FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal quarter ended March 31, 2003 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number 0-6814
U.S. ENERGY CORP.
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(Exact Name of Company as Specified in its Charter)
Wyoming 83-0205516
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (307) 856-9271
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Not Applicable
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Former name, address and fiscal year, if changed since last report)
Check whether the Company: (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 Company was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 13, 2003
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Common stock, $.01 par value 12,294,750 Shares
U.S. ENERGY CORP. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 3-4
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 2003 and 2002 5-6
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 7-8
Notes to Condensed Consolidated
Financial Statements 9-12
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
ITEM 4. Controls and Procedures 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 2. Changes in Securities and Use of Proceeds 19
ITEM 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications 21-22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2003 2002
-------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,123,400 $ 1,741,000
Accounts receivable:
Trade, net of allowance of $27,800 1,659,300 1,655,700
Affiliates 150,300 117,600
Current portion of long-term notes 117,200 165,900
Assets held for resale and other 1,081,100 1,061,100
Inventory 18,400 14,000
-------------- --------------
Total current assets 4,149,700 4,755,300
INVESTMENTS: 9,885,200 9,911,700
PROPERTIES AND EQUIPMENT 19,464,700 19,802,300
Less accumulated depreciation
depletion and amortization (7,377,100) (7,214,800)
Net property and equipment 12,087,600 12,587,500
OTHER ASSETS:
Notes receivable
Employees 12,900 48,800
Deposits and other 928,900 887,300
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Total other assets 941,800 936,100
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Total assets $ 27,064,300 $ 28,190,600
============== ==============
See accompanying notes to condensed financial statements.
3
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
2003 2002
-------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,407,800 $ 1,592,800
Prepaid drilling costs 74,800 134,400
Current portion long-term debt 270,900 317,200
-------------- --------------
Total current liabilities 1,753,500 2,044,400
LONG-TERM DEBT 2,915,100 2,820,600
ASSET RETIREMENT OBLIGATIONS 7,382,800 8,906,800
OTHER ACCRUED LIABILITIES 2,269,500 2,319,900
DEFERRED TAX LIABILITY 1,144,800 1,144,800
MINORITY INTERESTS 549,700 587,400
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK, $.01 par value
465,880 and 500,788 shares issued, forfeitable until earned 2,726,600 3,009,900
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; unlimited shares
11,966,278 and 11,826,396 shares issued respectively 119,700 118,300
Additional paid-in capital 49,553,000 48,877,100
Accumulated deficit (38,099,000) (38,407,700)
Treasury stock at cost
964,725 and 959,725 shares respectively (2,760,900) (2,740,400)
Unallocated ESOP contribution (490,500) (490,500)
Total shareholders' equity 8,322,300 7,356,800
-------------- --------------
Total liabilities and shareholders' equity $ 27,064,300 $ 28,190,600
============== ==============
See accompanying notes to condensed financial statements.
4
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002
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OPERATING REVENUES:
Motel and real estate operations $ 175,000 $ 162,700
Gas sales 140,000 --
Management fees 113,600 62,900
------------ ------------
428,600 225,600
OPERATING COSTS AND EXPENSES:
Motel and real estate operations 260,400 170,000
Gas operations 150,800 24,900
Mine holding costs 303,000 286,000
General and administrative 999,300 1,203,300
1,713,500 1,684,200
------------ ------------
OPERATING LOSS (1,284,900) (1,458,600)
OTHER INCOME AND EXPENSES:
(Loss) gain on sale of assets (5,000) 142,700
Interest income 172,400 141,100
Interest expense (227,100) (81,200)
------------ ------------
(59,700) 202,600
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LOSS BEFORE MINORITY INTEREST,
PROVISION FOR INCOME TAXES,
DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (1,344,600) (1,256,000)
MINORITY INTEREST IN LOSS OF
CONSOLIDATED SUBSIDIARIES 37,700 5,700
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LOSS BEFORE PROVISION FOR INCOME TAXES,
DISCONTINUED OPERATIONS AND,
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (1,306,900) (1,250,300)
See accompanying notes to condensed financial statements.
