<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 15,591,831 shares outstanding
at November 15, 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.
-2-
<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...................................................... 22
SIGNATURES....................................................................... 24
EXHIBIT INDEX.................................................................... 25
</TABLE>
-3-
<PAGE> 4
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash & cash equivalents $ 1,567,129 $ 1,000,661
Accounts receivable 2,068,905 2,980,700
Due from related parties 31,579 4,761
Inventory 2,423 9,684
Prepaid expenses & deposits 112,435 806,947
Assets held for sale -- 1,825,000
----------- -----------
Total current assets 3,782,471 6,627,753
PROPERTY AND EQUIPMENT, AT COST, NET:
Oil and gas property and equipment 25,371,835 25,166,771
Natural gas gathering systems 970,566 987,596
Other equipment and leasehold improvements 324,365 295,046
----------- -----------
26,666,766 26,449,413
OTHER ASSETS
Land held for resale 700,000 700,000
Pipeline lease, less accumulated amortization
of $286,785 at September 30, 1999 and
of $248,481 at December 31, 1998 426,275 451,811
Loan costs, less accumulated
amortization of $98,330 at September 30, 1999 and
amortization of $44,695 at December 31, 1998 375,442 429,076
----------- -----------
1,501,717 1,580,887
----------- -----------
Total assets $31,950,954 $34,658,053
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE> 5
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 2,514,256 $ 2,365,983
Accrued liabilities 741,992 450,449
Due related parties 10,592 47,379
Due bank under credit facility 31,250,000 31,900,000
------------ ------------
Total current liabilities 34,516,840 34,763,811
NON CURRENT LIABILITIES
STOCKHOLDERS' EQUITY
Preferred stock-$.01 par value
Authorized-100,000,000 shares
issued and outstanding Series C
Cumulative Convertible 443,166 shares
at September 30, 1999 and 493,166 at
December 31, 1998 (liquidation preference
of $2,924,896) 2,658,996 2,958,996
Common stock-$.0001 par value
Authorized-500,000,000 shares
issued and Outstanding-15,591,831 shares at
September 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 (38,127,483) (35,643,355)
------------ ------------
Total stockholders' deficit (2,565,886) (105,758)
------------ ------------
Total liabilities & stockholders' equity $ 31,950,954 $ 34,658,053
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
-5-
<PAGE> 6
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 1999 SEPTEMBER 1998 SEPTEMBER 1999 SEPTEMBER 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Sale of purchased gas $ 263,821 $ 53,315 $ 664,792 $ 661,905
Sale of company produced oil and gas 1,765,625 1,209,055 4,820,186 2,471,693
Contracting and operating fees 129,665 16,155 283,673 34,406
------------ ----------- ----------- -----------
2,159,111 1,278,525 5,768,651 3,168,004
COSTS & EXPENSES
Gas acquistion costs 151,280 17,704 358,938 335,868
Gathering & transmission costs 103,273 130,526 277,774 433,060
Production costs-oil and gas 647,935 709,261 1,930,786 1,507,354
Other operating costs 8,300 64,331 115,839 138,742
Depletion, depreciation, and amortization 507,433 573,184 1,781,823 1,254,106
Provision for impairment of assets -- -- -- 145,000
General and administrative expenses 607,989 741,732 2,068,443 1,485,507
------------ ----------- ----------- -----------
2,026,210 2,236,738 6,533,603 5,299,637
Earnings (loss) from operations 132,901 (958,213) (764,952) (2,131,633)
OTHER INCOME (EXPENSE)
Interest income 13,322 9,126 51,319 301,095
Interest expense (607,219) (570,649) (1,770,911) (853,201)
Other (2,050) 5,908 418 (1,985)
------------ ----------- ----------- -----------
(595,947) (555,615) (1,719,174) (554,091)
------------ ----------- ----------- -----------
NET LOSS (463,046) (1,513,828) (2,484,126) (2,685,724)
Preferred stock dividends attributable to period (53,180) (68,780) (159,540) (985,353)
Net loss applicable to common stockholders $ (516,226) $(1,582,608) $(2,643,666) $(3,671,077)
============ =========== =========== ===========
Basic and diluted loss per common share $ (0.03) $ (0.10) $ (0.17) $ (0.33)
============ =========== =========== ===========
Weighted average common shares outstanding 15,591,831 15,320,194 15,591,831 11,015,848
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-6-
<PAGE> 7
UNITED STATES EXPLORATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net loss $ (2,484,126) $ (2,685,724)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation, depletion and amortization 1,781,823 1,254,106
