<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission file number 1-13513
UNITED STATES EXPLORATION, INC.
-----------------------------------------
(Exact name of small business issuer as specified in its charter)
Colorado 84-1120323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1560 Broadway, Suite 1900, Denver, Colorado 80202
- ------------------------------------------- -----
(Address or principal executive offices) (Zip Code)
(303) 863-3550
------------------------------------------------
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
- --------------------------------------------------------------------------------
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 XX No
----
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class of Stock Amount Outstanding
-------------- ------------------
Common Stock, $.0001 par value 15,480,192 shares outstanding
at November 20, 1998
<PAGE> 2
UNITED STATES EXPLORATION, INC.
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................... 3
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 11
Part II - OTHER INFORMATION................................................................... 21
SIGNATURES.................................................................................... 23
</TABLE>
2
<PAGE> 3
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 327,143 $ 15,988,152
Accounts receivable 3,513,660 561,016
Due from related parties 4,761 --
Inventory 12,785 14,889
Prepaid expenses and deposits 187,170 32,267
------------- -------------
Total current assets 4,045,519 16,596,324
PROPERTY AND EQUIPMENT, AT COST, NET
Oil and gas property and equipment 41,888,966 3,390,640
Natural gas gathering systems 1,365,004 1,367,266
Building and other equipment 521,263 392,645
------------- -------------
43,775,233 5,150,551
OTHER ASSETS
Land held for resale 700,000 700,000
Natural gas stripping plant -- 20,000
Equipment -- 10,000
Pipeline lease, less accumulated amortization
of $235,763 at September 30, 1998 and
of $197,871 at December 31, 1997 475,076 509,437
Loan costs, less accumulated amortization
of $26,773 at September 30, 1998 446,219 --
------------- -------------
1,621,295 1,239,437
------------- -------------
Total assets $ 49,442,047 $ 22,986,312
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Accounts payable $ 1,496,111 $ 371,888
Accrued liabilities 416,188 33,266
Due related parties 70,059 62,344
Dividends payable -- 460,200
Due bank under credit facility (Note G) 29,000,000 --
------------- ------------
Total current liabilities 30,982,358 927,698
STOCKHOLDERS' EQUITY
Preferred Stock - $.01 par value
Authorized - 100,000,000 shares
Issued and outstanding Series C Cumulative
Convertible - 573,166 shares at September 30,
1998 and 3,835,000 at December 31, 1997
(liquidation preference of $3,507,776) 3,438,996 23,010,000
Common Stock - $.0001 par value
Authorized - 500,000,000 shares
Issued and outstanding - 15,320,194 shares at
September 30, 1998 and 8,795,400 shares at
December 31, 1997 1,532 880
Capital in excess of par 32,097,069 12,523,345
Accumulated deficit (17,077,908) (13,475,611)
------------- ------------
Total stockholders' equity 18,459,689 22,058,614
------------- ------------
Total liabilities and stockholders' equity $ 49,442,047 $ 22,986,312
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Sale of purchased gas $ 53,315 $ 291,419 $ 661,905 $ 800,502
Sale of company produced oil
and gas 1,209,055 622,053 2,471,693 2,173,984
Contracting, drilling and oil
field supplies 16,155 29,486 34,406 177,220
----------- ----------- ----------- -----------
1,278,525 942,958 3,168,004 3,151,706
COSTS AND EXPENSES
Gas acquisition costs 17,704 198,308 335,868 511,380
Gathering and transmission costs 130,526 175,571 433,060 333,393
Production costs - oil and gas 709,261 322,124 1,507,354 1,082,512
Other operating costs 64,331 80,410 138,742 241,814
Depletion, depreciation, and 573,184 230,622 1,254,106 984,655
amortization
Provision for impairment of -- 1,276,008 145,000 1,597,405
assets
General and administrative
expenses 741,732 349,648 1,485,507 650,395
----------- ----------- ----------- -----------
2,236,738 2,632,691 5,299,637 5,401,554
----------- ----------- ----------- -----------
Loss from operations (958,213) (1,689,733) (2,131,633) (2,249,848)
OTHER INCOME (EXPENSE)
Interest income 9,126 226,706 301,095 683,833
Interest expense (570,649) (258) (853,201) (979)
Other 5,908 5,308 (1,985) 67,493
----------- ----------- ----------- -----------
(555,615) 231,756 (554,091) 750,347
----------- ----------- ----------- -----------
NET LOSS (1,513,828) (1,457,977) (2,685,724) (1,499,501)
Preferred Stock dividends
attributable to period (68,780) (480,000) (985,353) (1,440,000)
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders $(1,582,608) $(1,937,977) $(3,671,077) $(2,939,501)
=========== =========== =========== ===========
Basic and diluted loss per common
share $ (0.10) $ (0.23) $ (0.33) $ (0.35)
=========== =========== =========== ===========
Weighted average common shares
outstanding 15,320,194 8,373,966 11,015,848 8,353,541
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net loss $ (2,685,724) $ (1,499,501)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation, depletion and amortization 1,254,106 984,655
Provision for impairment of assets 145,000 1,597,405
Loss on sale of assets 8,716 19,852
Decrease (increase) in accounts receivable (2,952,644) 433,340
Decrease (increase) in due from related parties (4,761) 45,775
Decrease in inventory 2,104 146,297
Increase in prepaid expenses (154,903) (22,756)
Increase (decrease) in accounts payable
and accrued expenses 1,507,145 (384,026)
Increase in due to related parties 7,715 54,658
Stock issued as compensation -- 80,750
Provision for doubtful accounts -- 22,389
Other 1,997 (31,302)
------------ ------------
Net cash provided by (used in) operating activities (2,871,249) 1,447,536
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificate of deposit -- (1,500,000)
Capital expenditures (1,485,795) (146,605)
Proceeds from sale of equipment 43,065 256,629
Acquisition of oil and gas leases (38,497,265) (1,481,000)
Acquisition of companies, net of cash received -- (674,731)
------------ ------------
Net cash used in investing activities (39,939,995) (3,545,707)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable to bank -- (165,000)
Proceeds from debt 29,000,000 --
Loan costs related to acquisition financing (472,992) --
Dividend paid on Preferred Stock (1,376,773) (1,320,000)
Proceeds from exercise of stock options -- 100,500
------------ ------------
Net cash provided by financing activities 27,150,235 (1,384,500)
Net increase (decrease) in cash and cash equivalents (15,661,009) (3,482,671)
Cash and cash equivalents-beginning of period 15,988,152 18,565,460
------------ ------------
Cash and cash equivalents-end of period $ 327,143 $ 15,082,789
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - COMPANY HISTORY AND NATURE OF OPERATIONS
United States Exploration, Inc. (the "Company") was incorporated in 1989. The
Company is an independent producer of oil and gas and an operator of gas
gathering systems. The Company's operations are located in southern Kansas,
northern Oklahoma and, from May 15, 1998, in Colorado. See Note D.
The consolidated financial statements include the accounts of United States
Exploration, Inc. and its wholly owned subsidiaries Producers Service
Incorporated, Performance Petroleum Co., Pacific Osage, Inc., and United States
Gas Gathering Co., Inc. All significant intercompany transactions and balances
have been eliminated.
The foregoing financial information is unaudited. In the opinion of management,
the unaudited financial information includes all adjustments necessary to
reflect properly the results of operations for the interim periods presented.
The adjustments consist only of normal recurring accruals, except as described
in the following paragraph. The results of operations for the three months ended
September 30, 1998 and the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the year. The unaudited
results of operation and cash flows for the nine months ended September 30, 1998
include the Colorado properties acquired from Union Pacific Resources Company, a
subsidiary of Union Pacific Resources Group, Inc. ("UPR"), from May 15, 1998,
the closing date of the UPR transaction.
During 1997, the Company changed its fiscal year end from March 31 to December
31, resulting in a transition period of nine months from April 1, 1997 to
December 31, 1997. The unaudited statements of operations and cash flows for the
nine-month period ended September 30, 1997 include the quarter ended March 31,
1997 and the results for the quarter ended March 31, 1997 were derived by
subtracting the Company's results for the nine-month period ended December 31,
1996 from the results for the fiscal year ended March 31, 1997. As a result, the
statements included in this Report which include the unaudited statement of
operations and cash flows for the nine months ended September 30, 1997 reflect
all of the year-end audit adjustments for the fiscal year. Some of these
adjustments relate to the whole year rather than to the fiscal quarter.
Consequently, comparisons between the results of operations and cash flows of
the Company for the nine months ended September 30, 1997 and 1998 may not be
meaningful.
7
<PAGE> 8
NOTE B - FINANCIAL STATEMENTS
In accordance with applicable rules of the Securities and Exchange Commission,
substantially all footnotes relating to the condensed financial statements of
the Company have been omitted. The condensed financial statements should be read
in conjunction with the Company's audited financial statements contained in its
Annual Report on Form 10-KSB for the transition period ended December 31, 1997
and also in conjunction with the audited and unaudited financial statements
included in the Amendment to the Form 8-K filed in connection with the
acquisition of the Colorado properties from UPR.
NOTE C - 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 shares of Common Stock outstanding during each period presented.
NOTE D - ACQUISITION OF PROPERTIES
On May 15, 1998, the Company acquired from UPR, effective January 1, 1998, all
of UPR's working interests in producing oil and gas wells in 34 oil and gas
fields in the Wattenberg area of the Denver- Julesburg Basin in northeastern
Colorado. The purchase price for the wells was $41 million, subject to
accounting adjustments to reflect the revenues and operating costs of the wells
from the effective date to the closing date and to adjustments based on uncured
title matters. UPR's calculation of the final accounting adjustment, which will
result in a reduction of the purchase price, is approximately $1,100,000. The
Company has reviewed UPR's estimate and believes the accounting adjustments
should be approximately $300,000 higher. The final accounting adjustment is
scheduled for mutual approval in December 1998 and absent such mutual approval,
an independent auditor is to be appointed to review all calculations. In
addition, the Company expects to receive approximately $1,400,000 in adjustments
for uncured title matters, which will further reduce the purchase price. At the
closing of the acquisition, the Company also entered into an Exploration
Agreement with UPR giving the Company the right to explore and develop all of
UPR's undeveloped acreage in the area, excluding certain acreage already
committed to other agreements.
The producing properties acquired include 336 gross producing wells, which, on
the effective date of the acquisition, were producing 5.5 Mmcf. of gas and 640
barrels of oil per day net to UPR's interest. UPR acted as operator of 81 of the
producing properties and the Company has taken over those operations.
The Exploration Agreement covers approximately 400,000 gross acres and will also
cover any undeveloped acreage currently committed to another agreement that
reverts to UPR during its term. In order to keep the Exploration Agreement in
effect, the Company must drill 15 commitment wells during the first 18 months
and 20 commitment wells during each succeeding 12-month period for up to five
12-month option periods. If the Company does not drill the required number of
8
<PAGE> 9
commitment wells during any period, the Exploration Agreement will terminate at
the end of the period and the Company will be required to pay liquidated damages
of $125,000 for each commitment well that was not drilled during the period. In
addition, the Exploration Agreement requires UPR to transfer to the Company any
working interests in wells in the subject area that UPR acquires under existing
agreements during the term of the Exploration Agreement. That requirement covers
some existing wells in which UPR has the right to obtain a working interest or
convert an overriding royalty interest into a working interest after payout has
been reached and will cover other wells that may be drilled by operators with
whom UPR has existing farm-out or similar agreements. The Company also has the
right to take over wells on the UPR lands that are required to be offered to UPR
prior to abandonment.
In the case of minerals owned in fee by UPR, the Company was and will be granted
oil and gas leases under the purchase agreement and the Exploration Agreement.
In November, 1998, the Company entered into a Development Agreement with another
operator covering properties in which both companies own an interest which are
located in the Wattenberg area of the Denver-Julesburg Basin. The Agreement
provides for the deepening of as many as 86 wells. The Company estimates its
deepening program costs at approximately $8 million.
NOTE E - SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
Effective as of June 30, 1998, holders of 3,363,834 shares of Series C
Cumulative Convertible Preferred Stock have agreed to voluntarily convert their
stock to Common Stock. At September 30, 1998, the financial statements reflect
6,433,668 shares of Common Stock having been issued pursuant to this voluntary
arrangement, representing the Series C Preferred Stock certificates which had
been sent to the transfer agent for conversion as of that date. Since September
30, 1998, the Company has received certificates representing an additional
80,000 shares of the Series C Preferred Stock that the holders had previously
agreed to convert and will issue an additional 160,000 shares of Common Stock as
a result of that conversion. An additional 134,000 shares of Common Stock will
be issued when the Company receives the remaining 67,000 shares of Series C
Preferred Stock which holders have agreed in writing to convert. No quarterly
dividend was declared on the Series C Convertible Preferred Stock for the
quarter ended September 30, 1998.
