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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 June 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.
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(Exact name of registrant as specified in its charter)
Colorado 84-1120323
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1560 Broadway, Suite 1900, Denver, Colorado 80202
- ------------------------------------------- ----------
(Address or principal executive offices) (Zip Code)
(303) 863-3550
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XX No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class of Stock Amount Outstanding
-------------- ------------------
Common Stock, $.0001 par value 15,043,000 shares outstanding
at August 17, 1998
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UNITED STATES EXPLORATION, INC.
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Item 2. Management's Discussion and Analysis or Plan of Operation......... 10
Part II - OTHER INFORMATION.................................................................. 14
SIGNATURES................................................................................... 15
</TABLE>
2
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UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,635,921 $15,988,152
Accounts receivable 1,285,584 561,016
Inventory 12,653 14,889
Prepaid expenses and deposits 109,028 32,267
----------- -----------
Total current assets 3,043,186 16,596,324
PROPERTY AND EQUIPMENT, AT COST, NET
Oil and gas property and equipment 43,769,359 3,390,640
Natural gas gathering systems 1,408,278 1,367,266
Building and other equipment 505,632 392,644
----------- -----------
45,683,269 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 $223,132 at June 30, 1998 and
of $197,871 at December 31, 1997 484,176 509,437
Loan costs, less accumulated amortization
of $8,356 at June 30, 1998 434,526 --
----------- -----------
1,763,702 1,239,437
----------- -----------
Total assets $50,345,157 $22,986,312
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 981,662 $ 371,898
Accrued liabilities 329,213 33,266
Due related parties 60,767 62,334
Dividends payable -- 460,200
------------ ------------
Total current liabilities 1,371,642 927,698
NON CURRENT LIABILITIES
Due bank under credit facility 29,000,000 --
STOCKHOLDERS' EQUITY
Preferred Stock - $.01 par value
Authorized - 100,000,000 shares
Issued and outstanding Series C Cumulative
Convertible - 711,763 shares at June 30,
1998 and 3,835,000 at December 31, 1997
(liquidation preference of $4,270,578) 4,270,578 23,010,000
Common Stock - $.0001 par value
Authorized - 500,000,000 shares
Issued and outstanding - 15,043,000 shares at
June 30, 1998 and 8,795,400 shares at
December 31, 1997 1,504 880
Capital in excess of par 31,265,515 12,523,345
Accumulated deficit (15,564,082) (13,475,611)
------------ ------------
Total stockholders' equity 19,973,515 22,058,614
------------ ------------
Total liabilities and stockholders' equity $ 50,345,157 $ 22,986,312
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
<S> <C> <C> <C> <C>
REVENUES
Sale of purchased gas $ 222,544 $ 306,080 $ 599,588 $ 509,083
Sale of Company produced oil 903,704 720,486 1,271,639 1,551,931
and gas
Contracting, drilling and oil 3,750 72,247 18,251 147,734
----------- ----------- ----------- -----------
field supplies
1,129,998 1,098,813 1,889,478 2,208,748
COSTS AND EXPENSES
Gas acquisition costs 123,248 218,876 318,164 313,072
Gathering and transmission costs 147,722 145,207 302,534 157,822
Production costs - oil and gas 489,672 255,508 798,093 760,388
Other operating costs 49,247 104,040 74,411 161,404
Depletion, depreciation, and 419,658 291,410 680,922 754,033
amortization
Provision for impairment of 145,000 -- 145,000 321,397
assets
General and administrative
expenses 451,892 155,108 743,775 300,747
----------- ----------- ----------- -----------
1,826,439 1,170,149 3,062,899 2,768,863
----------- ----------- ----------- -----------
Loss from operations (696,441) (71,336) (1,173,421) (560,115)
OTHER INCOME (EXPENSE)
Interest income 87,925 233,282 291,969 457,127
Interest expense (282,552) (321) (282,552) (721)
Other (5,317) 6,008 (7,892) 62,185
----------- ----------- ----------- -----------
(199,944) 238,969 1,525 518,591
----------- ----------- ----------- -----------
NET INCOME (LOSS) (896,385) 167,633 (1,171,896) (41,524)
Preferred Stock dividends
attributable to period (456,536) (480,000) (916,573) (960,000)
----------- ----------- ----------- -----------
Net loss applicable to common
shareholders $(1,352,921) $ (312,367) $(2,088,469) $(1,001,524)
