<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 June 30, 1999
-------------------
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 registrant 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
----------------------------------------------------
(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 X 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 15,591,828 shares outstanding
at August 18, 1999
<PAGE> 2
ADDITIONAL INFORMATION
Descriptions in this Report are qualified by reference to the contents
of any contract, agreement or other documents and are not necessarily complete.
Reference is made to each such contract, agreement or document filed as an
exhibit to this Report, or previously filed by the Company pursuant to
regulations of the Securities and Exchange Commission (the "Commission"). (See
"Part II, Item 6. Exhibits and Reports on Form 8-K".)
FORWARD LOOKING STATEMENTS
See "Special Note Regarding Forward Looking Statements" at the end of
"Part I, Item 2. Management's Discussion and Analysis or Plan of Operation" for
cautionary statements concerning forward looking information contained in this
report.
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<PAGE> 3
UNITED STATES EXPLORATION, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements.......................................................................... 4
Item 2 Management's Discussion and Analysis or Plan of Operation..................................... 12
Part II - OTHER INFORMATION.................................................................................... 21
SIGNATURES..................................................................................................... 23
EXHIBIT INDEX.................................................................................................. 24
</TABLE>
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<PAGE> 4
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash & cash equivalents $ 2,101,289 $ 1,000,661
Accounts receivable 1,929,277 2,980,700
Due from related parties 31,058 4,761
Inventory 6,101 9,684
Prepaid expenses & deposits 76,528 806,947
Assets held for sale -- 1,825,000
----------- -----------
Total current assets 4,144,253 6,627,753
PROPERTY AND EQUIPMENT, AT COST, NET:
Oil and gas property and equipment 25,094,536 25,166,771
Natural gas gathering systems 957,760 987,596
Other equipment and leasehold improvements 374,591 295,046
----------- -----------
26,426,887 26,449,413
OTHER ASSETS
Land held for resale 700,000 700,000
Pipeline lease, less accumulated amortization
of $274,017 at June 30, 1999 and
of $248,481 at December 31, 1998 439,043 451,811
Loan costs, less accumulated
amortization of $80,452 at June 30, 1999 and
amortization of $44,695 at December 31, 1998 393,320 429,076
----------- -----------
1,532,363 1,580,887
----------- -----------
Total assets $32,103,503 $34,658,053
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 5
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 2,559,692 $ 2,365,983
Accrued liabilities 379,808 450,449
Due related parties 16,844 47,379
Due bank under credit facility 31,250,000 31,900,000
------------ ------------
Total current liabilities 34,206,344 34,763,811
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock-$.01 par value
Authorized-100,000,000 shares;
issued and outstanding Series C Cumulative
Convertible 443,166 shares at June 30,
1999 and 493,166 at December 31, 1998
(liquidation preference of $2,871,716) 2,658,996 2,958,996
Common stock-$.0001 par value
Authorized-500,000,000 shares;
issued and outstanding-15,591,831 shares at
June 30, 1999 and 15,480,194 shares at
December 31, 1998 1,559 1,548
Capital in excess of par 32,901,042 32,577,053
Accumulated deficit (37,664,438) (35,643,355)
------------ ------------
Total stockholders' deficit (2,102,841) (105,758)
------------ ------------
Total liabilities & stockholders' deficit $ 32,103,503 $ 34,658,053
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 6
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Sale of purchased gas $ 265,145 $ 222,544 $ 400,971 $ 599,588
Sale of company produced oil and gas 1,731,738 903,704 3,054,561 1,271,639
Contracting and operating fees 92,553 3,750 154,008 18,251
--------------- --------------- --------------- ---------------
2,089,436 1,129,998 3,609,540 1,889,478
COSTS & EXPENSES
Gas acquisition costs 164,876 123,248 207,658 318,164
Gathering & transmission costs 92,007 147,722 174,501 302,534