Provision for impairment of assets 0 145,000
Loss on sale of assets 6,810 8,716
Decrease (increase) in accounts receivable 911,795 (2,952,644)
(Increase) in due from related parties (26,818) (4,761)
Decrease in inventory 7,261 2,104
Decrease (increase) in prepaid expenses and deposits 694,512 (154,903)
Increase in accounts payable
and accrued expenses 439,816 1,507,145
(Decrease) increase in due related parties (36,787) 7,715
Stock issued as compensation 24,000 --
Other 1,997
------------ -----------
Net cash provided by (used in) operating activities 1,318,286 (2,871,249)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,709,618) (1,485,795)
Proceeds from sale of equip 2,607,800 43,065
Acquisition of oil and gas leases 0 (38,497,265)
------------ -----------
Net cash (used in) investing activities (101,818) (39,939,995)
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 0 (472,992)
Dividend paid on preferred stock 0 (1,376,773)
Net cash (used in) provided by financing activities (650,000) 27,150,235
------------ -----------
Net increase (decrease) in cash and cash equivalents 566,468 (15,661,009)
Cash and cash equivalents-beginning of period 1,000,661 15,988,152
------------ -----------
Cash and cash equivalents-end of period $ 1,567,129 $ 327,143
============ ============
</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
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.
NOTE B - FINANCIAL STATEMENTS
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 and nine months ended September 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 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.
-8-
<PAGE> 9
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 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. At
November 15, 1999, 11 of the 15 commitment wells which must be commenced by
November 30, 1999 are in some stage of the drilling, deepening or reentry
process.
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>
As part of its program to reduce general and administrative expenses, the
Company is attempting to sublease this space.
-9-
<PAGE> 10
The Company has committed to drill, deepen or reenter 15 wells by November 30,
1999 under the Exploration Agreement described in Note D. See Note D for further
details.
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. The Credit Agreement called for the repayment of principal in 20
quarterly installments beginning March 31, 2000. The loan bears interest,
payable quarterly, at a rate determined by reference to LIBOR or the lender's
reference rate, at the Company's option, 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.
At December 31, 1998 and September 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. In
addition, the Company did not make scheduled interest payments on the loan in
September, October and November 1999. As a result, beginning October 1, 1999,
interest accrues on the unpaid principal and the unpaid interest at a rate which
is 2% per annum above the normal rate. At November 15, 1999 this rate is 11% per
annum.
As a result of the Company's failure to meet these ratios and requirements at
December 31, 1998 and September 30, 1999, and, as a result of the failure to
make scheduled interest payments, 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:
<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>
-10-
<PAGE> 11
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.
-11-
<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 nine
months of 1999 to the first nine 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 would be 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 September 30, 1999, the outstanding loan
balance was $31.25 million.
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.
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 loan was reclassified as a
current liability on the Company's balance sheet in accordance with the
requirements of generally accepted accounting principles. We did not make
scheduled interest payments in September, October and November 1999. We were
notified, effective October 1, 1999, that our failure to make scheduled interest
payments was also a default and interest would be computed at the default
interest rate. The default rate is generally 2% per annum higher than the rate
that would otherwise apply. At November 15, 1999, the default interest rate was
11% per annum. The Company does not plan to resume interest payments while
negotiations continue as to a possible restructuring of its lending
relationships.
