<PAGE> 1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
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.
<TABLE>
<CAPTION>
Class of Stock Amount Outstanding
-------------- ------------------
<S> <C>
Common Stock, $.0001 par value 18,620,631 shares outstanding
at August 1, 2000
</TABLE>
<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> <C>
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements............................................ 4
Item 2 Management's Discussion and Analysis or Plan of Operation....... 11
Part II - OTHER INFORMATION.......................................................... 19
SIGNATURES........................................................................... 21
EXHIBIT INDEX........................................................................ 22
</TABLE>
-3-
<PAGE> 4
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash & cash equivalents $ 1,857,906 $ 3,096,691
Accounts receivable 1,688,305 1,308,015
Due from related parties 31,077 41,764
Inventory 2,083 2,792
Prepaid expenses & deposits 25,305 64,717
----------- --------------
Total current assets 3,604,676 4,513,979
PROPERTY AND EQUIPMENT, AT COST, NET:
Oil and gas property and equipment 17,265,147 24,720,045
Natural gas gathering systems 899,151 949,229
Other equipment and
leasehold improvements 267,095 313,661
----------- --------------
18,431,393 25,982,935
OTHER ASSETS
Land held for resale 130,000 300,000
Pipeline lease, less accumulated amortization
of $324,176 at June 30, 2000 and
of $298,915 at December 31, 1999 383,132 408,393
Loan costs, less accumulated
amortization of $1,089 at June 30, 2000
and $116,208 at December 31, 1999 7,911 357,563
----------- --------------
521,043 1,065,956
----------- --------------
Total assets $22,557,112 $ 31,562,870
=========== ==============
</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' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 3,499,755 $ 2,885,830
Accrued liabilities 151,808 260,265
Due related parties 12,949 14,878
Note payable-Related Party 4,000,000 0
Note payable-Bank 0 31,250,000
Accrued Interest 43,279 1,288,458
------------ ------------
Total current liabilities 7,707,791 35,699,431
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 June 30, 2000
and December 31, 1999 (liquidation preference of
$3,084,436 and $2,978,076 at June 30, 2000 and
December 31,1999 respectively) 2,658,996 2,658,996
Common stock-$.0001 par value
Authorized-500,000,000 shares
issued and Outstanding-18,620,631 shares at
June 30, 2000 and 15,591,831 shares at
December 31, 1999 respectively 1,861 1,559
Capital in excess of par 36,226,740 32,901,042
Accumulated deficit (24,038,276) (39,698,158)
------------ ------------
Total stockholders' equity (deficit) 14,849,321 (4,136,561)
------------ ------------
Total liabilities & stockholders'
equity $ 22,557,112 $ 31,562,870
============ ============
</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 THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
June 30, 2000 June 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES
Sale of purchased gas $ 375,225 $ 265,145 $ 650,238 $ 400,971
Sale of company produced oil and gas 2,340,619 1,731,738 4,645,478 3,054,561
Contracting and operating fees 8,147 14,943 29,083 29,587
------------ ------------ ------------ -----------
2,723,991 2,011,826 5,324,799 3,485,119
COSTS & EXPENSES
Gas acquisition costs 227,633 164,876 383,957 207,658
Gathering & transmission costs 103,947 92,007 204,272 174,501
Production costs-oil and gas 829,303 693,019 1,529,870 1,282,851
Other operating costs (699) 48,914 (740) 107,539
Depletion, depreciation, and amortization 692,464 679,021 1,403,519 1,274,390
Provision for impairment of assets 170,000 0 170,000 0
General and administrative expenses 486,969 661,207 945,356 1,336,034
------------ ------------ ------------ -----------
2,509,617 2,339,044 4,636,234 4,382,973
Earnings (loss) from operations 214,374 (327,218) 688,565 (897,854)
OTHER INCOME (EXPENSE)
Interest income 6 22,274 20,273 37,998
Interest expense (550,559) (583,502) (1,484,610) (1,163,692)
Other 155,436 (3,082) 143,561 2,467
------------ ------------ ------------ -----------
(395,117) (564,310) (1,320,776) (1,123,227)