5
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
(CONTINUED)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002
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PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (1,306,900) (1,250,300)
DISCONTINUED OPERATIONS, NET OF TAX -- (8,100)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,615,600 --
------------ ------------
NET INCOME (LOSS) $ 308,700 $(1,258,400)
============ ============
PER SHARE DATA:
NET INCOME (LOSS) PER SHARE, BASIC
FROM CONTINUED OPERATIONS $ (0.12) $ (0.13)
FROM DISCONTINUED OPERATIONS -- --
FROM EFFECT OF ACCOUNTING CHANGE 0.15 --
------------ ------------
$ 0.03 $ (0.13)
============ ============
NET INCOME (LOSS) PER SHARE, DILUTED
FROM CONTINUED OPERATIONS $ (0.12) $ (0.13)
FROM DISCONTINUED OPERATIONS -- --
FROM EFFECT OF ACCOUNTING CHANGE 0.15 --
------------ ------------
$ 0.03 $ (0.13)
============ ============
BASIC WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 10,881,394 9,837,494
============ ============
DILUTED WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 11,385,593 9,837,494
============ ============
See accompanying notes to condensed financial statements.
6
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 308,700 $(1,258,400)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in loss of
consolidated subsidiaries (37,700) 5,700
Depreciation and amortization 170,400 181,200
Accretion of asset retirement obligations 91,600 --
Noncash services 105,800 14,400
Amortization of debt discount 131,200 --
Loss (gain) on sale of assets 5,000 (142,700)
Noncash cumulative effect of accounting change (1,615,600) --
Noncash compensation 133,600 409,000
Net changes in assets and liabilities (233,600) (475,500)
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NET CASH USED IN OPERATING ACTIVITIES: (940,600) (1,266,300)
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration of coalbed methane gas properties (29,300) 230,600
Proceeds from sale of gas interests 375,000 375,000
Proceeds from sale of property and equipment 6,300 191,000
Net change in restricted investments 26,500 31,000
Purchase of property and equipment (1,200) (22,700)
Net change in investments in affiliates -- 28,600
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NET CASH PROVIDED BY INVESTING ACTIVITIES: 377,300 833,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 52,400 979,600
Proceeds from third party debt 2,600 --
Repayments of third party debt (109,300) (170,600)
------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES: (54,300) 809,000
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See accompanying notes to condensed financial statements.
7
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (617,600) 376,200
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,741,000 2,107,300
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,123,400 $ 2,483,500
============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 227,100 $ 81,200
============ ============
Income tax paid $ -- $ --
============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets through issuance of debt $ 26,300 $ 99,700
============ ============
Acquisition of assets through issuance of stock $ -- $ 48,400
============ ============
Issuance of stock as deferred compensation $ 151,900 $ 261,300
============ ============
Issuance of stock for retired employees $ 435,200 $ --
============ ============
Issuance of stock for services $ 84,000 $ 14,400
============ ============
Satisfaction of receivable - employee
with stock in company $ 20,500 $ 20,600
============ ============
See accompanying notes to condensed financial statements.
8
U.S. ENERGY CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) The Condensed Consolidated Balance Sheet as of March 31, 2003 and
the Condensed Consolidated Statements of Operations and Cash Flows for the three
months ended March 31, 2003 and 2002, have been prepared by the Company without
audit. The Condensed Consolidated Balance Sheet at December 31, 2002 has been
taken from the audited financial statements included in the Company's Annual
Report on Form 10-K for the period then ended. In the opinion of the Company,
the accompanying financial statements contain all adjustments (consisting of
only normal recurring accruals except for the cumulative effect of a change in
accounting principal in 2003) necessary to present fairly the financial position
of the Company as of March 31, 2003 and 2002 and the results of operations and
cash flows for the three months ended March 31, 2003 and 2002.
2) Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these financial statements be read in conjunction with the
Company's December 31, 2002 Form 10-K. The results of operations for the
periods ended March 31, 2003 and 2002 are not necessarily indicative of the
operating results for the full year.
3) The consolidated financial statements of the Company include its
majority-owned and controlled subsidiaries: Energx Ltd. ("Energx")(90%), Crested
Corp. ("Crested")(70.5%), Plateau Resources Limited ("Plateau")(100%), Sutter
Gold Mining Co. ("SGMC")(66.3%), Yellow Stone Fuels Corp. ("YSFC")(35.9%), Four
Nines Gold, Inc. ("FNG")(50.9%), Northwest Gold, Inc. ("NWG")(96%), Rocky
Mountain Gas, Inc.("RMG")(91.5%) and the USECC joint venture ("USECC"), a
consolidated joint venture which is equally owned by the Company and Crested,
through which the bulk of their operations are conducted. All material
intercompany profits and balances have been eliminated.
