serves.
5. The Elgin pipeline has been shut down since August 31, 1995 due ot lack of
exploration in the vicinity which this pipeline serves.
6. The Company owns a 50% interest in this Pipeline.
- -------------
Oil and Gas Properties.
-----------------------
1. Peru-Hale Pipeline Region, Chautauqua County, Kansas. The Company owns a
100% working interest (87.5% net revenue interest) in approximately 1,998 acres
of oil and gas leases in the area surrounding the Peru-Hale Gathering System, in
southeast Kansas. The area contains 29 wells, of which 11 are producing, one
salt water disposal well, and 17 are shut-in at March 31, 1997. Developmental
drilling to date has established proved reserves of 27,310 bbls of oil and 1,888
mmcf of natural gas in this area. Production levels approximate 168 mcf of
natural gas per day and approximately 2.7 BOPD at March 31, 1997.
2. Havana-Chautauqua Pipeline Region, Montgomery and Chautauqua Counties,
Kansas. The Company has a 100% working interest (87.5% net revenue interest)
10
<PAGE>
in 2,783 acres of oil and gas leases located in proximity to the
Chautauqua-Havana Gas Gathering System in Chautauqua and Montgomery Counties,
Kansas, owned by the Company. The properties are in close proximity to the
interest held by the Company in the Peru-Hale Pipeline Region. Each of these
properties, in turn, is in close proximity to the PSI Line and the Williams
Natural Gas Pipeline (owned by an unaffiliated third party), crossing southern
Kansas.
The Chautauqua-Havana Pipeline property currently contains 13 producing
wells and 35 shut- in wells, and four salt water disposal wells. Developmental
drilling to date has established proved reserves of 21,490 bbls of oil and 2,611
mmcf of natural gas in this area. Daily production from these leases was
approximately 71 mcf of natural gas per day at March 31, 1997.
3. Central Oklahoma Properties. As a result of the Performance acquisition,
the Company has a 100% working interest in six leases in Kay County, Oklahoma.
As a result of the Five Star acquisition, the Company has a 100% working
interest in 5 leases in Logan and Noble Counties, Oklahoma. In the aggregate,
these 11 leases contain 23 producing wells and five non-producing wells,
including a certain number of salt water disposal wells. The Company's net
revenue interest in these properties ranges from 81.25% to 87.5%. Drilling to
date has established proved developed producing reserves estimated at 1,227 mmcf
of gas and 249,490 bbls of oil. Daily production from these leases was
approximately 494 mcf of natural gas per day and approximately 72 BOPD at March
31, 1997.
4. Osage County, Oklahoma Properties. Also as a result of the Performance
acquisition, the Company has a 100% working interest in 31 leases in Osage
County, Oklahoma covering approximately 8,680 acres. The 31 leases contain 143
producing wells and 159 non-producing wells, including a certain number of salt
water disposal wells. Drilling to date has established proved developed
producing reserves estimated at 1,061 mmcf of gas and 479,380 bbls of oil. Daily
production from these leases was approximately 257 mcf of natural gas per day
and approximately 173 BOPD at March 31, 1997.
5. US Gas Region, Osage County, Oklahoma. As a result of the US Gas
acquisition, the Company presently has a 100% working interest (83.333% net
revenue interest) in a Blanket Lease covering approximately 64,160 acres in
Osage County, Oklahoma. The Lease contains 30 producing wells and 7
non-producing wells, including a certain number of salt water disposal wells.
Drilling to date has established 2,921 mmcf of gas and 14,750 bbls of oil. Under
the terms and conditions of the Company's Lease Agreement with the Osage Indian
Tribe, the Company must nominate 10,080 acres or 63 non-producing or undeveloped
quarter sections at the end of each lease year for release. Once nominated, the
Company then has one year within which to drill a new well or recomplete an
existing well on the nominated quarter sections. At the end of the nominating
year, the quarter sections which remain undeveloped will be released back to the
Osage Indian Tribe and will be deleted from the Blanket Lease. The nomination
and release program will continue until only quarter sections which contain a
developed producing well will remain subject to the Lease. Daily production from
these leases was approximately 238 mcf of natural gas per day and approximately
8 BOPD at March 31, 1997.
11
<PAGE>
The following table summarizes gross and net interest producing wells,
gross and net developed acres and proved reserves of the Company at March 31,
1997. Unless otherwise stated, all wells are gas wells.
<TABLE>
<CAPTION>
TABLE III
Developed Properties
Proved Reserves
---------------
Producing
Wells Acres Oil (Bbls) Gas (mmcf)
----- ----- ---------- ----------
Property Location Gross Net Gross Net Gross Net Gross Net
- -------- -------- ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Havana-
Chautauqua
Pipeline Chautauqua 13 13 2,783 2,783 24,560 21,490 3,134 2,613
Region County, KS
- ---------------------------------------------------------------------------------------------------------------------------
Peru-Hale
Pipeline Chautauqua 11 11(1) 1,998 1,998 31,220 27,310 2,289 1,888
Region County, KS
- ---------------------------------------------------------------------------------------------------------------------------
Osage Osage
Region County, OK 143 143(2) 8,680 8,680 585,460 479,390 1,300 1,060
- ---------------------------------------------------------------------------------------------------------------------------
US Gas Pipeline Osage
Region County, OK 30 30(3) 64,160 64,160(5) 18,110 14,750 3,524 2,921
- ---------------------------------------------------------------------------------------------------------------------------
Central Kay, Noble &
Oklahoma Logan 23 23(4) 1,440 1,440 296,180 249,490 1,468 1,226
Region Counties, OK
- ---------------------------------------------------------------------------------------------------------------------------
TOTALS 220 220 79,061 79,061 955,530 792,430 11,715 9,708
</TABLE>
- ----------------
(1) Includes 2 oil wells.
(2) Includes 140 oil wells.
(3) Includes 6 oil wells.
(4) Includes 22 oil wells.
(5) Portions of this acreage are subject to drilling oligations to hold the
acreage. In addition, a third party has the right to earn a 50% interest in
wells drilled on this acreage.
Reserves
Included below is selected information from reports of an independent
petroleum engineering firm retained by the Company for the assets presently
owned by the Company. Information is taken from reports of Petroleum
Consultants, Inc. ("PC") and were prepared for the Company. These examinations
included the following:
1. A study and evaluation of the oil and gas reserves and production for
the Company properties, during the fiscal years ending March 31, 1997, 1996 and
1995;
2. Tests to estimate the Company's proved oil and gas reserves to project
timing of future production from proved reserves and project timing of future
production and expenditures required to develop proved undeveloped reserves
based upon current costs, assuming continuation of existing economic conditions;
and
12
<PAGE>
3. Other such procedures and examinations which PC considered necessary
under the circumstances.
The following factors are applicable to the tables set forth below with
respect to the Company's estimated proved reserves and estimated future oil and
gas revenues:
1. Non-escalated Basis Reporting. All estimates are made on the basis of
non-escalated reporting. This estimate of reserves, estimated future net
revenues and present value of estimated future net revenues, is based upon the
assumption that oil and gas prices will remain at current levels and that
production costs will not escalate in the future.
2. Oil and Gas Prices and Operating Costs. Information contained in the
reserve reports is based on certain assumptions regarding prices of oil and gas,
operating costs and future investment necessary to produce hydrocarbons. The
1997 report assumes current field prices of $18.25 per barrel of oil and $1.08
or $1.14 per mcf of gas for the Company's Kansas properties, depending upon
which pipeline the lease is connected; $20.98 per barrel for oil and $1.12 per
mcf of gas located on the Osage County properties; $1.36 per mcf for the
Company's central Oklahoma properties except for the Williams lease, which was
$1.53 per mcf and the Company operated wells in Logan County, Oklahoma, where
the per mcf price was $1.67; and the ZCA properties where the price per barrel
for oil was $20.98 and the price per mcf for gas was $1.06. The 1996 report
assumes oil prices of $19.50 and $20.70 per barrel for the properties located in
Kansas and Oklahoma respectively, and gas prices of between $1.00 and $2.00,
depending on which pipeline the lease is connected. The 1995 report assumes oil
prices of $17.25 per barrel for oil and prices of either $.87 or $1.24 per mcf
for natural gas, depending upon which pipeline the lease is attached. Average
monthly operating expenses were obtained from the Company, as were investments
necessary for additional development.
3. Proved Developed and Undeveloped Reserves. The following tables take
into account total proved reserves, defined as those quantities of crude oil,
natural gas and natural gas liquids which, upon analysis of geologic and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under existing economic and operating
conditions. Proved reserves have been limited to those quantities of oil and gas
which can be expected with little doubt to be recoverable commercially at
current prices and costs, under existing regulatory practices and with existing
conventional equipment and operating methods. Proved developed reserves are
limited to those reserves expected to be produced from completion intervals now
on production in existing wells or reserves existing behind the casing of
existing wells or at minor depths below the present bottom of such wells which
are expected to be produced in the predictable future, where the cost of making
such oil and gas available for production is relatively small compared to the
cost of a new well. Proved undeveloped reserves are proved reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion.
The following tables set forth the estimated proved developed and proved
undeveloped oil and gas reserves of the Company as of March 31, 1997, 1996 and
1995.
13
<PAGE>
<TABLE>
<CAPTION>
TABLE IV (1)
Remaining Reserves at March 31,1997
-----------------------------------
Natural Gas
Crude Oil & NGL's -----------
Gross Net Gross Net
----- --- ----- ---
bbls bbls Mmcf Mmcf
<S> <C> <C> <C> <C>
Proved Developed
Producing 699,570 579,830 3,956 3,064
Nonproducing 81,450 68,040 3,905 3,313
------- ------- ------ -----
Subtotal 781,020 647,870 7,861 6,377
Proved Undeveloped 174,510 144,560 3,854 3,331
TOTAL PROVED 955,530 792,430 11,715 9,708
------- ------- ------
- ---------------
(1) For a description of the decrease in Company reserves from March 31, 1996
to March 31, 1997, see "Decrease in Reserves for Fiscal 1997" below.
- ---------------
TABLE V
-------
Remaining Reserves at March 31,1996
-----------------------------------
Natural Gas
Crude Oil & NGL's -----------
Gross Net Gross Net
----- --- ----- ---
bbls bbls Mmcf Mmcf
Proved Developed
Producing 710,992 580,850 1,951 1,451
Nonproducing 102,038 87,682 3,350 2,873
--------- -------- ----- -----
Subtotal 813,030 668,532 5,301 4,324
Proved Undeveloped 1,418,453 1,128,787 5,923 5,176
--------- --------- ----- -----
TOTAL PROVED 2,231,483 1,797,319 11,224 9,500
========= ========= ====== =====
14
<PAGE>
TABLE VI
--------
Remaining Reserves March 31, 1995
---------------------------------
Natural Gas
Crude Oil & NGL's -----------
Gross Net Gross Net
----------------------- ----------------------
bbls bbls Mmcf Mmcf
Proved Developed
Producing 2,777 2,432 260 160
Nonproducing 76,480 66,915 2,090 1,828
------ ------ ----- -----
Subtotal 79,257 69,347 2,350 1,988
Proved Undeveloped 14,491 12,685 5,097 4,460
------ ------ ----- -----
TOTAL PROVED 93,748 82,032 7,447 6,448
====== ====== ===== =====
</TABLE>
Decrease in Reserves for Fiscal 1997. The substantial decrease in reserves
from March 31, 1996 to March 31, 1997 is attributable to an adjustment in
estimates of reserves. The greatest component of the downward adjustment is
attributable to a proposed secondary recovery project in Oklahoma. A particular
field was estimated to have reserves recoverable from a water flood project
proposed to be undertaken in the future.
