<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 March 31, 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 May 19, 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............................................................................... 19
SIGNATURES................................................................................................ 21
EXHIBIT INDEX............................................................................................. 22
</TABLE>
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<PAGE> 4
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,311,800 $ 1,000,661
Accounts receivable 1,262,683 2,980,700
Due from related parties 75,005 4,761
Inventory 8,139 9,684
Prepaid expenses and deposits 92,955 806,947
Assets held for sale -- 1,825,000
----------- -----------
Total current assets 4,750,582 6,627,753
PROPERTY AND EQUIPMENT, AT COST, NET:
Oil and gas property and equipment
(full cost method) 25,821,830 25,166,770
Natural gas gathering systems 956,232 977,050
Other equipment and leasehold improvements 394,485 295,046
----------- -----------
27,172,547 26,438,866
OTHER ASSETS
Land held for resale 700,000 700,000
Pipeline lease, less accumulated amortization
of $261,249 at March 31, 1999 and
of $248,481 at December 31, 1998 451,811 462,358
Loan costs, less accumulated
amortization of $62,574 at March 31, 1999 and
amortization of $44,695 at December 31, 1998 411,198 429,076
----------- -----------
1,563,009 1,591,434
----------- -----------
Total assets $33,486,138 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' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 2,365,599 $ 2,365,983
Accrued liabilities 331,852 450,449
Due related parties -- 47,379
Due bank under credit facility 32,000,000 31,900,000
------------ ------------
Total current liabilities 34,697,451 34,763,811
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock-$.01 par value
Authorized-100,000,000 shares; issued and outstanding Series C Cumulative
Convertible-493,166 shares at March 31, 1999 and 493,166 at December 31,
1998 (liquidation preference of $3,136,535)
Common stock-$.0001 par value 2,958,996 2,958,996
Authorized-500,000,000 shares;
issued and outstanding-15,491,831 shares at
March 31, 1999 and 15,480,194 shares at
December 31, 1998 1,549 1,548
Capital in excess of par 32,601,052 32,577,053
Accumulated deficit (36,772,910) (35,643,355)
------------ ------------
Total stockholders' equity (deficit) (1,211,313) (105,758)
------------ ------------
Total liabilities and stockholders' equity $ 33,486,138 $ 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
--------------------------------------
MARCH 31, 1999 MARCH 31. 1998
-------------- --------------
<S> <C> <C>
REVENUES
Sale of purchased gas $ 135,826 $ 377,044
Sale of company produced oil and gas 1,322,823 367,935
Contracting and operating fees 61,455 14,501
------------- -----------
1,520,104 759,480
COSTS AND EXPENSES
Gas acquisition costs 42,781 194,916
Gathering and transmission costs 82,494 154,812
Production costs-oil and gas 589,832 308,421
Other operating costs 58,625 25,164
Depletion, depreciation, and amortization 595,369 261,264
General and administrative expenses 721,638 291,883
------------- -----------
2,090,739 1,236,460
Loss from operations (570,635) (476,980)
OTHER INCOME (EXPENSE)
Interest income 15,723 204,044
Interest expense (580,190) --
Other 5,549 (2,575)
------------- -----------
(558,918) 201,469
------------- -----------
NET LOSS (1,129,553) (275,511)
Preferred stock dividends attributable to period (59,180) (460,037)
------------- -----------
Net loss applicable to common stockholders $ (1,188,733) $ (735,548)
============= ===========
Basic and diluted loss per common share $ (0.08) $ (0.08)
============= ===========
Weighted average common shares outstanding 15,491,831 8,797,775
============= ===========
</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>
Three months ended
-------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net loss $ (1,129,553) $ (275,511)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 595,369 261,264
(Gain) loss on sale of assets (99) 4,282
Decrease in accounts receivable 1,718,017 142,385
Increase in due from related parties (70,244) --
Decrease (increase) in inventory 1,545 (38,687)
Decrease in prepaid expenses 713,992 10,276
Increase (decrease) in accounts payable
and accrued expenses (118,981) 238,336
Decrease in due to related parties (47,379) (13,810)
Stock issued as directors fees 24,000 --
Other (1) --
------------ ------------
Net cash provided by operating activities 1,686,666 328,535
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,300,526) (179,366)
Proceeds from sale of properties and equipment 1,825,000 26,010
------------ ------------
Net cash provided by (used in) investing activities 524,474 (153,356)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of borrowings to bank (2,600,000) --
Borrowings from bank 2,700,000 --
Loan costs related to aquisition financing -- (116,935)
Dividend paid on preferred stock -- (460,200)
------------ ------------
Net cash provided by (used in) financing activities 100,000 (577,135)
Net increase (decrease) in cash and cash equivalents 2,311,140 (401,956)
Cash and cash equivalents-beginning of period 1,000,661 15,988,152
------------ ------------
Cash and cash equivalents-end of period $ 3,311,800 $ 15,586,196
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
-7-
<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.