4) Accrued asset retirement obligations and holding costs of $7,382,800
at March 31, 2003 and $8,906,800 at December 31, 2002 are primarily the
reclamation liability at the SMP mining properties and the reclamation and
holding liabilities at the Shootaring Uranium Mill. The reclamation of these
properties will not be completed until such time as all the uranium
mineralization contained in the properties is produced or the properties are
abandoned. The reclamation work may be performed over several years and is
bonded with either cash or certain of the Company's real estate assets.
5) Components of Properties and Equipment at March 31, 2003 consist of
coalbed methane properties, land, buildings and equipment.
Accumulated
Amortization
Cost and Depreciation Net Value
----------- ------------------ -----------
Coalbed methane and oil properties $ 6,363,800 $ (1,885,600) $ 4,478,200
Buildings, land and equipment 13,100,900 (5,491,500) 7,609,400
----------- ------------------ -----------
$19,464,700 $ (7,377,100) $12,087,600
=========== ================== ===========
The Company has impaired a portion of historical costs associated with its
properties in prior periods. The Company will provide additional impairments if
necessary in the future.
6) On July 10, 2001, RMG closed a Purchase and Sale Agreement with
CCBM, Inc. ("CCBM"), a wholly-owned subsidiary of Carrizo Oil & Gas, Inc. of
Houston, Texas. CCBM has a right to purchase an undivided 50% interest as part
of the purchase and sale agreement in all of RMG's existing coalbed properties.
CCBM signed a $7,500,000 Promissory Note payable in principal amounts of
$125,000 per month plus interest at 8% per year over 41 months (starting July
31, 2001) with a balloon payment due in the forty-second month. At March 31,
2003, the payments under the CCBM note were current.
7) The Company presents basic and diluted earnings per share in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings per Share". Basic earnings per common share, is based on the
weighted average number of common shares outstanding during the period.
8) The Internal Revenue Service (IRS) has audited and closed the
Company's tax years through May 31, 2000 with no change in the amount of tax
due.
9) Certain reclassifications have been made in the December 31, 2002
financial statements to conform to the classifications used in March 31, 2003.
10) The Company has shut down the mine properties for which it is
responsible for the reclamation expense. These expenses are scheduled to be
completed over the next seven years. The Company cannot predict the exact
amount of such future reclamation liabilities. Estimated future reclamation
costs are based upon the Company's best engineering estimates and legal and
regulatory requirements.
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligation." The statement requires the Company to record
the fair value of the reclamation liability on its shut down mining properties
as of the date that the liability is recorded. The statement further requires
that the Company review the liability each quarter and determine its
accurateness as well as accrete the total liability on a quarterly basis for the
full value of the liability.
The Company will also deduct any actual funds expended for reclamation
during the quarter in which it occurs. As a result of the Company taking
impairment allowances in prior periods on its shut down mining properties, it
has no remaining book value for these properties. All accretion amounts will
therefore be expensed in the quarter in which they are recorded.
The following is a reconciliation of the total liability for asset
retirement obligations (unaudited)
Balance December 31, 2002 $ 8,906,800
Impact of adoption of SFAS No. 143 (1,615,600)
Addition to Liability
Liability Settled
Accretion Expense 91,600
-------------
Balance March 31, 2003 $ 7,382,800
9
The following table shows what the Company's net income (loss) and net
income (loss) per share would have been in the first quarter of 2002 if the
provisions of SFAS No. 143 had been applied in that period, compared with net
income (loss) and net income (loss) per share recorded in the first quarter of
2003.