Production costs-oil and gas 693,019 489,672 1,282,851 798,093
Other operating costs 48,914 49,247 107,539 74,411
Depletion, depreciation and amortization 679,021 419,658 1,274,390 680,922
Provision for impairment of assets -- 145,000 -- 145,000
General and administrative expenses 738,817 451,892 1,460,455 743,775
--------------- --------------- --------------- ---------------
2,416,654 1,826,439 4,507,394 3,062,899
Earnings (loss) from operations (327,218) (696,441) (897,854) (1,173,421)
OTHER INCOME (EXPENSE)
Interest income 22,274 87,925 37,998 291,969
Interest expense (583,502) (282,552) (1,163,692) (282,552)
Other (3,082) (5,317) 2,467 (7,892)
--------------- --------------- --------------- ---------------
(564,310) (199,944) (1,123,227) 1,525
--------------- --------------- --------------- ---------------
NET LOSS (891,528) (896,385) (2,021,081) (1,171,896)
Preferred stock dividends attributable to period (53,180) (456,536) (106,360) (916,573)
--------------- --------------- --------------- ---------------
Net loss applicable to common stockholders $ (944,708) $ (1,352,921) $ (2,127,441) $ (2,088,469)
=============== =============== =============== ===============
Basic and diluted loss per common share $ (0.06) $ (0.15) $ (0.14) $ (0.24)
=============== =============== =============== ===============
Weighted average common shares outstanding 15,591,831 8,857,900 15,591,831 8,828,004
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 7
UNITED STATES EXPLORATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1999 June 30, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net loss $ (2,021,081) $ (1,171,896)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization 1,274,390 680,922
Provision for impairment of assets -- 145,000
Loss on sale of assets 3,952 10,249
Decrease (increase) in accounts receivable 1,051,423 (724,568)
(Increase) in due from related parties (26,297) --
Decrease in inventory 3,583 2,236
Decrease (increase) in prepaid expenses and deposits 730,419 (76,761)
Increase in accounts payable
and accrued expenses 123,068 905,720
(Decrease) in due related parties (30,535) (1,577)
Stock issued as compensation 24,000 --
Other (3) 3,369
--------------- ---------------
Net cash provided by (used in) operating activities 1,132,919 (227,306)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,957,691) (807,502)
Proceeds from sale of equipment 2,575,400 58,065
Aquisition of oil and gas leases -- (40,555,833)
--------------- ---------------
Net cash provided by (used in) investing activities 617,709 (41,305,270)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable to bank (3,350,000) --
Proceeds from debt 2,700,000 29,000,000
Loan costs related to acquisition financing -- (442,882)
Dividend paid on preferred stock -- (1,376,773)
--------------- ---------------
Net cash (used in) provided by financing activities (650,000) 27,180,345
Net increase (decrease) in cash and cash equivalents 1,100,628 (14,352,231)
Cash and cash equivalents-beginning of period 1,000,661 15,988,152
--------------- ---------------
Cash and cash equivalents-end of period $ 2,101,289 $ 1,635,921
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 8
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - COMPANY HISTORY AND NATURE OF OPERATIONS
History and Operations
United States Exploration, Inc. (the "Company") was incorporated on January 9,
1989. The Company produces oil and gas and operates gas gathering systems. The
Company's operations have historically been located in Kansas and Oklahoma.
Effective May 15, 1998, the Company acquired producing oil and gas properties in
northeast Colorado which now constitute its principal oil and gas assets. The
Company's properties in Oklahoma were sold in three separate transactions in
January and May of 1999.
Principles of Consolidation
The accompanying 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. (formerly ZCA Gas Gathering, Inc.). On January
20, 1999, the stock of Performance Petroleum Corporation, Pacific Osage, Inc.
and United States Gas Gathering Co. Inc. was sold in two separate transactions.
All significant intercompany transactions and balances have been eliminated in
consolidation.
NOTE B - FINANCIAL STATEMENTS
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. The results of
operations for the three months ended June 30, 1999 and for the six months ended
June 30, 1999 are not necessarily indicative of the results to be expected for
the year.