During fiscal 1997, the geological staff and engineering consultants of the
Company performed further analysis of these lease wells to determine the
feasibility of installing the proposed field-wide water flood. The Company's
further analysis indicated that the reservoir targeted for secondary recovery
did not have characteristics suitable for a large scale water flood project and
the expenditures for such a project would bear considerable risks. At the
conclusion of this analysis, the Company and its independent engineering
consultants decided to eliminate these reserves for fiscal 1997. The Company
hopes to modify the proposed water flood program on this lease starting with a
smaller pilot project. Reserves for this modified program have not yet been
determined by the Company or its engineers.
Increase in Reserves for Fiscal 1996. The substantial increase in estimated
reserves at March 31, 1996 compared to those estimates at March 31, 1995 is
attributable to the acquisition of Performance Petroleum. That acquisition added
an estimated 1,772,427 bbls of oil and 2,336 mmcf of natural gas.
The Company emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than those of producing oil
and gas properties. Accordingly, the estimates may change as future information
becomes available.
15
<PAGE>
The Company did not file any reports pertaining to its reserves with any
governmental authority or agency, other than the information contained in this
Report, during the period ended March 31, 1997, or thereafter. The Company does
not have any reserves subject to long-term supply or similar agreements with
foreign governments or authorities.
Following is information provided by the Company's independent engineers
concerning the estimated future oil and gas revenues of the Company's estimated
proved oil and gas reserves net of future operating and development costs and
the present value of estimated future net revenues from proved oil and natural
gas reserves calculated on a 10% non-escalated basis. No provision has been made
for Federal income tax and accordingly, the disclosures in these tables differ
slightly from the disclosure in the Financial Statements. For further
information concerning the Company's oil and gas reserves, see "ITEM 7.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
<TABLE>
<CAPTION>
TABLE VII
---------
Estimated Future Net Revenues from
Proved Net Oil and Natural Gas Reserves
(non-escalated basis)
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
($000's) ($000's) ($000's)
<S> <C> <C> <C>
Proved Developed
Producing $ 7,704 $ 7,186 $ 71
Nonproducing 3,036 3,777 2,048
-------- -------- ------
Subtotal 10,740 10,963 2,119
Proved Undeveloped $ 4,013 23,407 1,786
-------- -------- ------
TOTAL PROVED $ 14,753 $ 34,370 $3,905
======== ======== ======
</TABLE>
The substantial decrease in estimated future net revenues as of March 31,
1997 is primarily attributable to the Company's determination that reserve
estimates for certain Company owned properties should be decreased pending
further study of an anticipated water flood recovery program. (See - "Decrease
in Reserves for Fiscal 1997").
The substantial increase in estimated future net revenues during the year
ended March 31, 1996 is attributable to the acquisition of Performance
Petroleum. Properties associated with that acquisition contribute $27,186,734 of
the estimated future net revenues at March 31, 1996.
16
<PAGE>
<TABLE>
<CAPTION>
TABLE VIII
----------
Present Value of Estimated
Future Net Revenues from
Proved Oil and Natural Gas Reserves
(based upon a 10% discount rate)
(non-escalated basis)
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
($000's) ($000's) ($000's)
<S> <C> <C> <C>
Proved Developed
Producing $ 5,013 $ 5,178 $ 63
Nonproducing 2,074 2,679 1,463
-------- -------- -------
Subtotal 7,087 7,857 1,526
Proved Undeveloped 2,549 11,846 1,086
-------- -------- -------
TOTAL PROVED $ 9,636 $ 19,703 $ 2,612
======== ======== =======
</TABLE>
Titles
The Company acquired substantially all its properties from third parties
through acquisition. The properties acquired from Cirque were based upon the
warranties and representations as to good title made by the officers and
directors of that entity. The assets acquired from the remaining entities were
acquired in an "as is, where is" basis. While the Company has not or did not
obtain warranties of title in every case, management undertook procedures
designed to be reasonable under the circumstances prior to the acquisition to
confirm the status of those titles.
Although the Company does not intend to regularly investigate titles to oil
and gas leases when acquiring unproven acreage, it proposes to do so before any
drilling or development is undertaken. Status of title on unproved acreage is
determined by the representations and warranties of the seller delivered at
closing. However, the Company acquires a title opinion from an attorney prior to
making any substantial expenditures on a property. Management believes that its
practices are consistent with industry standards.
The methods of title examination adopted by the Company are reasonably
calculated, in the opinion of management of the Company, to insure that
production from its properties, if obtained, will be readily saleable for the
account of the Company. Certain of the Company's producing properties have been
subject to independent title investigations and such titles have been accepted
by the Company. Insofar as is known to the Company, there is no material
litigation pending or threatened pertaining to its proved acreage. With respect
to the rights-of-way, easements and site leases required for the components of
the Company's gathering systems, title to the underlying land may be subject to
certain defects and encumbrances, none of which are, in the opinion of
management of the Company, material in relation to the Company's property and
operations.
17
<PAGE>
Facilities
The Company's executive and administrative offices are located at 1901 New
Street, Independence, Kansas 67301. The Company's telephone number is
(316)331-8102. The Company currently occupies this space on a month to month
basis pursuant to a lease arrangement with Mr. Terry Carroll and his wife,
Violet M. Carroll. The Lease provides for monthly payments in the amount of
$806.
The Company owns an oil field parts and supply store located in Barnsdall,
Oklahoma. The store consists of approximately 10,000 square feet of retail space
devoted to presentation of inventory and sales offices. In addition, the store
has warehouse facilities and related real property covering approximately 6.54
acres of land. The business of the store is to provide wholesale, retail and
contracting services to end users of oil field parts and supplies, which
supplies consist of various supplies used in the industry.
The Company also owns a non-operating crude oil refinery located near
Corpus Christie, Texas. This refinery has an estimated processing capacity of
approximately 10,400 BOPD and miscellaneous storage tanks with capacity of
approximately 125,000 bbls. Included within the company's interest in the
refinery facility is approximately 100 acres of real estate, 80 of which are
presently undeveloped and the balance of which contain the refinery.
Employees
The Company currently has 26 employees, including its President/Treasurer
and its Vice President/Secretary. In addition to its executive officers, the
Company employs a field supervisor, a geologist, accounting and administrative
staff and various field personnel. The Company also engages independent contract
laborers to supplement the services of its employees on an as-needed basis. At
March 31, 1997, the Company engaged approximately three contract laborers in its
field operations.
In connection with his appointment as the Company's President and Chief
Executive Officer, Mr. Carone serves at the pleasure of the Board of Directors.
Under the terms and conditions of his appointment, Mr. Carone serves in these
positions for no compensation and is not subject to the terms and conditions of
any formal employment contract with the Company.
The Company may engage additional employees as its business requires in the
future.
Competition
The Company competes with numerous other firms and individuals in its
activities. The Company's competitors include major oil companies and other
independent operators, most of which have financial resources, staffs and
facilities substantially greater than those of the Company. Competition in the
oil and gas industry is intense.
18
<PAGE>
The Company also faces intense competition in obtaining risk capital for
drilling its prospects and acquiring other assets and may be at a competitive
disadvantage compared with more established companies with proven records of
successful operations. The competition to obtain drilling funds far exceeds the
funds available, and the Company can make no assurance that it will be able to
obtain such funding. Management believes that competition for drilling funds is
principally dependent upon an analysis of the potential source of revenues, the
cost of drilling and related activities, the likelihood of discovering oil or
other hydrocarbons in commercial quantities, and the potential size of oil
reserves which may be eventually established.
In its efforts to obtain additional leases, the Company will encounter
competition from lease speculators, independent oil firms and major oil
companies, many of which have larger financial and other resources than the
Company. The ability to acquire leases is generally determined by the amount of
cash paid to acquire the lease, the royalty or other interest retained by the
transferor, and the nature of any commitment to drill on the leased acreage. In
the case of a drilling commitment, the ability to acquire leases is also
determined by the perception of the leaseholder of the Company's ability to
perform such commitment.
Government Regulation
The production and sale of oil and gas is subject to Federal and state
governmental regulations, including the imposition of excise taxes, the
prevention of waste, conservation, pollution controls and price regulations.
Most states may regulate the rate of well production and establish maximum daily
production allowances, as well as having requirements for obtaining drilling
permits, the spacing and operation of wells and other matters. In addition, the
Federal government can increase imported oil and gas quantities or impose
various regulations in the future.
The Company's sales of natural gas are subject to regulation by FERC under
the Natural Gas Policy Act of 1978 (the "Act"). Most natural gas pricing is
presently deregulated and the remaining regulation has no material impact on
prices received by the Company. It is not possible to predict the long-term
impact of future natural gas price regulation or deregulation. The Company's
activities are subject to existing Federal and state regulations governing
environmental quality and pollution control. Such regulations have not had a
significant effect upon the capital expenditures, earnings or competitive
position of the Company.
Miscellaneous
There are no patents, trademarks, licenses, franchises or concessions held
by the Company.
The oil and gas business is generally not seasonal in nature, although
unusual weather extremes for extended periods may increase or decrease demand
for oil and gas products.
19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings to which the Company (or any of its officers
or directors in their capacities as such) is a party or to which the property of
the Company is subject is pending and no such legal proceeding is known by
management of the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this Report.
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SHAREHOLDER MATTERS
The Company's Common Shares are traded in the over-the-counter market.
Commencing April 1, 1993, the Common Shares were approved for listing in the
National Association of Securities Dealer's Automated Quotation System
("NASDAQ") under the symbol "USXP". The following table sets forth the range of
high and low bid quotations as reported for the Common Shares of the Company for
the periods indicated as reported in NASDAQ. Quotations represent prices between
dealers, and do not include retail markups, markdowns or commissions, and do not
necessarily represent prices at which actual transactions were effected.
Common Shares
High Low
---- ---
FISCAL YEAR 1997
- ----------------
First Quarter
(April 1 to June 30) $1.19 $ .63
Second Quarter
(July 1 to Sept. 30) $5.63 $ .69
Third Quarter
(October 1 to Dec. 31) $5.38 $3.63
Fourth Quarter
(January 1 to March 31) $4.38 $2.81
FISCAL YEAR 1996
- ----------------
First Quarter
(April 1 to June 30) $1.03 $ .56
Second Quarter
(July 1 to Sept. 30) $1.47 $ .91
Third Quarter
20
<PAGE>
(October 1 to Dec. 31) $1.50 $ .75
Fourth Quarter
(January 1 to March 31) $1.44 $ .69
The number of record holders of the Common Shares as of March 31, 1997 was
402, including nominees of beneficial owners. The Company estimates that there
were approximately 1,000 beneficial owners of its Common Shares as of that date.
Holders of the Common Shares are entitled to receive such dividends as may
be declared by the Company's Board of Directors. No dividends on the Common
Shares have been paid by the Company to date nor does the Company anticipate
that dividends will be paid in the foreseeable future. The Series "C" Preferred
Stock of the Company currently outstanding prevents the Company from paying any
dividends until the Series C Preferred Stock is redeemed.
21
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
Portions of this section include "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. See note
regarding forward looking statements, p. iv of this Report.