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 March 31, 1999 are not necessarily
indicative of the results to be expected for the year.
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 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. The Company has finalized an amendment
to the Exploration Agreement wherein certain future 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
The Company has committed to drill 15 wells by November 30, 1999 under the
Exploration Agreement which is a part of the acquisition of properties from
UPR. At March 31, 1999 no wells have been drilled pursuant to the Exploration
Agreement. Liquidated damages of $125,000 per commitment well not drilled will
be due UPR, resulting in a total of $1,875,000 if no commitment wells are
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, 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. 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.
At December 31, 1998 and March 31, 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 March 31, 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 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 2,500,000
-----------
$32,000,000
===========
</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>
Because these sales were effective December 31, 1998, the Company has not
reported any results of operations relating to the properties owned by these
subsidiaries during the first quarter of 1999. If these sales had been
completed January 1, 1998, the pro forma results for the quarter ended March
31, 1998 would have been as follows:
<TABLE>
<S> <C>
Revenues $ 435,258
Income (loss) from continuing operations $ (299,138)
Net income (loss) $ (97,669)
Net income (loss) per common share $ (.06)
</TABLE>
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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 first
quarter of 1999 to the first quarter 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 March 31, 1999, the
outstanding loan balance was $32 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. Prior to June 30, 1999, we are prohibited from paying any
dividend on the Series C Preferred Stock if a default under the Credit
Agreement exists. 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, by which time it had been
anticipated that ING would have completed its year-end review of the Company's
reserves and established a new borrowing base.
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<PAGE> 13
As of May 14, 1999, the bank had not yet completed its review of
reserves or established a new borrowing base level. Based on preliminary
reports provided to the bank at the end of the first quarter, ING advised that
the new borrowing base level would likely be established in a range between $21
million and $26 million. Since that time both oil and gas prices have increased
significantly. The Company's average well-head oil price increased from $12.40
per barrel in March to an estimate of $15.20 per barrel in April. The average
well-head gas price similarly increased from $1.57 per mcf in March to an
estimate of $2.03 per mcf for the month of May. We anticipate that these
increases will have a positive impact on the bank's determination of the
borrowing base, but ING has made no commitment regarding the impact of
increasing prices on the borrowing base level.
We have not yet established with the bank a plan for eliminating a
possible borrowing base deficiency. However, we have begun discussions with ING
and are evaluating our options. If 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. However, ING has
given no indication that it intends to exercise such remedies in the
foreseeable future. On the contrary, the bank has expressed its desire to work
with us to find a mutually acceptable solution to these issues.
ING has recently 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, and has stated that their withdrawal from the oil and
gas business is being managed in order to have as little adverse impact on
their clients as possible.
Capital Expenditures
Until the potential borrowing base shortfall described above has been
resolved, we will 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 sources
will become available.
Under the Exploration Agreement with UPR, we have an obligation to
drill 15 commitment wells prior to December 1, 1999. As of May 14, 1999, none
of these wells had been drilled. 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 future
deepenings and reentries, which are significantly less expensive than new
wells, will count as commitment wells during the initial 18-month term.
Management believes that resources are available to satisfy the Company's
commitment under the Exploration Agreement during the initial term.
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<PAGE> 14
Cash Balances and Cash Flow
As of May 19, 1999 the Company had cash and cash equivalents of
approximately $2.2 million. The recent increase in commodity prices discussed
above and the implementation of certain cost reduction measures allow us to
project positive cash flow before capital spending for the month of May and the
remainder of the year. However, there can be no assurance that prices will
remain at current levels and that cash flow will remain positive.