NOTE F - DENVER, COLORADO OFFICE LEASE
The Company entered into a 10-year lease, effective July 1, 1998, for additional
office space. Approximately 12,000 square feet were leased with monthly payments
of $14,817 for the first 57 months and monthly payments of $19,411 for the
remainder of the lease term. The Company expects to spend approximately $125,000
for leasehold improvements relating to the additional office space during the
fourth quarter.
9
<PAGE> 10
NOTE G - CREDIT AGREEMENT
In connection with the acquisition of the UPR properties, the Company entered
into a Credit Agreement with ING (U.S.) Capital Corporation establishing a
revolving credit facility (the "Credit Agreement"). The maximum available
borrowings under the Credit Agreement are $35 million, subject to periodic
redeterminations of the borrowing base. The Company borrowed $29 million under
the Credit Agreement to pay a portion of the purchase price of the UPR
properties, and the balance was paid with the Company's existing funds.
Principal is repayable in 20 quarterly installments beginning March 31, 2000.
Interest is generally payable on a quarterly basis at a rate selected by the
Company which is determined by reference to LIBOR or the lender's reference rate
plus varying margins. At November 17, 1998, the outstanding loan balance of
$29.9 million bore interest at rates varying from 7.125% to 7.375% per annum.
The obligations of the Company under the Credit Agreement are secured by
substantially all of the Company's oil and gas properties. The Credit Agreement
prohibits the payment of dividends on Common Stock and prohibits the payment of
dividends on the Series C Preferred Stock for periods ending after June 30,
1999. Prior to June 30, 1999, no dividend can be paid on the Series C Preferred
Stock if a default under the Credit Agreement exists or would exist after the
payment. The Company intends to use additional borrowings under the Credit
Agreement to finance development work on the properties acquired.
At September 30, 1998, the Company did not meet certain financial ratios and net
worth requirements contained in the Credit Agreement. The Credit Agreement
requires the Company to have a ratio of EBITDA to interest expense of not less
than 2.75:1 and to maintain tangible net worth of at least $20 million. The
lender has not taken any action to accelerate the maturity of the loan and has
indicated to the Company that additional borrowings remain available up to the
$35 million maximum. However, the Company has not yet received a written waiver
of the covenant defaults as of the end of the third quarter. The Company does
not expect to be in compliance with these ratios and requirements at the end of
the fourth quarter. The Company has initiated discussions with the lender to
negotiate an amendment to the Credit Agreement to modify the ratios and
requirements to attainable levels while the Company further develops the UPR
properties to increase its revenues. Management believes that the Company will
be able to negotiate a satisfactory amendment with the lender. However, there
can be no assurance that the lender will agree to such an amendment. If the
Company is unable to negotiate such an amendment or to obtain waivers of
noncompliance, additional borrowings under the Credit Agreement would not be
available for the Company's planned capital expenditures and the Company would
be required to refinance the existing indebtedness. There can be no assurance
that the Company would be able to arrange such a refinancing.
As a result of the Company's failure to meet these ratios and requirements at
the end of the third quarter, the Company is required by generally accepted
accounting principles to classify the entire $29,000,000 due to the lender at
September 30, 1998 as a current liability, even though the loan is payable by
its terms over a five-year period beginning March 31, 2000. If the Company is
successful in negotiating an amendment to the Credit Agreement to eliminate the
noncompliance, the amount due to the lender will again be classified as a
long-term liability.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion is qualified in its entirety by reference to the
unaudited Financial Statements and Notes thereto presented elsewhere in this
report and the Company's Form 8-K filed April 17, 1998 and amended on July 29,
1998. The acquisition of the Colorado properties from UPR, the operations
contemplated by the Exploration Agreement and the borrowings under the Credit
Agreement have had and will continue to have a significant impact on the
Company. Accordingly, the following discussion of the Company's liquidity,
capital resources and results of operations at September 30, 1998 and for the
quarter and nine months then ended should not be considered indicative of the
Company's liquidity, capital resources or results of operations in future
periods.
The Company intends to develop the proved undeveloped reserves associated
with the properties acquired from UPR by deepening existing wells to known
productive reservoirs, recompleting wells in up-hole zones and drilling new
wells allowed under increased density drilling policies recently adopted by the
Colorado Oil and Gas Commission. Since the date of the acquisition, the Company
has been assimilating the properties acquired from UPR into its accounting and
operating systems, evaluating the development opportunities presented and
establishing relationships with other operators in the area to facilitate
development operations.
Most of the wells acquired from UPR are potentially productive from
multiple zones. However, the ownership of those zones is not uniform, which can
create obstacles to full development of the properties. For example, if the
operator of a well has no interest in a deeper formation that the Company wishes
to develop, the Company must negotiate an agreement with the operator to deepen
the well. The Company has been negotiating with the operators of wells in which
it owns an interest to provide a structure for accessing the various formations
from which the wells could produce without the need to drill new wells. It has
recently entered into an agreement with one operator pursuant to which the
Company contemplates the deepening of up to 86 wells to access proved
undeveloped reserves estimated at 16 billion cubic feet equivalent of gas. (See
"Liquidity and Capital Resources.") However, the need to negotiate such
agreements has delayed the progress of the Company's development efforts.
Management believes that the Company will be able to negotiate satisfactory
agreements with other operators to enable it to realize the value of its proved
undeveloped reserves.
Gas sales during the third quarter were lower than expected as a result
of a number of third-party operational problems, including compressor failures
and high pipeline pressures. Compressor problems and shut-ins resulting from a
leak in a third-party pipeline continued to adversely affect production in the
fourth quarter. However, these problems have been largely resolved and
production is returning to normal levels as of November 1998.
During 1997, the Company changed its fiscal year end from March 31 to
December 31, resulting in a transition period of nine months from April 1, 1997
to December 31, 1997. The unaudited statements of operations and cash flows for
the nine-month period ended September 30, 1997 include the quarter ended March
31, 1997 and the results of operation for the quarter ended
11
<PAGE> 12
March 31, 1997 were derived by subtracting the Company's results for the
nine-month period ended December 31, 1996 from the results for the fiscal year
ended March 31, 1997. As a result, the statements included in this Report which
include the unaudited statements of operations for the nine months ended
September 30, 1997 reflect all of the year-end audit adjustments for the fiscal
year. Some of these adjustments relate to the whole year rather than to the
fiscal quarter. Consequently, comparisons between the results of operations and
cash flows of the Company for the nine months ended September 30, 1997 and 1998
may not be meaningful.
Results of Operations -- Three-Month Period ended September 30, 1998
Sales of purchased gas for the three months ended September 30, 1998 were
$53,315 compared to $291,419 for the three months ended September 30, 1997. Gas
acquisition and gas gathering and transportation costs totaled $148,230 for the
three months ended September 30, 1998 compared to $373,879 for the three months
ended September 30, 1997. Although the Company purchases some gas along its
gathering systems in Oklahoma, most gas is purchased along its gathering systems
in southeast Kansas. The Company's gathering system in southeast Kansas was shut
in during June, 1998 and reactivated in October 1998. The reason for the shut-in
was that the average heating value of the gas moving through the gathering
system was too low. The Company has established a propane injection facility to
regulate the heating value of the transported gas in southeast Kansas. Sales of
purchased gas net of related direct costs have historically produced a small
profit or loss for the Company. The Company expects to continue to make a small
profit or loss on its gas gathering systems until more purchased gas is acquired
for resale. There can be no assurance that additional purchased gas will be
available in quantities that will materially affect the results of the Company's
operation of its gathering systems.
Sales of Company produced oil and gas for the three months ended
September 30, 1998 were $1,209,055 compared to $622,053 for the three months
ended September 30, 1997. The three months ended September 30, 1998 include
sales of oil and gas from the Colorado properties acquired from UPR in an
approximate amount of $925,000. Sales of oil and gas from the Company's other
properties declined from $622,053 for the 1997 quarter to approximately $284,000
for the 1998 quarter. Decreased production levels, lower product prices and the
shut-in of the gathering system in southeast Kansas were the main reasons for
this decline.
Income from contracting, drilling and oil field supplies for the three
months ended September 30, 1998 was $16,155 compared to $29,486 for the three
months ended September 30, 1997. This decrease reflects the Company's decision
in 1997 to close its supply store in Oklahoma and phase out its oilfield
servicing business. The results for the three months ended September 30, 1998
reflect only miscellaneous fees and operating fees charged other owners of the
properties located in Colorado.
Oil and gas production costs increased to $709,261 for the three months
ended September 30, 1998 from $322,124 for the three months ended September 30,
1997. Production costs for the 1998 quarter include approximately $466,000 for
production costs for the Colorado properties.
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Depletion, depreciation and amortization increased to $573,184 for the
three months ended September 30, 1998 from $230,622 for the three months ended
September 30, 1997. This increase is attributable to the addition of the cost of
the Colorado properties to oil and gas property and equipment. The Company's oil
and gas property and equipment is depreciated, depleted and amortized using the
full cost method of accounting.
The Company recorded a $1,276,008 provision for impairment of assets
during the three months ended September 30, 1997. The impairment was principally
related to the fair market value of land near Corpus Christi, Texas held for
resale.
General and administrative expenses were $741,732 for the three months
ended September 30, 1998 as compared to $349,648 for the three months ended
September 30, 1997. Most of this increase is attributable to increased staffing
and related costs incident to the expansion of the Company's operations as a
result of the acquisition of the Colorado properties from UPR. Approximately
$45,000 of this increase is directly attributable to the new office building
lease. (See Note F to unaudited Financial Statements.)
Interest income decreased from $226,706 for the three months ended
September 30, 1997 to $9,126 for the three months ended September 30, 1998. The
decrease is attributable to a reduced amount of cash, cash equivalents and
certificates of deposit available for investment. Approximately $11,000,000 of
the Company's cash and cash equivalents were used to pay a portion of the
purchase price for the Colorado properties acquired from UPR.
Interest expense increased to $570,649 for the three months ended
September 30, 1998 from $258 for the three months ended September 30, 1997. This
increase is attributable to the $29,000,000 borrowed in connection with the
Colorado properties acquisition.
Results of Operations - Nine-Month Period ended September 30, 1998
Sales of purchased gas for the nine months ended September 30, 1998 were
$661,905 compared to $800,502 for the nine months ended September 30, 1997. Gas
acquisition and gas gathering and transportation costs totaled $768,928 for the
nine months ended September 30, 1998 compared to $844,773 for the nine months
ended September 30, 1997. Sales for the nine months ended September 30, 1997
were affected by reclassification and audit adjustments for the year ended March
31, 1997, which cover more than three months. Although the Company purchases
some gas along its gathering system in Oklahoma, most gas is purchased along its
gathering system in southeast Kansas. The Company's gathering system in
southeast Kansas was shut in during June, 1998 and reactivated in October, 1998.
The reason for the shut-in was that the average heating value of the gas moving
through the gathering system was too low. The Company has established a propane
injection facility to regulate the heating value of the transported gas in
southeast Kansas. Sales of purchased gas net of related direct costs have
historically produced a small profit or loss for the Company. The Company
expects to continue to make a small profit or loss on its gas gathering systems
until more purchased gas is acquired for resale. There can be no assurance that
additional
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purchased gas will be available in quantities that will materially affect the
results of the Company's operation of its gathering systems.
Sales of Company produced oil and gas for the nine months ended September
30, 1998 were $2,471,693 compared to $2,173,984 for the nine months ended
September 30, 1997. The nine months ended September 30, 1998 include sales of
oil and gas from the Colorado properties in an approximate amount of $1,517,000
for the period May 16, 1998 through September 30, 1998. Sales of oil and gas
from the Company's other properties declined from $2,173,984 in the 1997 period
to approximately $955,000 for the 1998 period. Decreased production levels,
lower product prices and the shut-in of the gathering system in southeast Kansas
were the main reasons sales of Company produced oil and gas from the Kansas and
Oklahoma properties declined during the nine-month period ended September 30,
1998.
Income from contracting, drilling and oil field supplies for the nine
months ended September 30, 1998 was only $34,406 compared to $177,220 for the
nine months ended September 30, 1997. This decrease reflects the Company's
decision in 1997 to close its supply store in Oklahoma and phase out its
oilfield servicing business. The results for the nine months ended September 30,
1998 reflect only miscellaneous fees and operating fees charged other owners of
the properties located in Colorado.
Oil and gas production costs increased to $1,507,354 for the nine months
ended September 30, 1998 from $1,082,512 for the nine months ended September 30,
1997. Production costs for the 1998 period include approximately $669,000 for
the Colorado properties for the period May 16, 1998 through September 30, 1998.