------------ ------------ ------------ -----------
Net loss from continuing operations (180,743) (891,528) (632,211) (2,021,081)
Extraordinary gain on extinguishment of debt 16,292,093 0 16,292,093 0
------------ ------------ ------------ -----------
Net income (loss) after extraordinary gain 16,111,350 (891,528) 15,659,882 (2,021,081)
Preferred stock dividends attributable to period (53,180) (53,180) (106,360) (106,360)
------------ ------------ ------------ -----------
Net lncome (loss) applicable to common
shareholders 16,058,170 (944,708) 15,553,522 (2,127,441)
------------ ------------ ------------ -----------
Earnings per common share:
Loss before extraordinary item $ (0.01) $ (0.06) $ (0.05) $ (0.13)
Extraordinary gain on extinguishment of debt $ 0.95 -- $ 1.00 --
------------ ------------ ------------ -----------
Net income (loss) per common share $ 0.94 $ (0.06) $ 0.95 $ (0.13)
------------ ------------ ------------ -----------
Weighted average common shares outstanding 17,042,380 15,591,831 16,321,113 15,591,831
============ ============ ============ ===========
</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>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net Income (Loss) $ 15,659,882 $ (2,021,081)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation, depletion and amortization 1,403,519 1,274,390
Provision for impairment of assets 170,000 0
Loss on sale of assets 11,875 3,952
Extraordinary gain on extinguishment of debt - non-cash (13,919,542) 0
Decrease (increase) in accounts receivable (net) (380,290) 1,051,423
Decrease (increase) in due from related parties 10,687 (26,297)
Decrease in inventory 712 3,583
Decrease in prepaid expenses 39,412 730,419
Increase (decrease) in accounts payable
and accrued expenses (739,711) 123,068
Decrease in due to related parties (1,929) (30,535)
Stock issued as compensation 36,000 24,000
Other (3) (3)
-------------- --------------
Net cash provided by operating activities 2,290,612 1,132,919
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (980,397) (1,957,691)
Proceeds from sale of properties and equipment 7,170,000 2,575,400
-------------- --------------
Net cash provided by investing activities 6,189,603 617,709
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Note Payable to Bank (17,000,000) (3,350,000)
Proceeds from Debt (Net of loan costs) 3,991,000 2,700,000
Common Stock issued (net of issuance costs) 3,290,000 0
-------------- --------------
Net Cash used in Financing Activities (9,719,000) (650,000)
Net increase (decrease) in cash and cash equivalents (1,238,785) 1,100,628
Cash and cash equivalents-beginning of period 3,096,691 1,000,661
-------------- --------------
Cash and cash equivalents-end of period $ 1,857,906 $ 2,101,289
-------------- --------------
</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 operates as a producer of oil and gas and as an operator of
gas gathering systems. The Company's operations are currently located in
southeast Kansas and, effective May 1998, northeast Colorado. The Company's
properties in Oklahoma were sold in three separate transactions during January
and May of 1999.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
United States Exploration, Inc. and its wholly owned subsidiaries Producers
Service Incorporated, Performance Petroleum Co., Pacific Osage, Inc., and United
States Gas Gathering Co., Inc. (formerly ZCA Gas Gathering, Inc.). On January
20, 1999, the stock of Performance Petroleum Corporation, Pacific Osage, Inc.
and United States Gas Gathering Co. Inc. was sold in two separate transactions.
All significant intercompany transactions and balances have been eliminated in
consolidation.
NOTE B - FINANCIAL STATEMENTS
The foregoing financial information is unaudited. In the opinion of management,
the unaudited financial information includes all adjustments necessary to
reflect properly the results of operations for the interim periods presented.
The adjustments consist only of normal recurring accruals except for the
extraordinary item described in Notes E and G. The results of operations for the
three months ended June 30, 2000 and for the six months ended June 30, 2000 are
not 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, 1999.