The Company's cash flow is very sensitive to changes in commodity
prices. A $.25/mcf increase in the price of gas and a $1.00/bbl increase in the
price of oil would increase expected cash flow from the Company's currently
producing wells over the twelve month period beginning June 1, 1999 by
approximately $500,000 and $90,000, respectively.
Conversion of Series C Preferred Stock
In order to reduce the negative impact to earnings attributable to
common shareholders and cash flow attributable to preferred stock dividends, 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
(including 50,000 shares of preferred stock converted after March 31, 1999).
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 March 31,
1999 are $59,180 compared to $460,037 for the first 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.
-14-
<PAGE> 15
Results of Operations -- Quarter Ended March 31, 1999
The Company realized a net loss of $1,129,553 for the first quarter of
1999 compared to a loss of $275,511 for the first quarter of 1998. Including
preferred stock dividends, the loss for the first quarter of 1999 was
$1,188,773 or $.08 per share.
Because of the acquisition of the UPR properties in May 1998,
comparison of the results of operations between the quarter ended March 31,
1999 and the quarter ended March 31, 1998 is not meaningful. The oil and gas
properties involved in the UPR acquisition dwarf the oil and gas properties
owned by the Company at March 31, 1998. 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.
Sales of purchased gas and the related costs of gas acquisition and
gathering and transmission reflect the fact that in the first quarter of 1998,
the Company purchased gas in Oklahoma and Kansas while in the first quarter of
1999 we only purchased gas in Kansas. The Oklahoma gathering systems were sold
effective December 31, 1998 resulting in lower sales of purchased gas and
related costs for the first quarter of 1999.
Gas prices have increased since March 31, 1999. 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 of its oil and gas properties for the first quarter of 1999.
Contracting and operating fees revenues were $61,455 for the first
quarter of 1999 compared to $14,501 for the first quarter of 1998. This
increase is substantially attributable to amounts payable by Benson Mineral
Group, Inc. for time spent by Company employees on the business affairs of
Benson Mineral Group, Inc.
Net oil and gas production (after royalties) and weighted average
sales prices for the Company's products for the three months ended March 31,
1998 and March 31, 1999 are shown in the table below:
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<PAGE> 16
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1998 1999
----------------------------------- ---------------------------------
Kansas and
Oklahoma Colorado Total Oklahoma Colorado Total
---------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl 16.74 -- 16.74 4.22 23.30 27.53
Natural Gas - mmcf 78.76 -- 78.76 28.13 577.71 605.84
Total - mmcfe 179.20 -- 179.20 53.46 717.53 770.99
Weighted Average Prices
Oil - $/bbl 15.42 -- 15.42 12.75 10.67 10.99
Natural Gas - $/mcf 1.48 -- 1.48 1.84 1.58 1.59
</TABLE>
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.
-16-
<PAGE> 17
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. These
factors can
-17-
<PAGE> 18
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. Recent
declines in oil and gas prices have adversely affected the Company and have
resulted in a reduction in the estimated proved reserves attributable to the
Company's properties, with a resulting decrease in the Company's borrowing
base. Further price declines could occur in the future with similar results. 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. 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, and 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 could have a material adverse effect on the Company.
Most of these factors are beyond the control of the Company. Investors
are cautioned not to place undue reliance on forward-looking statements.
-18-
<PAGE> 19
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 $32,000,000 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 May 15, 1999 approximate $186,130. The
Series C Convertible Preferred Stock is not registered stock.
.
Item 4. Submission of Matters to a Vote of Security Holders.
No report required.
Item 5. Other Information.
No report required.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits:
10.1 Contract Amendment dated April 21, 1999 to
Exploration Agreement effective June 1, 1998,
Wattenberg area, Weld, Adams, and Arapahoe Counties,
Colorado.
10.2 First Amendment to that certain Exploration
Agreement dated April 9, 1998, but effective as of
June 1, 1998, by and between Union Pacific Resources
Company and United States Exploration, Inc.
27.1 Financial Data Schedule.
-19-
<PAGE> 20
B. Reports on Form 8-K.
Form 8-K with a report date of January 20, 1999 was
filed February 2, 1999 reporting the disposition of assets. On March 18, 1999
Form 8-K/A was filed to furnish financial information relating to the
disposition of assets. Financial statements filed were (1) Pro Forma Condensed
Balance Sheet as of September 30, 1998 and (2) Pro Forma Condensed Consolidated
Statements of Operations for the nine months ended September 30, 1998 and 1997.