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 year ended December 31, 1998.
NOTE C - LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss applicable to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that could occur if
common stock options were exercised and preferred stock were
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<PAGE> 9
converted into common stock. Basic and diluted loss per share are the same for
all periods presented as the exercise of stock options and the conversion of
preferred stock would have an anti-dilutive effect on all periods.
NOTE D - ACQUISITIONS
On May 15, 1998, the Company acquired from Union Pacific Resources Company
(UPR), 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, as adjusted, was
approximately $39,560,000. Included in accounts receivable at December 31, 1998
was $1,686,118 due from UPR as a final settlement of the purchase price
adjustments. The final settlement was received during the first quarter of 1999.
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 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 (see Note E). The Company has finalized an
amendment to the Exploration Agreement wherein certain deepenings and reentries
of wells will qualify as commitment wells during the initial 18-month period.
Deepenings and reentries of wells require less capital than the drilling of new
wells.
NOTE E - COMMITMENTS
Effective July 1, 1998, the Company entered into a 117 month lease for office
space. Approximately 12,000 square feet were leased with monthly payments of
$14,817 for the first 57 months and $19,411 for the remainder of the lease term.
The Company has incurred costs of approximately $100,000 for leasehold
improvements, substantially all of which were incurred during the first quarter
of 1999. The approximate minimum aggregate rental commitment under the office
space lease is as follows:
<TABLE>
<S> <C>
1999 $ 177,804
2000 177,804
2001 177,804
2002 177,804
2003 219,150
Thereafter 989,961
----------
$1,920,327
==========
</TABLE>
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<PAGE> 10
As part of its program to reduce general and administrative expenses, the
Company is attempting to sublease this space.
The Company has committed to drill 15 wells by November 30, 1999 under the
Exploration Agreement described in Note D. At August 18, 1999 three wells have
been drilled or deepened pursuant to the Exploration Agreement. Liquidated
damages of $125,000 per commitment well not drilled will be due UPR, resulting
in a total of $1,500,000 if the remaining 12 commitment wells are not drilled by
November 30, 1999. See Note D for further details of an amendment to the
Exploration Agreement which will reduce the capital required to fulfill this
commitment.
NOTE F - 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 were initially set at $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. The balance of the purchase price 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. 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.
At December 31, 1998 and June 30, 1999, 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 (Earnings
Before Interest, Taxes, Depreciation and Amortization) to interest expense of
not less than 2.75:1 and a ratio of current assets to current liabilities of not
less than 1:1, and to maintain tangible net worth of at least $20 million.
As a result of the Company's failure to meet these ratios and requirements at
December 31, 1998 and June 30, 1999, the loan is in default and can be called by
the bank. Therefore, the Company is required by generally accepted accounting
principles to classify the entire outstanding balance due to the lender as a
current liability even though the current outstanding balance of the loan is
payable by its terms over a five year period beginning March 31, 2000 as
follows:
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<PAGE> 11
<TABLE>
<S> <C>
1999 $ --
2000 8,000,000
2001 7,500,000
2002 7,000,000
2003 7,000,000
Thereafter 1,750,000
-----------
$31,250,000
===========
</TABLE>
The report of independent auditors as of December 31, 1998 and for the year then
ended was qualified regarding doubt about the Company's ability to continue as a
going concern based upon operating losses and the Company's default of certain
covenants of its Credit Agreement.
NOTE G - ASSETS HELD FOR SALE
On January 20, 1999, the Company sold, effective as of December 31, 1998, the
stock of three wholly owned subsidiaries. Performance Petroleum Corporation and
Pacific Osage, Inc. were sold in one of the transactions for $650,000. United
States Gas Gathering Co., Inc. was sold in the other transaction for $1,175,000.