Three Months Ended March 31,
--------------------------------
2003 2002
------------ ------------
NET INCOME (LOSS):
Reported net income (loss) $ 308,700 $(1,258,400)
Cumulative effect of adoption
of SFAS No. 143 (1,615,600) --
Pro-Forma SFAS No. 143 accretion -- (103,000)
------------ ------------
Adjusted net income (loss) $(1,306,900) $(1,361,400)
============ ============
PER SHARE OF COMMON STOCK:
Reported net income (loss)-basic $ 0.03 $ (0.13)
Cumulative effect of adoption
of SFAS No. 143 (0.15) --
Pro-Forma SFAS No. 143 accretion -- (0.01)
------------ ------------
Adjusted net income (loss) - basic $ (0.12) $ (0.14)
============ ============
Reported net income (loss)-diluted 0.03 (0.13)
Cumulative effect of adoption
of SFAS No. 143 (0.15) --
Pro-Forma SFAS No. 143 -- (0.01)
------------ ------------
Adjusted net income (loss)-diluted $ (0.12) $ (0.14)
============ ============
The Company has reviewed other current outstanding statements from the
Financial Accounting Standards Board and does not believe that any of those
statements will have a material adverse affect on the financial statements of
the Company when adopted.
11) The Accompanying condensed financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a going concern.
We have sustained substantial losses from operations in recent years, and such
losses have continued through March 31, 2003. In addition, we have used, rather
than provided, cash in our operations.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the condensed
consolidated accompanying balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon our ability to meet our
financing requirements on a continuing basis, to maintain present financing, and
to succeed in our future operations.
We continue to pursue several items that will help us meet our future cash
needs. We are aggressively pursuing our claims against Nukem. We are also
currently working with several different sources, including both strategic and
financial investors, in order to raise sufficient capital to finance our
continuing operations. Although there is no assurance that funding will be
available or that the outcome in the Nukem litigation will be positive, we
believe that our current business plan, if successfully funded, will
significantly improve our operating results and cash flow in the future.
10
U.S. ENERGY CORP. & SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
--------------
The following is Management's Discussion and Analysis of significant
factors, which have affected our liquidity, capital resources and results of
operations during the periods included in the accompanying financial statements.
For a detailed explanation of the Company's Business Overview, it is suggested
that Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three months ended March 31, 2003 be read in conjunction with
the Company's Form 10-K for the year ended December 31, 2002. The discussion
contains forward-looking statements that involve risks and uncertainties. Due
to uncertainties in our business, actual results may differ materially from the
discussion below.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
OIL AND GAS PRODUCING ACTIVITIES - Through our subsidiary, Rocky Mountain
Gas, Inc. ("RMG") we follow the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration,
and development of oil and gas reserves, including directly related overhead
costs, are capitalized.
All capitalized costs of oil and gas properties subject to amortization and
the estimated future costs to develop proved reserves, are amortized on the
unit-of-production method using estimates of proved reserves. Investments in
unproved properties and major exploration and development projects are not
amortized until proved reserves associated with the projects can be determined.
Unproved properties are assessed periodically to ascertain whether impairment
has occurred. Such assessments could cause the Company to reduce the carrying
values of the properties.
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present value,
discounted at a 10-percent interest rate of future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproved properties.
The discounted present value of our proved natural gas reserves is a major
component of the ceiling calculation and requires many subjective judgments.
Estimates of reserves are forecasts based on engineering and geological
analyses. Different reserve engineers may reach different conclusions as to
estimated quantities of natural gas reserves based on the same information. Our
reserve estimates are prepared by independent consultants. The passage of time
provides more qualitative information regarding reserve estimates, and revisions
are made to prior estimates based on updated information. However, there can be
no assurance that more significant revisions will not be necessary in the
future. Significant downward revisions could result in a full cost write-down.
In addition to the impact on calculation of the ceiling test, estimates of
proved reserves are also a major component of the calculation of depletion.
While the quantities of proved reserves require substantial judgment, the
associated price of natural gas reserves that are included in the discounted
present value of our reserves are objectively determined. The ceiling
calculation requires prices and costs in effect as of the last day of the
accounting period are generally held constant for the life of the properties.
As a result, the present value is not necessarily an indication of the fair
value of the reserves. Natural gas prices have historically been volatile and
the prevailing prices at any given time may not reflect our Company's or the
industry's forecast of future prices.
RECLAMATION LIABILITIES - The Company's policy is to accrue the liability
for future reclamation costs of its mineral properties based on the current
estimate of the future reclamation costs as determined by internal and external
experts.