Effective September 1, 1995, the Company acquired all the outstanding stock
of Performance Petroleum Corporation and Pacific Osage, Inc. Effective October
1, 1996, the Company acquired all of the outstanding stock of Argas, Inc. and
ZCA Gathering, Inc. The Consolidated Financial Statements of the Company include
the assets of these combined entities and results of operations for these
subsidiaries from the effective date of acquisition, together with the assets
and operations of the Company's other wholly owned subsidiaries, USX Operating
Co., Inc. and Producers Service, Inc.
Liquidity and Capital Resources
March 31, 1997
- --------------
The financial position of the Company improved dramatically during the
fiscal year ended March 31, 1997, primarily as a result of a private placement
of equity securities conducted during the year. Working capital increased from a
deficit of $957,641 at March 31, 1996, to a positive $17,062,422 at March 31,
1997, an increase of $18,020,063. Current assets increased from $838,595 at
March 31, 1996 to $17,593,425 at March 31, 1997, reflecting receipt of proceeds
by the Company from sale of a new class of Preferred Stock in this private
placement. In addition to a substantial increase in cash and cash equivalents
and a certificate of deposit, the increase in current assets was affected by an
increase in accounts receivable in the approximate amount of $200,000. Such
increase results from increased operations of the Company and reflects the
increased sale of oil and gas to third parties. Accounts payable and accrued
liabilities also increased as a result of this increase in operations, although
in a smaller amount than the increase in accounts receivable.
Management is of the opinion that the Company has sufficient liquidity and
working capital for the foreseeable future. The Company has no existing
commitments for capital expenditures at year end. The Company's focus during
fiscal 1998 will be to invest its capital in the exploration, development and
acquisition of oil and gas properties in an effort to increase cash flow and
profitability.
The Company completed a private placement of equity securities during the
second and third fiscal quarters of 1997. The Company sold 4,000,000 shares of a
newly created Series "C" Preferred Stock to qualified investors pursuant to an
exemption from the registration requirements of Federal and state securities
laws. Proceeds from the offering of $24,000,000 were budgeted for development of
currently owned property, acquisition and development of additional property and
repayment of debt. The Preferred Stock carries a cumulative dividend of 8% per
annum. The Series C Preferred Stock Dividends applicable for the period were
$840,000. The Series C Preferred Stock is redeemable at the Company's option at
any time at the issue price of $6 per share, plus accrued but unpaid dividends,
and is convertible at the holder's option into 2 shares of Common Stock for each
share of Preferred. The Series C Preferred Stock has a liquidation preference of
$6 per share.
22
<PAGE>
A portion of the proceeds of the private placement were utilized during
fiscal 1997 to reduce debt and acquire additional assets. The Company repaid
term debt in the amount of $6,615,210, originally acquired in connection with
the acquisition of Performance and Pacific-Osage. As a result of that repayment,
the Company was debt free at March 31, 1997. The Company also paid $1,481,000 to
acquire additional oil and gas leases and $674,731, net of cash received, to
acquire ZCA and Argas. It is anticipated that these acquisitions will assist in
expanding the Company's operations during fiscal 1998.
Cash flow from operations also contributed to an increase in working
capital during fiscal 1997. Cash flow from operating activities for the year was
$1,316,118, compared to $59,382 for the year ended March 31, 1996.
Finally, the Company received proceeds from the exercise of outstanding
stock options during fiscal 1997, contributing to its overall cash flow. Options
to acquire 1,015,700 shares of Common Stock were exercised by officers,
directors, former officers and consultants, resulting in net proceeds to the
Company of $669,585. Those proceeds were added to Company's working capital and
utilized for operations.
March 31, 1996
- --------------
During fiscal 1996, the Company realized its short-term objective of
expanding operations through the acquisition of producing oil and gas assets.
The Company completed the acquisition of Performance and Pacific Osage effective
September 1, 1995. While management believes those acquisitions have improved
the Company's financial condition, its liquidity and working capital were
adversely effected during the year ended March 31, 1996.
The working capital deficit at March 31, 1996 was $957,641 compared to a
deficit of $850,880 at March 31, 1995, an increase of $106,761. Current assets
and current liabilities both increased during fiscal 1996, although current
liabilities increased in a greater amount. The greatest factor affecting the
decrease in working capital was debt associated with the acquisition of
Performance and Pacific Osage. Those acquisitions were financed with a term loan
in the amount of $6.8 million, of which approximately $1.2 million was
classified as a current liability at March 31, 1996. This note was payable at
the rate of $141,000 per month until July, 1997, when the remaining balance was
due and payable in full. The note represented the Company's greatest need for
liquidity and working capital during 1996.
The Company relied primarily on cash flow from operations to service this
debt during fiscal 1996. However, during the latter portion of the fiscal year,
when the monthly payments rose to $141,000, cash flow from operations was
insufficient to make the required payments. As a result, the Company relied on
restricted cash to satisfy the balance. Restricted cash (available only for
repayment of then-existing term debt) at March 31, 1996 represents proceeds of
asset or equity sales made by the Company subsequent to execution of the
promissory note in September, 1995. At March 31, 1996, the Company had remaining
restricted cash of approximately $75,000 with which to service the debt. As a
23
<PAGE>
result of its limited cash and insufficient cash flow, management anticipated
that the Company required additional cash from outside sources to make the
monthly payments during fiscal 1997 and pay the remaining balance when the note
matures in July, 1997. The private placement in fiscal 1997 accomplished that
objective.
During fiscal 1996, the Company relied principally on proceeds of the term
loan and proceeds from the exercise of stock options to provide capital for
development of oil and gas properties and finance the acquisitions of
Performance and Pacific. The Company also repaid debt to a different lender in
the amount of $397,000. Proceeds from the exercise of stock options totaled
$286,500, substantially all of which was received from a consultant to the
Company.
Debentures outstanding during fiscal 1995 were converted to equity during
fiscal 1996. In connection with the acquisition of Performance and Pacific, the
Company agreed to conversion of the Debentures into shares of its common stock
in accordance with the provisions of the Debenture instrument. As a result of
that transaction, debt and accrued interest in the amount of $500,000 was
converted from current liabilities to stockholders' equity and an additional
2,000,000 shares of common stock were issued by the Company. A substantial
portion of those 2,000,000 shares of common stock are now owned by the former
owners of Performance.
Management's efforts to generate additional cash through the acquisition of
producing properties was successful, as the Company's operations generated
approximately $60,000 of cash during fiscal 1996. This compares to fiscal 1995,
when the Company's operations used approximately $235,000 in cash. Despite this
improvement, however, the Company continued to require cash from outside sources
to service its debt during 1996 and expand its operations. External sources of
working capital include one or more proposed equity offerings, either directed
by the Company or through an underwriter or broker-dealer. The Company also owns
a crude oil refinery, equipment and real estate located in the State of Texas,
which are held for resale. However, the Company's efforts to market these assets
have continued since calendar 1994, with no definitive agreement to-date.
Substantially all of the increase in current assets during 1996 is
attributable to the acquisition of Performance and Pacific. The increase in cash
and accounts receivable are directly attributable to the increased production
from the Performance properties and sales and operations from Pacific Osage. The
increase in inventories from fiscal 1995 to fiscal 1996 is associated with the
parts and supplies store operated by Pacific Osage. The increase in liabilities
is also primarily attributable to the acquisition of Performance and Pacific. In
addition to current maturities of the long term debt, both accounts payable and
amounts due related parties increased. Such increases are also attributable to
the operations of Performance and Pacific.
24
<PAGE>
Results of Operations
Year Ended March 31, 1997
- -------------------------
During the fiscal year ended March 31, 1997, the Company realized a net
loss of $87,530 on revenues of $4,513,387. This compares to a net loss of
$786,165 for the year ended March 31, 1996. Taking into account Series "C"
Preferred Stock dividends applicable to the period, the net loss for fiscal 1997
equates to $0.13 per share, compared to a net loss of $0.19 per share during
fiscal 1996. Excluding provision for the impairment of assets, which management
does not anticipate to be repeated during fiscal 1998, the Company would have
realized a profit of $233,867 for the year ended March 31, 1997.
The improved operations for fiscal 1997 are primarily attributable to
acquisitions completed during fiscal 1996 and 1997, together with increased oil
and gas prices during 1997 compared to those prevailing during 1996. The
acquisition of Performance Petroleum and, to a lesser extent, Five Star
Petroleum, resulted in an increase of Company-produced oil and gas. The
acquisition of Pacific- Osage contributed to the increase of sale of purchased
gas. Finally, the Company received an average of $2.57 per mcf of gas and $20.25
per bbl of oil during 1997, compared to $1.74 and $16.48 during 1996,
respectively. Those two factors resulted in revenues from the sale of purchased
gas and the Company-produced oil and gas almost doubling from 1996 to 1997.
Primarily as a result of these acquisitions, the Company's revenues are
sufficient to offset operating expenses, together with general and
administrative costs. Operating expenses increased from fiscal 1996 to 1997,
commensurate with an increase in revenues. General and administrative expenses
actually decreased, from $544,915 for the year ended March 31, 1996 to $505,417
for the year ended March 31, 1997. Part of that decrease is attributable to the
Company's president serving without compensation during fiscal 1997.
Other factors affecting the Company's loss are interest income and expense.
Interest income increased from $2,064 from fiscal 1996 to $346,294 in fiscal
1997, as a result of temporary investment of the proceeds of the private
placement. Interest expense decreased slightly from fiscal 1996 to 1997, from
$367,299 to $307,455. Such expense was attributable to the term debt incurred by
the Company in connection with the acquisition of Performance and Pacific-Osage.
It is not anticipated that such interest expense will be repeated during fiscal
1998, as the Company is presently debt free.
25
<PAGE>
The loss for fiscal 1997 included provision for impairment of assets in the
amount of $321,397. Such amount included a write-down of the Company's
investment in oil and gas assets in the amount of $41,432 based upon its oil and
gas reserve estimate at March 31, 1997 compared to the amount recorded for such
investment. During the fourth quarter, the Company also decided to discontinue
its drilling and service business formerly conducted by a wholly-owned
subsidiary, USX Operating Co. As a result of that decision, the Company made
adjustments totaling $246,000 to write-down equipment, goodwill and supplies
inventory to their liquidation or fair values. Finally, the Company recorded an
additional impairment reserve of $65,000 to adjust the gas stripping plant and
other assets to their net realizable values.
Year Ended March 31, 1996
- -------------------------
During the year ended March 31, 1996, the Company lost $786,165 on total
revenues of $2,536,788. Total revenue increased $1,165,767 from the year ended
March 31, 1995, or 85%. This substantial increase in revenues resulted from the
acquisition of Performance and Pacific, which operations were included with
those of the Company effective September 1, 1995. The net loss for the year also
decreased, from ($829,149) for the fiscal year ended March 31, 1995 to
($786,165) for the fiscal year ended March 31, 1996. Management anticipates that
revenues will continue to increase during fiscal 1997, as a the result of the
acquisitions of Performance and Pacific. During fiscal 1997, the operations of
Performance and Pacific will be integrated for the entire year.