-20-
<PAGE> 21
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: May 21, 1999 By: /s/ Bruce D. Benson
-----------------------------------------
Bruce D. Benson, President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: May 21, 1999 By: /s/ F. Michael Murphy
-----------------------------------------
F. Michael Murphy, Vice President,
Secretary and Chief Financial Officer
(Principal Financial Officer)
-21-
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Item Page No.
- ------- ---- --------
<S> <C> <C>
10.1 Contract Amendment dated April 21, 1999 -
Exploration Agreement effective June 1, 1998,
Wattenberg area, Weld, Adams, and
Arapahoe Counties, Colorado
10.2 First Amendment to that certain Exploration
Agreement dated April 9, 1998, but effective
as of June 1, 1998, by and between Union Pacific
Resources Company and United States
Exploration, Inc.
27.1 Financial Data Schedule
</TABLE>
-22-
<PAGE> 1
EXHIBIT 10.1
[UNION PACIFIC RESOURCES LETTERHEAD]
April 21, 1999
United States Exploration, Inc.
1560 Broadway, Suite 1900
Denver, Colorado 80202
Attn: John R. Wallace
Re: Contract Amendment
Exploration Agreement Effective June 1, 1998 (the "Agreement")
Wattenberg Area
Weld, Adams, and Arapahoe Counties, Colorado
Gentlemen:
The purpose of this letter is to formalize the amendments to the
Agreement that have been agreed to between Union Pacific Resources Company
("UPR") and United States Exploration, Inc. ("UXP"). The following responses
should correspond to the numbered requests set forth in UXP's letter dated
March 1, 1999 (copy of which is attached as Exhibit "A"). Any capitalized term
used herein shall have the same meaning as in the Agreement.
1) UPR agrees that should UXP drill a well on lands and/or leases that
were acquired pursuant to the terms of that certain Asset Purchase and
Sale Agreement dated April 9, 1998, as amended, in which UPR is
entitled to receive a royalty or ORRI payment and the well is drilled
in a manner consistent with the requirements for a Commitment Well
then such well shall count as a Commitment Well only for the purposes
of UXP's minimum drilling commitment under the Agreement. A well
drilled under these circumstances, however, will not serve to earn any
additional interest in or to such lands.
2) UPR does not agree with UXP's proposed amendment to the Agreement.
Since UXP will be earning a lease covering an entire section of land
by the drilling of a Commitment Well, only one well per section shall
count as a Commitment Well.
3) Subject to paragraph 2 hereinabove, UPR agrees that with respect to
the fifteen Commitment Wells required to be drilled during the first
18-month period (i.e., the Initial Term) of the Agreement any
deepening and/or re-entry of a wellbore to 4,000' or greater and to a
formation in which there is no then currently producing well, shut-in
well, or well capable
<PAGE> 2
of production in the drillsite section shall count as a Commitment
Well. However, such deepenings and/or re-entries shall not be included
in the calculation of the number of excess Commitment Wells which can
be credited against the minimum drilling requirement for the next
Option Year. In other words, allowing for any deepenings and/or
re-entries to count as Commitment Wells is limited to those occurring
during the Initial Term. UXP's request for the application of this
right to additional Option Years will be considered by UPR on an
annual basis.
4) UPR agrees that if UXP recompletes a well on the Subject Lands in a
formation which is currently not under lease or committed to a third
party then UXP shall earn a lease. The lease will be specific to the
producing horizon and cover the lands necessary to establish ownership
in the production from the wellbore (i.e. the drillsite spacing unit).
In no event shall a recompletion count as a Commitment Well.
5) UPR agrees that if a proposed operation falls under an existing
operating agreement and is to be conducted by a third party who is the
designated operator under said operating agreement, UXP does not need
UPR's consent if UXP elects to participate in the proposed operation.
Provided, however, should UXP desire to grant support or allow a third
party to operate a well which it wishes to qualify as a Commitment
Well, or for that matter any other assignment of UXP's rights under
the Agreement, UXP must obtain the prior written consent of UPR in
accordance with the terms of the Agreement. Further, it has been UPR's
policy that even when it consents to the assigning of an interest
under an agreement the assigning party remains liable for the actions
and inactions of the assignee.