As required by the Company's credit agreement with its lender, the proceeds of
the sales were used to reduce the Company's borrowings. The underlying
properties sold consisted of the following:
<TABLE>
<S> <C>
Current assets $ 134,542
Natural gas gathering systems, net 371,622
Oil and gas property and equipment, net 1,159,076
Building and other equipment, net 218,203
-----------
1,883,443
Current liabilities (58,443)
-----------
$ 1,825,000
</TABLE>
In May, 1999, the Company sold its oil and gas properties in Logan, Noble and
Kay Counties, Oklahoma for $750,000 effective as of April 1, 1999. The proceeds
were used to reduce the Company's borrowings.
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
In May 1998, we acquired our Colorado properties from UPR. Those new
properties are many times larger than the properties we have historically owned.
As a result of the impact of this acquisition, comparisons of the second quarter
and the first six months of 1999 to the second quarter and the first six months
of 1998 are not particularly meaningful.
As a result of the losses experienced by the Company in recent periods
and existing defaults under our principal loan agreement, our auditors included
a "going concern" qualification in their opinion on our 1998 financial
statements.
Liquidity and Capital Resources
Bank Credit Facility
On May 15, 1998, in connection with the UPR acquisition, we entered
into a Credit Agreement with ING (U.S.) Capital Corporation ("ING") establishing
a revolving credit facility (the "Credit Agreement"). The maximum available
borrowings under the Credit Agreement were initially set at $35 million, subject
to periodic redeterminations of the borrowing base. The original loan
amortization schedule included 20 quarterly installments beginning March 31,
2000. Loan interest is generally payable on a quarterly basis at a rate selected
by us which is determined by reference to LIBOR or the lender's reference rate
plus varying margins. At June 30, 1999, the outstanding loan balance was $31.25
million with a weighted-average interest rate of approximately 7.3% per annum.
Our obligations 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 our Common Stock and prohibits the payment of dividends
on our Series C Preferred Stock for periods ending after June 30, 1999. No
dividend has been paid on the Series C Preferred Stock since the quarter ended
June 30, 1998.
On November 18, 1998, we notified ING that we were in default of
several of the Credit Agreement's financial covenants as of September 30, 1998.
As a result, the entire amount of the outstanding bank loan was reclassified as
a current liability on the Company's balance sheet in accordance with the
requirements of generally accepted accounting principles. On January 15, 1999,
we received a Limited Consent and Agreement from ING waiving all outstanding
matters of default in conjunction with the bank's consent to sell certain
Oklahoma assets and a reduction in the Company's borrowing base to $32 million.
The waiver of default expired on February 28, 1999.
As of August 18, 1999, the bank had not established a new borrowing
base level based on our year-end reserves. Based upon discussions to date with
the bank, it is not clear when the bank
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<PAGE> 13
will establish a new borrowing base. However, when a new borrowing base is
established, we still anticipate the amount would be sufficiently below the
outstanding loan balance that we would not be able to unilaterally satisfy the
deficiency in a timely manner. Consequently, we have begun discussions with ING
regarding a restructuring of the loan which would potentially include a
combination of reduction in the face amount of the loan and conversion of a
portion of the loan to subordinated debt and/or some form of equity. No
timetable has been established for the conclusion of these discussions and no
assurance can be given that these discussions will be successful. If the
discussions are not successful and a borrowing base deficiency or some other
form of default remains uncured, the bank has the ability under the terms of the
Credit Agreement to declare the outstanding loan balance to be due and payable
and foreclose on the properties which secure the loan.
ING has advised all of the customers of its Natural Resources Group
that this department of the bank has ceased ongoing operations. However, the
bank has retained certain personnel to administer the loans of existing clients,
including UXP. We cannot predict what impact the bank's decision to discontinue
lending in the natural resources industries will have on our ability to
negotiate a satisfactory restructuring of our loan.
Capital Expenditures
Until the potential borrowing base shortfall described above has been
resolved, we will continue to significantly curtail projects requiring cash
investment by the Company, focusing principally on projects that pay back their
investment over a short period of time. We will also seek sources of outside
financing which will allow development of the Company's capital projects with
little or no investment by the Company, but no assurance can be given that such
financing will become available. Such financing arrangements would necessarily
involve a significant reduction of the Company's interest in the properties to
be developed.