The greatest component of the increase in revenues during the year ended
March 31, 1996 was sale of Company-produced oil and gas. Revenues from the sale
of the Company-produced oil and gas increased from $98,726 for the year ended
March 31, 1995 to $1,399,195 for the year ended March 31, 1996. This increase is
primarily attributable to the acquisition of Performance and the accompanying
properties owned by that entity, and to a lesser extent, improving natural gas
prices. Oil and gas production at March 31, 1996 was approximately 335 barrels
of oil and 1065 mcf of natural gas per day. Sale of gas purchased from third
parties decreased from fiscal 1995 to 1996, as a result of a decreased volume of
gas transported by the Company during the latest fiscal year. That decline, in
turn, is attributable to declining reserves owned by third parties in proximity
to the gas gathering systems and shutting down the SEK gas gathering system.
Contracting, drilling and oil field supply sales remained generally constant.
The Company's gross margin, defined as total revenues less direct operating
expenses (excluding depreciation, depletion, amortization and general and
administrative expenses) improved substantially during the year ended March 31,
1996 compared to fiscal 1995. The gross margin increased from $261,453 for the
year ended March 31, 1995 to $888,070 for the year ended March 31, 1996.
Notwithstanding this increase, the Company continued to experience a loss, as
income generated from field operations remain insufficient to offset
depreciation, depletion and amortization, which increased substantially during
the year ended March 31, 1996 due to the Company's acquisition of Performance
and Pacific. Production costs also increased from fiscal 1995 to fiscal 1996, as
a greater proportion of the Company's production was attributable to oil and its
accompanying higher costs of production compared to natural gas.
26
<PAGE>
The greatest increase in other expenses included depreciation, depletion
and amortization, together with interest. Depreciation, depletion and
amortization increased from $470,398 for fiscal 1995 to $718,021 for fiscal
1996. This increase is associated with the acquisition of Performance and
accompanying oil and gas properties. Interest expense also increased
substantially, from $64,212 for the year ended March 31, 1995 to $367,299 for
the year ended March 31, 1996. This increase is associated with the term debt
incurred to acquire the Performance and Pacific properties. General and
administrative expenses remain generally constant from fiscal 1995 to 1996.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements following Part IV of
this report for a listing of the Company's financial statements and notes
thereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the two most recent fiscal years, there have been no changes in, or
disagreements with, the Company's certified public accountants of the nature
requiring disclosure pursuant to this item.
27
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the names and ages of the members of the
Company's Board of Directors and its executive officers:
NAME AGE POSITION
---- --- --------
Demetrie D. Carone 57 President, Chief Executive Officer,
Chairman of the Board and Director
Ronald R. McGinnis 61 Vice-President, Secretary
and Director
Jack MacIsaac 56 Director
DEMETRIE D. CARONE. Mr. Carone has served as the President, Chief Executive
Officer, Chairman of the Board and a director of the Company since September,
1996. He currently devotes approximately 30 hours per week to the Company's
affairs. Since 1977, Mr. Carone has also been president of WP&G Distributing
Co., Inc., a privately held Colorado corporation involved in the wholesale
distribution of dairy products. From September, 1995 to January, 1997, Mr.
Carone served as the president of Five Star Petroleum, Inc., a privately-owned
Oklahoma corporation involved in the exploration, development and production of
oil and gas and from which the Company acquired certain assets during the fiscal
year. Prior to that, he was the president and a director of Performance
Petroleum Corporation and Pacific-Osage, acquired by the Company in September,
1995. Finally, from July, 1996 to January, 1997, he served as the president and
a director of US Gas Gas Gathering, Inc., a privately held Delaware corporation
acquired by the Company in fiscal 1997.
RONALD R. McGINNIS. Mr. McGinnis has served as Vice President, Secretary
and a Director of the Company since May 18, 1990. He presently devotes
approximately 10 to 20 hours per week to its affairs, primarily in the areas of
strategic planning and corporate finance. Concurrently, Mr. McGinnis serves as
the vice-president and a director of Wallstreet Racing Stables, Inc., a publicly
traded Colorado corporation engaged in the business of acquiring, training and
racing thoroughbred race horses. He has occupied that position since July, 1995.
From 1990 to January, 1997, Mr. McGinnis also served as the vice-president and a
director of Consolidated Capital of North America, Inc., a publicly traded
Colorado corporation engaged in the real estate industry. Finally, from 1990 to
1995, Mr. McGinnis was the president, sole director and shareholder of Argas
Pipeline Company, a private Kansas corporation which owned an interest in a gas
gathering system.
28
<PAGE>
JACK MacISAAC. Mr. MacIsaac has been a director of the Company since May
26, 1992. Since 1986, Mr. MacIsaac has been engaged as a private investor. Prior
to that, he was employed in the real estate industry.
Each director is serving a term of office which shall continue until the
next annual meeting of shareholders and until his successor has been duly
elected or appointed and qualified. Officers of the Company serve at the
pleasure of the Board of Directors. The Company held its last annual meeting of
shareholders on November 14, 1994. None of the Company's officers or directors
are party to any material legal proceeding, nor are such legal proceedings
contemplated to the best information of such officers and directors. No family
relationships exist between any of the officers and directors of the Company.
Compliance with Section 16(a) of the Securities Act of 1934.
The following information sets forth each officer, director or beneficial
owner of more than ten percent of any class of equity securities of the Company
registered pursuant to Section 12 of the 1934 Act who, based solely upon a
review of Forms 3, 4 and 5 received by the Company pursuant to Rule 16(a)-3 of
the 1934 Act, failed to file on a timely basis, Forms 3, 4 or 5 as required by
Section 16(a) during the most recent fiscal year or prior fiscal years:
Name of Reporting Person Late Form 4 Late Form 5 No. of Transactions
- ------------------------ ----------- ----------- -------------------
Thomas Stansfield 1 1 1
Donald F. Dillon 1 1 2
Lancaster, LLC 1 1 1
ITEM 10. EXECUTIVE COMPENSATION
All of the officers and directors of the Company presently serve without
compensation, although each officer and director is entitled to participate in
the Company's Incentive Stock Option and Non-Qualifying Stock Option Plans and
to be reimbursed for reasonable and necessary expenses incurred on behalf of the
Company. Neither did the Company grant any stock options to its officers or
directors during fiscal 1997. However, the Company may enter into compensation
arrangements with one or more of its officers or directors in the future, as
deemed reasonable and prudent in the discretion of the Board of Directors.
The following table summarizes the total compensation of the Chief
Executive Officer (the only "Named Officer") of the Company for the last fiscal
year:
29
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION
Annual Compensation Long Term Compensation
-------------------- ----------------------
Other Annual Restricted Stock LTIP All other
Name Year Salary Bonus Compensation Stock Awards Option Payouts Compensation
- ---- ---- ------ ----- ------------ ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demetrie D. Carone (1), 1997 -0- -0- -0- -0- -0- -0- -0-
Chairman of the Board,
President and Chief
Executive Officer.
Terry L. Carroll, 1997 $24,000
Chairman of the Board, 1996 96,000 -0- -0- -0- -0- -0- -0-
Chief Executive
Officer and President. 1995 96,000 -0- -0- -0- -0- -0- -0-
- -------------
(1) See Item 12, Certain Relationships and Related Party Transactions for a
description of certain options issued to executive officer in connection
with a previous acquisition.
</TABLE>
Option Grants for Fiscal 1996
The Company granted no options to its officers or directors during fiscal
1997.
Value Realized Upon Exercise of Options
The following table sets forth the value realized by the Named Officers
upon exercise of stock options during the last completed fiscal year and the
value of any unexercised options at the end of fiscal 1997:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values
- -------------------------------------------------------------------------------------------------------------------
Name Shares Value Number of Value of unexercised
acquired realized unexercised in-the-money options/SARS's
on ($) options/SAR's at at Fiscal Year end ($)
exercise ($) Fiscal Year end (#)
exercisable/ exercisable/
unexcercisable unexercisable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Terry L. Carroll 131,400 $75,555 (1) -0- -0-
Demetrie D. Carone 480,000 $1,369,000 (2) -0- -0-
</TABLE>
(1) On August 5, 1996, the reporting person exercised options to purchase
131,400 shares of the Company's Common Stock at a purchase price of $.55
per share. The value realized represents the difference between the
exercise price and the last reported price of the stock as reported by the
NASDAQ Stock Market.
(2) On May 30, August 1 and November 4, 1996 the reporting person exercised
options to purchase 120,000, 25,000 and 335,000 shares of the Company's
Common Stock at exercise prices of $.55, $.75 and $.75. The value realized
reflects the difference between the exercise price on the purchase date and
the last reported price for the stock on that date as reported by the
NASDAQ Stock Market.
30
<PAGE>
Compensation of Directors
The Company reimburses the outside directors for reasonable expenses
incurred by them in attending meetings of the Board of Directors or of
Committees of the Board. During fiscal 1997, the Company did not incur nor
reimburse any director for any such expenses. Directors do not receive
compensation for their directorships over their normal compensation if also
employees, although the Company may provide such compensation in the future.
Incentive Stock Option Plan. Effective January 13, 1989, the Company
adopted an Incentive Stock Option Plan (the "Plan") and reserved a total of
1,000,000 Common Shares for issuance pursuant to the Plan. The Plan, designed as
an incentive for key employees, is administered by a compensation committee
which is formed by the Board of Directors, which selects optionees and
determines the number of Common Shares subject to each option. The Plan provides
that no option may be granted at an exercise price less than the fair market
value of the Common Shares of the Company on the date of grant. Unless otherwise
specified, the options expire five years from date of grant and may not be
exercised during the initial one year period from date of grant. Thereafter,
options may be exercised in whole or in part, depending on terms of the
particular option.
No options were granted pursuant to the Plan during fiscal 1997. As of
March 31, 1997, there were no options outstanding under the Plan and 841,900
remain available for issuance.
Nonqualifying Stock Option Plan. Effective May 25, 1990, the Board of
Directors adopted a Nonqualifying Stock Option Plan ("NQSOP") for the benefit of
non-employee directors of the Company and others having rendered significant
services to the Company. To date, an aggregate of 2,900,000 Common Shares have
been reserved to be issued pursuant to the NQSOP. The NQSOP is administered in
the discretion of the Board of Directors, who have the authority to select
optionees, determine the number of Common Shares subject to each option and the
exercise price per share. In determining the value of services rendered to the
Company by potential optionees, the Board considers, among other things, such
factors as the value of comparable services rendered by others in the community,
the benefits received by the Company and the availability of comparable
services. All options granted pursuant to the NQSOP were exercisable at a price
not less than the fair market value of the Common Shares at the time of grant.
Unless otherwise specified, the options expire ten years from the date of grant.
As of March 31, 1997, three individuals or entities held options to acquire
an aggregate of 203,700 Common Shares at an exercise prices ranging from $0.55
to $3.00 per share. During the fiscal year ended March 31, 1997, no options were
issued under the NQSOP. Finally, options to acquire 716,200 Common Shares remain
available for issuance under the NQSOP.
31
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 31, 1997, a total of 8,312,358 Common Shares, the Company's
only class of voting stock, were issued and outstanding. The Company also has
outstanding 4,000,000 shares of Preferred Stock which are convertible into
8,000,000 shares of Common Stock in the discretion of the holders.
The following table sets forth as of March 31, 1997, certain information
with respect to the Company's Common Stock owned beneficially by (i) each
executive officer and director of the Company; (ii) each person who owns
beneficially more than five percent (5%) of the Company's outstanding Common
Stock; and (iii) all directors and officers as a group. Unless otherwise stated,
the address of each person listed is the Company's address, 1901 New Street,
Independence, Kansas 67301, and the type of ownership is record and beneficial.