NOTE C - INCOME OR LOSS PER COMMON SHARE
Basic income or loss per share is computed by dividing net income or loss
applicable to common stockholders by the weighted-average common shares
outstanding for the period. Diluted income or loss per share reflects the
potential dilution that could occur if common stock options were
-8-
<PAGE> 9
exercised and preferred stock were converted into common stock. Basic and
diluted income or 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 the net loss from continuing operations applicable to
common shareholders.
NOTE D - 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>
2000 177,804
2001 177,804
2002 177,804
2003 219,150
2004 232,932
Thereafter 757,029
-----------
$ 1,742,523
===========
</TABLE>
The Company has committed to drill 20 wells by November 30, 2000 under the
Exploration Agreement which is a part of the May, 1998 acquisition of Colorado
properties from Union Pacific Resources Company (UPR). At August 1, 2000 14
wells have been drilled pursuant to the Exploration Agreement. Liquidated
damages of $125,000 per commitment well not drilled or commenced by November 30,
2000 will be due UPR.
NOTE E - 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). At March 31, 2000, the Company
was in default under the Credit Agreement for failure to make scheduled interest
and principal payments and to meet certain financial ratios and net worth
requirements contained in the Credit Agreement. In April 2000, the Company
entered into an agreement with ING in which ING granted the Company (or its
designee) an option to purchase the ING loan for $17,000,000. On May 18, 2000,
the Company exercised that option and settled all of its obligations to ING. The
Company is no longer in default under any loan or credit agreement.
The funds for the ING settlement were obtained from several sources. First, the
Company sold its interest in 60 wells and associated undeveloped acreage in the
Wattenburg Field of Northeastern Colorado to an unaffiliated oil and gas company
for approximately $7.15 million, subject to customary adjustments. Second, the
Company sold 3,000,000 shares of its common stock to Bruce D. Benson, its
Chairman, Chief Executive Officer and President, for $1.10 per share, or a total
of
-9-
<PAGE> 10
$3.3 million. Third, Benson Mineral Group, Inc. ("BMG"), a private company
owned by Mr. Benson, provided $4 million in debt financing. BMG paid that amount
directly to ING in return for the note, credit agreement and related security
documents entered into in connection with the ING loan. The Company entered into
an amendment to the note and credit agreement that reduces the outstanding
principal balance of the note to $4 million, forgives all interest and fees
accruing prior to the date of the amendment, provides for interest on the
reduced principal amount of the note at 9% per annum and requires the Company to
pay the note and accrued interest in a lump sum not later than May 17, 2001. The
Company agreed to use its best efforts to refinance or otherwise prepay the note
prior to that date. The balance of the payment to ING was made with existing
Company funds.
NOTE F - 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 from ING. 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 from ING.
NOTE G - EXTRAORDINARY ITEMS
The Company realized an extraordinary item of income in May 2000 resulting from
the Credit Agreement settlement with ING as described in Note E. The
extraordinary item is comprised of the following:
<TABLE>
<S> <C>
Loan principal due ING through May 17, 2000 $31,250,000
Loan interest due ING through May 17, 2000 2,729,789
-----------
33,979,789
Less previously capitalized loan costs (net of
amortization to May 17, 2000) and transaction costs 687,696
-----------
33,292,093
Less cash paid 17,000,000
-----------
Extraordinary item $16,292,093
===========
</TABLE>
-10-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
The Company's plan is to obtain a bank credit facility which will allow
the repayment of the interim financing provided by BMG and to provide funds for
the continued development of the Company's oil and gas properties. The plan also
includes efforts to identify and sell or exchange assets and continued efforts
to reduce costs.
As a result of the losses experienced by the Company in recent periods
and defaults under our principal loan agreement (which have since been settled
as described below), our auditors included a "going concern" qualification in
their opinions on our 1999 and 1998 financial statements.