Under the Exploration Agreement described in Note D, we have an
obligation to drill 15 commitment wells prior to December 1, 1999. If the wells
are not drilled by the deadline, the Exploration Agreement is terminated and we
will be obligated to pay liquidated damages of $125,000 for each well not
drilled. The Company has finalized an amendment to the Exploration Agreement
under which certain deepenings and re-entries, which are significantly less
expensive than new wells, will count as commitment wells during the initial
18-month term. As of August 18, 1999, three commitment wells had been drilled or
deepened. Management believes that the remainder of the Company's commitment
under the Exploration Agreement during the initial term will be satisfied.
Cash Balances and Cash Flow
As of August 18, 1999 the Company had cash and cash equivalents of
approximately $1.1 million. The increases in commodity prices and the
implementation of certain cost reduction measures are expected to produce
positive cash flow before capital spending the remainder of the
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<PAGE> 14
year. However, there can be no assurance that prices will remain at current
levels and that cash flow will be positive.
Conversion of Series C Preferred Stock
In order to reduce the negative impact of preferred stock dividends on
earnings attributable to common shareholders and cash flow, we engaged in an
active program to convert Series C Preferred Stock into shares of common stock
during 1998. Since December 31, 1997, 3,391,834 shares of Series C Preferred
Stock have been converted into 6,783,668 shares of common stock. This conversion
reduces preferred stock dividend requirements by approximately $1.6 million per
year. The annual dividend requirement on the 443,166 shares that remain
outstanding is approximately $200,000. However, no dividends have been paid on
any of the Company's preferred stock since June 30, 1998.
Preferred stock dividends attributable to the quarter ended June 30,
1999 are $53,180 compared to $456,536 for the second quarter of 1998. The large
reduction is attributable to the conversion of preferred stock to common stock
during 1998. Most of these conversions were effective immediately after the cash
dividend was paid for the second quarter of 1998.
Property Sales
During the first quarter of 1999, we sold certain Oklahoma assets for
$1,825,000. On May 6, 1999, we sold our remaining Oklahoma assets for $750,000.
These sales did not result in any gain or loss to the Company as the proceeds
reduced the carrying cost of the Company's oil and gas property and equipment
full cost pool. The proceeds from these sales were applied to reduce the ING
loan. We have also announced our intention to dispose of the Company's remaining
assets in Kansas and Texas. Under the terms of the Credit Agreement, any
proceeds of the sale of these assets will also be required to be applied against
the ING loan. Therefore, sales of the Company's non- Colorado properties have in
the past and may in the future reduce interest expense and any borrowing base
shortfall, but until such time as the borrowing base shortfall has been
eliminated, cannot be expected to improve the Company's liquidity.
Results of Operations
Introduction
Because of the acquisition of the UPR properties in May 1998,
comparison of the results of operations between the quarter and six months ended
June 30, 1999 and the quarter and six months ended June 30, 1998 is not
meaningful. Results of operations for the quarter ended June 30, 1998 include
only one and one- half months of Colorado operations and include Oklahoma
operations for the entire quarter. Results of operations for the quarter ended
June 30, 1999 include operations in Colorado for the entire quarter and Oklahoma
operations in Kay, Logan and Noble Counties for one month. The oil and gas
properties involved in the UPR acquisition dwarf the oil and gas properties
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<PAGE> 15
previously owned by the Company. As a result, sales of Company produced oil and
gas, production costs of oil and gas, depletion, depreciation and amortization
expense, general and administrative expenses and interest expense increased
substantially, while interest income declined substantially. All interest
expense is attributable to the UPR acquisition and substantially all of the
decrease in interest income results from the use of Company cash in the UPR
acquisition. The increase in general and administrative expense primarily
results from additional personnel and associated costs, office facilities and
legal and accounting expenses, all of which are related to the continuing
operations of the UPR properties.