[SPACE INTENTIONALLY LEFT BLANK]
32
<PAGE>
Name and Address of Number of Percent of Class
Beneficial Owner Shares Beneficially Owned
- ---------------- ------ ------------------
Officers & Directors
- --------------------
Demetrie D. Carone 2,042,866(1) 24.69%
Jack MacIsaac 4,000(2) *
Ronald R. McGinnis 321,515 3.87%
Principal Shareholders
Dale Jensen 3,368,770(3) 32.67%
2417 Ridge Road
Lincoln, Nebraska 68512
Donald F. Dillon 1,132,818(4) 12.27%
6600 South 56th Street
Lincoln, NE 68516
Thomas Stansfield 1,377,000(5) 14.79%
7052 East Fremont Place
Englewood, CO 80112
Jerome and Betty Fenna 432,134 5.1%
13631 Balsam Lane
Dayton, MN
All Directors and Executive 2,368,381 28.33%
Officers as a Group (3 Persons)
- ---------------
* Less than 1%
(1) Includes 47,330 Common Shares underlying 23, 665 shares of the Company's
1996 Series "C" Convertible Preferred Stock held by Mr. Carone.
(2) Includes Options to purchase 3,700 Common Shares under the Company's
Non-Qualified Stock Option Plan.
(3) Includes 2,000,000 Common Shares underlying 1,000,000 shares of the
Company's 1996 Series "C" Convertible Preferred Stock held by the reporting
person.
(4) Includes 916,668 Common Shares underlying 458,334 shares of the Company's
1996 Series "C" Convertible Preferred Stock and 216,150 Common Shares of
the issuer's securities held byLancaster Ventures, LLC of which the named
individual is the sole Member and the Manager.
(5) Includes 1,000,000 Common Shares underlying 500,000 shares of the Company's
1996 Series "C" Convertible Preferred Stock held by the reporting person.
Changes in Control
- ------------------
The Company knows of no arrangements or events, the happening of which
might result in a change in control of the Company, except the discussions
referred to on page 1 of this Report with Bruce Benson, the happening of which
there is no assurance.
33
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ---------------------------------------------
Recent Acquisitions
Effective January 15, 1997, the Company completed three acquisitions from
individuals who are either officers, directors or principal shareholders of the
Company, or entities controlled by such individuals. The Company acquired all of
the assets of Five Star Petroleum, consisting of interests in oil and gas leases
and related equipment, for a purchase price of $1,300,000. The entire purchase
price was paid in cash. Demetrie "Dan" Carone, President of the Company, is also
president, a director and principal shareholder of Five Star. In addition,
Messrs. Jensen and Stansfield, beneficial owners of greater than five percent of
the Company's Common Stock, were principal shareholders of Five Star. As a
result of that acquisition, Messrs. Carone, Jensen and Stansfield were paid
$262,286, $275,340 and $241,150 , respectively.
Contemporaneously, the Company completed the acquisition of US Gas , a
privately-held Delaware corporation. The assets of US Gas include an interest in
a gas gathering system and oil and gas leases. The purchase price of this
acquisition was $560,000, paid in cash. Messrs. Carone and Jensen were sole
shareholders of US Gas, owning an equal interest in that entity. US Gas was
acquired by Messrs. Carone and Jensen in July, 1996 for a purchase price of
$800,000.
Finally, the Company acquired certain oil and gas leases located in Osage
County, Oklahoma from certain individuals, including Messrs. Carone, Jenson and
Donald Dillon, a beneficial owner of more than 5% of the Company's Common Stock.
The Company paid $200,000 cash for those leases, of which Mr. Carone received
$120,000, Mr. Jenson $20,000, and Mr. Dillon $20,000.
Effective August 31, 1995, the Company completed the acquisitions of
Performance Petroleum Corporation and Pacific-Osage. The Company paid $800,000
cash to the former stockholders of Performance and satisfied outstanding notes
payable in the approximate amount of $4,600,000. The Company also issued 1,000
shares of its Common Stock in connection with the acquisition. The Company
acquired Pacific-Osage for approximately $840,000 in cash. Messrs. Carone and
Jensen were also officers, directors and principal shareholders of Performance
and Mr. Carone was an officer, director and principal shareholder of
Pacific-Osage. By virtue of those positions, Messrs. Carone and Jensen were paid
$280,540 and $148,260, respectively. Mr. Carone also received 408,805 shares of
the Company's Common Stock and Mr. Jensen 408,770 shares in connection with
those acquisitions, as a result of the conversion of the outstanding Debentures
previously held by Five Star Petroleum. Mr. Carone also received options to
acquire an aggregate of 480,000 shares of Common Stock of the Company, and Mr.
Jensen 360,000 options in conjunction with consulting agreements executed with
the Company. All of those options were subsequently exercised.
Management is of the opinion that the terms of these acquisitions were no
less favorable than could be obtained from unaffiliated third parties.
Other Events
- ------------
The Company sold shares of its Series C Preferred Stock to Mr. Carone, an
officer, director and principal shareholder of the Company, and Messrs. Jenson,
Dillon and Stansfield, principal shareholders of the Company in a private
placement during fiscal 1997. Such individuals purchased 23,665, 1,000,000,
458,334 and 500,000 shares of the Series C, respectively. These sales were made
on the same terms and conditions as those made to other purchasers in the
offering.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report signed on its
behalf by the undersigned, thereunto duly authorized.
UNITED STATES EXPLORATION, INC.
Date: 07/14/97 By: /s/ Demetrie D. Carone
-------------------------------------
Demetrie D. Carone, President
Pursuant to the requierments of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Demetrie D. Carone President, Chief Executive 07/14/97
- ------------------------- Officer, Chief Financial and
Demetrie D. Carone Accounting Officer, Chief
Operating Officer, Treasurer
and Director
/s/ Ronald R. McGinnis Vice President, Secretary and 07/14/97
- ------------------------- Director
Ronald R. McGinnis
35
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules.
The Financial Statements filed herein are described in the Index to
Financial Statements included in Item 7 and indexed on page F-1.
(b) Exhibits.
Except as otherwise indicated, each of the following documents were
included as exhibits to the Company's Registration Statement on Form
S-18 filed under the Securities Act of 1933, as amended and are
incorporated herein by this reference.
Exhibit No.
-----------
3.1 Articles of Incorporation of the Company as filed on
January 9, 1989, with the Secretary of State of the State
of Colorado.
3.2 By-laws of the Company.
3.3 Articles of Amendment of the Company filed on June 7,
1990 with the Secretary of State of the State of Colorado.
3.4 (1) Articles of Amendment of the Company as filed with the
Secretary of State on September 24, 1996.
4.1 Certificate for Common Stock.
9 Not Applicable.
10.1 1989 Incentive Stock Option Plan of the Company.
10.2 1990 Non-Qualifying Stock Option Plan.
10.3.1 (2) Lease Areement between Mid-America Pipeline Company and
Producers Service, Incorporated.
10.3.2 (2) Amendment to Lease Agreement between Mid-America Pipeline
Company and Producers Service, Incorporated.
10.43 Stock Purchase Agreement between the Company and
Shareholders of Performance Petroleum Corporation
effective September 1, 1995.
36
<PAGE>
10.53 Stock Purchase Agreement between the Company and
shareholders of Pacific Osage, Inc. effective
September 1, 1995.
11 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
19 Not applicable.
21* List of the Company's subsidiaries.
22 Not applicable.
23 Not applicable.
24 Consent of Grant Thornton.
27 Financial Data Schedule
28 Not applicable.
99 Not applicable.
- ------------------------
(1) Filed as an Exhibit to Form 8-K dated September 30, 1996.
(2) Filed as an Exhibit to Form 10-KSB for the fiscal year ended March 31,
1994 and incorporated herein by reference.
(3) Filed as an Exhibit to Form 8-K dated September 29, 1995, and
incorporated herein by reference.
* Filed herewith.
- -------------------------
(C) Reports on Form 8-K.
The Company has not filed any reports on Form 8-K during the fourth
quarter of its fiscal year.
