<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, 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)
Check 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:
State the number of shares outstanding of each of the issuer's classes of common
equity, 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 October 20, 2000
</TABLE>
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<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"). You
may read and copy any reports and other information filed by the Company with
the Commission at the Public Reference Room of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Information concerning the operation of the public
reference room may be obtained by calling the Commission at 1-800-SEC-0330. The
Company's public filings are also available from commercial document retrieval
services and at the Internet web site maintained by the Commission at
http://www.sec.gov.
FORWARD LOOKING STATEMENTS
See "Special Note Regarding Forward Looking Statements" at the end of
"Part I, Item 2. Management's Discussion and Analysis or Plan of Operation" for
cautionary statements concerning forward looking information contained in this
Report.
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<PAGE> 3
UNITED STATES EXPLORATION, INC.
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements ........................................ 4
Item 2 Management's Discussion and Analysis or Plan of Operation ... 12
Part II - OTHER INFORMATION ................................................. 20
SIGNATURES .................................................................. 23
EXHIBIT INDEX ............................................................... 24
</TABLE>
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<PAGE> 4
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash & cash equivalents $ 533,393 $ 3,096,691
Accounts receivable 2,232,685 1,308,015
Due from related parties 16,528 41,764
Inventory 6,387 2,792
Prepaid expenses & deposits 61,243 64,717
----------- -----------
Total current assets 2,850,236 4,513,979
PROPERTY AND EQUIPMENT, AT COST, NET:
Oil and gas property and equipment 18,121,834 24,720,045
Natural gas gathering systems 959,602 949,229
Other equipment and leasehold improvements 264,921 313,661
----------- -----------
19,346,357 25,982,935
OTHER ASSETS
Land held for resale 130,000 300,000
Pipeline lease, less accumulated amortization
of $336,807 at September 30, 2000 and
of $298,915 at December 31, 1999 370,502 408,393
Loan costs, less accumulated
amortization of $1,273 at September 30, 2000
and $116,208 at December 31, 1999 39,793 357,563
----------- -----------
540,295 1,065,956
----------- -----------
Total assets $22,736,888 $31,562,870
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 5
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 3,106,986 $ 2,885,830
Accrued liabilities 215,982 260,265
Due related parties 17,027 14,878
Note payable-Bank 0 31,250,000
Accrued Interest 29,167 1,288,458
------------ ------------
Total current liabilities 3,369,162 35,699,431
NON CURRENT LIABILITIES
Note payable-Bank 4,000,000 0
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, 2000 and December 31, 1999
(liquidation preference of $3,137,616 and $2,978,076 at September 30, 2000
and December 31,1999 respectively) 2,658,996 2,658,996
Common stock-$.0001 par value
Authorized-500,000,000 shares
issued and Outstanding-18,620,631 shares at
September 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 (23,519,871) (39,698,158)
------------ ------------
Total stockholders' equity (deficit) 15,367,726 (4,136,561)
------------ ------------
Total liabilities & stockholders' equity (deficit) $ 22,736,888 $ 31,562,870
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 6
UNITED STATES EXPLORATION, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES
Sale of purchased gas $ 442,056 $ 263,821 $ 1,092,293 $ 664,792
Sale of company produced oil and gas 2,375,426 1,765,625 7,020,905 4,820,186
Contracting and operating fees 15,231 12,303 44,314 41,889
------------------ ------------------ ------------------ ------------------
2,832,713 2,041,749 8,157,512 5,526,867
COSTS & EXPENSES
Gas acquistion costs 254,962 151,280 638,918 358,938
Gathering & transmission costs 140,715 103,273 344,988 277,774
Production costs-oil and gas 705,297 647,935 2,235,167 1,930,786
Other operating costs (280) 8,300 (1,020) 115,839
Depletion, depreciation, and amortization 616,333 507,433 2,019,852 1,781,823
Provision for impairment of assets 0 0 170,000 0
General and administrative expenses 485,202 490,627 1,430,559 1,826,659
------------------ ------------------ ------------------ ------------------
2,202,229 1,908,848 6,838,464 6,291,819
Earnings (loss) from operations 630,484 132,901 1,319,048 (764,952)
OTHER INCOME (EXPENSE)
Interest income 5 13,322 20,280 51,319
Interest expense (90,226) (607,219) (1,574,837) (1,770,911)
Other (21,856) (2,050) 121,705 418
------------------ ------------------ ------------------ ------------------
(112,077) (595,947) (1,432,852) (1,719,174)
------------------ ------------------ ------------------ ------------------
Income (loss) before extraordinary item 518,407 (463,046) (113,804) (2,484,126)
------------------ ------------------ ------------------ ------------------