Quarter Ended June 30, 1999
The Company realized a net loss of $891,528 for the second quarter of
1999 compared to a loss of $896,385 for the second quarter of 1998. Including
preferred stock dividends, the loss for the second quarter of 1999 was $944,708
or $.06 per share compared to a loss of $1,352,921 ($.15 per common share) for
the second quarter of 1998.
The decrease in sales of purchased gas and the related costs of gas
acquisition and gathering and transmission reflects the fact that in the second
quarter of 1998, the Company purchased gas in Oklahoma and Kansas while in the
second quarter of 1999 we only purchased gas in Kansas. The Oklahoma gathering
systems were sold effective December 31, 1998. The sales of purchased gas in
Kansas for the second quarter of 1999, net of gas acquisition costs and
gathering and transmission costs, produced a small profit. The Company continues
its efforts to contract with others to purchase additional natural gas from
wells in the area of its Kansas gathering system and has recently installed
additional facilities which will allow resales of its purchased gas through two
pipelines instead of one pipeline, thus increasing marketing flexibility.
Gas prices have increased since December 31, 1998. The Company has not
given effect to any revisions in proved reserve quantities which might result
from these increased prices in its calculations of depletion, depreciation and
amortization for the second quarter of 1999.
Contracting and operating fees were $92,553 for the second quarter of
1999 compared to $3,750 for the second quarter of 1998. This increase is
substantially attributable to amounts billed to Benson Mineral Group, Inc. for
time spent by Company employees on the business affairs of Benson Mineral Group,
Inc.
The following table reflects net oil and gas production (after
royalties) and weighted average sales prices for the Company's products for the
three months ended June 30, 1998 and June 30, 1999 and, to illustrate changes in
production and pricing since the end of the first quarter of 1999, summarizes
the Company's production and pricing in that quarter:
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<PAGE> 16
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Three months ended June 30 Three months
-------------------------- ended March
1998 1999 31, 1999
-------------------------------------- ------------------------------------ ------------
Kansas and Kansas and
Oklahoma Colorado Total Oklahoma Colorado Total Total
---------- -------- ------ ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl 16.83 16.63 33.46 3.08 31.02 34.10 27.52
Natural Gas - mmcf 48.36 193.32 241.68 31.88 602.81 634.69 605.84
Total - mmcfe 149.34 293.10 442.44 50.36 788.93 839.29 770.96
Weighted Average Prices
Oil - $/bbl 14.04 12.55 13.30 15.88 16.10 16.08 10.99
Natural Gas - $/mcf 2.17 1.79 1.87 1.20 1.99 1.95 1.59
</TABLE>
The three months ended June 30, 1998 include only 1.5 months of
Colorado operations and a full quarter of operations from the Oklahoma
properties, including those properties sold effective December 31, 1998. The
three months ended June 30, 1999 include Oklahoma operations for Logan, Noble
and Kay Counties for one month only, including sale of oil in tanks at April 1,
1999.
Six Months Ended June 30, 1999
Because a comparison of the results of operation for the first six
months of 1999 to the results of operation for the six months ended June 30,
1998 is not very meaningful, most of the discussion below compares results of
operations for the second quarter of 1999 to those of the first quarter of 1999.
The Company realized a net loss of $2,021,081 for the first six months
of 1999, compared to a net loss of $1,171,896 for the first six months of 1998.
Including preferred stock dividends, the loss for the first six months of 1999
was $2,127,441 or $.14 per share compared to a loss of $2,086,469 ($.24 per
common share) for the first six months of 1998.