37
<PAGE>
UNITED STATES EXPLORATION, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accounts ................. F-1
Consolidated Balance Sheets at March 31, 1997 and 1996 .......... F-2
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1997 and 1996 ................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended March 31, 1997 and 1996 .............. F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1997 and 1996 ................................... F-6
Notes to Consolidated Financial Statements ...................... F-7
38
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
United States Exploration, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of United States
Exploration, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United States
Exploration, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Wichita, Kansas
May 30, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
United States Exploration, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
ASSETS
1997 1996
---- ----
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $15,323,038 $ 169,965
Certificate of deposit 1,500,000 --
Restricted cash -- 74,697
Accounts receivable 590,237 384,571
Due from related parties 4,300 23,095
Inventories 152,401 161,186
Prepaid expenses and other 23,449 25,081
----------- -----------
Total current assets 17,593,425 838,595
PROPERTY AND EQUIPMENT, AT COST, NET
Oil and gas property and equipment -
full cost method 9,636,527 8,208,034
Natural gas gathering systems 1,695,394 1,269,221
Building and equipment 478,949 1,019,909
----------- -----------
11,810,870 10,497,164
OTHER ASSETS
Assets held for sale
Crude oil refinery 1,775,011 1,775,011
Natural gas stripping plant 40,000 80,000
Equipment 146,486 --
Pipeline lease agreement, less accumulated
amortization of $159,981 in 1997 and $109,461
in 1996 547,327 597,847
Investment in joint ventures -- 325,139
Goodwill -- 69,684
Other -- 40,710
----------- -----------
2,508,824 2,888,391
----------- -----------
$31,913,119 $14,224,150
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---- ----
CURRENT LIABILITIES
<S> <C> <C>
Current maturities of long-term debt $ -- $ 1,196,947
Accounts payable and accrued liabilities 515,788 423,363
Due to related parties 15,215 175,926
------------ ------------
Total current liabilities 531,003 1,796,236
LONG-TERM DEBT -- 5,427,853
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value
Authorized - 100,000,000 shares
Issued and outstanding
Series A Cumulative Convertible - 250,000
shares in 1996 -- 1,250,000
Series B Cumulative Convertible - 104,000
shares in 1996 -- 520,000
Series C Cumulative Convertible - 4,000,000
shares (liquidation preference $24,480,000) 24,000,000 --
Common stock - $.0001 par value
Authorized - 500,000,000 shares
Issued and outstanding - 8,312,358 shares in
1997 and 6,469,404 shares in 1996 831 647
Capital in excess of par value 11,370,867 8,581,466
Accumulated deficit (3,989,582) (3,352,052)
------------ ------------
31,382,116 7,000,061
------------ ------------
$ 31,913,119 $ 14,224,150
============ ============
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
United States Exploration, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31,
1997 1996
---- ----
Revenues
<S> <C> <C>
Sale of purchased gas $ 1,271,372 $ 716,496
Sale of company produced oil and gas 2,772,284 1,399,195
Contracting and oil field supplies 381,978 425,408
Equity in net income (loss) of joint ventures 87,753 (17,988)
----------- -----------
4,513,387 2,523,111
Costs and expenses
Gas acquisition costs 831,011 476,814
Gas transportation costs 463,377 353,257
Production costs - oil and gas 1,329,667 652,632
Other operating expenses 163,375 166,015
Depreciation, depletion and amortization 1,100,749 718,021
Provision for impairment of assets 321,397 44,000
General and administrative 505,417 544,915
----------- -----------
4,714,993 2,955,654
----------- -----------
Loss from operations (201,606) (432,543)
Other income (expense)
Interest income 346,294 2,064
Interest expense (307,455) (367,299)
Other 75,237 11,613
----------- -----------
114,076 (353,622)
----------- -----------
NET LOSS (87,530) (786,165)
Preferred stock dividends applicable to the period (884,250) (88,500)
----------- -----------
Net loss applicable to common stockholders $ (971,780) $ (874,665)
=========== ===========
Loss per common share $ (.13) $ (.19)
=========== ===========
The accompanying notes are an integral part of these statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
United States Exploration, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred stock Common stock
---------------------------------------------------------- -------------
Series A Series B Series C Capital in
---------------- -------------- ------------------ Par excess of Accumulated
Shares Amount Shares Amount Shares Amount Shares value par value deficit Total
------ ------ ------ ------ ------ ------ ------ ----- --------- --------- -----
Balance at
April 1,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 250,000 $1,250,000 104,000 $520,000 - $ - 4,079,404 $408 $7,795,205$(2,565,887) $6,999,726
Exercise of
stock
options - - - - - - 390,000 39 286,461 - 286,500
Shares issued
upon
conversion of
debentures - - - - - - 2,000,000 200 499,800 - 500,000
Net loss for
the year - - - - - - - - - (786,165) (786,165)
------- --------- ------- ------- -------- -------- --------- --- --------- --------- ----------
Balance at
March 31,
1996 250,000 1,250,000 104,000 520,000 - - 6,469,404 647 8,581,466 (3,352,052) 7,000,061
Exercise of
stock
options - - - - - - 1,015,700 101 669,484 - 669,585
Conversion of
preferred
stock and
related
dividends to
common stock (250,000) (1,250,000)(104,000)(520,000) - - 827,254 83 1,959,917 (190,000) -
Issuance of
Series C
Preferred stock - - - - 4,000,000 24,000,000 - - - - 24,000,000
Contribution of
accrued salary
by former
president and
stockholder - - - - - - - - 160,000 - 160,000
Cash dividends
paid
on Series C
preferred
stock - - - - - - - - - (360,000) (360,000)
Net loss for
the year - - - - - - - - - (87,530) (87,530)
-------- -------- -------- ------- --------- ----------- --------- ---- ----------- ----------- -----------
Balance at
March 31,
1997 - $ - - $ - 4,000,000 $24,000,000 8,312,358 $831 $11,370,867 $(3,989,582) $31,382,116
======== ======== ======== ======= ========= =========== ========= ==== =========== =========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
United States Exploration, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31,
Increase (decrease) in cash and cash equivalents
1997 1996
---- ----
Cash flows from operating activities
<S> <C> <C>
Net loss $ (87,530) $ (786,165)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation, depletion and amortization 1,100,749 718,021
Provision for doubtful accounts -- 18,604
Provision for impairment of assets 321,397 44,000
Loss on sale of equipment 9,820 --
Equity in net (income) loss of joint ventures (87,753) 17,988
Change in assets and liabilities, net of effect
of acquisitions
(Increase) decrease in accounts receivable 103,800 (150,754)
(Increase) decrease in due from related parties 18,795 (629)
Decrease in inventories 8,785 6,743
Decrease in prepaid expenses and
other 2,632 11,387
Increase in accounts payable 86,134 111,069
Increase (decrease) in due to related parties (160,711) 69,118
------------ ------------
Net cash provided by operating
activities 1,316,118 59,382
Cash flows from investing activities
(Increase) decrease in restricted cash 74,697 (74,697)
Purchase of certificate of deposit (1,500,000) --
Capital expenditures (111,386) (178,133)
Acquisition of oil and gas leases (1,481,000) --
Acquisition of companies, net of cash received (674,731) (6,209,473)
------------ ------------
Net cash used in investing activities (3,692,420) (6,462,303)
Cash flows from financing activities
Issuance of Series C preferred stock 24,000,000 --
Repayment of note payable to bank (165,000) (397,000)
Proceeds from issuance of term debt 0 6,800,000
Repayment of term debt (6,615,210) (193,620)
Proceeds from exercise of stock options 669,585 286,500
Dividends paid on preferred stock (360,000) --
------------ ------------
Net cash provided by financing activities 17,529,375 6,495,880
------------ ------------
Net increase in cash and cash equivalents 15,153,073 92,959
Cash and cash equivalents, beginning of year 169,965 77,006
------------ ------------
Cash and cash equivalents, end of year $ 15,323,038 $ 169,965
============ ============
The accompanying notes are an integral part of these statements.
F-6
</TABLE>
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows.
1. Company history and nature of operations
----------------------------------------
United States Exploration, Inc. was incorporated on January 9, 1989. The
Company through its subsidiaries operates as a producer of oil and gas and
as an operator of gas gathering systems and an oil field parts and supply
store. The Company's operations are located in southeast Kansas and
northeast Oklahoma.
2. Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of United States
Exploration, Inc. and its wholly-owned subsidiaries, USX Operating Co.,
Inc., Producers Service Incorporated, Performance Petroleum Corporation,
Pacific Osage, Inc., Argas, Inc. and US Gas Gathering, Inc. Operations of
Performance and Pacific are included in the consolidated financial
statements from September 1, 1995, which was the effective date of their
acquisition, while the operations of Argas, Inc. and US Gas Gathering,
Inc. are included as of October 1, 1996, the effective date of their
acquisitions. All significant intercompany transactions and balances have
been eliminated.
3. Use of estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
4. Cash equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
5. Inventories
-----------
Inventories are comprised of valves, pipe, pumps, motors and other
miscellaneous oil field supplies. They are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.
F-7
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
6. Oil and gas interests
---------------------
The Company follows the full cost method of accounting as defined by the
Securities and Exchange Commission, whereby all costs incurred in
connection with the acquisition, exploration and development of oil and gas
properties, whether productive or unproductive, are capitalized.
Capitalized costs which relate to proved properties and estimated future
costs to be incurred in the development of proved reserves are amortized
using the units-of-production method. Capitalized costs associated with
significant investments in unproved properties are excluded from the
amortization base until such time as these properties are evaluated.
Additionally, no gains or losses are recognized upon the disposition of oil
and gas properties. Capitalized costs are subjected to an annual test of
recoverability by comparison to the present value of future net revenues
from proved reserves. Any capitalized costs in excess of the present value
of future net revenues from proved reserves, adjusted for the cost of
certain unproved properties, are charged to expense in the year such excess
occurs.
7. Depreciation and amortization
-----------------------------
Property and equipment, exclusive of the oil and gas full cost pool, is
stated at cost and depreciated using the straight-line method over the
following estimated useful lives once the asset is put into productive use.
Natural gas gathering systems 17 years
Equipment 3 to 7 years
Building (field headquarters) 30 years
Maintenance, repairs and renewals which neither materially add to the value
of the asset nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of these assets are included in
operations.
The capitalized pipeline lease agreement is being amortized using the
straight-line method over the remaining term of the lease including renewal
options. Goodwill was amortized using the straight-line method over fifteen
years.
8. Investment in joint ventures
----------------------------
The Company accounted for its net interest in joint ventures using the
equity method. Accordingly, the investments were initially recorded at cost
and were adjusted thereafter to include the Company's share of
post-acquisition operations, net of distributions. Effective October 1,
1996, the Company purchased the remaining interest in the joint ventures.
The assets and operations of the joint ventures are included in the
consolidated financial statements subsequent to October 1, 1996.
9. Income taxes
------------
United States Exploration, Inc. and its subsidiaries file a consolidated
federal income tax return. Deferred tax assets and liabilities are
determined based on the differences between the financial accounting and
tax basis of assets and liabilities. Deferred tax assets or liabilities at
the end of each year are determined using the currently enacted tax rate
expected to apply to taxable income in the periods in which the deferred
tax asset or liability is expected to be realized or settled.
F-8
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE B - RELATED PARTY TRANSACTIONS
The Company purchased, effective October 1, 1996, 100% of the outstanding
common stock of Argas, Inc. for $160,000. Argas, Inc. was purchased from
the Company's former president who is also a stockholder of the Company.
Argas, Inc.'s primary asset was its investment in the joint ventures in
which the Company was an investor. Subsequent to the purchase of Argas,
Inc., the joint ventures were consolidated with Company operations. Prior
to the purchase, the joint ventures sold natural gas of approximately
$228,000 and $122,000 to the Company during 1997 and 1996, respectively. In
addition, the joint ventures had contracting expense with the Company of
approximately $52,000 and $70,500 during 1997 and 1996, respectively.
The Company also purchased during 1997 the common stock of US Gas
Gathering, Inc. and certain oil and gas leases from the Company's president
and another significant stockholder for total cash consideration of
$2,030,000. See Note R for additional information.
In connection with substantial changes in the capitalization of the
Company, the Company entered into a comprehensive agreement with its former
President on September 17, 1996. As a part of the agreement, the President
resigned his position and released the Company from payment for past
services. Accordingly, the Company transferred $160,000 of accrued salary
to paid in capital.
The Company utilized during 1996 a financial public relations consulting
firm, MCM Capital Management, Inc. (MCM). MCM is a related party in that a
stockholder and former director of United States Exploration, Inc. is an
officer, director and stockholder of MCM. The Company incurred fees to MCM
of $6,656 during 1996.
The Company leases its premises from its former president under an
operating lease. The lease provides for monthly payments of $806.
A summary of account balances with related parties at March 31 is as
follows:
1997 1996
---- ----
Due from related parties
USX-Argas 1996 Joint Venture $ - $ 21,895
Individual stockholders 4,300 1,200
----------- -----------
$ 4,300 $ 23,095
=========== ===========
1997 1996
---- ----
Due to related parties
Individual stockholder $ 15,215 $ -
T. L. Carroll (accrued compensation) - 145,081
USX-Argas 1996 Joint Venture - 18,798
MCM Capital Management, Inc. - 10,548
Individual stockholder - 938
Argas, Inc. - 561
---------- ------------
$ 15,215 $ 175,926
=========== ============
F-9
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE C - RESTRICTED CASH
The Company's note payable to bank (see Note K) required that cash received
from the sale of assets or equity proceeds be placed in an escrow account
with the bank. The use of the cash was restricted to loan prepayments and
monthly loan payments should the net production revenue from the
Performance properties be less than $210,000 in a given month. This note
payable was paid off in fiscal 1997.
NOTE D - INVESTMENT IN JOINT VENTURES
The Company participated in two joint ventures which operated gas
pipelines. During fiscal 1997 a joint venture, in which the Company was a
49% participant, settled a claim against a gas purchaser. The joint venture
income of $87,753 recognized in fiscal 1997 primarily relates to the
settlement of that claim. The Company acquired the remaining interests in
these joint ventures during fiscal 1997. The carrying value of the
investment in the joint ventures is summarized as follows:
1997 1996
---- ----
Carrying value, beginning of year $ 325,139 $ 221,498
Investment in joint venture - 143,566
Equity in net earnings (loss)
of joint ventures 87,753 (17,988)
Amortization of investment (34,487) (21,937)
Termination of joint venture and
inclusion in consolidated
financial statements (378,405) -
----------- ------------
Carrying value, end of year $ - $ 325,139
=========== ============
NOTE E - OIL AND GAS PROPERTIES
The Company's oil and gas activities are conducted within the continental
United States with the exception of one insignificant lease located in
Alberta, Canada which was sold during 1997. The following schedules present
capitalized costs at March 31, 1997 and 1996 and results of operations for
producing activities for the years then ended. At March 31, 1997 and 1996
costs associated with acquisition and development activities of $14,561,258
and $12,468,395, respectively, are considered evaluated and subject to
amortization.