-12-
<PAGE> 13
No timetable has been established for the conclusion of these
restructuring discussions and no assurance can be given that these discussions
will be successful. If the discussions are not successful and a borrowing base
deficiency, interest payment deficiency or some other form of default remains
uncured, ING 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 ING has ceased ongoing operations. However, ING has
retained certain personnel to administer the loans of existing clients,
including UXP. We cannot predict what impact ING's decision to discontinue
lending in the natural resources industries will have on our ability to
negotiate a satisfactory restructuring of our banking relationships.
Capital Expenditures
Until the loan defaults described above have 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.
For example, in November 1999, we entered into an arrangement in which
we granted an unaffiliated oil and gas company the right to drill and complete
up to 20 Colorado wells prior to December 31, 2000. The other company will pay
all of the costs to drill and complete the wells, and will earn a 78% working
interest in the wellbore of each well drilled and completed as a producing well.
At November 15, 1999 two wells have been drilled under this arrangement.
Under the Exploration Agreement described in Note D, we have an
obligation to drill, deepen or reenter 15 commitment wells prior to December 1,
1999. If the wells are not commenced 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 November 15, 1999, 11 commitment wells have been or are in
the process of being drilled, reentered or deepened. Management believes that
the remainder of the Company's commitment under the Exploration Agreement during
the initial term will be satisfied.
-13-
<PAGE> 14
Cash Balances and Cash Flow
As of November 15, 1999 the Company had cash and cash equivalents of
approximately $2.1 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 year. In
addition, the fact that the Company has ceased making interest payments on its
credit facility will conserve cash. 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. Most of these
conversions were effective immediately after the cash dividend was paid for the
second quarter of 1998. This conversion has reduced 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
$213,000. However, no dividends have been paid on any of the Company's preferred
stock since June 30, 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 would 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, but cannot be
expected to improve the Company's liquidity.
American Stock Exchange Listing
The American Stock Exchange is conducting a review of the Company's
listing on the Exchange based upon its guidelines for continued listing and its
routine periodic review of the Company's SEC and other filings. In connection
with this review, the Exchange has requested a report by November 30, 1999
detailing, among other things, certain Company projections and the status of
negotiations with the Company's lender.
-14-
<PAGE> 15
Results of Operations
Introduction
Because of the acquisition of the UPR properties in May 1998,
comparison of the results of operations between the nine months ended September
30, 1999 and the nine months ended September 30, 1998 is not very meaningful.
Results of operations for the nine months ended September 30, 1999 include
Oklahoma operations in Kay, Logan and Noble counties for four months and
Colorado operations for the entire nine months. Results of operation for the
nine months ended September 30, 1998 include Oklahoma operations in Osage, Kay,
Logan and Noble counties for all nine months and Colorado operations for four
and one-half months. The oil and gas properties involved in the UPR acquisition
dwarf the oil and gas properties 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 September 30, 1999
The Company realized a net loss of $463,046 for the third quarter of
1999 compared to a loss of $1,513,828 for the third quarter of 1998. Including
preferred stock dividends, the loss for the third quarter of 1999 was $516,226
or $.03 per share compared to a loss of $1,582,608 or $.10 per common share for
the third quarter of 1998.
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 September 30, 1998 and September 30, 1999. To illustrate
changes in production and pricing since the end of the second quarter of 1999,
the table also summarizes the Company's production and pricing in that quarter:
-15-
<PAGE> 16
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Three months ended September 30
------------------------------------------------------------------------- Three months
1998 1999 ended
--------------------------------- ----------------------------------- June 30, 1999
Kansas and Kansas and -------------
Oklahoma Colorado Total Oklahoma Colorado Total Total
---------- -------- ----- ---------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl 16.69 15.74 32.43 (.40) 22.71 22.31 34.10
Natural Gas - mmcf 53.66 441.54 495.20 23.00 535.66 558.66 634.69
Total - mmcfe 153.80 535.98 689.78 20.60 671.92 692.52 839.29
Weighted Average Prices
Oil - $/bbl 13.46 12.65 13.07 15.98 19.39 19.45 16.08
Natural Gas - $/mcf 1.73 1.55 1.57 1.61 2.42 2.38 1.95
</TABLE>
The three months ended September 30, 1998 include a full quarter of
operations from the Oklahoma properties, including those properties sold
effective December 31, 1998 and May 1, 1999. The three months ended September
30, 1999 do not include any operations in Oklahoma.