Liquidity and Capital Resources
Bank Credit Facility
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"). At May 18, 2000, we owed ING
$31,250,000 plus accrued interest of approximately $2,729,800 accrued at a
default interest rate and were otherwise in default under the Credit Agreement.
On that date, we settled our obligations to ING for an aggregate payment of
$17,000,000.
The Company obtained the funds to effect the settlement from several
sources. First, the Company sold its interests in 60 producing wells and
associated undeveloped acreage in the Wattenburg field of Northeastern Colorado
to an unaffiliated oil and gas company for approximately $7.15 million, subject
to customary adjustments. Second, the Company sold 3,000,000 shares of its
common stock to Bruce D. Benson, its Chairman of the Board, Chief Executive
Officer and President, for $1.10 per share, or a total of $3.3 million. Third,
Benson Mineral Group, Inc., ("BMG"), a private company owned by Mr. Benson,
provided $4 million in debt financing to the Company. The balance of the payment
to ING was made from internally generated Company funds.
The shares purchased by Mr. Benson were issued pursuant to an agreement
entered into on April 21, 2000. The closing price of the Company's common stock
on April 20, 2000 was $0.56 per share. Pursuant to that agreement, at the time
the shares were purchased, Mr. Benson's employment agreement was amended to
extend its term until August 6, 2001, and Mr. Benson voluntarily relinquished
options to purchase 4,000,000 shares of common stock that were granted pursuant
to
-11-
<PAGE> 12
his employment agreement. The amendment also provides for a severance payment
of $1 million to Mr. Benson in the event that he is terminated by the Company
without cause prior to the end of the term of the agreement, a majority of the
board of directors changes during the period or the Company defaults under the
Agreement.
The proceeds of the debt financing provided by BMG were paid directly
to ING and ING assigned to BMG the Note, Credit Agreement and related security
documents entered into in connection with the ING loan. Upon that assignment,
BMG and the Company entered into an amendment to the Credit Agreement and the
Note that reduces the outstanding principal balance of the Note to $4 million,
forgives all interest and fees accruing prior to the date of the amendment,
provides for interest on the reduced principal amount at 9% per annum and
requires the Company to pay the Note in a lump sum no later than May 17, 2001.
In addition, the Note may be paid from Company cash flow or the proceeds of
additional property sales. In that amendment, the Company acknowledges that the
financing was provided by BMG as an accommodation and agrees to use its best
efforts to refinance or otherwise prepay the Note as soon as possible. The
Company is in preliminary discussion with a bank for replacement financing to
pay the Note held by BMG and to provide funds for the further development of its
properties. No assurance can be made that any replacement financing will be
obtained.
Capital Expenditures
Capital expenditures were $208,727 for the second quarter of 2000.
Under the Exploration Agreement with UPR, we have an obligation to
drill 20 commitment wells prior to December 1, 2000. As of June 30, 2000, 14 of
these wells had been drilled. If the remaining 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.
On July 13, 2000 we announced a second drilling program with a third
party whereby the third party could drill up to 62 wells at no cost to us and we
would own approximately 20% of each well drilled. These are wells which we had
no plans to drill ourselves. Of the 62 wells, 25 could satisfy the remaining six
wells to be drilled prior to December 1, 2000 under the Exploration Agreement
with UXP or could be credited against our next yearly option period 20 well
commitment which begins December 1, 2000 if we can and do elect to exercise the
option. In the same announcement we reported that a prior 20 well drilling
program with the same third party had 18 wells completed as producers with two
wells yet to be drilled and that the 18 wells increased the reserves
attributable to our interest by 1.3 Bcfe.
-12-
<PAGE> 13
Cash Balances and Cash Flow
As of August 1, 2000 the Company had cash and cash equivalents of
approximately $1,700,000. Higher commodity prices and the continuing
implementation of cost reduction measures allow us to project positive cash flow
before capital spending for 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.