=========== =========== =========== ===========
Basic and diluted loss per common
share $ (0.15) $ (0.04) $ (0.24) $ (0.12)
=========== =========== =========== ===========
Weighted average common shares
outstanding 8,857,900 8,312,358 8,828,004 8,312,358
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net loss $ (1,171,896) $ (41,524)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation, depletion and amortization 680,922 754,033
Provision for impairment of assets 145,000 371,397
Gain on sale of assets 10,249 1
Decrease (increase) in accounts receivable (724,568) 487,159
Decrease in due from related parties -- 45,775
Decrease in inventory 2,236 14,700
Increase in prepaid expenses (76,761) (32,794)
Increase (decrease) in accounts payable
and accrued expenses 905,720 (345,446)
Increase (decrease) in due to related parties (1,577) 32,015
Other 3,369 (20,725)
------------ ------------
Net cash provided by (used in) operating activities (227,306) 1,264,591
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificate of deposit -- (1,500,000)
Capital expenditures (807,502) --
Proceeds from sale of equipment 58,065 110,289
Acquisition of oil and gas leases (40,555,833) (1,481,000)
Acquisition of companies, net of cash received -- (674,731)
------------ ------------
Net cash used in investing activities (41,305,270) (3,545,442)
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 (442,882) --
Dividend paid on Preferred Stock (1,376,773) (840,000)
Proceeds from exercise of stock options -- 21,500
------------ ------------
Net cash provided by financing activities 27,180,345 (983,500)
Net decrease in cash and cash equivalents (14,352,231) (3,264,351)
Cash and cash equivalents-beginning of period 15,988,152 18,565,460
------------ ------------
Cash and cash equivalents-end of period $ 1,635,921 $ 15,301,109
============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
6
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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
June 30, 1998 and the six months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the year. The unaudited results of
operation for the three month period ended June 30, 1998 and the unaudited
results of operation and cash flows for the six months ended June 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
six-month period ended June 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 six months ended June 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 six months ended
June 30, 1997 and 1998 may not be meaningful.
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
7
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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. The
computation of weighted average shares of Common Stock outstanding for the three
months ended June 30, 1998 and for the six months ended June 30, 1998 does not
include the large number of shares of Preferred Stock converted to shares of
Common Stock on June 30, 1998.
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 for a cash purchase price of $41 million, subject to adjustments. UPR's
calculation of the adjustment, which will result in a reduction of the purchase
price was due August 17, 1998 and the Company will have 90 days to review the
calculation. The information provided with the calculation will include
financial information concerning UPR for the second quarter of 1998. The Company
has not yet made an estimate of the amount of the purchase price adjustment. 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
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.
8
<PAGE> 9
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 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 August 15, 1998, the interest rate is 7.5625% per
annum. 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 and on the properties subject to the Exploration Agreement.
NOTE E - SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
Effective as of June 30, 1998, holders of 3,279,834 shares of Series C
Cumulative Convertible Preferred Stock agreed to convert their stock to Common
Stock. At June 30, 1998, the financial statements reflect 6,156,474 shares of
Common Stock having been issued pursuant to this voluntary arrangement,
representing the Series C Preferred Stock certificates which have been sent to
the transfer agent for conversion. An additional 403,194 shares of Common Stock
will be issued when the Company receives the 201,597 shares of Series C
Preferred Stock which holders of such have agreed in writing to convert. Holders
of Series C Preferred Stock were paid the quarterly cash dividend on June 30,
1998.