RECENT ACCOUNTING PRONOUNCEMENTS
- ----------------------------------
SFAS NO. 143 - The Company has implemented the Financial Accounting
Standards Board issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" effective January 1, 2003. The statement requires the Company to
record the fair value of a liability for legal obligations associated with the
retirement of obligations of tangible long-lived assets in the period in which
it is incurred. The Company's reclamation liabilities on its mining and oil and
gas properties are subject to SFAS No. 143. See note 10 of the interim
financial statements for details of the adoption.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands the
information disclosures required by guarantors for obligations under certain
types of guarantees. It also requires initial recognition at fair value of a
liability for such guarantees. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in the Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this statements did not have a material
impact on the Company's financial condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which addresses consolidation by
business enterprises where equity investors do not bear the residual economic
risks and rewards. These entities have been commonly referred to as
"special-purpose entities." Companies are required to apply the provision of
FIN 46 prospectively for all variable interest entities created after January
31, 2003. For public companies, all interest acquired before February 1, 2003
must follow the new rules in accounting periods beginning after June 15, 2003.
The Company is currently evaluating the impact FIN 46 is expected to have on the
Company's financial condition or results of operations.
The Company has reviewed other current outstanding statements from the
Financial Accounting Standards Board and does not believe that any of those
statements will have a material adverse affect on the financial statements of
the Company when adopted.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2003, the Company relied upon cash
that it had on hand at December 31, 2002 and the receipt of cash payments on a
note for the sale of coal bed methane properties to fund operations. As a
result our cash position decreased by $617,600 during the quarter ended March
31, 2003 to a cash balance of $1,123,400. Operating and Financing activities
consumed $940,600 and $54,300, respectively during the three months ended March
31, 2003 while Investing activities provided $377,300 during the same period.
The reduction of cash was the primary reason that working capital decreased
by $314,700 during the three months ended March 31, 2003. Cash was applied to
operations but also was used to reduce accounts payable, prepaid drilling costs
and long term debt by $290,900 during the quarter ended March 31, 2003.
Operations during the three months ended March 31, 2003, resulted in net
income of $308,700. The major noncash components of the net income during the
three months ended March 31, 2003 were: depreciation and amortization of
$170,400; noncash services of $105,800; noncash compensation of $133,600; loss
on sale of assets of $5,000; amortization of debt discounts of $131,200, the net
change (reduction) in assets and liabilities of $233,600 and the noncash
reduction of the asset retirement obligation.
Noncash services relate to the amortization of compensation paid to a
financial consultant in a prior period, which is being amortized over the life
of the consulting contract and the payment of legal services through the
issuance of common stock. Noncash compensation is the amortization compensation
relating to forfeitable shares of the Company's stock pursuant to an approved
stock bonus program and the funding of the employee ESOP retirement plan.
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting
for Asset Retirement Obligation". As a result of the valuation made to
implement SFAS No. 143, the Company recognized $1,615,600 in income as the
valuation of the reclamation liability was over accrued. The Company also
recorded an accretion expense of its total reclamation liability of $91,600
during the three months ended March 31, 2003.
The Company entered into two convertible debt agreements during prior
periods. The two combined debts total $1.5 million dollars and are convertible
at the owners' option into common stock of the Company. The owners of the
convertible debt also have options to purchase shares of the Company's common
stock. Due to these beneficial conversion features of the debt, a discount was
recognized on the debt. The discount is amortized over the term of the debt.
Depreciation consists of ongoing depreciation of the Company's buildings and
equipment and the amortization of capitalized costs relating to producing coal
bed methane gas properties owned by RMG.
Investing activities provided $377,300 during the three months ended March
31, 2003. The primary components of this increase in cash were proceeds from
the sale of coalbed methane interests of $375,000; proceeds from the sale of
equipment of $6,300, and a decrease in restricted investments of $26,500. The
Company through its subsidiary RMG, invested an additional $29,300 in the coal
bed methane business during the three months ended March 31, 2003.
Financing activities consumed $54,300 during the three months ended March
31, 2003. Cash was used to reduce long term debt by $109,300. The only offset
of any significance to this use of cash was the receipt of cash when one of the
Company's consultants exercises his option to purchase his shares.