Property Sales
As discussed above under Bank Credit Facility the Company sold its
interests in 60 Colorado producing wells and associated undeveloped acreage
effective May 1, 2000 to an unrelated oil and gas company for $7.15 million,
subject to customary closing adjustments. Of the production for the second
quarter of 2000, approximately 1.20 Mbbl of oil and 45.44 Mmcf were
attributable to these properties. The gross proceeds from the sale reduced the
Company's carrying cost of its full cost pool of oil and gas property and
equipment.
Sale of Common Stock
As discussed above under Bank Credit Facility, the Company sold
3,000,000 shares of its common stock at $1.10 per share to Bruce D. Benson, its
Chairman of the Board, Chief Executive Officer and President on May 18, 2000.
Series C Preferred Stock
At June 30, 2000, unpaid dividends on the Company's Series C Preferred
Stock totaled $425,440. 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 dividends 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 totaled six quarters and this right of
the holders to elect two directors arose. At August 1, 2000, no written request
from the holders of the Series C Preferred had been received by the Company but
each preferred shareholder has been further apprised of these rights in the
proxy materials distributed in connection with the August 8, 2000 annual
stockholders meeting. At the August 8, 2000 annual stockholders meeting, the
Series C Preferred stockholders elected Joseph A. Hutchinson and Charles D.
Unruh to fill these two vacancies. No preferred stock dividends may be paid
under the terms of the existing credit facility.
-13-
<PAGE> 14
Results of Operations
Quarter Ended June 30, 2000
The Company realized net income applicable to common shareholders of
$16,058,170 ($.94 per common share) for the second quarter of 2000 compared to a
loss applicable to common shareholders of $944,078 (($.06) per common share) for
the second quarter of 1999. Included in net income for the second quarter of
2000 is an extraordinary gain resulting from the settlement of the ING credit
facility in an amount of $16,292,093 ($.95 per common share).
Sales of purchased gas less the related gas acquisition costs and
gathering and transmission costs produced an operating profit of $43,645 for the
second quarter of 2000 compared to an operating profit of $8,262 for the second
quarter of 1999. No depreciation or amortization expense is included in these
calculations.
Net oil and gas production (after royalties) and weighted average sales
prices for the Company's products for the three months ended June 30, 2000 and
June 30, 1999 are shown in the table below:
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Three months ended June 30
--------------------------
2000 1999
----------------------------------- ------------------------------ Three months
ended
Kansas and March 31,
Kansas Colorado Total Oklahoma Colorado Total 2000
------ -------- ----- ---------- -------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl .18 31.22 31.40 3.08 31.02 34.10 31.10
Natural Gas - mmcf 17.56 474.22 491.78 31.88 602.81 634.69 552.80
Total - mmcfe 18.64 661.54 680.18 50.36 788.93 839.29 739.40
Weighted Average Prices
Oil - $/bbl 21.56 26.89 26.85 15.88 16.10 16.08 26.33
Natural Gas - $/mcf 2.32 3.07 3.04 1.20 1.99 1.95 2.69
</TABLE>
The three months ended June 30, 2000 include the 60 Colorado wells sold
to an unaffiliated oil and gas company for one month only. The three months
ended June 30, 1999 include the Oklahoma wells in Logan, Noble and Kay Counties
for one month only.
The increase in production costs oil and gas from $693,019 for the
second quarter of 1999 to $829,303 for the second quarter of 2000 is partially
attributable to an increase of $55,393 in production taxes based upon the value
of the Company's oil and gas sold. In addition, the Company has increased its
remedial work on owned operated properties.
-14-
<PAGE> 15
The decrease in other operating costs from $48,914 for the second
quarter of 1999 to $(699) for the second quarter of 2000 is the result of the
closure of the Company's field offices during 1999.
The provision for impairment of assets is a $170,000 impairment of the
value of the Company's Texas land held for resale. The impairment is based upon
a contract the Company has signed to sell the land for $150,000 less estimated
closing costs of $20,000. If the sale is consummated, closing would occur late
in the third quarter of 2000 or early in the fourth quarter of 2000.