March 31,
------------------------------
1997 1996
---- ----
Capitalized costs
Oil and gas properties $ 14,561,258 $ 12,468,395
Accumulated depreciation, depletion,
amortization and valuation allowance 4,924,731 4,260,361
------------ ------------
Net capitalized costs $ 9,636,527 $ 8,208,034
============ ============
F-10
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE E - OIL AND GAS PROPERTIES - Continued
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------
1997 1996
---- ----
Results of operations for producing activities
<S> <C> <C>
Oil and gas sales $ 2,772,284 $ 1,399,195
Production costs (1,329,667) (652,632)
Depreciation, depletion and amortization (623,291) (268,735)
Full cost pool valuation allowance (41,432) -
------------ ----------
Results of operations from producing activities
(excluding overhead expenses) $ 777,894 $ 477,828
============ ===========
Amortization per equivalent physical unit
(barrels) of production (excludes full cost
pool valuation allowance) $4.42 $2.98
===== =====
</TABLE>
Costs incurred in oil and gas acquisition and development activities during
the years ended March 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Property acquisition costs $ 1,981,830 $ 5,438,061
Development costs 111,386 160,625
------------- ------------
$ 2,093,216 $ 5,598,686
============= ============
</TABLE>
Capitalized costs are subjected to an annual test of recoverability by
comparison to the present value of future net revenues from proved
reserves. Any capitalized costs in excess of the present value of future
net revenues are required to be expensed. At March 31, 1997, capitalized
costs exceeded the present value of future net revenues by $41,432 which
resulted in a write down of the carrying value of the oil and gas
properties.
F-11
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE F - NATURAL GAS GATHERING SYSTEMS
Natural gas gathering systems consist of the following at March 31:
1997 1996
---- ----
Peru-Hale $ 1,132,108 $ 1,132,108
Southeast Kansas 453,588 453,588
Pacific Gas 480,431 480,431
Independence 400,663 -
US Gas 269,757 -
Chautauqua 200,440 -
Havanna 53,735 -
Elgin 25,452 -
Cowley 8,484 -
--------------- --------------
3,024,658 2,066,127
Less accumulated depreciation 1,329,264 796,906
--------------- ---------------
$ 1,695,394 $ 1,269,221
=============== ===============
NOTE G - BUILDING AND EQUIPMENT
Building and equipment consists of the following at March 31:
1997 1996
---- ----
Building $ 130,588 $ 126,800
Oil field equipment 1,024,954 1,343,590
Autos and trucks 133,631 76,677
Office equipment 51,903 62,448
------------ ------------
1,341,076 1,609,515
Less accumulated depreciation and
valuation allowance 862,127 589,606
------------ ------------
$ 478,949 $ 1,019,909
============ ============
F-12
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE H - CRUDE OIL REFINERY
The Company owns a crude oil refinery and tank storage farm located in
Ingleside, Texas, which it acquired in July 1994. The refinery has a
capacity of 10,400 bbls per day and is located on a small portion of 100
acres of undeveloped real estate also owned by the Company.
The refinery which has been nonoperational since the early 1980's is skid
mounted and has been preserved internally with noncorrosive oil-based
liquid. The Company intends to resell both the refinery and real estate.
NOTE I - CONVERTIBLE DEBENTURES
On June 15, 1993, pursuant to an exchange agreement with Cirque Energy Ltd.
(a majority stockholder of the Company at that date), the Company exchanged
2,000,000 each of Series A, B and C Company Convertible Debentures for
6,000,000 Company common shares. The Series A, B and C Debentures were
noninterest- bearing and had an aggregate principal value of $1,200,000.
The debentures were recorded at their present value of $1,069,815,
discounted at 10%. The Company repaid the Series A and B Debentures prior
to March 31, 1995.
The remaining 2,000,000 Series C Company Debentures matured on June 30,
1995. The Company did not make the required $500,000 payment on that date.
As the sole remedy for default any debentures which were not retired at
maturity could be converted into common shares of the Company on a
one-for-one basis at the holder's option. In conjunction with the
acquisitions of Performance and Pacific Osage discussed in Note R, the
sellers acquired the Series C debentures. The Company agreed to allow the
purchasers of the debentures to convert them into Company stock. On
December 28, 1995, the debentures were converted into 2,000,000 common
shares of the Company.
NOTE J - PIPELINE LEASE
The Company leases and operates a seventy-two mile gas pipeline under an
operating lease which was acquired for a total cost of $707,308. The lease
expires January 31, 1998 with a ten-year renewal option which can be
exercised at that time. The lease provides for minimum monthly payments of
$6,500 per month. A volume rent adjustment is computed at each six-month
anniversary date. The recomputed monthly rent is equal to the average
monthly MCF's transported through the pipeline during the previous six
months times $.08 but not less than $6,500. The maximum monthly rental
under the formula is $13,600 a month. The pipeline transported an average
of 37,640 and 31,030 MCF's per month during the years ended March 31, 1997
and 1996, respectively. The agreement includes a purchase option for
$1,800,000 which can be exercised at any time during the term of the lease.
F-13
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE K - LONG-TERM DEBT
Long-term debt consisted of the following at March 31, 1996:
Term note payable to a bank with monthly
interest only payments through January
1, 1996 and monthly interest and
principal payments of $141,000 from
February 1, 1996 through July 1, 1997 at
which time the balance of the principal
was due. The note bore interest at the
bank's national rate (8.25% at March 31,
1996) - collateralized by all Company
assets and was guaranteed by certain
stockholders of the Company. The note
was repaid in full September 1996 $6,612,545
7% note payable to a bank with monthly
payments of $599 through February 1998 -
collateralized by a vehicle 12,255
----------
6,624,800
Less current maturities 1,196,947
----------
$5,427,853
==========
NOTE L - INCOME TAXES
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities
Purchase accounting adjustment - book basis of
acquired assets greater than tax basis
Equipment $ 248,993 $ 334,660
Lease agreement 207,984 227,182
Other - 30,782
Oil and gas properties - tax depletion greater
than full cost pool amortization 2,195,993 2,107,440
Depreciation on equipment 49,958 68,739
------------ ------------
2,702,928 2,768,803
Deferred tax assets
Net operating loss carryforwards 2,934,053 3,266,493
Provision for doubtful accounts - 30,553
Valuation allowance (natural gas stripping plant) 31,920 16,720
Accrued compensation - 67,992
Other 12,048 29,119
----------- ------------
2,978,021 3,410,877
Less valuation allowance 275,093 642,074
------------ ------------
2,702,928 2,768,803
------------ ------------
Net deferred amount $ - $ -
============ ============
F-14
</TABLE>
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE L - INCOME TAXES - Continued
The valuation allowance was decreased by $366,981 in 1997 and $1,275,134 in
1996 to reduce the deferred tax asset to zero.
The net operating loss carryforwards available to United States
Exploration, Inc. for income tax purposes are as follows. The Company is
limited in its use of net operating loss carry-forwards. The Company may
use, in any one tax year, up to $507,000 of net operating losses from
carry-forwards expiring in years before 2009 and up to $2,285,000 of net
operating losses from carry-forwards expiring after 2008 for a maximum of
$2,792,000 in any one year.
Expiration
dates
----------
2003 $ 361,000
2004 2,545,000
2005 1,300,000
2006 293,000
2007 448,000
2008 37,000
2009 1,765,000
2010 537,000
2011 435,000
--------------
$ 7,721,000
==============
NOTE M - MAJOR CUSTOMERS
The Company sold approximately 77% in 1997 and 83% in 1996 of its gas to
four and six purchasers, respectively. The Company sold approximately 91%
and 99% of its oil to one purchaser during 1997 and 1996, respectively.
NOTE N - STOCK OPTION PLANS
Effective January 13, 1989, the Company adopted an Incentive Stock Option
Plan (the Plan) and reserved a total of 1,000,000 common shares for
issuance pursuant to the Plan. As of March 31, 1997, there were 841,900
options available for issuance. The Plan, designed as an incentive for key
employees, is administered by the compensation committee of the Board of
Directors, which selects optionees and determines the number of common
shares subject to each option. The Plan provides that no option may be
granted at an exercise price less than the fair market value of the common
shares of the Company on the date of grant. Unless otherwise specified, the
options expire five years from date of grant and may not be exercised
during the initial one-year period from date of grant. Thereafter, options
may be exercised in whole or in part, depending on terms of the particular
option.
F-15
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE N - STOCK OPTION PLANS - Continued
Effective May 25, 1990, the Board of Directors adopted a Nonqualifying
Stock Option Plan (NQSOP) for the benefit of nonemployee directors of the
Company and others having rendered significant services to the Company. To
date, an aggregate of 2,900,000 common shares have been reserved to be
issued pursuant to the NQSOP. As of March 31, 1997, there were 716,200
options available for issuance. The NQSOP is administered in the discretion
of the compensation committee of the Board of Directors. Unless otherwise
specified, the options expire ten years from the date of the grant. All
options issued in 1996 were to nonemployees.
A summary of the Company's two stock option plans as of March 31, 1997 and
1996 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
Weighted
Shares average
-------------------------------- exercise
The Plan NQSOP price
-------- ----- ---------
<S> <C> <C> <C> <C>
Outstanding at April 1, 1995 262,800 917,700 $1.49
Granted - 1,667,800 1.29
Exercised - (390,000) .73
Canceled - (650,000) 2.35
------------ --------------
Outstanding at March 31, 1996 262,800 1,545,500 1.16
Exercised (148,900) (866,800) .66
Canceled (113,900) (475,000) 2.00
------------ --------------
Outstanding at March 31, 1997 - 203,700 1.28
============ ==============
</TABLE>
All options outstanding at March 31, 1997 were exercisable and can be
summarized as follows:
Exercise Remaining
Shares price life
------ ----- ---------
130,000 $ .55 5 months
30,000 2.00 7 years
3,700 2.50 6 years
40,000 3.00 6 years
-------
203,700
=======
F-16
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE O - PREFERRED STOCK
The Company's Series A and Series B Cumulative Convertible Preferred Stock
had an issue price and preference on liquidation of $5 per share and
accrued dividends at the rate of $.25 per share per annum, payable in cash
or common shares of the Company. The preferred shares were convertible at
the option of the holder into common shares of the Company based upon a
conversion price of $2.25 per common share. All outstanding shares were
converted on September 30, 1996 into 786,667 common shares of the Company.
In addition, 40,587 common shares were issued in satisfaction of all
accrued but unpaid dividends.
During the year ended March 31, 1997 the Company completed a private
placement of 4,000,000 shares of Series "C" Convertible Preferred Stock at
$6.00 per share. Total proceeds received were $24,000,000. The stock
carries an 8% cumulative per annum dividend and is convertible at the
option of the holder into two shares of Company common stock for each share
of Series C Preferred Stock. This conversion rate is subject to adjustment
in certain events. The Series C Preferred Stock has a liquidation
preference of $6.00 per share, plus accred and unpaid dividends. The
Company may redeem the stock, subsequent to March 17, 1997, at the price of
$6.00 per share plus accrued and unpaid dividends.