CAPITAL RESOURCES
The primary sources of our capital resources are cash on hand; collection
of receivables; receipt of monthly payments from CCBM, Inc. ("CCBM") for the
purchase of an interest in RMG's coalbed methane properties; CCBM funding of
drilling and exploration programs; projected production from RMG's coalbed
methane properties; sale of excess mine, construction and drilling equipment;
sale of real estate properties which are no longer needed in the core business
of the Company; sale of partial ownership interest in exploration properties;
proceeds under the line of credit; equity financing of the Company's
subsidiaries, and the final determination of the Sheep Mountain Partners ("SMP")
arbitration/litigation.
Drilling and exploration capital requirements of RMG will be initially
funded during the balance of 2003 from the CCBM work commitment. As of March
31, 2003, there was a balance of $1,711,200 available to RMG under the CCBM work
commitment. Of this amount, CCBM is committed to expend $831,200, on behalf of
RMG. There was also a balance of $4,875,000 at March 31, 2003 due from CCBM
under its purchase agreement. Under the terms of the promissory note, this
amount will continue to be paid at the rate of $125,000 per month plus interest
until November 2004 at which time a balloon payment of $2,375,000 is due.
CCBM's interest in RMG's coalbed methane properties is pledged as security for
the note to RMG. CCBM can discontinue making payments at any time subject to
certain earn-in provisions and penalties.
The Company, RMG and CCBM are actively seeking additional financing to
acquire additional coalbed methane acreage and complete the drilling on existing
properties as well as expand current operations. No assurance can be given that
such financing efforts will be successful. Management of the Company however
believes that the future of the natural gas business is very good and that
financing will be available at some point to develop RMG's properties.
The Company has shut down its mines and has discontinued its mining and
construction operations. It therefore has surplus equipment and building from
these operations. During fiscal 2001 and 2002, the Company sold the majority of
its surplus equipment. In addition, the Company owns various raw land, which is
held as investment property or was intended to be used in mining operations.
These properties are no longer needed for the core business of the Company and
will be sold.
The Company continues to market home and mobile home lots at the Ticaboo
Townsite in southern Utah. These fully developed properties are not important
to the operations of the company. The lots were a portion of the assets that
the Company acquired when it purchased the Shootaring uranium mill and Ticaboo
townsite. The Company has also listed the commercial operations at Ticaboo for
sale. It is the present intention of management of the Company to sell this
commercial property.
We currently have a $750,000 line of credit with a commercial bank. At
March 31, 2003, the entire line of credit was available to the Company. We also
have a $500,000 line of credit through our affiliate Plateau Resources Ltd
("Plateau"). This line of credit is for the development of the Ticaboo
Townsite. Plateau has drawn down $300,000 of this financing facility, which is
repayable over 10 years. All payments on these lines of credit are current as
of the filing date of this Report.
We have been involved in litigation with Nukem, Inc. involving Sheep
Mountain Partners, ("SMP") for the past twelve years. On May 1, 2003, the
Company received the Accounting as ordered by the U.S. District Federal Court.
The Accounting was filed under seal. The Company has until May 27, 2003 to file
any objections it may have to the accounting.
CAPITAL REQUIREMENTS
EXPLORATION OF COALBED METHANE PROPERTIES
- ---------------------------------------------
The majority of the 2003 exploration costs associated with the coalbed
methane properties of RMG has been funded through the CCBM agreement. Under the
CCBM purchase and sale agreement, if properties are drilled that are owned 50%
by RMG, we may be required to fund the drilling costs for the interest ownership
of the remaining non-participating parties. Should we be required to fund any
non-participating entities portion of the exploration programs, there is a
back-in provision on each property, which gives RMG a disproportionate amount of
the production revenues until our cost and additional amounts are recovered
before the non-participating parties begin to receive production funds.
MAINTAINING MINERAL PROPERTIES
- --------------------------------
SMP URANIUM PROPERTIES
The holding costs associated with the uranium properties formerly owned by
Sheep Mountain Partners ("SMP"), are approximately $28,000 per month. We
continue to implement cost cutting measures to reduce the holding costs while at
the same time preserving the properties. We have begun the process of
reclamation on certain of these properties and will continue to do work during
2003. It is estimated that approximately $50,000 in reclamation work will be
completed on the SMP properties during 2003.