Production costs for the Company's Oklahoma and Kansas properties decreased by
approximately $245,000 in the nine-month period ended September 30, 1998.
Depletion, depreciation and amortization increased to $1,254,106 for the
nine months ended September 30, 1998 from $984,655 for the nine months ended
September 30, 1997. This increase is attributable to the addition of the cost of
the Colorado properties to oil and gas property and equipment. The Company's oil
and gas property and equipment is depreciated, depleted and amortized using the
full cost method of accounting.
The Company recorded a $145,000 provision for impairment of assets during
the nine months ended September 30, 1998. The impairment reflects the
dismantling costs for a former refinery located on a portion of the land held
for resale. The Company recorded a provision for impairment of assets during the
nine months ended September 30, 1997 in the amount of $1,597,405 to reflect the
write-down of certain assets to estimated net realizable value and the write-off
of goodwill from a prior acquisition. The 1997 impairment provision was
principally related to the fair market value of the land held for resale but
also includes amounts related to the Company's decision to close its supply
store and oil field servicing facilities.
General and administrative expenses were $1,485,507 for the nine months
ended September 30, 1998 as compared to $650,395 for the nine months ended
September 30, 1997. Most of this
14
<PAGE> 15
increase is attributable to increased staffing and related costs incident to the
expansion of the Company's operations as a result of the acquisition of the
Colorado properties from UPR.
Interest income decreased from $683,833 for the nine months ended
September 30, 1997 to $301,095 for the nine months ended September 30, 1998. The
decrease is attributable to a reduced amount of cash, cash equivalents and
certificates of deposit available for investment. Approximately $11,000,000 of
the Company's cash and cash equivalents were used to pay a portion of the
purchase price for the Colorado properties acquired from UPR.
Interest expense increased to $853,201 for the nine months ended
September 30, 1998 from $979 for the nine months ended September 30, 1997. This
increase is attributable to the $29,000,000 borrowed in connection with the
Colorado properties acquisition.
Liquidity and Capital Resources
The Company's liquidity and capital resources have substantially changed
since December 31, 1997. The acquisition from UPR of the Colorado properties has
reduced cash, increased long term debt, increased accounts receivable, accounts
payable and accrued liabilities, increased oil and gas property and equipment
and increased loan costs which are being amortized over the life of the loan.
Capital Expenditures
The Company currently expects to expend up to $14 million to further
develop the UPR properties through the end of 1999. As part of that development
program, in November, 1998 the Company entered into an agreement with another
operator covering wells in which both companies own an interest in the
Wattenberg area of the Denver-Julesburg Basin. The agreement provides that
either party may propose the deepening of as many as 86 existing wells to access
proved undeveloped reserves assigned to the J Sand formation and the Dakota
formation owned by the parties. Deepening operations will be conducted only if
both parties agree to participate. The Company estimates its deepening program
costs for 86 wells at approximately $8 million. The program is expected to
increase the Company's proved developed producing reserves by approximately 16
billion cubic feet equivalent of natural gas. The agreement will allow the
participants to save between $50,000 and $150,000 per well compared to the cost
of drilling a new well to access the same reserves. In addition, the agreement
provides that up-hole zones may be accessed through existing wells that might
not be economic if the drilling of separate wells were required for their
exploitation.
The Company intends to use borrowings under the Credit Agreement, working
capital and cash from operations to fund its planned capital expenditures on the
properties acquired from UPR. In addition, the Company expects to receive a
refund from UPR on the purchase price of the UPR properties under the
post-closing adjustment provisions of the acquisition agreement. (See Note D to
the unaudited Financial Statements.) At September 30, 1998, the Company had
included in accounts receivable approximately $2,500,000 as its estimate of such
purchase price adjustments.
15
<PAGE> 16
The Company also expects to sign an agreement during the fourth quarter of 1998
which will monetize certain federal tax credits associated with properties
acquired in the UPR transaction. The cash proceeds to the Company are expected
to be approximately $1,000,000. The Company believes that these sources will be
adequate to fund its planned capital expenditures on the properties acquired
from UPR through 1999.
The Company intends to make arrangements with industry or financial
partners for the drilling of the commitment wells under the Exploration
Agreement entered into with UPR. (See Note D to unaudited Financial Statements.)
Although such arrangements have not been finally structured, the Company expects
its partners in these wells to provide the required capital.
With the exception of one gathering system in Oklahoma which is 50%
owned, the Company has substantially completed the repairs to gas gathering
systems and workovers of oil and gas wells in the Company's Kansas and Oklahoma
assets that commenced in the quarter ended September 30, 1997. The Company does
not expect to make material additional capital expenditures with respect to
those assets.
The Company continues efforts to dispose of real estate located near
Corpus Christi, Texas. A refinery located on a portion of the real estate has
been dismantled and all of the real estate has been listed for sale.
The Company also intends to continue to evaluate additional acquisitions
of producing and non-producing oil and gas properties that have exploration and
development potential. There can be no assurance that such activities will
result in any acquisition.
Credit Agreement
In connection with the acquisition of the UPR properties, the Company
entered into a Credit Agreement with ING (U.S.) Capital Corporation establishing
a revolving credit facility (the "Credit Agreement"). The maximum available
borrowings under the Credit Agreement are $35 million, subject to periodic
redeterminations of the borrowing base. The Company borrowed $29 million under
the Credit Agreement to pay a portion of the purchase price of the UPR
properties, and the balance was paid with the Company's existing funds.
Principal is repayable in 20 quarterly installments beginning March 31, 2000.
Interest is generally payable on a quarterly basis at a rate selected by the
Company which is determined by reference to LIBOR or the lender's reference rate
plus varying margins. At November 17, 1998, the outstanding loan balance of
$29.9 million bore interest at rates varying from 7.125% to 7.375% per annum.
The obligations of the Company under the Credit Agreement are secured by
substantially all of the Company's oil and gas properties. The Credit Agreement
prohibits the payment of dividends on Common Stock and prohibits the payment of
dividends on the Series C Preferred Stock for periods ending after June 30,
1999. Prior to June 30, 1999, no dividend can be paid on the Series C Preferred
Stock if a default under the Credit Agreement exists or would exist after the
payment. The Company intends to use additional borrowings under the Credit
Agreement to finance development work on the properties acquired.
16
<PAGE> 17
At September 30, 1998, the Company did not meet certain financial ratios
and net worth requirements contained in the Credit Agreement. The Credit
Agreement requires the Company to have a ratio of EBITDA to interest expense of
not less than 2.75:1 and to maintain tangible net worth of at least $20 million.
The lender has not taken any action to accelerate the maturity of the loan and
has indicated to the Company that additional borrowings remain available up to
the $35 million maximum. However, the Company has not yet received a written
waiver of the covenant defaults as of the end of the third quarter. The Company
does not expect to be in compliance with these ratios and requirements at the
end of the fourth quarter. The Company has initiated discussions with the lender
to negotiate an amendment to the Credit Agreement to modify the ratios and
requirements to attainable levels while the Company further develops the UPR
properties to increase its revenues. Management believes that the Company will
be able to negotiate a satisfactory amendment with the lender. However, there
can be no assurance that the lender will agree to such an amendment. If the
Company is unable to negotiate such an amendment or to obtain waivers of
noncompliance, additional borrowings under the Credit Agreement would not be
available for the Company's planned capital expenditures and the Company would
be required to refinance the existing indebtedness. There can be no assurance
that the Company would be able to arrange such a refinancing.
As a result of the Company's failure to meet these ratios and
requirements at the end of the third quarter, the Company is required by
generally accepted accounting principles to classify the entire $29,000,000 due
to the lender at September 30, 1998 as a current liability, even though the loan
is payable by its terms over a five-year period beginning March 31, 2000. If the
Company is successful in negotiating an amendment to the Credit Agreement to
eliminate the noncompliance, the amount due to the lender will again be
classified as a long-term liability.
Preferred Stock
Of the 4,000,000 shares of the Company's Series C Preferred Stock
originally issued, 573,166 shares remained outstanding at September 30, 1998.
The Company has received agreements from holders of an additional 147,000 shares
of its Series C Preferred Stock to voluntarily convert their shares into 294,000
shares of Common Stock as of June 30, 1998. Although the agreements to convert
have been received by the Company, the stock certificates had not been received
at September 30, 1998. Since that date, the Company has received the
certificates for 80,000 of these 147,000 shares. The Series C Preferred Stock
accrues cumulative dividends at the rate of 8% per annum. The Company's annual
dividend accrual will be decreased by approximately $1,684,000 as a result of
the conversion of Series C Preferred Stock to date. No dividend on the shares of
Series C Preferred that remain outstanding was declared for the third quarter of
1998. The decision not to declare the dividend was made in order to preserve the
Company's liquidity for the timely development of the UPR properties. No
dividend can be paid on the Series C Preferred Stock if a default under the then
Credit Agreement exists.
17
<PAGE> 18
Year 2000 Compliance
Year 2000 issues result from the inability of computer programs or
equipment to accurately calculate, store or use a date subsequent to December
31, 1999. This could result in a system failure or miscalculations causing
disruptions of the Company's operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
normal business operations. Year 2000 problems experienced by the Company's
suppliers and customers could also adversely affect the Company by delaying its
receipt of goods, services or payments.
The Company believes that its own computer systems are Year 2000
compliant. For reasons unrelated to Year 2000 issues, the Company acquired new
IBM hardware for all of its critical systems during 1998 and has been advised by
the vendor that the new equipment is Year 2000 compliant. The balance of the
Company's operating systems are PC-based and all PCs have been acquired within
the past two years. The Company's software system was purchased in 1992, but has
been continuously maintained by the software vendor, who has advised the Company
that the system is Year 2000 compliant. Accordingly, the Company does not expect
to incur any material costs associated with internal Year 2000 issues.
The Company is developing a program to have formal communications with
its significant suppliers, business partners and customers to determine whether
those third parties have addressed Year 2000 issues. The primary companies with
which the Company deals are large, publicly-held enterprises that can be
expected to be alert to Year 2000 issues as a result of regulatory pressures or
otherwise. However, there can be no assurance that the Company's receipt of
goods, services or payments will not be complicated or delayed as a result of
Year 2000 problems experienced by third parties, including its suppliers and
customers or others with whom its suppliers and customers deal.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Report contain "forward-looking statements" within the
meaning of the federal securities laws. Such forward-looking statements include,
without limitation, statements regarding the Company's need for working capital,
future revenues and results of operations and are identified by words such as
"anticipates," "plans," "expects" and "estimates." Factors that could cause
actual results to differ materially include, among others, the following:
Reserve Estimates. The Company's estimates of proved reserves of oil and
gas and future net cash flows therefrom are based on various assumptions and,
therefore, are inherently imprecise. Actual future production, revenue, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves may be subject to revision based upon production history,
results of future exploration and development, prevailing oil and gas prices,
operating costs and other factors.
Reliance on Key Personnel. The Company is dependent upon its executive
officers and key employees, particularly Bruce D. Benson, its Chief Executive
Officer. The unexpected loss of the
18
<PAGE> 19
services of one or more of these individuals could have a detrimental effect on
the Company. The Company does not have key person life insurance on any of its
officers.
Management of Growth. The acquisition of the UPR properties resulted in a
substantial change in the size and extent of the Company's assets and
operations. In order to accommodate this growth, the Company is expanding its
staffing, office space and management information systems. The Company could
experience temporary difficulties in the course of assimilating the new
properties and managing the growth within the Company. Any such difficulties
could adversely affect the Company's business, financial condition or results of
operations until resolved.
Availability of Services and Materials. The Company's expanded operations
will require significantly higher levels of third-party services and materials.
Such services and materials have at times been scarce and the unavailability of
a sufficient number of drilling rigs or other goods or services could impede the
Company's ability to achieve its objectives and significantly increase the costs
of its operations.
Increased Debt. The Company's ability to service the debt incurred under
the Credit Agreement is in part dependent upon increasing its cash flows from
the UPR properties through further development work. The Company's ability to
conduct that further development work is, in turn, dependent upon the
availability of adequate capital and its ability to enter into appropriate
agreements with the operators of wells in which it owns an interest to deepen or
recomplete the wells for production from additional zones. Although the Company
believes that its cash flows will be sufficient to service the new debt, the
higher levels of debt may adversely affect the Company's ability to obtain
additional financing for working capital, capital expenditures and other
purposes, should it need to do so, or to acquire additional oil and gas
properties utilizing new borrowings.
Oil and Gas Prices and Markets. The Company's revenues are dependent upon
prevailing prices for oil and gas. Oil and gas prices can be extremely volatile.