NOTE P - LOSS PER COMMON SHARE
Loss per common share has been computed by dividing net loss, after
reduction for preferred stock dividends applicable to the period, by the
weighted average number of common shares outstanding during the year.
NOTE Q - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Noncash investing and financing activities
Conversion of 354,000 shares of preferred
stock and accrued dividends into 827,254
shares of common stock $ 1,960,000 $ -
2,000,000 Series C Debentures with principal
value of $430,621 and accrued interest of
$69,379 converted to 2,000,000 shares of
common stock - 500,000
Liabilities assumed in connection with acquisitions 346,291 112,763
Accounts receivable exchanged for
interest in joint venture - 94,237
Transfer of accrued salary to paid in capital 160,000 -
Cash paid during the year
Interest 353,788 320,759
F-17
</TABLE>
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE R - ACQUISITIONS
Effective October 1,1996, the Company acquired 100% of the common stock of
US Gas Gathering, Inc. for total consideration of $549,000. US Gas
Gathering, Inc. owns oil and gas leases and owns a 50% interest and
operates a gas gathering system. The Company also acquired during November
and December 1996 oil and gas leases located in the State of Oklahoma for
cash consideration of $1,481,000. The leases and US Gas Gathering, Inc.
were purchased from the Company's president and another significant
stockholder.
The Company purchased, effective October 1, 1996, 100% of the common stock
of Argas, Inc. for $160,000. See Note B for additional information.
The pro forma unaudited results of operations for the years ended March 31,
1997 and 1996, assuming consummation of the purchase of US Gas Gathering,
Inc. the Oklahoma leases and Argas at the beginning of each period are as
follows:
Year ended March 31,
-----------------------------
1997 1996
---- ----
Revenue $5,026,915 $3,412,861
Net loss 35,445 621,829
Loss per common share .12 .15
Effective September 1, 1995 the Company purchased all the outstanding stock
of Performance Petroleum Corporation and Pacific Osage, Inc. Performance
holds working interests in oil and gas leases located in Osage and Kay
counties in northeast Oklahoma. Pacific operates a natural gas gathering
system and an oil field parts and supply store.
The Company paid $800,000 to the former stockholders of Performance and
satisfied outstanding notes payable of Performance in the approximate
amount of $4,600,000. The Company also issued 1,000 shares of Company
common stock. The Company acquired Pacific for approximately $840,000 in
cash. The acquisitions were financed through the issuance of a $6,800,000
term bank note (see Note K). In addition, the Company entered into
consulting agreements with certain stockholders of Performance and Pacific
and issued 720,000 stock options at $.75 per share and 322,800 stock
options at $.55 per share.
F-18
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE S - IMPAIRMENT OF ASSETS
The Company purchased its subsidiary, USX Operating Co., Inc., in February
1994. USX Operating owns and operates oil field drilling, production and
service equipment for outside parties as well as for Company projects.
During the fourth quarter of fiscal 1997 Company management decided to
discontinue its drilling and service business. In connection with this
decision, management identified certain equipment which will be liquidated.
Impairment of $19,000 was recorded to write down the equipment to be sold
to its net realizable value. Other equipment which will be retained and
used in the Company's operations were written down $131,000 to their
estimated fair value. Certain inventory held in connection with the
discontinued business was written down $32,000. In addition, the goodwill
recorded in connection with the purchase of USX Operating was written off.
Revenues received from outside parties in 1997 and 1996 for drilling and
contracting services were not significant.
The impairment provision in 1997 also includes a $41,432 write down of the
full cost pool, a $40,000 write down of the natural gas stripping plant and
the write off of $25,000 of other assets.
NOTE T - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1997 the company recorded additional
depletion of $140,000 and recorded a write down of the full cost pool of
$41,432. These adjustments were made based upon the March 31, 1997 reserve
study. Also in the fourth quarter, the Company decided to discontinue its
drilling and service business. As a result of that decision, the Company
made adjustments totaling $246,000 to write down equipment goodwill and
supplies inventory to their liquidation and or fair values. The Company
also recorded additional impairment of $65,000 to adjust the gas stripping
plant and other assets to their net realizable values.
NOTE U - OIL AND GAS INFORMATION (UNAUDITED)
The estimates of the Company's proved oil and gas reserves are based upon
evaluations prepared by independent petroleum engineers as of March 31,
1997 and 1996. All reserves are located within the United States. Reserves
are estimated in accordance with guidelines established by the Securities
and Exchange Commission and the Financial Accounting Standards Board which
require that reserve estimates be prepared under existing economic and
operating conditions with no provision for price and cost escalation except
by contractual arrangements. Proved reserves are estimated quantities of
oil and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs. Proved developed reserves are those which are expected to be
recovered through existing wells with existing equipment and operating
methods. Reserves are stated in barrels of oil and millions of cubic feet
of natural gas.
F-19
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE U - OIL AND GAS INFORMATION (UNAUDITED) - Continued
<TABLE>
<CAPTION>
1997 1996
-------------------------- -----------------------
Oil Gas Oil Gas
(bbls) (mmcf) (bbls) (mmcf)
------ ------ ------ ------
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves, beginning of year 1,797,319 9,500 82,032 6,448
Revisions of previous estimates (1,085,609) (3,180) 2,037 902
Production (88,114) (318) (59,177) (186)
Purchase of minerals in place 168,834 3,706 1,772,427 2,336
----------- -------- ---------- ------
Proved developed and undeveloped
reserves, end of year 792,430 9,708 1,797,319 9,500
=========== ======== ========== ======
Proved developed reserves
Beginning of year 668,532 4,324 69,347 1,988
=========== ======== ========== ======
End of year 647,870 6,377 688,532 4,324
=========== ======== ========== ======
</TABLE>
Included in proved undeveloped reserves at March 31, 1996 are the
Fitzpatrick leases which assumed the installation of a field-wide
waterflood project. Reserves of 1,351,000 barrels had been assigned to this
project at March 31, 1996.
During fiscal year 1997 the geological staff and engineering consultants of
the Company performed an analysis of the Fitzpatrick main and north lease
wells to determine the feasibility of installing the proposed field-wide
waterflood. The Company's analysis indicated that the Bartlesville
sandstone reservoir targeted for secondary recovery did not have
characteristics suitable for a large scale waterflood project and
expenditures for such a project would bear considerable risk. At the
conclusion of this analysis the Company and its independent engineering
consultants decided to remove the Fitzpatrick proved undeveloped oil
reserves from its proved oil reserves at March 31, 1997. The Company
intends to modify the waterflood program on the Fitzpatrick leases starting
with a smaller pilot project. Oil reserves for this modified program have
not yet been determined by the Company.
Geological and engineering estimates of proved oil and gas reserves at one
point in time are highly interpretive, inherently imprecise and subject to
ongoing revisions that may be substantial in amount. Although every
reasonable effort is made to ensure that the reserve estimates reported
represent the most accurate assessments possible, these estimates are by
their nature generally less precise than other estimates presented in
connection with financial statement disclosures.
F-20
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE U - OIL AND GAS INFORMATION (UNAUDITED) - Continued
Standardized measure of discounted future net cash flows - The following
schedules present the standardized measure of estimated discounted future
net cash flows from the Company's proved reserves and an analysis of the
changes in these amounts for the years indicated. Estimated future cash
flows are determined by using year-end prices for March 31, 1997 and 1996
adjusted only for fixed and determinable increases in natural gas prices
provided by contractual agreements. Estimated future production and
development costs are based on economic conditions at March 31, 1997 and
1996. The standardized measure of future net cash flows was prepared using
the prevailing economic conditions existing at March 31, 1997 and 1996 and
such conditions continually change. Accordingly, such information should
not serve as a basis in making any judgment on the potential value of
recoverable reserves or in estimating future results of operations.
<TABLE>
<CAPTION>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS RELATING TO PROVED RESERVES (UNAUDITED)
1997 1996
---- ----
<S> <C> <C>
Future cash inflows $ 27,126,992 $ 50,680,390
Future production and development costs (12,374,014) (16,310,051)
------------- ---------------
Future net cash flows before income taxes 14,752,978 34,370,339
Future income taxes (367,425) (6,771,724)
------------- ---------------
Future net cash flows 14,385,553 27,598,615
10% annual discount for estimated timing of
cash flows (4,848,224) (11,254,017)
------------- ---------------
Standardized measure of discounted future
net cash flows $ 9,537,329 $ 16,344,598
============= ===============
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOWS RELATING TO PROVED RESERVES (UNAUDITED)
1997 1996
---- ----
Amount at beginning of year $ 16,344,598 $ 2,612,411
Sales and transfers of oil and gas production,
net of production costs (1,442,617) (746,563)
Development costs incurred 111,386 160,625
Revisions of previous quantity estimates, net
of changes in previous estimates of develop-
ment and production costs and timing revisions (11,855,103) (177,833)
Purchase of minerals in place 2,390,684 14,666,467
Accretion of discount 560,286 1,169,783
Net changes in prices and production costs 168,571 2,018,430
Net change in income taxes 3,259,524 (3,358,722)
-------------- -------------
(6,807,269) 13,732,187
-------------- -------------
Amount at end of year $ 9,537,329 $ 16,344,598
============== =============
</TABLE>
F-21
<PAGE>
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1997 and 1996
NOTE V - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. Such information is
based on the requirements set forth in that Statement and does not purport
to represent the aggregate net fair value of the Company. The carrying
amounts are the amounts at which the financial instruments are listed in
the Company's balance sheet. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument:
Cash, cash equivalents, certificate of deposit and restricted cash: The
carrying amounts reported in the balance sheet for cash, cash equivalents,
certificate of deposit and restricted cash approximate their fair value.
Long-term debt: The carrying amount of the Company's long-term debt with a
variable rate approximated its fair value. The fair value of long-term debt
with fixed rates is estimated using a discounted cash flow calculation
using current rates. At March 31, 1996, there was no significant difference
between carrying amount and estimated fair value.
F-22
A list of wholly owned subsidiaries of the Company is as follows:
1. USX Operating Co., Inc., a corporation organized and existing
under the laws of the State of Kansas.
2. Producer Service Incorporated, a corporation organized and existing
under the laws of the State of Kansas.
3. Performance Petroleum Corporation, a corporation organized and
existing under the laws of the State of Colorado.
4. Pacific Osage, Inc., a corporation organized and existing under the
laws of the State of Oklahoma.
6. Argas, Inc., a corporation organized and existing under the laws of
the State of Kansas.
7. US Gas Gathering, Inc., a corporation organized and existing under
the laws of the State of Delaware.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 15,323,038
<SECURITIES> 0
<RECEIVABLES> 594,537
<ALLOWANCES> 0
<INVENTORY> 152,401
<CURRENT-ASSETS> 17,593,425
<PP&E> 11,810,870
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,913,119
<CURRENT-LIABILITIES> 531,003
<BONDS> 0
0
24,000,000
<COMMON> 831
<OTHER-SE> 7,381,285
<TOTAL-LIABILITY-AND-EQUITY> 31,913,119
<SALES> 4,425,634
<TOTAL-REVENUES> 4,513,387
<CGS> 831,011
<TOTAL-COSTS> 2,624,055
<OTHER-EXPENSES> 2,090,938
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307,455
<INCOME-PRETAX> (87,530)
<INCOME-TAX> 0
<INCOME-CONTINUING> (87,530)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (844,250)
<NET-INCOME> (87,530)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