The sales of company produced oil and gas were $1,731,738 in the second
quarter of 1999 compared to $1,322,823 for the first quarter of 1999, an
increase of more than 30%, as a result of significantly increased prices,
coupled with more modest increases in production volumes. Sales of oil and gas
from Logan, Noble and Kay Counties, Oklahoma are included for only the first
four months of 1999 ($97,590 in the first quarter of 1999 and $59,945 in the
second quarter of 1999). The sales from Logan, Noble and Kay Counties in the
second quarter of 1999 included approximately $22,000 from the sale of oil in
tanks which was a part of the sale of our properties in those counties as
described under Liquidity and Capital Resources - Property Sales above. See the
charts showing net oil and gas production and sales prices for the quarters and
six-month periods ended June 30, 1998 and 1999. The increased sales of company
produced oil and gas were partially
- 16 -
<PAGE> 17
offset by increased production and other operating costs and depletion,
depreciation and amortization.
Sales of purchased gas were $265,145 for the second quarter of 1999
compared to $135,826 for the first quarter of 1999. This increase reflects both
higher gas prices and larger volumes of gas purchased from others. Gas
acquisition costs and gathering and transmission costs were $256,883 in the
second quarter of 1999 compared to $125,276 for the first quarter of 1999.
Contracting and operating fees were $92,553 in the second quarter of
1999 compared to $61,455 in the first quarter of 1999. This revenue is basically
attributable to billings to Benson Mineral Group, Inc. for time spent by Company
employees on the business affairs of Benson Mineral Group, Inc. All Benson
Mineral Group, Inc. employees were moved to the Company payroll in February
1999.
Net oil and gas production (after royalties) and weighted average sales
prices for the Company's products for the six months ended June 30, 1998 and
June 30, 1999 are shown in the table below:
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Six months ended June 30
------------------------
1998 1999
------------------------------ -------------------------------
Kansas and Kansas and
Oklahoma Colorado Total Oklahoma Colorado Total
---------- -------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl 33.57 16.63 50.20 7.30 54.32 61.62
Natural Gas - mmcf 127.12 193.32 320.44 60.01 1180.52 1240.53
Total - mmcfe 328.54 293.10 621.64 103.81 1506.44 1610.25
Weighted Average Prices
Oil - $/bbl 14.73 12.55 14.01 14.07 13.77 13.80
Natural Gas - $/mcf 1.74 1.79 1.77 1.50 1.79 1.78
</TABLE>
The six months ended June 30, 1998 include only 1.5 months of Colorado
operations and include six months of operations from the Oklahoma properties,
including those properties sold effective December 31, 1998. The six months
ended June 30, 1999 include Oklahoma operations for Logan, Noble and Kay
Counties for four months only.
The provision for impairment of assets in the first six months of 1998
is related to the land in Texas held for resale.
- 17 -
<PAGE> 18
Production costs, oil and gas and other operating costs totaled
$741,933 in the second quarter of 1999 compared to $648,457 for the first
quarter of 1999, an increase of $93,476. Approximately $42,000 of the increase
is attributable to a once a year billing from another operator for ad valorem
taxes. Approximately $22,000 of the increase is attributable to taxes associated
with the increased dollar amount of oil and gas sales. In 1999 other operating
costs include field personnel and the Brighton, Colorado field office. The field
office was closed in June, 1999. One of the field employees moved to the Denver
offices and one of the field employees left in July, 1999 without replacement.
General and administrative costs remained fairly constant, being
$738,817 for the second quarter of 1999 compared to $721,638 for the first
quarter of 1999. Costs reduction efforts previously announced had minimal effect
in the second quarter of 1999 as these efforts had just begun.
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 in the process of communicating 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.
- 18 -
<PAGE> 19
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 and potential
sources of capital, oil and gas reserves, future revenues and results of
operations, plans for future development operations and plans for dealing with
third parties, and are identified by words such as "anticipates," "plans,"
"expects," "intends" and "estimates." Factors that could cause actual results to
differ materially from these contemplated by such forward-looking statements
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
interpretations 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 has expanded its
staffing, office space and management information systems. The Company could
experience temporary difficulties in the course of 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. The Company's capital
resources are quite limited and it is currently in default under its loan
agreement. There can be no assurance that it will be able to resolve the
existing defaults or increase revenues sufficiently to service its debt. If it
is not, the bank
- 19 -
<PAGE> 20
could foreclose on the Company's properties, which are its only significant
source of revenues. These factors can be expected to adversely affect the
Company's ability to obtain additional financing for working capital, capital
expenditures and other purposes.