Income from Debt Relief 0 0 16,292,093 0
------------------ ------------------ ------------------ ------------------
NET INCOME (LOSS) 518,407 (463,046) 16,178,289 (2,484,126)
------------------ ------------------ ------------------ ------------------
Preferred stock dividends attributable to period (53,180) (53,180) (159,540) (159,540)
------------------ ------------------ ------------------ ------------------
Net income (loss) applicable to common stockholders 465,227 (516,226) 16,018,749 (2,643,666)
------------------ ------------------ ------------------ ------------------
Earnings per common share:
Income (loss) before extraordinary item $0.02 ($0.03) ($0.02) ($0.17)
Extraordinary gain on extinguishment of debt $0.00 $0.00 $0.95 $0.00
------------------ ------------------ ------------------ ------------------
Net income (loss) per common share $0.02 ($0.03) $0.93 ($0.17)
------------------ ------------------ ------------------ ------------------
Weighted average common shares outstanding 18,620,631 15,591,831 17,115,136 15,591,831
================== ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 7
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES EXPLORATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS
Net Income (Loss) $ 16,178,289 $ (2,484,126)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation, depletion and amortization 2,019,852 1,781,823
Provision for impairment of assets 170,000 0
Loss on sale of assets 35,967 6,810
Decrease (increase) in accounts receivable (net) (924,670) 911,795
Decrease (increase) in due from related parties 25,236 (26,818)
Decrease (increase) in inventory (3,595) 7,261
Decrease in prepaid expenses 3,474 694,512
Increase (decrease) in accounts payable
and accrued expenses (1,082,418) 439,816
Increase (decrease) in due to related parties 2,149 (36,787)
Stock issued as compensation 36,000 24,000
Extraordinary gain on extinguishment on
debt - non cash (13,919,542) 0
------------ ------------
Net cash provided by operating activities 2,540,742 1,318,286
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,523,474) (2,709,618)
Proceeds from sale of properties and equip 7,188,500 2,607,800
------------ ------------
Net cash provided by investing activities 4,665,026 (101,818)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Notes Payable (21,000,000) (3,350,000)
Proceeds from Debt (Net of loan costs) 7,940,934 2,700,000
Common Stock issued (net of issuance costs) 3,290,000 0
------------ ------------
Net Cash used in Financing Activities (9,769,066) (650,000)
Net increase (decrease) in cash and cash equivalents (2,563,298) 566,468
Cash and cash equivalents-beginning of period 3,096,691 1,000,661
------------ ------------
Cash and cash equivalents-end of period $ 533,393 $ 1,567,129
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 8
United States Exploration, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - COMPANY HISTORY AND NATURE OF OPERATIONS
History and Operations
United States Exploration, Inc. (the "Company") was incorporated on January 9,
1989. The Company operates as a producer of oil and gas and as an operator of
gas gathering systems. The Company's operations are currently located in
northeast Colorado and southeast Kansas. 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 subsidiary Producers
Service Incorporated. 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 September 30, 2000 and for the nine months ended September
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 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
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<PAGE> 9
of preferred stock would have an anti-dilutive effect on the net loss or net
income 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 October 20, 2000 17
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 AGREEMENTS
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 September 30, 1999, the
Company was in default under the Credit Agreement and the bank subsequently
accelerated the loan. On May 18, 2000, the Company settled all of its
obligations to ING for $17,000,000. 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 $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 reduced the
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<PAGE> 10
outstanding principal balance of the note to $4 million, forgave all interest
and fees accruing prior to the date of the amendment, provided for interest on
the reduced principal amount of the note at 9% per annum and required 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.
On August 25, 2000, the Company entered into a credit agreement with Bank of
Oklahoma, N.A. The revolving credit agreement is available through August 1,
2003 in the original amount of $6 million, which may be increased up to $10
million based on subsequent borrowing base determinations by the lender. The
loan bears interest at rates varying from lender prime to 0.75% below lender
prime, depending upon the outstanding principal balance of the loan, and is
secured by all of the Company's oil and gas properties. Interest is payable
monthly and principal is payable at the end of the credit term. At September 30,
2000, the Company had drawn $4 million on the loan to repay the interim debt
financing provided by BMG in connection with the ING settlement.