The decrease in general and administrative expenses from $661,207 for
the second quarter of 1999 to $486,969 for the second quarter of 2000 is largely
attributable to a reduction in personnel costs.
Interest expense for the second quarter of 2000 includes $43,279 due
BMG for the period May 18, 2000 through June 30, 2000 and $507,280 accrued on
the ING credit facility loan for the period April 1, 2000 through May 17, 2000.
The unpaid interest due ING was eliminated in the ING credit facility settlement
(see Footnote G - Extraordinary Items to the Financial Statements). Going
forward, interest accrues on the $4 million interim borrowings from BMG at 9%
per annum, compounded quarterly, and all interest would be due on May 17, 2001.
Interest expense for the second quarter of 1999 was based upon the terms of the
ING credit facility and totaled $583,502.
Other income of $155,436 for the second quarter of 2000 is comprised of
a one time production tax refund relating to the years 1998 and 1999.
Extraordinary Item
As more fully described in Footnotes E and G to the financial
statements, the Company recorded $16,292,093 as an extraordinary gain resulting
from the ING credit facility settlement. No income taxes have been provided on
the gain since the Company will utilize tax loss carryforwards to offset taxes
otherwise payable.
Six Months Ended June 30, 2000
The Company realized net income applicable to common shareholders of
$15,553,522 ($.95 per common share) for the first six months of 2000 compared to
a net loss applicable to common shareholders of $2,127,441 (($.13) per common
share) for the first six months of 1999. Included in net income for the six
months ended June 30, 2000 is an extraordinary gain resulting from the
settlement of the ING credit facility in an amount of $16,292,093 ($1.00 per
common share).
Sales of purchased gas less the related gas acquisition costs and
transmission costs produced an operating profit of
-15-
<PAGE> 16
$62,009 for the first six months of 2000 compared to an operating profit of
$18,812 for the first six months of 1999. No depreciation or amortization
expense is included in these calculations.
Net oil and gas production (after royalties) and weighted average sales
prices for the Company's products for the six months ended June 30, 2000 and
June 30, 1999 are shown in the table below:
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Six months ended June 30
------------------------
2000 1999
----------------------------------- -------------------------------
Kansas and
Kansas Colorado Total Oklahoma Colorado Total
------ -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl .49 62.01 62.50 7.30 54.32 61.62
Natural Gas - mmcf 35.96 1008.62 1044.58 60.01 1180.52 1240.53
Total - mmcfe 38.90 1380.68 1419.58 103.81 1506.44 1610.25
Weighted Average Prices
Oil - $/bbl 22.09 26.63 26.60 14.07 13.77 13.80
Natural Gas - $/mcf 1.93 2.89 2.86 1.50 1.79 1.78
</TABLE>
The six months ended June 30, 2000 include the 60 Colorado wells sold
to an unaffiliated oil and gas company for four months only. The six months
ended June 30, 1999 include the Oklahoma wells in Logan, Noble and Kay Counties
for four months only.
The increase in production costs - oil and gas from $1,282,851 for the
six months ended June 30, 1999 to $1,529,870 for the six months ended June 30,
2000 is largely attributable to an increase of $132,539 in production taxes
based upon the value of the Company's oil and gas sold. The Company has also
increased its remedial work on owned operated properties.
The decrease in other operating costs of $108,279 from the six months
ended June 30, 1999 to the six months ended June 30, 2000 results from the
closing of the Company's field offices during 1999.
The six months ended June 30, 2000 contains a $170,000 impairment in
value to the Texas land held for sale and is more fully described in Results of
Operations - Three Months Ended June 30, 2000.
The decrease in general and administrative expenses from $1,336,034 for
the six months ended June 30, 1999 to $945,356 for the first six months of 2000
is largely attributable to reduced personnel costs.