Prevailing prices are also affected by the actions of foreign governments,
international cartels and the United States government. Any significant decline
in oil and gas prices would adversely affect the Company's revenues and
operating income and could result in a reduction in the estimated proved
reserves attributable to the Company's properties, with a resulting decrease in
the Company's borrowing ability. In addition, the Company's revenues depend upon
the marketability of production, which is influenced by the availability and
capacity of gas gathering systems and pipelines, as well as the effects of
federal and state regulation and general economic conditions.
Government Regulation. The production and sale of oil and gas are subject
to various federal, state and local governmental regulations, which may be
changed from time to time in response to economic or political conditions.
Matters subject to regulation include discharge permits for drilling operations,
drilling bonds, reports concerning operations, the spacing of wells, unitization
and pooling of properties, taxation and environmental protection. From time to
time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and gas wells below actual
production capacity in order to conserve supplies of oil and gas. Changes in
19
<PAGE> 20
these regulations or the failure to obtain regulatory approval for planned
increased density drilling on the UPR properties could have a material adverse
effect on the Company and its ability to achieve its objectives with respect to
the UPR properties.
Most of these factors are beyond the control of the Company. Investors
are cautioned not to put undue reliance on forward-looking statements.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
The Credit Agreement referenced in Note D to the Financial Statements
prohibits the payment of dividends on Common Stock and prohibits the payment of
dividends on the Series C Preferred Stock for periods ending after June 30,
1999. Prior to June 30, 1999, no dividend can be paid on the Series C Preferred
Stock if a default under the Credit Agreement exists or would exist after the
payment.
Item 3. Default Upon Senior Securities.
(a) See Note D to the unaudited Financial Statements for a description
of certain covenant defaults under the Company's Credit Agreement with ING
(U.S.) Capital Corporation.
(b) The Company has not declared a quarterly dividend for the three
months ended September 30, 1998 on its unregistered Series C Convertible
Preferred Stock. The amount of the dividend not declared was $68,780 and was
computed using the total number of Series C Convertible Preferred Shares
outstanding at September 30, 1998. The conversion of an additional 80,000 shares
of Series C Preferred Stock has been completed since September 30, 1998 and the
holders of an additional 67,000 shares have agreed in writing to convert their
shares as of June 30, 1998, but have not yet surrendered the certificates
representing those shares to the Company.
Item 5. Other Information.
The Company has adopted a Directors' Fee Stock Plan whereunder Directors'
fees are paid in common stock of the Company rather than in cash. The number of
shares issued each year is based upon the average of the market price of the
common stock on the first and last trading days of the year.
The Company has also adopted amended and restated versions of its 1989
Incentive Stock Option Plan and its 1990 Nonqualified Stock Option Plan. The
amended and restated plans cure certain internal inconsistencies in the original
plans and update them to comply with changes in applicable tax and securities
laws. In the opinion of management, these changes were not material and did not
require shareholder approval.
21
<PAGE> 22
The foregoing plans are filed as exhibits to this report.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits:
10.1 Directors' Fee Stock Plan
10.2 Amended and Restated 1989 Incentive Stock Option Plan
10.3 Amended and Restated 1990 Nonqualified Stock Option Plan
27 Financial Data Schedule
B. Reports on Form 8-K:
None.
22
<PAGE> 23
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 to be signed on
its behalf by the undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
UNITED STATES EXPLORATION, INC.
<S> <C> <C> <C>
Date: November 23, 1998 By: /s/ Bruce D. Benson
----------------------------- --------------------
Bruce D. Benson, President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: November 23, 1998 By: /s/ F. Michael Murphy
----------------------------- ----------------------
F. Michael Murphy, Vice President,
Secretary and Chief Financial Officer
(Principal Financial Officer)
</TABLE>
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 Directors' Fee Stock Plan
10.2 Amended and Restated 1989 Incentive Stock Option Plan
10.3 Amended and Restated 1990 Nonqualified Stock Option Plan
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
------------
DIRECTORS' FEE STOCK PLAN
UNITED STATES EXPLORATION, INC.
1. Purpose. This Directors' Fee Stock Plan (the "Plan")
has been established effective as of April 1, 1998 by United States Exploration,
Inc. (the "Company") to enable the Company to pay the compensation of its
Directors in shares of the Company's Common Stock, thereby providing for or
increasing the Directors' proprietary interest in the Company. The Plan provides
for the issuance of shares of Common Stock of the Company ("Common Stock") on an
annual basis in accordance with the terms and conditions set forth below.
2. Number of Shares. Compensation due to each Director of
the Company in his capacity as such, including compensation for committee
membership (collectively, "Directors Fees"), for each calendar year shall be
paid to the Director in shares of Common Stock ("Shares"). The number of Shares
to be issued to each Director each year shall be determined by dividing the
amount of Directors Fees due such Director for the year by the Average Fair
Market Value (as defined below) of the Company's Common Stock for the year. For
that purpose, (i) the Average Fair Market Value of the Common Stock shall equal
the arithmetic average of the Fair Market Values of the Common Stock on the
first trading day of the year and the last trading day of the year and (ii) the
Fair Market Value of the Common Stock shall mean the closing price of the Common
Stock on the principal stock exchange on which it is then traded or, if the
Common Stock is not then traded on an exchange, the closing price of the Common
Stock as reported by Nasdaq, or if closing prices for the Common Stock are not
then reported by Nasdaq, the average of the bid and asked prices of the Common
Stock as reported by Nasdaq, or, if no bid and asked prices are reported by
Nasdaq, the average of the bid and asked prices as reported by any other source
selected by the Company's Board of Directors. The number of Shares due a
Director shall be rounded up to the next whole Share in the event such
determination results in a fraction of a Share. For the 1998 calendar year, the
first trading day shall be deemed to be April 1, 1998. In the event a Director's
service on the Board shall terminate for any reason during a year, the number of
Shares to be issued for such partial year's service shall be determined by
calculating the Average Fair Market Value using the Fair Market Values of the
Common Stock on the first trading day of the year and the date that the
Director's service terminated (or if such date is not a trading day, the next
preceding trading day). In the event that a Director is first elected during a
year, the number of Shares to be issued for such partial year's service shall be
determined by calculating the Average Fair Market Value using the Fair Market
Values of the Common Stock on the first day of the Director's terms as such (or,
if such day is not a trading day, the next succeeding trading day) and the last
trading day of the year. As used in this Plan, trading day means a day upon
which the American Stock Exchange is open for trading. In the event of any stock
dividend, stock split or other subdivision or combination of the Company's
outstanding shares of Common Stock, the Fair Market Value of the Common Stock on
any date prior to the effective date thereof shall be appropriately adjusted.
Directors' Fees shall not include expenses for which the Directors are entitled
to reimbursement, which shall be payable in cash.
<PAGE> 2
3. Issuance of Shares. Subject to Section 4, Shares
issuable under this Plan in respect of each year shall be issued to the
Directors within 30 days after the end of the year. In the event a Director's
service on the Board shall terminate for any reason during a year, subject to
Section 4, certificates representing the Shares due for the partial year shall
be issued within 30 days after such termination. Notwithstanding the actual date
of issuance of the certificates representing the Shares, and subject to Section
4, a Director shall be deemed for all purposes the registered holder of the
Shares due for any year or partial year as of January 1 of the following year
or, if such Director's service terminated prior to the end of the year, as of
the first business day following such termination of service.
4. Securities Law Compliance. Notwithstanding any other
provision of the Plan, the Company shall not be obligated to issue any Shares
unless and until, in the opinion of the Company's counsel, there has been
compliance with all applicable federal and state securities laws and regulations
and only when all other legal matters in connection with the issuance and
delivery of such Shares have been approved by the Company's counsel. The Company
shall use its best efforts to effect any such compliance, and each Director
shall take any action reasonably requested by the Company in connection
therewith; provided, however, that in no event shall the Company be required to
file a registration statement under the Securities Act of 1933 (the "Securities
Act") or any state securities law to satisfy its obligation to use its best
efforts to effect such compliance. If the Shares have not been registered under
the Securities Act at the time of issuance, Shares shall be issued only upon
delivery by the Director to the Company of an investment letter and agreement
signed by the Director containing such representations, warranties and covenants
as the Committee may deem necessary to establish the availability of an
exemption from the registration requirements of the Securities Act and all
applicable state securities laws, which, until amended by the Board of
Directors, shall be substantially in the form attached as Exhibit A.
5. Establishment of Directors' Fees. The Board of
Directors may from time to time establish the amount of Directors' Fees payable
to each Director. Directors' Fees may be payable on an annual, per-meeting or
other basis selected by the Board of Directors.
6. Death of Director. In the event that a Director dies
while in office, any Shares issuable under the Plan shall be issued to the
Director's estate.
7. Amendment of Plan. The Board of Directors may amend the
Plan from time to time. No amendment shall adversely affect a Director's right
to receive Shares issued or issuable under the Plan in respect of any completed
year without the written consent of the affected Director.
8. Interpretation of Plan. The Plan shall be administered
and interpreted by the Board of Directors. Any determination by the Board as to
the meaning or operation of the Plan shall be binding on all Directors.
9. Effective Date. The Plan shall be effective as of April
1, 1998, and shall apply to all Directors' Fees due in respect of periods
commencing on or after that date unless and until amended by the Board of
Directors.
- 2 -
<PAGE> 3
10. Termination. The Board of Directors may terminate the
Plan at any time, but such action shall have no effect on Shares issued or
issuable for any completed year.
The foregoing Plan was duly adopted by
the Board of Directors on June 29, 1998
/s/ F. Michael Murphy
-----------------------------------------
F. Michael Murphy, Secretary
- 3 -
<PAGE> 1
EXHIBIT 10.2
UNITED STATES EXPLORATION, INC.
AMENDED AND RESTATED
1989 INCENTIVE STOCK OPTION PLAN
WHEREAS, the Board of Directors and shareholders of United States
Exploration, Inc., formerly known as Akiyama Financial Corporation (the
"Company"), previously adopted and approved a 1989 Incentive Stock Option Plan
(the "Plan") for the benefit of key employees and to advance the best interests
of the Company; and
WHEREAS, the Company desires to amend and restate the Plan to reflect
certain changes in applicable law since the date of its adoption and to cure
certain ambiguities.
NOW THEREFORE, the Company hereby amends and restates the Plan as
follows:
ARTICLE I
PURPOSE OF PLAN
This AMENDED AND RESTATED 1989 INCENTIVE STOCK OPTION PLAN (the "Plan")
of United States Exploration, Inc. (the "Company") for executive and other key
employees of the Company, is intended to advance the best interests of the
Company by providing those persons who have a substantial responsibility for its
management and growth with additional incentive and by increasing their
proprietary interest in the success of the Company, thereby encouraging them to
remain in its employ. Further, the availability and offering of Incentive Stock
Options under the Plan supports and increases the Company's ability to attract
and retain individuals of exceptional managerial talent upon whom, in large
measure, the sustained progress, growth and profitability of the Company
depends.
ARTICLE II
DEFINITIONS
For Plan purposes, except where the context might clearly indicate
otherwise, the following terms shall have the meanings set forth below:
"Act" shall mean the Securities Exchange Act of 1934 and the rules
promulgated thereunder, as heretofore or hereafter amended.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, and the rules and
regulations promulgated thereunder, as heretofore or hereafter amended.
<PAGE> 2
"Committee" means one or more of the committees described below.
Members of the Committee shall serve at the pleasure of the Board and may resign
at any time upon written notice to the Board.
(a) Generally: If paragraphs (b) and (c) below are not
applicable, the "Committee" shall consist of one or more members of the
Board and/or such other person or persons as may be appointed from time
to time by the Board, or the entire Board if no such Committee has been
appointed.
(b) For Reporting Persons: With respect to the grant or
administration of any Options granted under the Plan to persons who are
subject to the reporting requirements under Section 16(a) of the Act,
unless the Board determines otherwise, the Committee shall be
constituted so as to comply with Rule 16b-3 promulgated under the Act
and shall consist of (a) two non-employee directors (as defined in Rule
16b-3) or (B) the entire Board ("16b-3 Committee"); provided that if a
16b-3 Committee is not required for such grant or grants to meet the
exemption requirements under 16b-3, then this sentence shall not be
applicable.
(c) For Compliance with Code Section 162(m): With respect to
the grant or administration of any Options granted under the Plan to a
person subject to Code Section 162(m) and for which the Board
determines, in its discretion, that compliance with Code Section 162(m)
is necessary or desirable, the Committee shall be constituted so as to
comply with Code Section 162(m) and the Treasury Regulations thereunder
and shall consist of two or more outside directors and no other person;
provided that if a 162(m) Committee is not required for such grant or
grants to meet the conditions of Code Section 162(m), then this
sentence shall not be applicable.