NOTE F - IMPAIRMENT OF LAND HELD FOR RESALE
During the three months ended June 30, 1998, the Company completed the
dismantling of the refinery previously located on a portion of the real estate
located near Corpus Christi, Texas. The dismantling costs incurred were
$145,000. Based upon recent discussions with the listing agent, the net
realizable value of the real estate is estimated at $700,000; therefore, the
Company decided to create an additional impairment of $145,000 for the
dismantling costs incurred to write down the asset to its net realizable value.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion is qualified in its entirety by Note D to the unaudited
Financial Statements presented 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 will have a significant impact on the Company.
Accordingly, the following discussion of the Company's liquidity, capital
resources and results of operations at June 30, 1998 and for the quarter and six
months then ended should not be considered indicative of the Company's
liquidity, capital resources or results of operations in future periods.
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 six-month period ended June 30, 1997 include the quarter ended March 31,
1997 and the results of operation 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
statements of operations for the six months ended June 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 six months ended June 30, 1997 and 1998 may not be meaningful.
Results of Operations -- Three Month Period ended June 30, 1998
Sales of purchased gas for the three months ended June 30, 1998 were
$222,544 compared to $306,080 for the three months ended June 30, 1997. Gas
acquisition and gas gathering and transportation costs totaled $270,970 for the
three months ended June 30, 1998 compared to $364,083 for the three months ended
June 30, 1997. Sales of purchased gas net of related direct costs have
historically produced a small profit or loss for the Company. The Company
expects to make a small profit or loss on its gas gathering systems in the
future 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. The Company's gathering system in Southeast Kansas was shut in during
June, 1998 and remains inactive. The reason for the shut-in was that the average
heating value of the gas moving through the gathering system was too low.
Efforts to reestablish gas deliveries through this gathering system continue.
Sales of Company produced oil and gas for the three months ended June 30,
1998 were $903,704 compared to $720,486 for the three months ended March 31,
1997. The three months ended June 30, 1998 include sales of oil and gas from the
Colorado properties in an approximate amount of $592,000 for the period May 16,
1998 through June 30, 1998. Decreased production levels and pricing are the main
reasons sales of Company produced oil and gas from the Kansas and Oklahoma
properties declined.
Income from contracting, drilling and oil field supplies for the three
months ended June 30, 1998 was only $3,750 compared to $72,247 for the three
months ended June 30, 1997. This decrease reflects the Company's decision in
early 1997 to close its supply store and phase out its oilfield
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servicing business. The results for the three months ended June 30, 1998 reflect
only miscellaneous fees.
Oil and gas production costs increased to $489,672 for the three months
ended June 30, 1998 from $255,508 for the three months ended June 30, 1997.
Production costs for the three-month period ended June 30, 1998 include
approximately $203,000 for production costs for the Colorado properties for the
period May 16, 1998 through June 30, 1998.
Depletion, depreciation and amortization increased to $419,658 for the
three months ended June 30, 1998 from $291,410 for the three months ended June
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 provided a provision for impairment of assets during the
three months ended June 30, 1998 (see Note F). The impairment reflects the
dismantling costs for a former refinery located on a portion of the land held
for resale.
General and administrative expenses were $451,892 for the three months
ended June 30, 1998 as compared to $155,108 for the three months ended June 30,
1997. Most of this increase is attributable to increased staffing and related
costs incident to the expansion of the Company's operations.
Interest income decreased from $233,282 for the three months ended June
30, 1997 to $87,925 for the three months ended June 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 UPR for the Colorado properties.
Interest expense increased to $282,552 for the three months ended June
30, 1998 from $321 for the three months ended June 30, 1997. This increase is
attributable to the $29,000,000 borrowed in connection with the Colorado
properties acquisition.