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.
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<PAGE> 11
NOTE G - EXTRAORDINARY ITEM
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>
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
The Company's financial condition and results of operations have
improved dramatically as a result of the favorable settlement of its obligations
to its former lender and increased oil and gas prices. At September 30, 1999,
the Company had a stockholders deficit of $2,565,886 and no borrowing ability.
At September 30, 2000, the Company had stockholders equity of $15,367,726 and
$2,000,000 available under its credit facility. In the nine months ended
September 30, 1999, the Company sold its Colorado oil for an average price of
$15.42 per barrel and its Colorado gas for an average price of $1.99 per mcf. In
the nine months ended September 30, 2000, the comparable numbers were $27.67 for
oil and $3.14 for gas.
These improvements have allowed the Company to proceed with the
development of its oil and gas properties in Colorado and Kansas. Cash flow from
operations and available borrowings under a new credit agreement are expected to
be adequate to allow the Company to complete the development of its properties.
In addition, the Company has entered into a drilling agreement with an
independent oil and gas company that will result in the drilling of wells on its
Colorado properties that the Company probably would not drill itself, further
increasing reserves.
The Company's cash flow and the quantity and value of its oil and gas
reserves are directly and immediately affected by changing oil and gas prices.
Oil and gas prices are currently high. However, at year end 1998, the Company
was required to write down its oil and gas properties by $15,206,978, wiping out
its shareholders' equity, primarily because reduced oil and gas prices resulted
in lower estimated economically recoverable reserves. Generally accepted
accounting principles did not allow us to write the properties back up when oil
and gas prices recovered. This write-down and its effects on our stockholders
equity and earnings are illustrative of the effect that changing market
conditions can have on the financial condition and results of operations of an
oil and gas company, even though there has been no change in its underlying
assets and operations.
As a result of the losses experienced by the Company in recent periods
and defaults under our former 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
On August 25, 2000, we entered into a credit agreement with Bank of
Oklahoma, N.A. The revolving credit agreement is available through August 1,
2003 in the original amount of $6,000,000, which may be increased up to
$10,000,000 based on subsequent borrowing base determinations by the lender. The
loan bears interest at rates varying from lender prime to 0.75% below lender
prime,
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<PAGE> 13
depending upon the outstanding principal balance of the loan, and is secured by
all of the Company's oil and gas properties. Interest is payable monthly and
principal is payable at the end of the credit term. The interest rate for August
and September was 8.75% per annum. At September 30, 2000, the Company has
borrowed $4,000,000 to repay the interim debt financing provided by Benson
Mineral Group, Inc. See Note E to Financial Statements. The borrowing base is to
be redetermined as of December 1, 2000 and each April 1 and October 1
thereafter. Financial covenants included in the credit agreement require the
Company to (i) maintain a tangible net worth of $8,000,000, (ii) maintain a debt
coverage ratio (as defined) of 1.25 to 1 and (iii) maintain an EBITDA to
consolidated interest ratio (as defined) of 2.5 to 1.
Capital Expenditures
Capital expenditures were $1,543,077 for the third 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 October 20, 2000, 17
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.
Our Colorado development plan for the last half of this year includes
16 recompletions in different formations in existing wellbores and the drilling
of one new well. At September 30, 2000, nine of the recompletions had been
accomplished. We have also recently agreed to participate with other oil and gas
operators in the drilling of seven new wells plus six recompletions in existing
wellbores.
Our Kansas development plan for the remainder of the year includes
obtaining new leases, drilling or recompletion activity and continued efforts to
negotiate agreements to purchase gas from others.
We previously 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 be counted to satisfy the
remaining three wells in the 20-well commitment to be drilled prior to December
1, 2000 under the Exploration Agreement with UPR or could be credited against
the 20 commitment wells in our next yearly option period which begins December
1, 2000 if we can and do elect to exercise the option. There can be no assurance
that the third party will drill wells that count against our commitment under
the Exploration Agreement or, if they do, that such wells will be drilled within
the time periods established by the Exploration Agreement. At October 20, 2000,
five producing wells have been drilled under this second program, none of which
qualify under the UPR Exploration Agreement. 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.