"Common Shares" shall mean the common shares of the Company, $.0001 par
value per share, or, in the event that the outstanding common shares are
hereafter changed into or exchanged for different shares or securities of the
Company, such other shares or securities.
"Fair Market Value" shall mean, as of any date, the closing price of
the Common Shares on the principal market in which they are then traded on the
last trading day preceding such date or, if no closing price is reported for the
Common Shares on such trading day, on the next preceding trading day on which a
closing price was reported, as reported by such responsible source as the
Committee may select. In the event that closing prices for the Common Shares are
not being reported at the time that Fair Market Value is determined, the
Committee may determine the Fair Market Value in such other manner as it may
deem more equitable for Plan purposes or as is required by applicable laws or
regulations.
"Incentive Stock Option" or "ISO" shall mean a stock option which is
intended to meet and comply with the terms and conditions for an 'incentive
stock option' as set forth in Section 422 of the Code.
-2-
<PAGE> 3
"Optionee" shall mean an employee of the Company who has been granted
one or more Incentive Stock Options under the Plan.
"Stock Option Agreement" shall mean the agreement between the Company
and the Optionee under which the Optionee may purchase Common Shares hereunder.
"10% Shareholder" shall mean an employee who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any parent or subsidiary company, as defined in Section 424(e) and
424(f) of the Code. Attribution rules under Section 424(d) of the Code are
applicable to determine whether the 10% ownership rule is satisfied.
ARTICLE III
ADMINISTRATION OF THE PLAN
1. The Committee shall administer the Plan and accordingly, it shall
have full power to grant Incentive Stock Options, construe and interpret the
Plan, establish rules and regulations and perform all other acts, including the
delegation of administrative responsibilities, it believes reasonable and
proper.
2. The determination of those eligible to receive Incentive Stock
Options and the number of shares covered by and the timing of exercisability of
each stock option and the terms and conditions of the respective stock option
agreements shall rest in the sole discretion of the Committee, subject to the
provisions of the Plan.
3. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in the Plan, or in any Incentive Stock Option
granted hereunder, in the manner and to the extent it shall deem necessary to
carry it into effect.
4. Any decision made, or action taken, by the Committee or the Board
arising out of or in connection with the interpretation and administration of
the Plan shall be final and conclusive.
5. Meetings of the Committee shall be held at such times and places as
shall be determined by the Committee. A majority of the members of the Committee
shall constitute a quorum for the transaction of business, and the vote of a
majority of those members present at any meeting shall decide any question
brought before that meeting. In addition, the Committee may take any action
otherwise proper under the Plan by the affirmative vote, taken without a
meeting, of a majority of its members.
6. No member of the Committee shall be liable for any act or omission
of any other member of the Committee or for any act or omission on his own part,
including, but not limited to, the exercise of any power or discretion given to
him under the plan, except those resulting from his own gross negligence or
willful misconduct.
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<PAGE> 4
7. The Plan shall be administered in such a manner as to permit the
Incentive Stock Options granted hereunder to qualify as "Incentive Stock
Options" as described in Section 422 of the Code and, to the extent practical,
such that the grant of options shall qualify for the exemption provided by Rule
16b-3(d) of the Act.
8. The Company, through its management shall supply full and timely
information to the Committee on all matters relating to eligible employees,
their duties and performance, and current information on death, retirement, and
disability or other termination of employment of Optionees, and such other
pertinent information as the Committee may require. The Company shall furnish
the Committee with such clerical and other assistance as is necessary in the
performance of its duties hereunder.
ARTICLE IV
SHARES SUBJECT TO THE PLAN
1. The total number of Common Shares available for grants of Incentive
Stock Options under the Plan shall be 1,000,000 Common Shares, subject to
adjustment in accordance with Article VII of the Plan, which shares may be
either authorized but unissued or reacquired Common Shares of the Company.
2. If an Incentive Stock Option or portion thereof shall expire or
terminate for any reason without having been exercised in full, the unpurchased
shares covered by such ISO shall be available for future grants of Incentive
Stock Options.
ARTICLE V
GRANT OF OPTIONS
1. Consistent with the Plan's purpose, Incentive Stock Options may be
granted to employees of the Company and any parent or subsidiary of the Company
who are performing or who have been engaged to perform services of special
importance to the management, operation or development of the Company or any
parent and subsidiary of the Company. Included as eligible employees are
officers of the Company, including those who are also members of the Board.
Nonemployee members of the Board shall not be eligible for ISO grants.
2. Any Incentive Stock Option granted to an employee who at the time of
grant is a 10% Shareholder shall meet the terms of Section 422(c)(5) of the
Code.
ARTICLE VI
STOCK OPTION TERMS AND CONDITIONS
1. All Incentive Stock Options granted under the Plan shall be
evidenced by agreements which shall be subject to applicable provisions of the
Plan, and such other provisions as the Committee may adopt, including the
provisions set forth in paragraphs 2 through 11 of this Article VI.
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<PAGE> 5
2. The option price per share shall not be less than 100% of the Fair
Market Value of a Common Share on the date of grant and the Committee, in its
discretion, may specify a higher price than the Fair Market Value. The price at
which shares may be purchased by a 10% Shareholder shall be not less than 110%
of the fair market value of the Common Shares on the date the option is granted.
3. All Incentive Stock Options granted hereunder must be granted within
ten years from the earlier of the date this Plan is adopted or approved by the
Company's shareholders.
4. No Incentive Stock Option granted hereunder shall be exercisable
after the expiration of 10 years from the date such ISO is granted; provided,
however, that no ISO granted to any 10% Shareholder shall be exercisable after
the expiration of five years from the date such ISO is granted. The Committee,
in its discretion, may provide that an option shall be exercisable during all or
any portion of such ten- or five-year period or during any lesser period of
time.
The Committee may establish installment exercise terms for an Incentive
Stock Option such that the ISO becomes exercisable in a series of cumulating
portions or upon the happening of a specified event or condition.
5. An Incentive Stock Option, or portion thereof, shall be exercised by
delivery of (i) a written notice of exercise to the Company specifying the
number of Common Shares to be purchased, and (ii) payment of the full price of
such Common Shares, as fully set forth in paragraph 6 of this Article VI.
Until the Common Shares represented by an exercised ISO are issued to
an Optionee, he shall have none of the rights of a shareholder.
6. The price of an exercised Incentive Stock Option, or portion
thereof, may be paid:
A. In United States dollars, in cash or by cashier's check,
certified check, bank draft or money order, payable to the order of the
Company in an amount equal to the option price; or
B. At the discretion of the Committee, through the delivery of
fully paid and nonassessable Common Shares, with an aggregate Fair
Market Value as of the date of the ISO exercise equal to the option
price or any other form of "cashless" exercise; or
C. By a combination of both A and B above.
The Committee shall determine acceptable methods for tendering Common
Shares as payment upon exercise of an Incentive Stock Option and may impose such
limitations and prohibitions on the use of Common Shares to exercise an ISO as
it deems appropriate.
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<PAGE> 6
7. Except for grants of Incentive Stock Options described in Article
VII, no person may be granted Incentive Stock Options covering more than 3% of
outstanding Common Shares in any calendar year (in each case as adjusted as
provided in Article VII).
8. Except by will or the laws of descent and distribution, no right or
interest in any Incentive Stock Option granted under the Plan shall be
assignable or transferable, and no right or interest of any Optionee shall be
liable for, or subject to, any lien, obligation or liability of the Optionee.
Incentive Stock Options shall be exercisable during the Optionee's lifetime only
by the Optionee or the duly appointed legal representative of an incompetent
Optionee.
9. Unless otherwise provided in the Option Agreement, in the event an
Optionee shall cease to be employed by the Company, die, or become permanently
or totally disabled (within the means of Section 72(m)(7) of the Code) while he
is holding one or more Incentive Stock Options, each ISO held shall expire at
the earlier of the expiration of the Incentive Stock Option's term or the
following:
A. If the termination of Optionee's employment occurs for any
reason other than death or disability, such Optionee shall have the
right to exercise the ISO for three months after such termination date,
but not later than the expiration date of the ISO, to the extent that
it was exercisable on the date of such termination of employment; or
B. If the Optionee shall die or become disabled while employed
by the Company or during a three-month period after termination of such
employment while an ISO is exercisable under A. above, the personal
representative or administrator of the Optionee's estate or the
person(s) to whom an ISO granted hereunder shall have been validly
transferred by such personal representative or administrator pursuant
to the Optionee's will or the laws of descent and distribution, shall
have the right to exercise the ISO for one year after the date of the
Optionee's death, but not later than the expiration date of the ISO, to
the extent such ISO was exercisable on the date of the termination of
such Optionee's employment.
No transfer of an Incentive Stock Option by the will of an Optionee or
by the laws of descent and distribution shall be effective to bind the Company
unless the Company shall have been furnished with written notice thereof and an
authenticated copy of the will and/or such other evidence as the Committee may
deem necessary to establish the validity of the transfer and the acceptance by
the transferee of the terms and conditions of such Incentive Stock Option.
10. For the purposes of this paragraph, it shall not be considered a
termination of employment when an Optionee is placed by the Company on military
or sick leave or such other type of leave of absence which is considered by the
Committee as continuing intact the employment relationship of the Optionee. In
case of such leave of absence, the employment relationship shall be continued
until the later of the date when such leave equals 90 days or the date when the
Optionee's right to re-employment with the Company shall no longer be guaranteed
either by statute or contract.
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<PAGE> 7
11. Notwithstanding any other provision of the Plan, in the case of any
ISO granted under the Plan, the following provisions will apply:
A. The aggregate Fair Market Value of the Common Shares,
determined as of the time the ISO is granted, for which any Optionee
may be granted Incentive Stock Options under the Plan or any other plan
of the Company or of any corporation which is a parent or subsidiary
corporation (as defined in Code Sections 424(e) and 424(f)) which are
first exercisable in any calendar year shall not exceed $100,000,
computed in accordance with Section 422(d) of the Code; and
B. Any Optionee who disposes of Common Shares acquired on the
exercise of an ISO by sale or exchange either (i) within two years
after the date of the grant of the ISO under which the stock was
acquired, or (n) within one year after the acquisition of such Shares,
shall notify the Company of such disposition and of the amount realized
upon such disposition. The transfer of Common Shares may also be
restricted by applicable provisions of the Securities Act of 1933, as
amended.
ARTICLE VII
CORPORATE CHANGES
1. The number of shares and purchase price of Stock previously made
subject to an ISO and the aggregate number of shares available for issuance
under the Plan shall be proportionately adjusted in the event of any stock
dividend, stock split, reverse stock split or other division or combination of
outstanding Common Shares as determined by the Committee.
2. In the event of a merger or consolidation to which the Company is a
party and as a result of which the stockholders of the Company immediately prior
to the transaction will own less than a majority of the combined voting power
and ownership interest of the surviving corporation immediately after the
transaction [i] all outstanding Incentive Stock Options, whether or not
otherwise exercisable, shall become fully exercisable in respect of all Common
Shares covered thereby immediately prior to the effective time of the
transaction, contingent upon the consummation of the transaction, and [ii] any
Incentive Stock Options not exercised prior to the transaction shall
automatically terminate at the effective time of the transaction. The Committee
shall make such arrangements as it deems appropriate to allow Optionees to
exercise their Incentive Stock Options contingent upon the consummation of the
transaction, including, without limitation, establishing a cut-off date in
advance of the effective time of the transaction by which Incentive Stock
Options must be exercised. In the event that the transaction is not ultimately
consummated, all exercises of Incentive Stock Options pursuant to this provision
shall be of no force or effect, the Company shall return to the Optionees all
notices of exercise, payments and other documents received by it in connection
with such exercise and all Incentive Stock Options shall be exercisable only 'in
accordance with their original terms.
-7-
<PAGE> 8
3. In the event of a sale of all or substantially all of the property
of the Company, the sale or exchange by the Company or any one or more
stockholders of the Company of Common Shares constituting 50% or more of the
Common Shares outstanding immediately following such sale or exchange, or the
dissolution or liquidation of the Company, the Committee may, in its discretion,
take such action with respect to outstanding Incentive Stock Options as it deems
appropriate, including, without limitation [i] accelerating the exercisability
thereof, subject to such procedures and conditions as it may determine, [ii]
providing for the termination of all unexercised Incentive Stock Options as of
the effective date of the transaction or any other date established by the
Committee, [iii] providing for the conversion of outstanding Incentive Stock
Options into options or other rights to acquire stock or other securities or
property of any entity acquiring all or any portion of the Company's property or
any Common Shares in the transaction, or any Affiliate of such an entity, on
terms deemed reasonable by the Committee in its sole discretion, or [iv] making
cash payments to Optionees in settlement of their Stock Option in an amount
equal to the difference between the Fair Market Value of the Stock for which
they are then exercisable, or for all of the Common Shares covered thereby, as
the Committee may determine, and the Stock Option Price thereof. The Committee
shall not be required to take any of the foregoing actions and shall not be
required to treat all outstanding Stock Options in the same manner.