The increase in sales of purchased gas and the related costs of gas
acquisition and gathering and transmission reflects the fact that in the third
quarter of 1998, the Company purchased gas only in Oklahoma while in the third
quarter of 1999 we purchased gas only in Kansas. The Company's pipeline
operations in Kansas are somewhat larger than its operations in Oklahoma. The
Kansas purchased gas operations were shut in during the third quarter of 1998.
The Oklahoma gathering systems were sold effective December 31, 1998. The sales
of purchased gas in Kansas for the third quarter of 1999, net of gas acquisition
costs and gathering and transmission costs, produced a small cash operating
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.
Contracting and operating fees were $129,665 for the third quarter of
1999 compared to $16,155 for the third 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., being $117,362.
Oil and gas production costs for the third quarter of 1999 include
approximately $617,000 for the Colorado properties (including approximately
$158,000 in production taxes) and approximately $30,000 for the Kansas
properties. The third quarter of 1998 includes oil and gas production costs for
the Oklahoma properties which were sold effective December 31, 1998 and May 1,
1999. The third quarter of 1998 included Colorado oil and gas direct production
costs of approximately $554,000 including production taxes of approximately
$88,000.
-16-
<PAGE> 17
The reduction in other operating costs from $64,331 for the third
quarter of 1998 to $8,300 for the third quarter of 1999 reflects the closing of
the Oklahoma field office in early 1999 and the closing of the Colorado field
office in June 1999.
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 third quarter of 1999.
General and administrative expenses were $607,989 for the third quarter
of 1999 compared to $741,732 for the third quarter of 1998. There were
additional expenses in the third quarter of 1998 related to the then recent
acquisition of the Colorado properties. In addition, cost reduction measures
have been initiated during 1999. Net of billings to Benson Mineral Group, Inc.
for time spent by Company employees on the business affairs of Benson Mineral
Group, Inc., general and administrative expenses for the third quarter of 1999
would be $490,627, but there would be a corresponding decrease in contracting
and operating fees income.
Interest expense increased $36,570 from the third quarter of 1998 to
the third quarter of 1999. Substantially all of this increase relates to
increased borrowings from $29 million at September 30, 1998 to $31.25 million at
September 30, 1999.
Nine Months Ended September 30, 1999
The Company realized a net loss of $2,484,126 for the first nine months
of 1999, compared to a net loss of $2,685,724 for the first nine months of 1998.
Including preferred stock dividends, the loss for the first nine months of 1999
was $2,643,666 or $.17 per share compared to a loss of $3,671,077 or $.33 per
common share for the first nine months of 1998.
Net oil and gas production (after royalties) and weighted average sales
prices for the Company's products for the nine months ended September 30, 1998
and September 30, 1999 are shown in the table below:
-17-
<PAGE> 18
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Nine months ended September 30
----------------------------------------------------------------------------
1998 1999
---------------------------------- -------------------------------------
Kansas and Kansas and
Oklahoma Colorado Total Oklahoma Colorado Total
---------- -------- ----- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl 50.26 32.37 82.63 6.90 77.03 83.93
Natural Gas - mmcf 180.78 634.87 815.65 83.01 1,716.18 1,799.19
Total - mmcfe 482.34 829.09 1,311.43 124.41 2,178.36 2,302.77
Weighted Average Prices
Oil - $/bbl 14.31 12.60 13.64 13.96 15.42 15.30
Natural Gas - $/mcf 1.74 1.62 1.65 1.53 1.99 1.97
</TABLE>
The nine months ended September 30, 1998 include only 4.5 months of
Colorado operations and include nine months of operations from the Oklahoma
properties, including those properties sold effective December 31, 1998 and May
1, 1999. The nine months ended September 30, 1999 include Oklahoma operations
for Logan, Noble and Kay Counties, Oklahoma for four months only.