Results of Operations - Six Month Period ended June 30, 1998
Sales of purchased gas for the six months ended June 30, 1998 were
$599,588 compared to $509,083 for the six months ended June 30, 1997. Gas
acquisition costs and gas gathering and transportation costs were $318,164 and
$302,534 respectively, for a total of $620,698 for the six months ended June 30,
1998 compared to $313,072 and $157,822, respectively, for a total of $470,894
for the six months ended June 30, 1997. Sales for the six months ended June 30,
1997 were affected by reclassification and audit adjustments for the year ended
March 31, 1997, which cover more than three months. Sales of purchased gas net
of related direct costs have historically produced a small profit or loss for
the Company. The Company expects to make a small profit or loss on its gas
gathering systems in the future 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. The Company's gathering system in Southeast Kansas was
shut in during June, 1998 and remains inactive. The reason for the shut-in was
that the average heating value of the gas moving through the gathering system
was too low. Efforts to reestablish gas deliveries through this gathering system
continue.
Sales of Company produced oil and gas for the six months ended June 30,
1998 were $1,271,639 compared to $1,551,931 for the six months ended March 31,
1997. The six months ended June 30, 1998 include sales of oil and gas from the
Colorado properties in an approximate amount of $592,000 for the period May 16,
1998 through June 30, 1998. Decreased production levels and pricing are the main
reasons sales of Company produced oil and gas from the Kansas and Oklahoma
properties declined during the six month period ended June 30, 1998. Sales for
the six month period ended June 30, 1997 include sales from producing oil and
gas properties acquired in late calendar year 1996 and early in calendar year
1997.
Income from contracting, drilling and oil field supplies for the six
months ended June 30, 1998 was only $18,251 compared to $147,734 for the six
months ended June 30, 1997. This decrease reflects the Company's decision in
early 1997 to close its supply store and phase out its oilfield servicing
business. The results for the six months ended June 30, 1998 reflect only
miscellaneous fees.
Oil and gas production costs increased to $798,093 for the six months
ended June 30, 1998 from $760,388 for the six months ended June 30, 1997.
Production costs for the six-month period ended June 30, 1998 include
approximately $203,000 for production costs for the Colorado properties for the
period May 16, 1998 through June 30, 1998. Operating costs have decreased in the
six month period ended June 30, 1998 except for the additional costs
attributable to the Colorado properties.
Depletion, depreciation and amortization decreased to $680,922 for the
six months ended June 30, 1998 from $754,033 for the six months ended June 30,
1997. Most of this decrease is attributable to audit adjustments for the year
ended March 31, 1997 based upon the reserve study as of that date. The lower
recoverable reserves estimated in that study resulted in additional depletion,
depreciation and amortization for the year, all of which was recorded in the
final fiscal quarter ended March 31, 1997. The Company's oil and gas property
and equipment is depreciated, depleted and amortized using the full cost method
of accounting.
The Company provided a provision for impairment of assets during the
six months ended June 30, 1998 (see Note F). The impairment reflects the
dismantling costs for a former refinery located on a portion of the land held
for resale. In addition, the Company recorded a provision for impairment of
assets during the three months ended March 31, 1997 in the amount of $321,397,
to reflect the write-down of certain assets to estimated net realizable value
and the write-off of goodwill from a prior acquisition that were recognized in
the quarter ended March 31, 1997.
General and administrative expenses were $743,775 for the six months
ended June 30, 1998 as compared to $300,747 for the six months ended June 30,
1997. Most of this increase is attributable to increased staffing and related
costs incident to the expansion of the Company's operations.
Interest income decreased from $457,127 for the six months ended June
30, 1997 to $291,969 for the six months ended June 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 UPR for the Colorado properties.
Interest expense increased to $282,552 for the six months ended June
30, 1998 from $721 for the six months ended June 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, 1998. The acquisition from UPR of the Colorado properties has
reduced cash, increased long term debt, increased accounts receivable, accounts
payable, and accrued liabilities as they relate to oil and gas sales and
production costs, increased oil and gas property and equipment and increased
loan costs which are being amortized over the life of the loan. All significant
changes in these above described accounts relate to the acquisition from UPR of
the Colorado properties except that the payment during the three months ended
June 30, 1998 of Preferred Stock dividends also decreased cash approximately
$1,376,000.