4. If, upon any exercise of a Stock Option, a fractional share of Stock
would otherwise be issuable, the Company shall, in lieu of issuing the
fractional share, pay the Optionee in cash the Fair Market Value thereof as of
the date the Stock Option was exercised.
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
1. The Board, without further approval of the shareholders, may at any
time, and from time to time, suspend or terminate the Plan in whole or in part
or amend it from time to time in such respects as the Board may deem appropriate
and in the best interest of the Company; provided, however, that no such
amendment shall be made which would, without approval of the shareholders:
A. Materially modify the eligibility requirements for
receiving Incentive Stock Options;
B. Increase the total number of Common Shares which may be
issued pursuant to Incentive Stock Options, except as is provided for
in accordance with Article VII under the Plan;
C. Reduce the minimum option price per Share;
D. Extend the period of granting Incentive Stock Options; or
E. Materially increase in any other way the benefits accruing
to Optionees;
unless such approval is not required by the Code.
-8-
<PAGE> 9
2. No amendment, suspension or termination of this Plan shall, without
the Optionee's consent, alter or impair any of the rights or obligations under
any Incentive Stock Option theretofore granted to him under the Plan.
3. No ISO may be granted during any suspension of the Plan or after
termination of the Plan.
ARTICLE IX
GOVERNMENT AND OTHER REGULATIONS
1. The obligation of the Company to issue, transfer and deliver Common
Shares for Incentive Stock Options exercised under the Plan shall be subject to
all applicable laws, regulations, rules, orders and approval which shall then be
in effect and required by the relevant stock exchanges on which the Common
Shares are traded and by government entities as set forth below or as the
Committee in its sole discretion shall deem necessary of advisable. The Company
shall not be required to issue Common Shares unless the Committee has received
evidence satisfactory to it that the issuance of the Common Shares will not
constitute or result in a violation of applicable law, including, without
limitation, the Securities Act of 1933, as amended. Any determination in this
connection by the Committee shall be final, binding and conclusive. The Company
may, but shall in no event by obligated to, take any action in order to cause
the exercise of an Incentive Stock Option or the issuance of Common Shares
pursuant thereto to comply with any law or regulation of any government
authority.
ARTICLE X
MISCELLANEOUS PROVISIONS
1. No person shall have any claim or right to be granted an Incentive
Stock Option under the Plan, and the grant of an ISO under the Plan shall not be
construed as giving an Optionee the right to be retained in the employ of the
Company. Furthermore, the Company expressly reserves the right at any time to
dismiss an Optionee with or without cause, free from any liability, or any claim
under the Plan, except as provided herein or in an option agreement or in any
agreement between the Company and the Optionee.
2. Any expenses of administering this Plan shall be borne by the
Company.
3. The place of administration of the Plan shall be in the State of
Colorado, and the validity, construction, interpretation, administration and
effect of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined solely in accordance with the laws of the State of
Colorado.
4. Without amending the Plan, grants may be made to employees of the
Company who are foreign nationals or employed outside the United States, or
both, on such terms and conditions, consistent with the Plan's purpose,
different from those specified in the Plan as may, in the judgment
-9-
<PAGE> 10
of the Committee, be necessary or desirable to create equitable opportunities
given differences in tax laws in other countries.
5. In addition to such other rights of indemnification as they may have
as members of the Board or the Committee, the members of the Committee shall be
indemnified by the Company against all costs and expenses reasonably incurred by
them in connection with any action, suit or proceeding to which they or any of
them may be party by reason of any action taken or failure to act under or in
connection with the Plan or any Incentive Stock Option granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except a judgment based upon a finding of bad faith; provided that upon the
institution of any such action, suit or proceeding a Committee member shall, in
writing, give the Company notice thereof and an opportunity, at its own expense,
to handle and defend the same before such Committee member undertakes to handle
and defend it on his own behalf.
6. Incentive Stock Options may be granted under this Plan from time to
time, in substitution for incentive stock options held by employees of other
corporations who are about to become employees of the Company or any parent or
subsidiary of the Company as the result of a merger or consolidation of the
employing corporation with the Company or any parent or subsidiary of the
Company or the acquisition by the Company or any parent or subsidiary of the
Company of the assets of the employing corporation or the acquisition by the
Company of stock of the employing corporation as a result of which it becomes a
subsidiary of the Company. The terms and conditions of such substitute incentive
stock options so granted may vary from the terms and conditions set forth in
this Plan to such extent as the Board of Directors of the Company at the time of
grant may deem appropriate to conform, in whole or in part, to the provisions of
the incentive stock options in substitution for which they are granted, but no
such variations shall be such as to affect the status of any such substitute
incentive stock options as an incentive stock option under Section 422 of the
Code.
7. Notwithstanding anything to the contrary in the Plan, if the
Committee finds by a majority vote, after full consideration of the facts
presented on behalf of both the Company and the Optionee, that the Optionee has
been engaged in fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his employment by the Company or any parent or
subsidiary of the Company which damaged the Company or any parent or subsidiary
corporation, or for disclosing trade secrets of the Company or any parent or
subsidiary of the Company, the Optionee shall forfeit all unexercised Incentive
Stock Options and all exercised ISO's under which the Company has not yet
delivered the certificates and which have been earlier granted the Optionee by
the Committee. The decision of the Committee as to the cause of an Optionee's
discharge and the damage done to the Company shall be final. No decision of the
Committee, however, shall affect the finality of the discharge of such Optionee
by the Company or any parent or subsidiary of the Company in any manner.
-10-
<PAGE> 11
ARTICLE XI
SHAREHOLDER APPROVAL AND EFFECTIVE DATE
Upon approval by the shareholders of the Company, this Plan shall
become unconditionally effective as of January 13, 1989. No stock option may be
granted after January 13, 1999; provided however, that the plan and all
outstanding Incentive Stock Options shall remain in effect until such ISO's have
expired or until such options are canceled. If the shareholders shall not
approve the Plan, the Plan shall not be effective, and any and all actions taken
prior thereto shall be null and void or shall, if necessary, be deemed to have
been fully rescinded.
ARTICLE XII
WRITTEN AGREEMENT
Each Incentive Stock Option granted hereunder shall be embodied in a
written Incentive Stock Option Agreement which shall be subject to the terms and
conditions prescribed above and shall be signed by the Optionee and by the
President or any Vice President of the Company, for and in the name and on
behalf of the Company. Each such Incentive Stock Option Agreement shall contain
such other provisions as the Committee in its discretion shall deem advisable.
This Amended and Restated 1989 Incentive Stock Option Plan was adopted
by the Board of Directors of United States Exploration, Inc. on June 29,1998.
/s/ F. MICHAEL MURPHY
------------------------------------
F. Michael Murphy, Secretary
-11-
<PAGE> 12
Number of Shares Date of Grant
------------------- -------------------
INCENTIVE STOCK OPTION AGREEMENT
AGREEMENT made this ____ day of ___________, 19__, between
___________________ (the "Optionee"), and United States Exploration, Inc., a
Colorado corporation (the "Company").
1. Grant of Option. The Company, pursuant to the provisions of the
United States Exploration, Inc. Amended and Restated 1989 Incentive Stock Option
Plan (the "Plan"), a copy of which is attached as Exhibit A hereto, hereby
grants to the Optionee, subject to the terms and conditions set forth or
incorporated herein, an option (the "Option") to purchase from the Company up to
an aggregate of ____________ Common Shares at the purchase price of $________
per share. The Plan is incorporated herein by reference and the Option is
subject in all respects to the provisions of the Plan. Terms capitalized but not
defined herein are used as defined in the Plan. The Option is intended to
qualify as an Incentive Stock Option under Code Section 422.
2. Exercise. The Option shall not be exercisable prior to the first
anniversary of the date of Grant. On the first anniversary of the date of Grant,
the Option shall become exercisable for one-third of the total number of Shares
and on each of the second and third anniversaries of the date of Grant, the
Option shall become exercisable for an additional one-third of the total number
of Shares. The Option may be exercised at any time and from time to time, in
whole or in part, on or before __________, __________, for any Common Shares as
to which it has then become exercisable. The Option shall be exercisable by the
delivery to and receipt by the Company of (i) a written notice of election to
exercise, in the form attached hereto as Exhibit B, specifying the number of
shares to be purchased; (ii) payment of the full purchase price thereof in cash
or certified check payable to the order of the Company, or by fully-paid and
nonassessable Common Shares of the Company, properly endorsed over to the
Company, or any combination thereof, and (iii) this Stock Option Agreement for
endorsement hereon of exercise by the Company. In the event fully paid and
nonassessable Common Shares are submitted as whole or partial payment for Common
Shares to be purchased hereunder, such Common Shares will be valued at their
Fair Market Value (as defined in the Plan) as of the date of exercise.
3. Transferability. The Option evidenced hereby is not assignable or
transferable by the Optionee other than by the Optionee's will or by the laws of
descent and distribution, as provided in paragraph 9 of Article VI of the Plan.
The Option shall be exercisable only by the Optionee (or his legal
representative) during the Optionee's lifetime.
4. Limitations Upon Issuance of Stock. Anything contained herein to the
contrary notwithstanding, no Common Shares will be issued upon exercise of the
Option until the Company is satisfied that such shares may be issued in
compliance with all applicable laws and regulations, including, without
limitation, federal and applicable state securities laws, and with the
requirements of any stock exchange upon which the Common Shares are then listed.
In that connection, the
-1-
<PAGE> 13
Company may require the Optionee, as a condition to issuing such shares, to
execute such covenants and certificates, containing such agreements and
representations, as the Company deems appropriate to establish the availability
of exemptions from federal and applicable state securities laws and otherwise to
effect or establish such compliance. The Company will not have any liability
with respect to any failure to issue shares as a result of the provisions of
this paragraph 4.
5. Acceptance by Optionee. This Option shall be void and of no force or
effect unless the Optionee executes the Acceptance at the end of the Option and
returns an executed copy to the Company within 30 days after the date of Grant.
UNITED STATES EXPLORATION, INC.
By:
--------------------------------------
Its:
-------------------------------------
ACCEPTANCE
Optionee hereby acknowledges receipt of a copy of this Option and the
Plan and accepts this Option subject to each and every term and provision of the
Plan. Optionee hereby agrees to accept as binding, conclusive and final, all
decisions or interpretations of the Committee of administering the Plan on any
questions arising under the Plan.
Dated:
-------------------------- ----------------------------------
Optionee
----------------------------------
Print Name
----------------------------------
Address
----------------------------------
Social Security No.
---------------
-2-
<PAGE> 14
EXHIBIT B
Date:
United States Exploration, Inc. ---------
1560 Broadway, Ste. 1900
Denver, CO 80202
Dear Sir:
In accordance with paragraph 2 of the Stock Option Agreement evidencing
the Option granted to me on ______________ under the United States Exploration,
Inc. 1989 Amended and Restated Incentive Stock Option Plan, I hereby elect to
exercise the Option to the extent of _____________ Common Shares.
Enclosed are:
(i) Certificate(s) No.(s) ________________ representing fully-paid
Common Shares of United States Exploration, Inc. endorsed to the Company with
signature guaranteed; and/or
(ii) a certified check payable to the order of United States
Exploration, Inc. in the amount of $_______________ in payment of the purchase
price of $________________ for the Shares for which I have elected to exercise
the Option. I am also enclosing the original Stock Option Agreement for
endorsement thereon of the exercise. I acknowledge that the Common Shares (if
any) submitted as part payment for the exercise price due hereunder will be
valued by the company at their Fair Market Value (as defined in the Plan) as of
the date this notice of exercise is received by the Company.
In the event I hereafter sell any Common Shares issued pursuant to this
option exercise within one year from the date of exercise or within two years
after the date of grant of the Option, I agree to notify the Company promptly of
the amount of taxable compensation realized by me by reason of such sale for
Federal income tax purposes.