Sales of purchased gas were $664,792 for the first nine months of 1999
compared to $661,905 for the first nine months of 1998. Gas was purchased only
in Kansas during 1999. Gas was purchased in Oklahoma and Kansas during 1998,
although the Kansas operations were shut in during the third quarter of 1998.
Gas acquisition costs and gathering and transmission costs were $636,712 for the
first nine months of 1999 compared to $768,928 for the first nine months of
1998. On a cash operating basis the Kansas operations have been marginally
profitable in 1999. The Kansas and Oklahoma operations were not profitable for
the first nine months of 1998 in part because the Kansas operations were shut in
during the third quarter of 1998.
Contracting and operating fees were $283,683 for the first nine months
of 1999 compared to $34,406 for the first nine months of 1998. Included in the
first nine months of 1999 is $241,784 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.
Oil and gas production costs and other operating costs were $2,046,625
for the nine months ended September 30, 1999 compared to $1,646,096 for the nine
months ended September 30, 1998. Oil and gas production costs related to the
Colorado properties were approximately $669,000 for the period May 16, 1998
through September 30, 1998 and were approximately $1,845,000, including
approximately $430,000 in production taxes, for the nine months ended September
30, 1999. Other operating costs were $115,839 and $138,742 for the nine months
ended September 30, 1999 and
-18-
<PAGE> 19
September 30, 1998. During 1998 the Company maintained field offices in Oklahoma
and, from May, 1998, Colorado. The field office in Oklahoma was closed in early
1999 and the Colorado field office was closed in June 1999.
Depletion, depreciation and amortization increased from $1,254,106 for
the nine months ended September 30, 1998 to $1,781,823 for the nine months ended
September 30, 1999. This increase is attributable to the acquisition of the
Colorado properties effective May 15, 1998.
The increases in general and administrative expenses and interest
expense and the decrease in interest income for the periods ended September 30,
1999 and September 30, 1998 respectively are directly attributable to the
acquisition of the Colorado properties. Net of billings to Benson Mineral Group,
Inc. for time spent by Company employees on the business affairs of Benson
Mineral Group, Inc., general and administrative expenses for the nine months
ended September 30, 1999 would be $1,826,659 instead of $2,068,443 but there
would be a corresponding decrease in contracting and operating fees income.
The provision for impairment of assets in the first nine months of 1998
is related to the land in Texas held for resale.
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 PC's have been acquired within
the past two years. The Company's software system has been operating since 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 continues the process of communicating with its significant
suppliers, business partners and customers to determine whether those third
parties have addressed Year 2000 issues. Substantially all of these
communications have been verbal. 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
-19-
<PAGE> 20
Year 2000 problems experienced by third parties, including its suppliers and
customers or others with whom its suppliers and customers deal.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Portions of this Report contain "forward-looking statements" within the
meaning of the federal securities laws. Such forward-looking statements include,
without limitation, statements regarding the Company's need for 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. Revisions in
reserve estimates can affect the Company in various ways, including changes in
the borrowing base under its loan agreement, changes in depreciation, depletion
and amortization expense and, in the case of reductions in reserve estimates,
the need to create a provision for impairment of its oil and gas assets.