If the foregoing is acceptable to UXP, please execute in the space provided
below and return one original to Jim O'Malley.
Very truly yours,
UNION PACIFIC RESOURCES COMPANY
By: /s/ Charles R. Traxl
-------------------------------
Its: Attorney in Fact
AGREED and ACCEPTED
this 3rd day of May 1999.
UNITED STATES EXPLORATION, INC.
By: /s/ Bruce D. Benson
--------------------------------------
Its: President
<PAGE> 3
EXHIBIT A
UNITED STATES EXPLORATION, INC.
1560 BROADWAY, SUITE 1900
DENVER, COLORADO 80202
TELEPHONE FACSIMILE
(303) 863-3550 (303) 863-1932
March 1, 1999
Mr. Joseph F. Carroll
Union Pacific Resources Company
P.O. Box 7
Fort Worth, Texas 76101-0007
Re: Exploration Agreement
Dated April 9, 1998, Effective June 1, 1998
Wattenberg Area
Dear Joe:
United States Exploration, Inc. ("UXP") has been unsuccessful in the
past to amend the Exploration Agreement into a workable agreement considering
the nature of the Wattenberg area. UXP recently met with Union Pacific
Resources Company ("UPRC") in Fort Worth to discuss UXP's concerns with the
Exploration Agreement and suggested amendments to same. UPRC agreed in
principle with UXP's suggestions. To expedite finalization of a workable
agreement, UXP hereby sets out those items which were discussed in our most
recent meeting and requests that the Exploration Agreement be amended as
follows:
1. By virtue of that certain Asset Purchase and Sale Agreement
dated April 9, 1998, as amended, between UXP and UPRC, UXP
acquired some nonproducing leases. Because the lands are
undeveloped, UPRC agrees that these leases and lands shall be
included under the definition of "Subject Lands" as defined
in the Exploration Agreement, allowing UXP's operations
conducted on these leases, or on lands pooled therewith, to
count against its commitments under the Exploration
Agreement.
2. The Exploration Agreement is unclear whether a "Commitment
Well" may be located in a section in which another
"Commitment Well" is located. UPRC agrees that a "Commitment
Well" shall earn all of UPRC's interest in the section in
which the well is located; however, a "Commitment Well" may
be located in each drilling and spacing unit as established
by order of the Colorado Oil and Gas Conservation Commission
for the objective depth of such "Commitment Well",
irrespective that another "Commitment Well" may be located in
the same section. In the event the area is unspaced, the
drilling and spacing unit shall be deemed to be a 320-acre
unit, either stand-up or lay-down at UXP's choice, for a well
with an objective depth
<PAGE> 4
Mr. Joseph F. Carroll
Union Pacific Resources Company
March 1, 1999
Page Two of Three
intended to test the D-Sand, J-Sand, or Dakota formations,
and an 80-acre unit, either stand-up or lay-down at UXP's
choice, for a well with an objective depth intended to test
the Shannon, Sussex, Niobrara, or Codell formations.
3. In UXP's short time operating in the Wattenberg field, it has
found that many wells are being deepened and previously
abandoned wells are being re-entered rather than new wells
being drilled. Accordingly, UPRC agrees that all deepenings
and/or reentries under the Exploration Agreement shall
qualify as a "Commitment Well", subject to Paragraph 2 above.
4. Additionally, wells may be recompleted in zones above
presently producing formations wherein UPRC owns an unleased
mineral interest. Although UXP is not requesting that such a
recompletion qualify as a "Commitment Well", the Exploration
Agreement only addresses earning by "drilling a well".
Accordingly, UPRC agrees that UXP shall earn the same
interest as a "Commitment Well" by recompleting a well in a
new zone, even though such well would not qualify as a
"Commitment Well".
5. UPRC advised that it would amend the Exploration Agreement
whereby UPRC's written consent would not be necessary when a
third party wanted to drill a "Commitment Well". Presently,
the Exploration Agreement requires UPRC's prior written
consent before a third party may drill a "Commitment Well".