When the certificate for Common Shares which I have elected to purchase
has been issued, please deliver it to me, along with my endorsed Stock Option
Agreement in the event there remains an unexercised balance of Shares under the
Option, at the address set forth below:
Very truly yours,
-----------------------------------
Signature of Optionee
----------------------------------
Print Name
----------------------------------
Address:
----------------------------------
----------------------------------
<PAGE> 15
Optionee Date of Grant
--------------------------------- ----------------------
<TABLE>
<CAPTION>
SCHEDULE I
UNEXERCISED ENDORSING
SHARES PAYMENT SHARES OFFICER
DATE PURCHASED RECEIVED REMAINING INITIALS
--------- -------- --------- --------
<S> <C> <C> <C> <C>
</TABLE>
-2-
<PAGE> 1
EXHIBIT 10.3
UNITED STATES EXPLORATION, INC.
AMENDED AND RESTATED
1990 NONQUALIFIED STOCK OPTION PLAN
WHEREAS, the Board of Directors and shareholders of United States
Exploration, Inc. (the "Company"), previously adopted and approved a 1990
Nonqualified Stock Option Plan (the "Plan") for the benefit of employees,
consultants and directors to advance the best interests of the Company; and
WHEREAS, the Company desires to amend and restate the Plan to reflect
certain changes in applicable law since the date of its adoption and to cure
certain ambiguities.
NOW THEREFORE, the Company hereby amends and restates the Plan as
follows:
ARTICLE I
PURPOSE OF PLAN
This Amended and Restated 1990 Nonqualified Stock Option Plan (the
"Plan") of United States Exploration, Inc. (the "Company") for employees,
directors, consultants and other persons associated with the Company, is
intended to advance the best interests of the Company by providing those persons
who have a substantial responsibility for its management and growth with
additional incentive and by increasing their proprietary interest in the success
of the Company, thereby encouraging them to maintain their relationships with
the Company. Further, the availability and offering of Stock Options under the
Plan supports and increases the Company's ability to attract and retain
individuals of exceptional talent upon whom, in large measure, the sustained
progress, growth and profitability of the Company depends.
ARTICLE II
DEFINITIONS
For Plan purposes, except where the context might clearly indicate
otherwise, the following terms shall have the meanings set forth below:
"Act" shall mean the Securities Exchange Act of 1934 and the rules
promulgated thereunder, as heretofore or hereafter amended.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, and the rules and
regulations promulgated thereunder, as heretofore or hereafter amended.
<PAGE> 2
"Committee" means one or more of the committees described below.
Members of the Committee shall serve at the pleasure of the Board and may resign
at any time upon written notice to the Board.
(a) Generally: If paragraphs (b) and (c) below are not
applicable, the "Committee" shall consist of one or more members of the
Board and/or such other person or persons as may be appointed from time
to time by the Board. or the entire Board if no such Committee has been
appointed.
(b) For Reporting Persons: With respect to the grant or
administration of any Stock Options granted under the Plan to persons
who are subject to the reporting requirements under Section 16(a) of
the Act; unless the Board determines otherwise, the Committee shall be
constituted so as to comply with Rule 16b-3 promulgated under the Act
and shall consist of (a) two non-employee directors (as defined in Rule
16b-3) or (B) the entire Board ("16b-3 Committee"); provided that if a
16b-3 Committee is not required for such grant or grants to meet the
exemption requirements under 16b-3, then this sentence shall not be
applicable.
(c) For Compliance with Code Section 162(m): With respect to
the grant or administration of any Options granted under the Plan to a
person subject to Code Section 162(m) and for which the Board
determines, in its discretion, that compliance with Code Section 162(m)
is necessary or desirable, the Committee shall be constituted so as to
comply with Code Section 162(m) and the Treasury Regulations thereunder
and shall consist of two or more outside directors and no other person;
provided that if a 162(m) Committee is not required for such grant or
grants to meet the conditions of Code Section 162(m), then this
sentence shall not be applicable.
"Common Shares" shall mean the common shares of the Company, $.0001 par
value per share, or, in the event that the outstanding common shares are
hereafter changed into or exchanged for different shares or securities of the
Company, such other shares or securities.
"Fair Market Value" shall mean, as of any date, the closing price of
the Common Shares on the principal market in which they are then traded on the
last trading day preceding such date or, if no closing price is reported for the
Common Shares on such trading day, on the next preceding trading day on which a
closing price was reported, as reported by such responsible source as the
Committee may select. In the event that closing prices for the Common Shares are
not being reported at the time that Fair Market Value is determined, the
Committee may determine the Fair Market Value in such other manner as it may
deem more equitable for Plan purposes or as is required by applicable laws or
regulations.
"Optionee" shall mean a person who has been granted one or more Stock
Options under the Plan.
-2-
<PAGE> 3
"Stock Option" or "NQSO" shall mean a stock option granted pursuant to
the terms of the Plan.
"Stock Option Agreement" shall mean the agreement between the Company
and the Optionee under which the Optionee may purchase Common Shares hereunder.
ARTICLE III
ADMINISTRATION OF THE PLAN
1. The Committee shall administer the Plan and accordingly, it shall
have full power to grant Stock Options, construe and interpret the Plan,
establish rules and regulations and perform all other acts, including the
delegation of administrative responsibilities, it believes reasonable and
proper.
2. The determination of those eligible to receive Stock Options and the
number of shares covered by and the timing of exercisability of each Stock
Option and the terms and conditions of the respective Stock Option Agreements,
including the exercise price, shall rest in the sole discretion of the
Committee, subject to the provisions of the Plan.
3. The Committee, may correct any defect, supply any omission or
reconcile any inconsistency in the Plan, or in any Stock Option granted
hereunder, in the manner and to the extent it shall deem necessary to carry it
into effect.
4. Any decision made, or action taken, by the Committee or the Board
arising out of or in connection with the interpretation and administration of
the Plan shall be final and conclusive.
5. Meetings of the Committee shall be held at such times and places as
shall be determined by the Committee. A majority of the members of the Committee
shall constitute a quorum for the transaction of business, and the vote of a
majority of those members present at any meeting shall decide any question
brought before that meeting. In addition, the Committee may take any action
otherwise proper under the Plan by the affirmative vote, taken without a
meeting, of a majority of its members.
6. No member of the Committee shall be liable for any act or omission
of any other member of the Committee or for any act or omission on his own part,
including, but not limited to, the exercise of any power or discretion given to
him under the plan, except those resulting from his own gross negligence or
willful misconduct.
7. The Company, through its management shall supply full and timely
information to the Committee on all matters relating to the eligibility of
Optionees, their duties and performance, and current information on any
Optionee's death, retirement, disability or other termination of association
with the Company, and such other pertinent information as the Committee may
require.
-3-
<PAGE> 4
The Company shall furnish the Committee with such clerical and other assistance
as is necessary in the performance of its duties hereunder.
ARTICLE IV
SHARES SUBJECT TO THE PLAN
1. The total number of Common Shares available for grants of Stock
Options under the Plan shall be 2,900,000 Common Shares, subject to adjustment
in accordance with Article VI of the Plan, which shares may be either authorized
but unissued or reacquired Common Shares of the Company.
2. If a Stock Option or portion thereof shall expire or terminate for
any reason without having been exercised in full, the unpurchased shares covered
by such NQSO shall be available for future grants of Stock Options.
ARTICLE V
STOCK OPTION TERMS AND CONDITIONS
1. Consistent with the Plan's purpose, Stock Options may be granted to
individuals or entities, including directors, who are performing or who have
been engaged to perform services of special importance to the management,
operation or development of the Company and any parent or subsidiary of the
Company.
2. All Stock Options granted under the Plan shall be evidenced by
agreements which shall be subject to applicable provisions of the Plan, and such
other provisions as the Committee may adopt including the provisions set forth
in paragraphs 2 through 11 of this Article V.
3. All Stock Options granted hereunder must be granted within ten years
from the earlier of the date this Plan is adopted or approved by the Board.
4. No Stock Option shall be exercisable after the expiration of ten
years from the date such NQSO is granted. The Committee, in its discretion, may
provide that an option shall be exercisable during all or any portion of such
ten year period or during any lesser period of time.
The Committee may establish installment exercise terms for a
Stock Option such that the NQSO becomes exercisable in a series of cumulating
portions or upon the happening of a specified event or condition.
5. A Stock Option, or portion thereof, shall be exercised by delivery
of (i) a written notice of exercise to the Company specifying the number of
Common Shares to be purchased, and (ii) payment of the full price of such Common
Shares, as fully set forth in paragraph 6 of this Article V.
-4-
<PAGE> 5
Until the Common Shares represented by an exercised NQSO are
issued to an Optionee, he shall have none of the rights of a shareholder.
6. The exercise price of a Stock Option, or portion thereof, may be
paid:
A. In United States dollars, in cash or by cashier's check,
certified check bank draft or money order, payable to the order of the Company
in an amount equal to the option price; or
B. At the discretion of the Committee, through the delivery of
fully paid and nonassessable Common Shares, with an aggregate Fair Market Value
as of the date of the NQSO exercise equal to the option price or any other form
of "cashless" exercise; or
C. By a combination of both A and B above.
The Committee shall determine acceptable methods for tendering
Common Shares as payment upon exercise of a Stock Option and may impose such
limitations and prohibitions on the use of Common Shares to exercise an NQSO as
it deems appropriate.
7. Except for grants of Stock Options described in Article VI, no
person may be granted Stock Options covering more than 3% of outstanding Common
Shares in any calendar year (in each case as adjusted as provided in Article
VI).
8. Except by will or the laws of descent and distribution, no right or
interest in any Stock Option granted under the Plan shall be assignable or
transferable, and no right or interest of any Optionee shall be liable for, or
subject to, any lien, obligation or liability of the Optionee. Stock Options
shall be exercisable during the Optionee's lifetime only by the Optionee or the
duly appointed legal representative of an incompetent Optionee.
9. Unless otherwise provided in the Option Agreement, in the event an
Optionee shall cease to be associated with the Company, die, or become
permanently or totally disabled (within the means of Section 72(m)(7) of the
Code) while he is holding one or more Stock Options, each NQSO held shall expire
at the earlier of the expiration of the Stock Option's term or the following:
A. If termination of the Optionee's association with the
Company occurs for any reason other than death or disability, such Optionee
shall have the right to exercise the NQSO for three months after such
termination date. but not later than the expiration date of the Stock Option, to
the extent that it was exercisable on the date of such termination of
employment; or
B. If the Optionee shall die or become disabled while
associated with the Company or during a three-month period after termination of
such association while a Stock Option is exercisable under A above, the personal
representative or administrator of the Optionee's estate or the person(s) to
whom a NQSO granted hereunder shall have been validly transferred by such
-5-
<PAGE> 6
personal representative or administrator pursuant to the Optionee's will or the
laws of descent and distribution, shall have the right to exercise the NQSO for
one year after the date of the Optionee's death, but not later than the
expiration date of the Stock Option, to the extent such NQSO was exercisable on
the date of the termination of such Optionee's employment.
No transfer of a Stock Option by the will of an Optionee, or
by the laws of descent and distribution shall be effective to bind the Company
unless the Company shall have been furnished with written notice thereof and an
authenticated copy of the will and/or such other evidence as the Committee may
deem necessary to establish the validity of the transfer and the acceptance by
the transferee of the terms and conditions of such Stock Option.
ARTICLE VI
CORPORATE CHANGES
1. The number of shares and purchase price of Stock previously made
subject to a NQSO and the aggregate number of shares available for issuance
under the Plan shall be proportionately adjusted in the event of any stock
dividend, stock split, reverse stock split or other division or combination of
outstanding Common Shares as determined by the Committee.
2. In the event of a merger or consolidation to which the Company is a
party and as a result of which the stockholders of the Company immediately prior
to the transaction will own less than a majority of the combined voting power
and ownership interest of the surviving corporation immediately after the
transaction [i] all outstanding Stock Options, whether or not otherwise
exercisable, shall become fully exercisable in respect of all Common Shares
covered thereby immediately prior to the effective time of the transaction,
contingent upon the consummation of the transaction, and [ii] any Stock Options
not exercised prior to the transaction shall automatically terminate at the
effective time of the transaction. The Committee shall make such arrangements as
it deems appropriate to allow Optionees to exercise their Stock Options
contingent upon the consummation of the transaction, including, without
limitation, establishing a cut-off date in advance of the effective time of the
transaction by which Stock Options must be exercised. In the event that the
transaction is not ultimately consummated, all exercises of Stock Options
pursuant to this provision shall be of no force or effect, the Company shall
return to the Optionees all notices of exercise, payments and other documents
received by it in connection with such exercise and all Stock Options shall be
exercisable only in accordance with their original terms.