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<PAGE> 14
Cash Balances and Cash Flow
As of October 18, 2000 the Company had cash and cash equivalents of
approximately $500,000. 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. Our projected capital
spending will require additional borrowings from Bank of Oklahoma under our
credit facility. However, there can be no assurance that prices will remain at
current levels and that cash flow will remain positive.
Property Sales
The sale of the Company's Texas land held for resale at an amount of
$150,000 less customary closing costs is expected to close in the fourth quarter
of 2000.
Series C Preferred Stock
At September 30, 2000, unpaid dividends on the Company's Series C
Preferred Stock totaled $478,620. 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. Upon payment of the
dividends arrearage, the size of the Board is reduced by two and the terms of
directors elected by the holders of the Series C Preferred Stock automatically
terminate. On December 31, 1999, the dividend arrerages on the Series C
Convertible Preferred Stock totaled six quarters and this right of the holders
to elect two directors arose. 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 cash dividends may be paid under the terms of the
Bank of Oklahoma credit agreement. In the event preferred stock dividends have
not been paid on the Series C Preferred Stock for three successive years, the
Company, to the extent legally possible, is required to pay all dividends in
arrears in common stock of the Company, subject to prior permission of the
holders of the Series C Preferred Stock, which consent may not be withheld for
more than 180 consecutive days. Dividends will be in arrears on the Series C
Preferred Stock for three successive years on June 30, 2001.
Under the terms of the Series C Preferred Stock, certain issuances of
common stock or options to purchase common stock require a recalculation of the
number of common shares to be issued upon conversion of Series C Preferred. The
Company has made these recalculations because of common stock issued and options
granted in May 2000. Each Series C Preferred share is now convertible into
2.23048 shares of common stock instead of the original conversion number of two
shares of common stock for each share of Series C Preferred.
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<PAGE> 15
Results of Operations
Quarter Ended September 30, 2000
The Company realized net income applicable to common shareholders of
$465,227 ($.02 per common share) for the third quarter of 2000 compared to a
loss applicable to common shareholders of $516,226 ($.03 per common share) for
the third quarter of 1999.
Sales of purchased gas less the related gas acquisition costs and
gathering and transmission costs produced an operating profit from the resale of
purchased gas of $46,379 for the third quarter of 2000 compared to an operating
profit of $9,268 for the third 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 September 30, 2000
and September 30, 1999 are shown in the table below:
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Three months ended September 30
----------------------------------------------------------------------------- Three months
2000 1999 ended
----------------------------------- ----------------------------------- June 30,
Kansas Colorado Total Kansas Colorado Total 2000
------ -------- ----- ------ -------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl .16 27.40 27.56 (.40) 22.71 22.31 31.40
Natural Gas - mmcf 18.22 398.18 416.40 23.00 535.66 558.66 491.78
Total - mmcfe 19.18 562.58 581.76 20.60 671.92 692.52 680.18
Weighted Average Prices
Oil - $/bbl 21.63 30.02 29.97 15.98 19.39 19.45 26.85
Natural Gas - $/mcf 2.51 3.78 3.72 1.61 2.42 2.38 3.04
</TABLE>
The increase in production costs - oil and gas from $647,935 for the
third quarter of 1999 to $705,297 for the third quarter of 2000 is attributable
to an increase of $59,246 in production taxes based upon the value of the
Company's oil and gas sold.
General and administrative expenses of $490,627 for the third quarter
of 1999 are comparable to the $485,202 for the third quarter of 2000.
Interest expense for the third quarter of 2000 in the amount of $90,226
represents 9% per annum on the $4,000,000 interim financing provided by Benson
Mineral Group, Inc. for the period July 1, 2000 through August 24, 2000
($54,254) plus 8.75% per annum on $4,000,000 of borrowings under the Bank of
Oklahoma credit facility for the period August 25, 2000 through September 30,
-15-
<PAGE> 16
2000 ($35,972). Interest expense for the third quarter of 1999 was based upon
the terms of the ING credit facility and totaled $607,219.
Nine Months Ended September 30, 2000
The Company realized net income applicable to common shareholders of
$16,018,749 ($.93 per common share) for the first nine months of 2000 compared
to a net loss applicable to common shareholders of $2,643,666 ($.17 per common
share) for the first nine months of 1999. Included in net income for the nine
months ended September 30, 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).