UPRC agrees that if a proposed operation, which would fall
under the Exploration Agreement, falls under an existing
operating agreement naming a third party as operator, no
written consent from UPRC for such third party to operate is
necessary. If a third party wishes to drill on the "Subject
Lands", or on lands pooled therewith, and earn an interest
under the terms of the Exploration Agreement via UXP, UXP
agrees to remain primarily liable under the Exploration
Agreement for such third party's operations, and by doing so,
UPRC agrees that no written consent under the Exploration
Agreement for such party to drill and operate such well is
necessary. Nor will written consent from UPRC be required for
UXP to assign to such third party an interest in the lease
acquired by UXP under the Exploration Agreement. In any
event, UXP agrees to notify UPRC prior to commencement of any
operation conducted under the Exploration Agreement of the
name and address of the operator, if not UXP.
<PAGE> 5
Mr. Joseph F. Carroll
Union Pacific Resources Company
March 1, 1999
Page Three of Three
The above changes to the Exploration Agreement will allow UXP the
flexibility to begin an effective exploration program under today's current
environment which obviously will help improve cash-flow for both companies. If
the above changes are acceptable, by completing the operations which fall under
the definition of a "Commitment Well", UXP shall earn an interest in the
"Subject Lands" as provided in the Exploration Agreement and amended hereby.
UXP respectfully requests that UPRC give the above proposed changes
its careful consideration and if acceptable, please so indicate by signing,
dating, and returning one copy of this letter to the undersigned.
Sincerely,
UNITED STATES EXPLORATION, INC.
John R. Wallace,
Vice President
cc: Mr. Marty Searcy
Ms. Hilary Dussing
ACCEPTED and AGREED to this _________ day of March, 1999, by:
UNION PACIFIC RESOURCES COMPANY
UNION PACIFIC LAND RESOURCES CORPORATION
By:
--------------------------------------------------------------
Name:
------------------------------------------------------------
(Please type or print)
Title:
-----------------------------------------------------------
<PAGE> 1
EXHIBIT 10.2
[UNION PACIFIC RESOURCES LETTERHEAD]
July 29, 1998
Bruce D. Benson, Chairman
United States Exploration, Inc.
1560 Broadway, Suite 1900
Denver, CO 80202
RE: First Amendment to that certain Exploration Agreement dated April 9,
1998, but effective as of June 1, 1998, by and between Union Pacific
Resources Company and United States Exploration, Inc. ("Exploration
Agreement")
Dear Mr. Benson:
United States Exploration, Inc. ("UXP") and Union Pacific Resources Company
("UPR") agree to amend the Exploration Agreement as follows:
1. UXP and UPR agree that an agreement between HS Resources,
Inc. and Union Pacific Resources Company dated June 27, 1994,
as amended, ("HS Agreement") was inadvertently left off of
Exhibit "D-2" attached to the Exploration Agreement. By
execution of this letter both parties agree to amend Exhibit
"D-2" such that it shall be deemed to include the HS
Agreement. The inclusion of the HS Agreement on Exhibit "D-2"
shall serve to place the HS Agreement under the requirements
stated in Article 8 of the Exploration Agreement, as amended
hereby.
2. The following sentence shall replace the last sentence of the
first paragraph in Article 8:
UPR shall decline all requests for modifications and
extensions to any of the Existing Agreements. Notwithstanding
any omission to Exhibit "D-2" of an agreement to which UPR is
subject, such omitted agreement shall be deemed an Existing
Agreement.
3. In line 8 of the first paragraph of Article 8, "Existing
Agreements" is changed to read "Excluded Lands."
<PAGE> 2
Bruce D. Benson, Chairman
July 29, 1998
Page 2
4. Notices (Article 20.10) to UPR shall now be directed to:
Union Pacific Resources Company
801 Cherry Street
Fort Worth, Texas 76102
Attention: Virginia E. (Jenny) Parsons
Phone: 817/877-7520
Fax: 817/877-7309
Except as specifically amended herein, all other terms, covenants, conditions
and obligations shall remain the same as originally stated in said Exploration
Agreement. This First Amendment shall be effective as of June 1, 1998.
If the foregoing clearly represents our mutual understanding, please execute
and return one copy of this letter to the attention of Jenny Parsons at the
above address.
Very truly yours,
UNION PACIFIC RESOURCES COMPANY
By: /s/ JOSEPH F. CARROLL
---------------------------
Its: Attorney in Fact
---------------------------
AGREED TO AND ACCEPTED
this 31st day of July, 1998
UNITED STATES EXPLORATION, INC.
By: /s/ Bruce D. Benson
---------------------------
Its: Bruce D. Benson, President
---------------------------
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