The Company expects to expend substantial additional amounts to further
develop the UPR properties and to conduct drilling on the properties covered by
the Exploration Agreement. 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
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the Company's Kansas and Oklahoma assets that commenced in the quarter ended
September 30, 1997. The Company intends to use borrowings under the Credit
Agreement, working capital and cash from operations to fund such expenditures.
The Company believes that these sources will be adequate to fund these increased
expenditures. The Company also intends to continue to explore 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.
Prior to the end of the quarter ended June 30, 1998, 3,108,237 shares of
the Company's Series C Preferred Stock were converted into 6,217,054 shares of
Common Stock in accordance with their terms. This includes 3,078,237 shares of
Series C Preferred Stock which were voluntarily converted as of June 30, 1998
The Company has received agreements from holders of an additional 201,597 shares
of its Series C Preferred Stock who wish to voluntarily convert their shares
into 403,194 shares of Common Stock as of June 30, 1998.
The Company continues efforts to dispose of real estate located near the
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. See Note F.
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 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
12
<PAGE> 13
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. 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
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.
13
<PAGE> 14
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 4. Submission of Matters to a Vote of Security Holders.
At the June 29, 1998 Annual Meeting of Shareholders, the following
matters were voted on and the votes received were as follows:
Proposition 1 - Election of Directors
<TABLE>
<S> <C> <C> <C> <C>
Bruce D. Benson FOR 6,289,478 WITHHOLD AUTHORITY 0 ABSTAIN 10,500
Thomas N. Gamel FOR 6,289,478 WITHHOLD AUTHORITY 0 ABSTAIN 10,500
Richard L. Robinson FOR 6,288,478 WITHHOLD AUTHORITY 1,000 ABSTAIN 10,500
Robert J. Malone FOR 6,289,478 WITHHOLD AUTHORITY 0 ABSTAIN 10,500
</TABLE>
Proposition 2 - Ratification of appointment of Ernst &Young LLP as the
Company's auditors.
<TABLE>
<S> <C> <C> <C>
FOR 6,238,723 AGAINST 56,755 ABSTAIN 4,500
</TABLE>
There were no broker non-votes.
Item 5. Other Information.
Shareholders who wish to independently solicit proxies for the 1999
Annual Meeting must notify the Company of their intention no later than April
16, 1999.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits:
None.
B. Reports on Form 8-K:
Form 8-K dated May 15, 1998, as amended by Form 8-K/A filed July
29, 1998 - Item 2, Acquisition or Disposition of Assets.
Form 8-K dated May 19, 1998, as amended by Form 8-K/A filed June
19, 1998 - Item 4, Changes in Registrant's Certifying Accountants.
Form 8-K dated April 10, 1998 - Item 5, Other Events.
14
<PAGE> 15
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.
UNITED STATES EXPLORATION, INC.
Date: August 19, 1998 By: /s/ Bruce D. Benson
----------------------------- ----------------------------------
Bruce D. Benson, President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: August 19, 1998 By: /s/ F. Michael Murphy
----------------------------- ----------------------------------
F. Michael Murphy, Vice President,
Secretary and Chief Financial
Officer
(Principal Financial Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Item Page No.
- ------- ---- --------
<S> <C> <C>
27.1 Financial Data Schedules 17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,635,921
<SECURITIES> 0
<RECEIVABLES> 1,307,519
<ALLOWANCES> 21,935
<INVENTORY> 12,653
<CURRENT-ASSETS> 3,043,186
<PP&E> 59,878,944
<DEPRECIATION> 14,195,675
<TOTAL-ASSETS> 50,345,157
<CURRENT-LIABILITIES> 1,371,642
<BONDS> 29,200,000
0
4,270,578
<COMMON> 1,504
<OTHER-SE> 15,701,433
<TOTAL-LIABILITY-AND-EQUITY> 50,345,157
<SALES> 1,129,998
<TOTAL-REVENUES> 1,129,998
<CGS> 123,248
<TOTAL-COSTS> 1,826,439
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282,552
<INCOME-PRETAX> (896,385)
<INCOME-TAX> 0
<INCOME-CONTINUING> (896,385)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (896,385)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