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 has
experienced difficulties in the course of managing the growth within the
Company. The Company believes that it has resolved the difficulties encountered
insofar as its internal administrative functions are concerned, but has
continued to encounter difficulties in reaching agreements with other operators
in the Wattenberg field to facilitate the development operations planned for its
Colorado properties. The Company continues to negotiate with these other
operators in an effort to resolve the remaining issues. The Company's inability
to resolve these issues could adversely affect the Company's business, financial
condition or results of operations until resolved. In addition, the Company
expanded its facilities in anticipation of growth that has not occurred to date
as a result of these operational difficulties and the Company's lack of
resources to pursue the development of its Colorado properties at the
anticipated rate. That expansion has resulted in increased general and
administrative expenses, principally the rent on additional space leased by the
Company. See Note E to the Financial Statements. The Company is attempting to
-20-
<PAGE> 21
reduce its overhead by subleasing this additional space, but there can be no
assurance that it will be able to do so. In the meantime, these increased
general and administrative expenses will continue to adversely affect the
Company's results of operations and financial condition.
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; Defaults on Credit Facility. 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 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.
Most of these factors are beyond the control of the Company. Investors
are cautioned not to place undue reliance on forward-looking statements.
-21-
<PAGE> 22
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. The Company is in default on
certain financial covenants and has not made interest payments due in September,
October and November, 1999. 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 and cannot be paid for periods
after June 30, 1999, whether or not a default exists. Dividends on the Series C
Convertible Preferred Stock have not been declared or paid since the second
quarter of 1998. Unpaid dividends from July 1, 1998 through November 15, 1999
approximate $292,000. The Series C Convertible Preferred Stock is not registered
under the Securities Exchange Act of 1934.
Under the terms of the Series C Convertible Preferred Stock, if
dividends have not been paid in an amount equal to at least six quarterly
dividends, the number of directors on the Company's Board is automatically
increased by two and the holders of the Series C Convertible Preferred Stock are
entitled to elect the two new directors. The Company is obligated to call a
meeting of the holders of the Series C Preferred Stock for the purpose of
electing those directors upon the written request of the holders of two-thirds
of the outstanding shares of Series C Preferred Stock. Upon payment of the
dividend arrearage, the size of the Board is reduced by two and the terms of the
directors elected by the holders of the Series C Preferred Stock automatically
terminate. On December 31, 1999, the dividend arrearages on the Series C
Convertible Preferred Stock will total six quarters and this right of the
holders to elect two directors will arise.
If dividends are not paid on the Series C Convertible Preferred Stock
for three successive years, the Company may pay all dividends in arrears in
shares of its Common Stock, subject to the consent of the holders of the Series
C Preferred Stock. Such consent may not be withheld for more than 180
consecutive days.
Item 4. Submission of Matters to a Vote of Security Holders.
Previously reported in the Company's Form 10-QSB for the quarter ended
June 30, 1999.
-22-
<PAGE> 23
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.
-23-
<PAGE> 24
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: November 22, 1999 By: /s/ Bruce D. Benson
-------------------------------------
Bruce D. Benson, President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: November 22, 1999 By: /s/ F. Michael Murphy
-------------------------------------
F. Michael Murphy, Vice President,
Secretary and Chief Financial Officer
(Principal Financial Officer)
-24-
<PAGE> 25
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> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,567,129
<SECURITIES> 0
<RECEIVABLES> 2,079,073
<ALLOWANCES> 10,168
<INVENTORY> 2,423
<CURRENT-ASSETS> 3,782,471
<PP&E> 56,042,126
<DEPRECIATION> 29,375,360
<TOTAL-ASSETS> 31,950,954
<CURRENT-LIABILITIES> 34,516,840
<BONDS> 0
0
2,658,996
<COMMON> 1,559
<OTHER-SE> (5,226,441)
<TOTAL-LIABILITY-AND-EQUITY> 31,950,954
<SALES> 2,159,111
<TOTAL-REVENUES> 2,159,111
<CGS> 151,280
<TOTAL-COSTS> 2,026,210
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 607,219
<INCOME-PRETAX> (463,046)
<INCOME-TAX> 0
<INCOME-CONTINUING> (463,046)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (463,046)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