-16-
<PAGE> 17
Interest expense of $1,163,692 for the six months ended June 30, 1999
all related to the ING credit facility. Interest expense of $1,484,610 for the
six months ended June 30, 2000 consists of $43,279 due BMG for the period May
18, 2000 through June 30, 2000 and $1,441,331 accrued on the ING credit facility
at the default interest rate. Any unpaid interest due ING was eliminated in the
ING credit facility settlement (see Footnote G - Extraordinary Items to the
Financial Statements).
The $155,437 one time production tax refund included in the $143,561 of
other income for the six month period ended June 30, 2000 is more fully
described in Results of Operations - Three Months Ended June 30, 2000.
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:
Need for Additional Financing. The settlement of the Company's
obligations to ING used substantially all of its available cash. The Company is
obligated to drill 20 commitment wells under the Exploration Agreement with UPR
prior to December 1, 2000, of which 14 had been drilled as of June 30, 2000. In
addition, the Company is obligated to use its best efforts to prepay the $4
million bridge financing provided by BMG as soon as possible. In order to meet
these obligations and to further develop its existing properties, the Company
will need to obtain a credit facility from a bank or other lender. Management
believes that the Company's stronger financial position resulting from the
settlement of the ING loan will enable it to obtain such a credit facility but
there can be no assurance that it will be able to do so.
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 loan agreements, 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
-17-
<PAGE> 18
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.
Effects 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. The Company expanded its facilities and personnel in anticipation of
growth in its operations staff that has not occurred to date as a result of the
Company's lack of resources to pursue the development of its Colorado properties
at the anticipated rate and other factors. Personnel costs have subsequently
been reduced but the expansion has resulted in increased general and
administrative expenses, principally the rent on additional space leased by the
Company. The Company is attempting to 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. In addition, the Company has
experienced increased costs for such services and materials and may continue to
do so in the future. Such increased costs could have an adverse effect on the
Company's results of operations, reserve estimates and financial condition.
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.
-18-
<PAGE> 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
No report required.
Item 2. Changes in Securities.
On May 18, 2000 the Company sold 3,000,000 shares of its common stock
for $1.10 per share to Bruce D. Benson, its Chairman of the Board, Chief
Executive Officer and President. This transaction was effected in reliance on
the exemption afforded by Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
At May 17, 2000, the Company was in default under its Credit Agreement
with ING (U.S.) Capital LLC. The amount outstanding at May 17, 2000 is
$31,250,000 of principal and $2,729,789 of unpaid interest. On May 18, 2000, the
Company settled its obligations to ING as more fully described in Part I. Item 2
of this report and is no longer in default under any loan agreement.
At December 31, 1999, cash dividends on the Company's Series C
Convertible Preferred Stock were unpaid for six quarters. Pursuant to the terms
under which the Series C Preferred Stock was issued, the number of directors on
the Company's board automatically increased by two on that date and the holders
of the Series C Convertible Preferred Stock are entitled to elect the two new
directors. At the August 8, 2000 annual stockholders meeting, the Series C
Preferred stockholders elected Joseph A. Hutchinson and Charles D. Unruh to fill
these two vacancies. Dividends have not been declared or paid since the second
quarter of 1998. Unpaid dividends from July 1, 1998 through August 1, 2000
approximate $443,167. 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:
27.1 Financial Data Schedule.
-19-
<PAGE> 20
B. Reports on Form 8-K.
Form 8-K with a report date of May 18, 2000 was filed June 2,
2000 reporting the settlement of the Company's debt obligations to ING (U.S.)
Capital LLC. Financial statements included were (i) unaudited pro forma
consolidated balance sheet as of March 31, 2000; (ii) unaudited pro forma
consolidated statements of operations for the year ended December 31, 1999 and
the three months ended March 31, 2000; and (iii) notes to unaudited pro forma
consolidated financial statements.
-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: August 11, 2000 By: /s/ Bruce D. Benson
-------------------------------------
Bruce D. Benson, President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: August 11, 2000 By: /s/ F. Michael Murphy
-------------------------------------
F. Michael Murphy, Vice President,
Secretary and Chief Financial Officer
(Principal Financial Officer)
-21-
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