Before the extraordinary gain related to the loan settlement, the
Company had a net loss of $113,804 for the nine months ended September 30, 2000,
compared to a net loss of $2,484,126 for the same period in 1999. The 2000 loss
reflects interest expense of $1,574,837, of which $1,441,331 (approximately $.07
per common share) consists of interest accrued at the default rate on the
Company's former loan prior to the settlement in May 2000. Although that accrued
interest was extinguished in the settlement, it is still required to be
recognized as interest expense and therefore reduces net income for 2000.
Sales of purchased gas less the related gas acquisition costs and
transmission costs produced an operating profit from the resale of purchased gas
of $108,387 for the first nine months of 2000 compared to an operating profit of
$28,080 for the first nine 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 nine months ended September 30, 2000
and September 30, 1999 are shown in the table below:
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<PAGE> 17
Net Oil and Gas Production and Sales Prices
<TABLE>
<CAPTION>
Nine months ended September 30
---------------------------------------------------------------------------------------
2000 1999
--------------------------------------- -----------------------------------------
Kansas and
Kansas Colorado Total Oklahoma Colorado Total
------ -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Production
Oil - mbbl .65 89.41 90.06 6.90 77.03 83.93
Natural Gas - mmcf 54.18 1406.86(1) 1461.04 83.01(1) 1716.18 1799.19
Total - mmcfe 58.08 1943.32 2001.40 124.41 2178.36 2302.77
Weighted Average Prices
Oil - $/bbl 21.99 27.67 27.63 13.96 15.42 15.30
Natural Gas - $/mcf 2.13 3.14 3.10 1.53 1.99 1.97
</TABLE>
(1) Production for the nine months ended September 30, 2000 includes
the 60 Colorado wells sold to an unaffiliated oil and gas company effective May
1, 2000 for four months only. Production for the nine months ended September 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 $1,930,786 for the
nine months ended September 30, 1999 to $2,235,167 for the nine months ended
September 30, 2000 is largely attributable to an increase of $191,956 in
production taxes based upon the value of the Company's oil and gas sold. The
Company has also increased its remedial work on operated properties.
The decrease in other operating costs of $116,859 from the nine months
ended September 30, 1999 to the nine months ended September 30, 2000 results
from the closing of the Company's field offices during 1999.
The nine months ended September 30, 2000 contains a $170,000 impairment
in value to the Texas land held for sale. This impairment is based upon a
contract to sell the land for $150,000 less customary closing costs. The
transaction is scheduled to close in the fourth quarter of 2000.
The decrease in general and administrative expenses from $1,826,659 for
the nine months ended September 30, 1999 to $1,430,559 for the first nine months
of 2000 is largely attributable to reduced personnel costs.
Interest expense of $1,770,911 for the nine months ended September 30,
1999 all related to the ING credit facility. Interest expense of $1,574,837 for
the nine months ended September 30, 2000 consists of $1,441,331 accrued on the
ING credit facility at the default interest rate for the period January 1, 2000
through May 17, 2000, $97,533 paid to BMG for the period May 18, 2000 through
August 24, 2000 and $35,973 paid to Bank of Oklahoma for the period August 25,
2000 through September 30, 2000. Any unpaid interest due ING was eliminated in
the ING credit facility settlement (see Footnote G - Extraordinary Items to the
Financial Statements).
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<PAGE> 18
Other income or expense for the nine months ended September 30, 2000
includes a $155,437 one time production tax refund relating to 1998 and 1999 and
losses from dispositions of a vehicle, office furniture and outdated computer
hardware and software.
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", "projects" and "estimates." Factors that could cause
actual results to differ materially from these contemplated by such
forward-looking statements include, among others, the following:
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.
Availability of Services and Materials. The Company's current
development program requires significantly higher levels of third-party services
and materials. Such services and materials have been scarce in recent months due
to increased oil and gas activity. 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.
Additional Financing. The Company's borrowing base under its credit
facility with Bank of Oklahoma is currently $6,000,000. The borrowing base will
be redetermined as of December 1, 2000 and the maximum borrowing base is
$10,000,000. Although management believes that, based on current oil and gas
prices, the Company's proved reserves can support a borrowing base of
$10,000,000, there can be no assurance that the Company's lender will increase
the borrowing base or that future declines in oil and gas prices will not cause
the borrowing base to decrease. Material changes in the borrowing base could
result in the Company not having sufficient capital to develop its oil and gas
properties as contemplated and there can be no assurance that funding for such
development would be available from other sources.
-18-
<PAGE> 19
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 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.