PLATEAU RESOURCES URANIUM PROPERTIES
Plateau owns the Ticaboo Townsite, which includes a motel, convenience
store, boat storage, restaurant and lounge. Prior to fiscal 2002, we operated
all of these entities. A decision was made during fiscal 2001, to lease out all
but the motel operation. This decision relieved us of the obligation and
expense of employees, inventory and risk of loss from the business operations.
Additionally, Plateau owns and maintains the Tony M uranium mine and
Shootaring Canyon uranium mill. We are pursuing alternative uses for these
properties including the potential sale of the uranium mill.
SUTTER GOLD MINING COMPANY PROPERTIES ("SGMC")
We have one employee at the SGMC properties to preserve the core
properties. SGMC is in the process of selling certain of the non-essential land
positions that it has acquired. SGMC is also considering other alternatives
such as equity financing or obtaining industry partners to develop the property.
Carrying values for the SGMC properties, as of March 31, 2003, are lower
than the fair market value of the properties. These assets consist primarily of
raw land that was purchased for a mill tailings cell but was no longer needed
under the new mine development plan. A portion of this land was sold in
December 2002.
The SGMC properties contain no proven or probable reserves.
DEBT PAYMENTS
- --------------
Debt to non-related parties at March 31, 2003 was $3,186,000. Payment
requirements on the convertible debt referenced above during the balance of 2003
is $90,000 of interest. Principle due under other long term debt during 2003
total $270,900.
RECLAMATION COSTS
- ------------------
The asset retirement obligations are long term and are either bonded
through the use of cash bonds or the pledge of assets. It is anticipated that
$50,000 of reclamation work on the SMP properties and $100,000 on the southern
Utah mine uranium mine properties will be performed during 2003. The Company
has submitted a reclamation plan to the Nuclear Regulatory Commission ("NRC")
for the reclamation of the Shootaring Uranium Mill. As of March 31, 2003, the
plan has not been approved by the NRC. The Company has requested the release of
cash held as restricted investments to perform this work. The Company has
proposed in the reclamation plan to complete $2,100,100 of work before December
31, 2003. This work will not be completed unless the NRC agrees to release the
funds from the $9.9 million held in investment accounts for the reclamation and
standby costs of the Shootaring Uranium Mill.
The asset retirement obligation on the Plateau uranium mining and milling
properties in Utah at March 31, 2003 is $5,225,200, which is reflected on the
Balance Sheet as a reclamation liability. This liability is fully funded by
cash investments that are recorded as long term restricted assets.
The asset retirement obligation of the Sheep Mountain uranium properties in
Wyoming at March 31, 2003 are $2,084,400 and are covered by a reclamation bond
which is secured by a pledge of certain of our real estate assets.
11
RESULTS OF OPERATIONS
- -----------------------
During the three months ended March 31, 2003, the Company recorded an
operating loss of $1,284,900 as compared to an operating loss of $1,458,600 for
the three months ended March 31, 2002. Major components of this decrease of
$265,300 in the operating loss were increased revenues from motel and real
estate operations of $12,300; natural gas sales of $140,000 and management fees
of $50,700; along with reductions in mine holding costs of $28,400, and General
and Administrative Expenses of $203,900.
These changes are as a result of the Company's business model to exit the
uranium mining business and to become a natural gas producer. The Company's
business plan has called for reduced overhead while at the same time producing
natural gas as quickly as possible. The implementation of these plans has
resulted in the aforementioned changes in the operating loss.
Other interest expense increased by $145,900 during the three months ended
March 31, 2003 over the same three month period of the previous year as a result
of the payment of interest on the convertible notes discussed above and the
amortization of the discount on those convertible notes. Interest income
decreased by $31,300 during the three months ended March 31, 2003 from the
amount of interest revenue recognized during the same period of the previous
year as a result of lower interest rates on cash deposits.
The Company recorded noncash income of $1,615,600 during the three months
ended March 31, 2003 as a result of the implementation of SFAS No. 143. The
Company also recorded an accretion expense of the reclamation liability of
$91,600 during the three months ended March 31, 2003.
The Company recognized net income of $308,700 or $0.03 per share during the
three months ended March 31, 2003. During the prior year first quarter ended
March 31, 2002, the Company recognized a loss of $1,258,400 or $0.13 per share.