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. Price
declines have in the past and may in the future adversely affect the Company,
both in lower prices received for its oil and gas and in reductions in the
estimated proved reserves attributable to the Company's properties. 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. Changes in government regulations applicable to
the production and sale of oil and gas may adversely affect the Company. See
"Items 1 and 2 - Description of Business and Properties - Government
Regulation."
Most of these factors are beyond the control of the Company. Investors
are cautioned not to place undue reliance on forward-looking statements.
- 20 -
<PAGE> 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
No report required.
Item 2. Changes in Securities.
No report required.
Item 3. Defaults Upon Senior Securities.
The Company is in default under its Credit Agreement with ING
(U.S.) Capital LLC. The amount outstanding is $31,250,000 and the Company is in
default on certain financial covenants. Under the terms of the Credit Agreement,
cash dividends on the Company's Series C Convertible Preferred Stock may not be
paid if there is a default under the Credit Agreement. Dividends have not been
declared or paid since the second quarter of 1998. Unpaid dividends from July 1,
1998 through August 13, 1999 approximate $239,000. The Series C Convertible
Preferred Stock is not registered stock.
Item 4. Submission of Matters to a Vote of Security Holders.
At the July 13, 1999 annual meeting of shareholders, the
matters voted on and the voting results were as follows:
Proposition 1 - Election of Directors
<TABLE>
<CAPTION>
WITHHELD
FOR AUTHORITY ABSTAIN
---------- --------- -------
<S> <C> <C> <C>
Bruce D. Benson 11,898,981 44,335 78,910
Thomas N. Gamel 11,943,296 20 78,910
Richard L. Robinson 11,942,296 1,020 78,910
Robert J. Malone 11,943,296 20 78,910
</TABLE>
Proposition 2 - Approval of 1999 Employee Stock Option Plan
<TABLE>
<CAPTION>
WITHHELD
FOR AUTHORITY ABSTAIN
---------- --------- -------
<S> <C> <C> <C>
11,523,677 420,014 78,535
</TABLE>
- 21 -
<PAGE> 22
Proposition 3 - Ratify appointment of Ernst & Young LLP as auditors
<TABLE>
<CAPTION>
WITHHELD
FOR AUTHORITY ABSTAIN
---------- --------- -------
<S> <C> <C> <C>
11,990,541 26,650 5,085
</TABLE>
There were no broker non-votes.
Item 5. Other Information.
No report required.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits:
27.1 Financial Data Schedule.
B. Reports on Form 8-K.
None.
- 22 -
<PAGE> 23
SIGNATURE
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 23, 1999 By: /s/ Bruce D. Benson
----------------------------------------
Bruce D. Benson, President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: August 23, 1999 By: /s/ F. Michael Murphy
----------------------------------------
F. Michael Murphy, Vice President,
Secretary and Chief Financial Officer
(Principal Financial Officer)
- 23 -
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Item Page No.
- ------- ---- --------
<S> <C> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,101,289
<SECURITIES> 0
<RECEIVABLES> 1,944,385
<ALLOWANCES> 15,108
<INVENTORY> 6,101
<CURRENT-ASSETS> 4,144,253
<PP&E> 55,338,138
<DEPRECIATION> 28,911,251
<TOTAL-ASSETS> 32,103,503
<CURRENT-LIABILITIES> 34,206,344
<BONDS> 0
0
2,658,996
<COMMON> 1,559
<OTHER-SE> (4,763,396)
<TOTAL-LIABILITY-AND-EQUITY> 32,103,503
<SALES> 2,089,436
<TOTAL-REVENUES> 2,089,436
<CGS> 164,876
<TOTAL-COSTS> 2,416,654
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 583,502
<INCOME-PRETAX> (891,528)
<INCOME-TAX> 0
<INCOME-CONTINUING> (891,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (891,528)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