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.
-19-
<PAGE> 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
No report required.
Item 2. Changes in Securities and Use of Proceeds.
The Company's loan agreement with Bank of Oklahoma, N.A., which was
entered into on August 25, 2000, prohibits the payment of dividends on its
capital stock without the lender's consent.
As a result of the operation of the conversion rate adjustment
provisions of the Company's outstanding Series C Convertible Preferred Stock,
each share of Series C Convertible Preferred Stock is now convertible into
2.23048 shares of Common stock. At September 30, 2000 there were 443,166 shares
of Series C Convertible Preferred Stock outstanding.
Item 3. Defaults Upon Senior Securities.
At December 31, 1999, cash dividends on the Company's Series C
Convertible Preferred Stock were unpaid for six quarters. Pursuant to the terms
of the Series C Preferred Stock, 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 were entitled to elect the two new directors. At the
August 8, 2000 Annual Meeting of Shareholders, the Series C Preferred
shareholders elected Joseph A. Hutchinson and Charles D. Unruh to fill these
vacancies. Dividends have not been declared or paid since the second quarter of
1998. Unpaid dividends from July 1, 1998 through September 30, 2000 are
$478,620. If the dividends on the Series C Convertible Preferred Stock remain
unpaid for three years, the Company is required to pay the accrued dividends in
shares of its Common Stock, if legally permissible, and subject to the consent
of the holders of the Series C Preferred Stock, which consent cannot be withheld
for more than 180 days. The Series C Convertible Preferred Stock is not
registered under Section 12 of the Securities Exchange Act of 1934.
Item 4. Submission of Matters to a Vote of Security Holders.
At the August 8, 2000 annual meeting of the holders of the Company's
Common Stock, the matters voted on and the voting results were as follows:
-20-
<PAGE> 21
Proposition 1 - Election of Directors
<TABLE>
<CAPTION>
Withheld
For Authority Abstain
---------- --------- -------
<S> <C> <C> <C>
Bruce D. Benson 10,672,762 5,370 33,450
Thomas W. Gamel 10,677,782 350 33,450
Richard L. Robinson 10,677,782 350 33,450
Robert J. Malone 10,677,782 350 33,450
</TABLE>
Proposition 2 - Ratify Appointment of Ernst & Young LLP as Auditors
<TABLE>
<CAPTION>
Withheld
For Authority Abstain
---------- --------- -------
<S> <C> <C>
10,710,692 370 520
</TABLE>
On August 8, 2000, the Company also held a meeting of the holders of
its Series C Convertible Preferred Stock to elect the two directors that they
are entitled to elect as a result of existing dividend arrearages. The results
of that election were as follows:
Election of Two Directors by Series C Preferred Shareholders
<TABLE>
<CAPTION>
For Against
------- -------
<S> <C> <C>
Joseph A. Hutchinson 301,167 0
Charles D. Unruh 301,167 0
</TABLE>
Joseph A. Hutchinson, 54, has been a private investor for the last 16
years.
Charles D. Unruh, 47, is Chairman of the Board of The Oklahoma
Petroleum Worker's Compensation Association, an insurance mutual fund, and has
served in that capacity for the past five years. For more than the past five
years, Mr. Unruh has also been President of various Oklahoma oilfield
corporations, including Turner Tank Trucks, Inc., Oklahoma Liquid Resources and
Ruh Oil Company.
Item 5. Other Information.
No report required.
-21-
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits:
27.1 Financial Data Schedule.
B. Reports on Form 8-K.
Form 8-K with a report date of July 13, 2000 was filed July 19, 2000
reporting under Item 5 a 2000 Development Agreement between United States
Exploration, Inc. and Petroleum Development Corporation dated June 30, 2000.
Form 8-K with a report date of August 25, 2000 was filed September 5,
2000 reporting under Item 5 a new Credit Agreement dated August 25, 2000 by and
between United States Exploration, Inc. and Bank of Oklahoma, N.A.
-22-
<PAGE> 23
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED STATES EXPLORATION, INC.
Date: November 1, 2000 By: /s/ Bruce D. Benson
-------------------------------------
Bruce D. Benson, President,
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: November 1, 2000 By: /s/ F. Michael Murphy
-------------------------------------
F. Michael Murphy, Vice President,
Secretary and Chief Financial Officer
(Principal Financial Officer)
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<PAGE> 24
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
-24-