Although this improvement in profitability was as a result of the effect of an
accounting change, the adoption of SFAS No. 143, management of the Company
believes that the Company's trend to profitable operations will continue as it
continues to implement its business plan and the price of natural gas remains
stable or increases along with increases in the volume of natural gas produced.
ITEM 4. CONTROLS AND PROCEDURES
In the 90 day period before the filing of this report, the chief executive
and chief financial officers of the Company have evaluated the effectiveness of
the Company's disclosure controls and procedures. These disclosure controls and
procedures are those controls and other procedures we maintain, which are
designed to insure that all of the information required to e disclosed by the
Company in all its periodic reports filed with the SEC is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in its reports filed or submitted under the Securities
Exchange Act of 1934 is accumulated and communicated to Company management,
including the chief executive and chief financial officers of the Company, as
appropriate to allow those person to make timely decisions regarding required
disclosure.
Subsequent to date when the disclosure controls and procedures were
evaluated, there have not been any significant changes in the Company's
disclosure controls or procedures or in other factors that could significantly
affect such controls or procedures. No significant deficiencies or material
weaknesses in the controls or procedures were detected, so no corrective actions
needed to be taken.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
------------------
There have been no material developments in the Legal Proceedings since
they were last reported by the Company in Item 3 of its December 31, 2002 Form
10-K except in the Sheep Mountain Partners Arbitration litigation. On May 1,
2003, the Special Master filed under seal his Report of the Results of
Accounting ordered by the U.S. District Court of Colorado. The details of the
Report will not be made public until permitted by the Court.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------------
During the quarter ended March 31, 2003, the Company issued 61,596 shares
of restricted common stock: 3,891 shares to outside directors; 13,705 shares to
two attorneys in partial payment of services; 20,000 shares on exercise of an
option held by R.J. Falkner, and 24,000 shares issued to a public relations firm
(4,000 shares released to the firm, 20,000 held by the Company to be released as
earned by the firm).
The dollar values of the issuances were: $14,400 for stock to directors
(market value at issue date); $45,900 for the attorney services (market value at
issue date); $52,400 for the exercise price of Falkner's option, and $84,000 for
the 24,000 shares issued to the public relations firm. No commissions were paid
in connection with any of these issuances.
Also, 78,286 shares were re-categorized from "forfeitable" to regular
outstanding stock, and issued to Max Evans' estate. Mr. Evans had been an
officer and director of Crested Corp.; he passed away in 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------
(a) Exhibits.
99.1 Certification Pursuant to Section 1350 of Chapter 63
of title 18 of the United States Code
(b) REPORTS ON FORM 8-K. The Company filed three reports on Form 8-K
for the quarter ended March 31, 2003. The events reported were as follows:
1. The report filed on January 7, 2003, under Item 5, referenced the
company's subsidiary, Rocky Mountain Gas, Inc. (RMG) entering
into an Option Agreement to acquire in excess of 10,000 gross
acres of proven and undeveloped coalbed methane (CBM) properties
in the Power River Basin of Wyoming;
2. The report filed on February 7, 2003, under Item 5, referenced
RMG entering into an option to acquire some 40,000 acres of CBM
properties in the Powder River Basin of Wyoming, and
3. The report filed on February 19, 2003, under Item 5, referenced
the U.S. District Court of Colorado granting the Special Master
in the Nukem accounting case, an extension of time to file his
report to April 11, 2003.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
U.S. ENERGY CORP.
(Company)
Date: May 13, 2003 By: /s/ John L. Larsen
--------------------------------------
JOHN L. LARSEN,
CHAIRMAN and CEO
Date: May 13, 2003 By: /s/ Robert Scott Lorimer
--------------------------------------
ROBERT SCOTT LORIMER
Principal Financial Officer and
Chief Accounting Officer
14
CERTIFICATION
I, Robert Scott Lorimer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Energy Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made know to use by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATED this 13th day of May, 2003.
/s/ Robert Scott Lorimer
-----------------------------------------
Robert Scott Lorimer,
Chief Financial Officer
15
CERTIFICATION
I, John L. Larsen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. Energy Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made know to use by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATED this 13th day of May, 2003.
/s/John L. Larsen
-----------------------------------------
John L. Larsen,
Chief Executive Officer