3. In the event of a sale of all or substantially all of the property
of the Company, the sale or exchange by the Company or any one or more
stockholders of the Company of Common Shares constituting 50% or more of the
Common Shares outstanding immediately following such sale or exchange, or the
dissolution or liquidation of the Company, the Committee may, in its discretion,
take such action with respect to outstanding Stock Options as it deems
appropriate, including, without limitation [i] accelerating the exercisability
thereof, subject to such procedures and conditions as it may determine, [ii]
providing for the termination of all unexercised Stock Options as of the
effective date of the transaction or any other date established by the
Committee,
-6-
<PAGE> 7
[iii] providing for the conversion of outstanding Stock Options into options or
other rights to acquire stock or other securities or property of any entity
acquiring all or any portion of the Company's property or any Common Shares in
the transaction, or any Affiliate of such an entity, on terms deemed reasonable
by the Committee in its sole discretion, or [iv] making cash payments to
Optionees in settlement of their Stock Option in an amount equal to the
difference between the Fair Market Value of the Stock for which they are then
exercisable, or for all of the Common Shares covered thereby, as the Committee
may determine, and the Stock Option Price thereof. The Committee shall not be
required to take any of the foregoing actions and shall not be required to treat
all outstanding Stock Options in the same manner.
4. If, upon any exercise of a Stock Option, a fractional share of Stock
would otherwise be issuable, the Company shall, in lieu of issuing the
fractional share, pay the Optionee in cash the Fair Market Value thereof as of
the date the Stock Option was exercised.
ARTICLE VII
AMENDMENT AND TERMINATION OF PLAN
1. The Board may at any time, and from time to time, suspend or
terminate the Plan in whole or in part or amend it from time to time in such
respects as the Board may deem appropriate and in the best interest of the
Company.
2. No amendment suspension or termination of this Plan shall, without
the Optionee's consent, alter or impair any of the rights or obligations under
any Stock Option theretofore granted to him under the Plan.
3. No NQSO may be granted during any suspension of the Plan or after
termination of the Plan.
ARTICLE VIII
GOVERNMENT AND OTHER REGULATIONS
The obligation of the Company to issue, transfer and deliver Common
Shares for Stock Options exercised under the Plan shall be subject to all
applicable laws, regulations, rules, orders and approval which shall then be in
effect and required by the relevant stock exchanges on which the Common Shares
are traded and by government entities as set forth below or as the Committee in
its sole discretion shall deem necessary of advisable. The Company shall not be
required to issue Common Shares unless the Committee has received evidence
satisfactory to it that the issuance of the Common Shares will not constitute or
result in a violation of applicable law, including, without limitation, the
Securities Act of 1933, as amended. Any determination in this connection by the
Committee shall be final, binding and conclusive. The Company may, but shall in
no event by obligated to, take any action in order to cause the exercise of a
Stock Option or the issuance of Common Shares pursuant thereto to comply with
any law or regulation of any government authority.
-7-
<PAGE> 8
ARTICLE IX
MISCELLANEOUS PROVISIONS
1. No person shall have any claim or right to be granted a Stock Option
under the Plan, and the grant of an NQSO under the Plan shall not be construed
as giving an Optionee the right to be retained by the Company. Furthermore, the
Company expressly reserves the right at any time to terminate its relationship
with an Optionee with or without cause, free from any liability, or any claim
under the Plan, except as provided herein, in an option agreement, or in any
agreement between the Company and the Optionee.
2. Any expenses of administering this Plan shall be borne by the
Company.
3. The place of administration of the Plan shall be in the State of
Colorado, and the validity, construction, interpretation, administration and
effect of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined solely in accordance with the laws of the State of
Colorado.
4. Without amending the Plan, grants may be made to persons who are
foreign nationals or employed outside the United States, or both, on such terms
and conditions, consistent with the Plan's purpose, different from those
specified in the Plan as may, in the judgment of the Committee, be necessary or
desirable to create equitable opportunities given differences in tax laws in
other countries.
5. In addition to such other rights of indemnification as they may have
as members of the Board or the Committee, the members of the Committee shall be
indemnified by the Company against all costs and expenses reasonably incurred by
them in connection with any action, suit or proceeding to which they or any of
them may be party by reason of any action taken or failure to act under or in
connection with the Plan or any Stock Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except a
judgment based upon a finding of bad faith; provided that upon the institution
of any such action, suit or proceeding a Committee member shall, in writing,
give the Company notice thereof and an opportunity, at its own expense, to
handle and defend the same before such Committee member undertakes to handle and
defend it on his own behalf.
6. Stock Options may be granted under this Plan from time to time, in
substitution for stock options held by employees of other corporations who are
about to become employees of the Company or any parent or subsidiary of the
Company as the result of a merger or consolidation of the employing corporation
with the Company or any parent or subsidiary of the Company or the acquisition
by the Company or any parent or subsidiary of the Company of the assets of the
employing corporation or the acquisition by the Company of stock of the
employing corporation as a result of which it becomes a subsidiary of the
Company. The terms and conditions of such substitute stock options so granted
may vary from the terms and conditions set forth in this Plan to
-8-
<PAGE> 9
such extent as the Board of Directors of the Company at the time of grant may
deem appropriate to conform, in whole or in part, to the provisions of the stock
options in substitution for which they are granted, but no such variations shall
be such as to affect the status of any such substitute stock options as a stock
option under Section 422 of the Code.
7. Notwithstanding anything to the contrary in the Plan, if the
Committee finds by a majority vote, after full consideration of the facts
presented on behalf of both the Company and the Optionee, that the Optionee has
been engaged in fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his association with the Company or any parent or
subsidiary of the Company, or for disclosing trade secrets of the Company or any
parent or subsidiary of the Company, the Optionee shall forfeit all unexercised
Stock Options and all exercised NQSO's under which the Company has not yet
delivered the certificates and which have been earlier granted the Optionee by
the Committee. The decision of the Committee shall be final. No decision of the
Committee, however, shall affect the finality of any discharge of such Optionee
by the Company or any parent or subsidiary of the Company in any manner.
ARTICLE X
WRITTEN AGREEMENT
Each Stock Option granted hereunder shall be embodied in a written
Stock Option Agreement which shall be subject to the terms and conditions
prescribed above and shall be signed by the Optionee and by the President or any
Vice President of the Company, for and in the name and on behalf of the Company.
Each such Stock Option Agreement shall contain such other provisions as the
Committee in its discretion shall deem advisable.
This Amended and Restated 1990 Nonqualified Stock Option Plan was
adopted by the Board of Directors of United States Exploration, Inc. on
June 29, 1998.
/s/ F. MICHAEL MURPHY
--------------------------------
F. Michael Murphy, Secretary
-9-
<PAGE> 10
Number of Shares Date of Grant
--------------- ---------------
NONQUALIFIED STOCK OPTION AGREEMENT
AGREEMENT made this _______ day of _________________, 19___, between
___________________________ (the "Optionee"), and United States Exploration,
Inc., a Colorado
corporation (the "Company").
1. Grant of Option. The Company, pursuant to the provisions of the
United States Exploration, Inc. Amended and Restated 1990 Nonqualified Stock
Option Plan (the "Plan"), a copy of which is attached as Exhibit A hereto,
hereby grants to the Optionee, subject to the terms and conditions set forth or
incorporated herein, an option (the "Option") to purchase from the Company up to
an aggregate of __________ Common Shares at the purchase price of $__________
per share. The Plan is incorporated herein by reference and the Option is
subject in all respects to the provisions of the Plan. Terms capitalized but not
defined herein are used as defined in the Plan.
2. Exercise. The Option shall not be exercisable prior to the first
anniversary of the date of Grant. On the first anniversary of the date of Grant,
the Option shall become exercisable for one-third of the total number of Shares
and on each of the second and third anniversaries of the date of Grant, the
Option shall become exercisable for an additional one-third of the total number
of Shares. The Option may be exercised at any time and from time to time, in
whole or in part, on or before __________, __________, for any Common Shares as
to which it has then become exercisable. The Option shall be exercisable by the
delivery to and receipt by the Company of (i) a written notice of election to
exercise, in the form attached hereto as Exhibit B, specifying the number of
shares to be purchased; (ii) payment of the full purchase price thereof in cash
or certified check payable to the order of the Company, or by fully-paid and
nonassessable Common Shares of the Company, properly endorsed over to the
Company, or any combination thereof, and (iii) this Stock Option Agreement for
endorsement hereon of exercise by the Company. In the event fully paid and
nonassessable Common Shares are submitted as whole or partial payment for Common
Shares to be purchased hereunder, such Common Shares will be valued at their
Fair Market Value (as defined in the Plan) as of the date of exercise.
3. Transferability. The Option evidenced hereby is not assignable or
transferable by the Optionee other than by the Optionee's will or by the laws of
descent and distribution, as provided in paragraph 9 of Article V of the Plan.
The Option shall be exercisable only by the Optionee or his legal representative
during the Optionee's lifetime.
4. Limitations Upon Issuance of Stock. Anything contained herein to the
contrary notwithstanding, no Common Shares will be issued upon exercise of the
Option until the Company is satisfied that such shares may be issued in
compliance with all applicable laws and regulations, including, without
limitation, federal and applicable state securities laws, and with the
requirements of any stock exchange upon which the Common Shares are then listed.
In that connection, the Company may require the Optionee, as a condition to
issuing such shares, to execute such covenants and certificates, containing such
agreements and representations, as the Company deems appropriate to establish
the availability of exemptions from federal and applicable state securities laws
and
-1-
<PAGE> 11
otherwise to effect or establish such compliance. The Company will not have any
liability with respect to any failure to issue shares as a result of the
provisions of this paragraph 4.
5. Acceptance by Optionee. This Option shall be void and of no force or
effect unless the Optionee executes the Acceptance at the end of the Option and
returns an executed copy to the Company within 30 days after the date of Grant.
UNITED STATES EXPLORATION, INC.
By:
-----------------------------
Its:
----------------------------
ACCEPTANCE
Optionee hereby acknowledges receipt of a copy of this Option
and the Plan and accepts this Option subject to each and every term and
provision of the Plan. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Committee of administering the
Plan on any questions arising under the Plan.
Dated:
---------------------------- -----------------------------
Optionee
-----------------------------
Print Name
-----------------------------
Address
-----------------------------
Social Security No.
----------
-2-
<PAGE> 12
EXHIBIT B
Date:
United States Exploration, Inc. -----------------------
1560 Broadway, Ste. 1900
Denver, CO 80202
Dear Sir:
In accordance with paragraph 2 of the Stock Option Agreement
evidencing the Option granted to me on _______________ under the United States
Exploration, Inc. Amended and Restated 1990 Nonqualified Stock Option Plan, I
hereby elect to exercise the Option to the extent of __________ Common Shares.
Enclosed are:
(i) Certificate(s) No.(s) _______________ representing
fully-paid Common Shares of United States Exploration, Inc. endorsed to the
Company with signature guaranteed; and/or
(ii) a certified check payable to the order of United States
Exploration, Inc. in the amount of $_______________ in payment of the purchase
price of $_______________ for the Shares for which I have elected to exercise
the Option. I am also enclosing the original Stock Option Agreement for
endorsement thereon of the exercise. I acknowledge that the Common Shares (if
any) submitted as part payment for the exercise price due hereunder will be
valued by the company at their Fair Market Value (as defined in the Plan) as of
the date this notice of exercise is received by the Company.
When the certificate for Common Shares which I have elected to
purchase has been issued, please deliver it to me, along with my endorsed Stock
Option Agreement in the event there remains an unexercised balance of Shares
under the Option, at the address set forth below:
Very truly yours,
-------------------------------------
Signature of Optionee
-------------------------------------
Print Name
Address:
-------------------------------------
-------------------------------------
<PAGE> 13
Optionee Date of Grant
------------------------ ----------------------
SCHEDULE I
<TABLE>
<CAPTION>
UNEXERCISED ENDORSING
SHARES PAYMENT SHARES OFFICER
DATE PURCHASED RECEIVED REMAINING INITIALS
---- ----------- -------- --------- ---------
<S> <C> <C> <C> <C>
</TABLE>
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 327,143
<SECURITIES> 0
<RECEIVABLES> 3,538,586
<ALLOWANCES> 20,165
<INVENTORY> 12,785
<CURRENT-ASSETS> 4,045,519
<PP&E> 58,503,619
<DEPRECIATION> 14,728,386
<TOTAL-ASSETS> 49,442,047
<CURRENT-LIABILITIES> 30,982,358
<BONDS> 0
0
3,438,996
<COMMON> 1,532
<OTHER-SE> 15,019,161
<TOTAL-LIABILITY-AND-EQUITY> 49,442,047
<SALES> 1,278,525
<TOTAL-REVENUES> 1,278,525
<CGS> 17,704
<TOTAL-COSTS> 2,236,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 570,649
<INCOME-PRETAX> (1,513,828)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,513,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,513,828)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
